A Short Account of the History of the Corporation: PART 6 (The Rise of the American Business Corporation)

Previously, we saw how the railroad giants, relying on new corporate laws (limited liability, general incorporation, parent/subsidiary forms, acquisition/expansion across state lines), new sources of capital (the stock market), and new levels of organizational efficiency and operational scale (driven in large part by technology advancements in transportation and communication), rapidly emerged as the first true "super" corporations as we have come to know them over the past 120 years. The rise of corporate giants brought many new changes to society, and, it presented many new challenges. As was the case with chartered mercantile empires that preceded them, like the British East India Company, the accumulation of power and corporate misbehavior by these early “super” corporations would not go unchallenged by the public.

In an interview with the New York Times in 1882, railroad tycoon William Vanderbilt was quoted as follows:

"The public be damned. What does the public care for the railroads except to get as much out of them for as small a consideration as possible! I don’t take any stock in this silly nonsense about working for anybody’s good but our own because we are not. When we make a move we do it because it is in our interest to do so, not because we expect to do someone else some good. Of course we like to do everything possible for the benefit of humanity in general, but when we do we first see that we are benefiting ourselves. Railroads are not run on sentiment, but on business principles and pay."

The public disagreed. One form of public protest came through the organizing of labor unions. As one author points out, “The consolidation of capital prompted a consolidation of labor.” Initially, laborers organized in piecemeal: the printers organized in 1852, the hat finishers in 1854, iron molders in 1859, cigarmakers and shipmakers in 1864, as illustration. The first nationwide organization of labor came with the formation of The National Labor Union in 1866. Workers from various industries continued to organize nationally, campaigning for 8-hour workdays, protesting against the importation of Chinese contract laborers as well as poor factory conditions.

And in some cases violence ensued. The tension between corporate managers and corporate laborers was severe as evidence by the Preamble adopted the American Federation of Labor that organized in Columbus, OH in 1886. It read: “A struggle is going on in all of the civilized world between oppressors and oppressed of all countries, between capitalist and laborer.” By the 1890s, along with the maturation of big business also came the “maturing of the unions.”

In response to strong public discontent, politicians began applying pressure on corporations, passing among several other pieces of legislation targeted at the corporation, the Sherman Antitrust Act in 1890, which for the first time defined unlawful combinations as illegal monopolies under federal law. Not longer after in 1906, the Roosevelt administration would successfully break up the monopoly enjoyed by Standard Oil. The result of the breakup was the eventual formation of Exxon, Amoco, Mobil, and Chevron.

Despite these counter moves by public officials, the financial crisis “Panic of 1873” and the ensuing failure of the Reconstruction of the South by 1875, highlighted the inadequate regulatory structure in place at the time. Even with the implementation of the Foran Act of 1885, the Interstate Commerce Act of 1887, the Sherman Antitrust Act in 1890, among others, federal regulation proved largely ineffective, leaving the responsibility of regulating corporations to state governments.

Since states had already assumed the role of being the primary grantor of corporate charters, the regulation of corporate activity too was largely in the hands of state legislatures. Though there were federal regulatory provisions in place at the time, these early statutory laws were largely designed to provide significant freedom to state and corporate activity. As a matter of policy given the context, this makes some sense as the nation was attempting to rapidly expand geographically as well as industrially. Ultimately, this policy proved a failure since the economy was not only rapidly expanding geographically, it was doing so while growing in great complexity. The states were no match for the new giant corporation, which at the time was not only operating across state borders, but in some cases internationally.

The “Panic of 1906” amplifies the inadequacy of the regulatory structure at that time. In 1863, the National Bank Act of 1863 was enacted which among other things provided for federal incorporation of national banks to create a uniform national currency. These national banks were scrutinized by a newly created regulatory agency set up in the U.S. Treasury, the Office of the Comptroller of the Currency. What the Act didn’t provide for was a uniform regulatory structure for state banks. This flaw surfaced in 1906 when state banks adhering to state law mandated reserves caused a liquidity freeze among Wall Street brokers. In response, the Federal Reserve Act of 1913 was enacted, creating a central bank to regulate the movement of funds between national and state banks. While the Act provided for greater monetary control, it was far from a cure-all, as the stock crash of 1929 would demonstrate.

It was previously noted that legal developments by this time had opened the door for corporations to move from an “entity” structure to an “enterprise” structure, thereby adopting a parent-subsidiary-corporation model. Regulatory structures, on the other hand, were behind the times, still centering on corporate “entity law.” This inadequacy proved fatal during the “roaring” ‘20s when national and state banking institutions operating through subsidiaries engaged in non-traditional banking activities: participating in the securities business, including establishing stock brokerages, investment services, and securities underwriters. Congress was convinced that the Depression was largely due to the intermingling of commercial and securities activity in the banking system.

During the 1920s, New York bank Goldman Sachs (yep, the same one a key contributor to the latest financial crisis) sought to juice its corporate earnings by engaging in a new venture -- Goldman Sachs Trading Corp. The newly formed investment wing of the bank began investing through a new form of trading mechanism and using extensive amounts of leverage (debt). Goldman's trades failed in spectacular fashion, as did the investment practices of most other banks at the time. Sound familiar?

In response, the Banking Act of 1933 (commonly referred to as the Glass-Steagall Act) was passed which was designed to separate completely the commercial banking business and the securities business. The promulgation of this Act marked a shift underway in Franklin Roosevelt’s Administration, which “abandoned ‘entity’ as the legal standard” and now viewed the corporation as operating a complex, multi-tiered enterprise, requiring the application of “enterprise law.”

The FDR Administration rallied the people behind New Deal statutes, strengthening corporate law and in the same stroke transformed the federal government into the central force in the regulation of American business. The greatest failure of business in America was succeeded by the most sweeping changes to corporate, finance, and investment law in U.S. history; The Emergency Transportation Act of 1933, the Banking Act of 1933, the Securities Act of 1933, the Securities Exchange Act of 1934, the Public Utility Holding Company Act of 1935, the National Labor Relations Act of 1935, the Investment Advisors Act of 1940, and the Investment Company Act of 1940, all reflect this transformation.

Selling these landmark statutory changes to the public was not difficult as the drafters of the legislation mirrored the shift in sentiment the public had toward big business at this time: “That consumers, not business, made markets.” As such, “Consumers could, therefore, rightfully demand the regulation of business for the common good.”

Big business would survive the depression of the 1930s, and even with much heavier federal oversight, emerged stronger than ever before. By 1950, the United States accounted for an astounding 39.3% of the world’s GNP, manufactured 17 out of 20 of the world’s automobiles, and 72.7% of sales generated by the top 200 largest corporations in the world were based in the United States. Dominating every industrial and economic metric it was evident that a new super power had arisen: America’s big business corporation. Through improvement in corporate law, corporate regulation, rapid advancements and deployment of technology, and international expansion, the American business corporation led the U.S. to unprecedented growth from 1945 until 1970 when the GNP of the U.S. increased from $21.3 billion to one trillion dollars.

The unprecedented levels of business growth created new challenges for the American business corporation. Among these that we will address in our next part of the discussion, is the public response that was needed to counter the emerging environmental crisis in the 1960s, 70s, and 80s, through the formation of several important regulatory mechanisms. Labor outsourcing and labor offshoring would also create a public stir...

Peace

Jeremy