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Enterprising America: Businesses, Banks, and Credit Markets in Historical Perspective

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Enterprising America: Businesses, Banks, and Credit Markets in Historical Perspective Introduction to “Enterprising America: Businesses, Banks, and Credit Markets in Historical Perspective” By William J. Collins and Robert A. Margo* May 2014 *Terence E. Adderley Jr. Professor of Economics, Vanderbilt University, and Research Associate, National Bureau of Economic Research; Professor of Economics, Boston University, and Research Associate, National Bureau of Economic Research. This is the introductory chapter to the NBER conference volume, Enterprising America: Businesses, Banks, and Credit Markets in Historical Perspective. The conference was held at Vanderbilt University, Nashville TN, on December 14, 2013. Conference support from the NBER and Vanderbilt University’s Adderley Chair and Douglas Grey gift is gratefully acknowledged. 1 Introduction The American economy’s ascendance from a colonial outpost into one of the world’s most sophisticated and productive economies was an event of singular historical importance. From a global perspective, the American economy became a major force driving international trade, migration, capital flows, and business cycles. Although international comparisons of production are imprecise for the nineteenth century, it is clear that the United States rose from a peripheral to a primary position in the world’s economic order by 1900 (Kindleberger 1996, Landes 1998, Maddison 2001).1 Even as the world’s economic output grew at an unprecedented rate, the American economy’s growth surpassed all others. From a domestic perspective, there is no single metric that captures the scope of economic change and its implications for the American people, but salient features of the transformation are clearly visible. Between 1800 and 1900, the share of the labor force in agriculture declined by half (Carter 2006, p. 2-18), coinciding with the steady rise of towns and cities. At the same time, the geographic center of the population shifted dramatically westward, from near Baltimore to near Indianapolis (U.S. Department of Commerce 2011). Within the manufacturing sector, the rise of the factory system and subsequent business consolidations led to “huge corporations mass producing standardized products for a national market” (Atack and Bateman 2006, p. 4-575). This was encouraged and facilitated by the new network of railways, which sharply cut inter-regional transportation costs and physically tied national markets together into a large, open, commercial space. Finally, the development of the banking and 1 Maddison (2001, Appendix B), for example, estimated that between 1820 and 1913, the two benchmark dates closest to the start and end of the nineteenth century, the U.S. share of global GDP increased from below 2 percent to nearly 20 percent. 2 financial sector, despite several crises, provided credit and capital to firms, farms, and consumers, thereby fueling economic growth while in turn benefiting from it. A basic starting point for understanding the history of American economic growth is to model total output as a function of technology and “factors of production,” including labor, capital, and other resources. With certain assumptions and macroeconomic data, technological improvements and additions to the stock of factors can account for economic growth. Although this kind of accounting can provide a clear and quantitative view of the sources of American growth, it only scratches the story’s surface because it does not address how technological change and factor accumulation were actually accomplished or why so much of it was accomplished in this particular time and place. In the broadest terms, American economic growth was the product of successful enterprise, by which we mean purposeful, typically profit-seeking, initiatives to provide goods and services to markets. These initiatives were pursued within a framework of laws and institutions that set the ground rules for the organization and operation of economic entities. Effective laws and institutions form the foundation, if not the motivation, for modern economic growth. Ideally, they are designed to encourage enterprise while also constraining undesirable behaviors, such as those associated with principal-agent problems in corporate governance or the powers of the state itself. Enterprises come in many different forms and structures, depending in part on the nature of the productive activity and the state of technology and in part on the laws and institutions that govern them. Within the framework of laws and institutions, businesses interact with one another in ways that can be productivity enhancing because they complement one another across 3 sectors, such as banks that provide credit to manufacturers or farmers, or because they compete with one another within sectors, such as firms within manufacturing that vie to offer goods at lower costs or to invent entirely new goods. The ensuing processes of innovation, investment, and factor accumulation connect enterprise-level, profit-seeking initiatives with macro-level economic growth. Because the legal framework in the United States evolved from a deep colonial history and continued to be shaped at the state level throughout the nineteenth century, there is institutional variety across space and time and, in some places, exceptionally detailed enterprise-level data. This history, in turn, provides ample opportunity to study institutions, their evolution, and their ramifications for enterprises’ organization and performance. Volume Summary This book presents seven chapters that address topics concerning the historical economic behavior of American firms and financial institutions, primarily in the nineteenth century, and the associated legal and market institutions that shaped their behavior and performance. The chapters are revised versions of papers that were presented at a conference held at Vanderbilt University in December 2013. The National Bureau of Economic Research and Vanderbilt University supported the conference.2 The volume commences with an essay by Naomi Lamoreaux that explores differences in the evolution of corporate governance between the United States and other successful capitalist countries that embraced the common law as their fundamental legal framework. The United States is often held up as an example of how effective economic institutions can shape long-run 2 Coinciding with the conference were lunch and evening events celebrating the scholarly contributions of Jeremy Atack, whose research has done much to advance understanding of the historical development of economic enterprises in the United States. These events were sponsored by Vanderbilt University’s Adderley Chair and Douglas Grey gift. 4 growth, across all countries in the world and also within the group that adopted the common law. Yet, in the case of corporate governance, there is a paradox: the laws regulating corporate governance in the United States, which evolved at the state level, were less flexible than the laws that evolved in other common law countries, such as Great Britain, until well into the twentieth century. According to Lamoreaux, this relative inflexibility in the United States was manifested in fewer organizational forms that could be adopted legally and, conditional on the form, greater restrictions on specific features. Nonetheless, among those countries that adopted the common law (or any legal system for that matter), the United States was more successful economically. This outcome clashes with the usual view in economics that more contractual and organizational flexibility is better than less. Lamoreaux argues that the cross-county difference in institutions can be traced to differences in political economy. In England and other common law countries, universal manhood suffrage came long after the passage of their incorporation and related laws, whereas in the United States suffrage came first. As a result, in the United States incorporation statutes balanced the interests of the electorate, preventing in Lamoreaux’s words the “‘moneyed elite’ from using their influence to gain unfair advantages over other economic actors.” The first wave of legislation followed on the heels of Jacksonian Democracy and in the wake of the Panic of 1837. It was much more restrictive than what was possible in England at the time. However, as Lamoreaux points out, the greater institutional flexibility available in England did not necessarily improve economic efficiency; rather, there are many examples of English corporate charters that provided poor internal incentives. By limiting flexibility, laws in the United States may have prevented some sorts of principal-agent problems from becoming more widespread. Lamoreaux 5 develops her argument through a careful case-study of the evolution of incorporation law in Pennsylvania. The growth of manufacturing in the nineteenth-century United States was associated with changes in the distribution of firm sizes and production methods (Margo, this volume), but it also signaled change in organizational structure. Much of the historical narrative about these changes emphasizes the rise of the corporate form. In this regard the narrative is heavily influenced by the experience in the New England textile industry, which was among the first industries to make extensive use of incorporation and, through it, to capitalize production. The emergence of the corporate form motivated the classic study by Berle and Means (1932), which pointed to a significant corporate governance issue of “ownership versus control.” In the modern corporation, which they argue emerged
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