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The Financing Of Industry And Development Of Corporations

( Originally Published 1918 )



The importance of capital. In preceding chapters we have seen the importance to industry of an adequate labor supply, especially if it is of high quality, and we shall consider that matter further in the following chapter. But there is another element of the highest significance for the destiny of a country's industrial life, and that is capital. It is perfectly fair to say that the whole structure of material civilization rests upon labor and capital, and no less upon the latter than upon the former. If we were to sketch the growth of the industrial organization from its simplest and most primitive forms up to those of the present day, we should find that every considerable advance that had been made depended upon the presence and utilization of capital.

Scarcity of capital in new countries. In every new country capital is scarce. It takes a good while to develop a surplus of capital sufficient for embarkation upon industries much in advance of agriculture. The American colonists brought some capital with them in the form of seeds, goods, domestic animals, and other directly useful possessions, but for a long time wealth accumulated so slowly that industrial development financed with American capital was almost out of the question. As a matter of fact early colonial enterprises were financed very largely with English funds.

Colonial capital. It will be recalled that the colonists were substantially equal in the matter of property. There were few of the very wealthy, as of the very poor. People worked for the most part in occupations that did not demand a heavy capitalistic endowment, and the colonists were so conservative that they were very slow about putting their scanty savings into the development of new and untried industries. In some of the Eastern cities on the seaboard, especially Boston, New York, and Philadelphia, certain successful traders and shippers were able to accumulate a surplus, but they were more interested in commerce than in manufactures, so that their spare funds did not ordinarily go into the building up of the latter.

Growth of American capital. In the seventeenth century ac-cumulations became greater, and there are reported to have been in 1680 about thirty Massachusetts merchants worth between $50,000 and $100,000, whereas an earlier generation considered $22,000 to be a great estate. In the eighteenth century the process of accumulation went on rather rapidly, especially in Pennsylvania ; Philadelphia money supported ironworks and other manufactures as far south as Virginia and the Carolinas. Men who had acquired their fortunes by manufacturing became supporters of sound undertakings and critics of unpromising ventures.

Forms of colonial investment. However, foreign capital was generally behind the leading colonial manufacturing plants. After the colonists began to invest, it was generally in enterprises where manufacturing and commerce were combined ; in fact, since many manufacturing concerns marketed their own products, these two forms of enterprise, production and marketing, generally went hand in hand and were commonly managed directly by one man or one concern. The corporation was a product of the latter part of the nineteenth century.

Post-Revolution conditions. Only a relatively small amount of the total capital engaged in manufacture was sunk in building and machinery ; it was employed largely in operating the plant, being necessary on account of tardy transportation and long correspondence, which delayed returns from sales. Not until after the Revolution did conditions begin to shape themselves so as to favor the development of new industrial enterprises. About that time banking and credit facilities were much improved, and the rapid expansion of American commerce caused a speedy accumulation of wealth in the hands of Americans engaged in shipping. Commercial capital soon became greater in proportion to population than ever before.

The small demand for capital. In the earlier days, when a man put his money into a concern, he had usually been able to inform himself by direct examination concerning the nature and prospects of the industry, and very frequently knew a good deal about running it from having been connected with it. The case was quite different from what it is at present, when people buy stock in a corporation and hope that those who have charge will manage its affairs so as to pay dividends. There were at that time no large private fortunes to be drawn upon ; in fact, there was not yet a great mass of floating capital which could be relied upon for the development of new projects. We find that many early industrial plants were established and expanded by enterprising individuals who had faith in the development of the industry. It took little capital to set up a water-power mill, and if it was successful the earnings of the owner and the savings of the few operatives often furnished all the capital needed for expanding the business. Thus did the small mill develop into a large factory. Farmers and other neighbors came in with .contributions of land and mill-sites, and often with personal labor. From these informal partner-ships or associations arose the early joint-stock companies, out of which grew the small corporations characteristic especially of New England.

Government enterprises. But the lack of capital remained a serious drawback to the development of manufacture. It was even suggested that several millions of dollars be set aside by the government to loan to manufacturers at a low rate of interest. The separate states embarked in industrial enterprises, especially in connection with transportation and banking. The Federal government itself built the Cumberland Road. And so it was that during the first three or four decades of the last century our governments, both Federal and state, were financially interested in some of the most important industrial enterprises of the country.

The call for capital. The introduction of the steamboat on Western waters and the spread of cotton culture into the South-west started a rush of material development, which called for a large amount of capital, particularly in connection with transportation works. Canals and turnpikes represented undertakings of a size scarcely imagined by the preceding generation. The capital required was derived in part from the savings of Americans and in part from abroad. There had been a good deal of accumulation, especially in the East and South ; but foreigners, especially Englishmen, had, during the first half of the nineteenth century, large sums of money to lend, and the United States formed an attractive field for investment. Up to the middle of the forties England seems to have had in her own industries no adequate field for the employment of all her capital, and she invested very large sums in this country.

The beginnings of the corporation. Corporations were not unknown before 1850 ; they appeared as soon as industries grew to a point where they demanded more capital than could be supplied by a single individual or by a partnership. But corporations were not able to raise millions without the backing of the government ; there were no big banking houses to under-write securities and to insure the successful floating of new corporations. And so the governments of this country, instead of guaranteeing the interest on bonds of corporations, undertook to embark in the industries themselves, and government-owned enterprises developed on a large scale. It was with the failure of many of these that the states withdrew and left the field free for the modern form of development. However, it should not be understood that the states entered much into manufacturing ; for some time that form of development was exceedingly slow as compared with. its pace after the Civil War. Manufacturing plants that had been owned chiefly by individuals or partners were unincorporated joint-stock companies ; it was in the cotton manufacture that corporate organization very soon became common, and then the corporations spread into other lines of textile manufacture and into the iron industry.

Nature of the corporation. It is characteristic of a corporation that it exhibits (1) an artificial personality; (2) joint association in ownership ; (3) limited liability of stockholders. The first point marks its distinction from ownership by an individual or by several individuals, and the third means that stockholders are responsible for the obligations of the corporation only in pro-portion to the number of shares which they hold, whereas in a partnership with unlimited liability the part owner is responsible for all the obligations of the concern. The idea of limited responsibility in a joint-stock association runs back for four centuries or more, but the genuine corporation has come into prominence in the economic life of the world only within comparatively recent times.

Conditions favoring the growth of the corporation. The business corporation is really a product of the nineteenth century. It demanded certain industrial and political changes to pave its way. Before there was any great industrial expansion an end had to come to the conferring of special privileges by sovereign power upon individuals, and there had to be a rather general triumph of democracy — changes which came to pass during the latter part of the eighteenth century and the beginning of the nineteenth. The purely industrial changes came about with the so-called Industrial Revolution, which accompanied the utilization of steam power in industry and transportation. This led to the establishment of industries on a scale so large that their financing was beyond the capacity of an individual or even a partnership and so a new method of organizing business was necessarily developed, which could be provided either by the state going into business enterprises itself or by delegating its powers to corporations. But we have seen that in this country the state governments, after sad experience, withdrew from business, and in this way was opened a field for the development of genuine corporations.

The corporation was inevitable. There has been a great deal of objection, on various grounds, to the corporation. No doubt there have been unfortunate sides to its development and a number of abuses, but it is difficult to see how this leading form of industrial organization could have been evaded. It has been like some new and powerful engine which men have not understood very well and which has, therefore, caused a good deal of suffering and injury to certain parties. But in such a case the only recourse is to learn how to manage the new power, not to discard it and try to carry on by outgrown methods the enormous industrial organization of the twentieth century.

Extension of the corporation. If the corporation had been a bad thing in itself, it is hard to see how it could have made such headway and shown such results. It is to-day the dominant form of business organization ; practically every important line of industry considered in the foregoing chapters is organized in the corporate form, farming being the most notable exception. Four fifths or more of the products of our manufactories are turned out by corporations ; and this is true despite the fact that only about one fourth of the total number of establishments are on the corporate basis. This means that there are numerous small concerns engaged in manufacturing, but the corporations employ three fourths or more of the wage-earners employed in this line. In transportation and finance the corporation occupies a leading place. There were on a recent count about 270,000 corporations in this country whose outstanding stocks and bonds amounted to over $88,000,000,000 and whose reported income was about $ 3,860,000,000.

Increase in size of the business unit. In preceding chapters we have seen that many of the industries of this country took on new life after the Civil War. The old small-scale production, with small capital, was supplanted by something more nearly commensurate with the expanding development of our natural resources. There appeared not only the concentrated and centralized type of management but also the great captains of industry ; the small independent producer disappeared, and laborers were organized into larger and larger units. Of course such combination and concentration would have been impossible without the development of standardization of machinery and methods, the development of adequate accounting systems, the invention and improvement of the telegraph, telephone, and typewriter, and the building and organization of railroads. The great expansion of the railroad system came, as we have seen, after the Civil War. This greatly widened the market and called for a pronounced expansion in the size of the business unit. Large combinations of capital — trusts, as they were commonly called — came to dominate many of the leading interests of the country. These consolidations were few until the last decade of the nineteenth century, but from 1898-to 1903 there was tremendous activity. The largest combination of all —the United States Steel Corporation — was founded in 1901, with a capital of $1,100,000,000, besides $304,000,000 in bonds.

Economies of combination. Combination, like other advances in the organization of industry, was forced by the necessities of the case, for the older devices for managing industry and trade had been outgrown. Combination represented economies of several sorts and so was a welcome device in an industrial competition where every saving counted.

The wastes of competition. By the very fact that it limited competition, combination did away with the wastes of competition and also rendered possible the economies connected with large-scale production. The fact that it aimed at monopoly-power should not blind us to these facts. The main wastes of competition have to do with duplication of expenses in advertising and in paying salesmen and also with the uneconomical use of plants. In regard to the last point, plants are most economically run when their management represents the best knowledge and talent available. Thus managed, each plant will be doing the best it can for itself, and if there are a lot of smaller plants under a common talented management, the work of each plant will be apportioned so that it is doing what it is best fitted to do. Such combined plants will therefore be more prosperous than they could be if they continued to compete with one another under cheaper management. It should be realized, however, that there is a limit to the size of the business unit which can be efficiently handled ; after a certain size is attained the supervising expenses increase entirely out of proportion to the advantages secured.

The economies of large-scale production. The economies of large-scale production are almost self-evident ; everyone knows that articles that can be made by the thousands are produced much more cheaply than those which have to be made separately or in small quantities. It may cost a publishing concern, for example, a good many thousands of dollars to turn out the first copy of a book, but if the sale is going to be large enough, copies can be sold for a nominal price. The modern newspaper is a good example of the low price of an article produced on the large scale.

Monopoly. The desire for monopoly is an important cause for combination and is the one generally associated with the corporation or trust. There are both advantages and danger in monopoly. In some lines of industry, such as transportation, gas works, and telephone service, a monopoly is almost inevitable, and the dangers to the public which would arise from the ruthless use of this power have to be minimized by careful supervision of the companies by the state which grants them their charters.

Advantages of the corporation. If the corporate form of organization had not had its advantages, it could scarcely have developed so strongly and permeated almost every branch of modern business organization. It is worth while to point out several facts about corporate organization in addition to what has already been said.

Permanence. One of its leading advantages is its permanence : it need not die, but may continue for hundreds of years. In case of a business owned by a single individual, on the contrary, the death of the owner generally means that it has to be wound up or transferred to a successor ; very often it has to be sold to close an estate, and not infrequently at a great sacrifice. Similarly with a partnership : the business is thrown out of adjustment when a partner dies, and, although the surviving partner can buy out the heirs, disputes are likely to occur and there are all sorts of hazards, especially to the heirs of the deceased man. By contrast, the corporation is not necessarily involved in difficulties by the death of even the largest stockholder, for someone else can succeed to the ownership of the stock, and as long as the corporation is well managed it shows no change.

Accumulation of small capital. Another advantage of corporate organization is found in the fact that it provides a means for financing, by the collection of small sums from numerous individuals, undertakings completely beyond the ability of one or a few persons to carry. The shares of stock may be placed at any denomination from ten cents upwards, and thus millions of dollars may be collected from thousands or even tens of thousands, who are thus enabled to take their small share in a large enterprise. Naturally all such enterprises are not legitimate and profitable, but. it must be realized that, after all, the real capitalists of the country are the multitudes of small stockholders rather than the few large ones. There are so many more people in moderate than in affluent circumstances that without the combination of the-small savings of the former it would be hardly possible to run many of the largest enterprises.

Limited liability. This ability of the corporation to render possible a larger industrial development than could take place without the collection of small sums is favored by the limited liability feature of which we have spoken. A buyer of a share of stock, if it is fully paid and nonassessable, cannot lose more than the price of the stock. Now it is perfectly plain that no poor man who had saved one hundred dollars would dare put it into any enterprise if he were going to be unlimitedly responsible for the obligations of that enterprise ; he dares to risk the actual sum he puts in where he would not dare stake anything more. He is in no position to pay debts contracted by other people, even if these others are not criminal rascals. But, safe in his limited liability, he is able to contribute his mite to his country's industrial develop- - ment and also to derive his proper share of profits from it.

Ease of entrance or withdrawal. A further advantage of the corporate form is that one can withdraw from a corporation quite easily by selling his share on the market. A partner cannot so readily withdraw from a partnership, for many a partnership has been dissolved only after disagreements and even after appeal to the courts. This ease of withdrawal, which is matched by a similar ease of entrance, allows a mobility of business movement which makes the whole organization more flexible and more adaptable to the needs and crises that may arise.

Disadvantages of the corporation. If there were no disadvantages in the corporate form, every business, large and small, would be so organized. What are these disadvantages ? There is the cost of incorporation then again, the officers may be less careful in their management than they would be if they were the sole owners ; again, there is a disadvantage in the fact that a corporation is more subject to governmental control than is an individual or a partnership. Furthermore, it is objected that in large corporations the separation of the employer and employee, and their consequent lack of sympathy with one another, is greater than it could be in smaller concerns. The stockholders who control the policy of the corporation may never have seen certain large portions of its plant, much less have met the persons there employed. This is one of the reasons why a corporation is spoken of not only as impersonal but also as soulless.

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