Page 327 - Encyclopedia of Business and Finance

eobf_F 7/5/06 3:02 PM Page 304

Finance: Historical Perspectives

lic stocks. The emphasis on developing domestic industry FINANCE IN THE 1800S
and reducing dependence on imports was appealing to On the brink of the nineteenth century the United States
potential investors, and private citizens were getting had a dismal record of successful corporations, as illus-
encouragement from the newly formed federal govern- trated by the effort in New Jersey discussed above. The
ment to undertake business activity on a broader scale country was a world of small mercantile businesses. As of
than had been common at the time. 1790, for example, there were only three banks, three
bridge companies, a few insurance associations, and a
At the time the prospectus for this new enterprise was
dozen canal companies. Some businesspeople, however,
being circulated, Alexander Hamilton, the secretary of the
began to see the value of the corporation: The risks of
Treasury, presented his Report on Manufacturers, which
manufacturing made the limited liability of the corpora-
was prepared in response to President George Washing-
tion appealing.
ton’s direction “to prepare and report to the House, a
Several states enacted useful laws. In 1811 New York
proper plan for the encouragement and promotion of
passed a law that allowed for the incorporation of certain
such manufactories as will tend to render the United
kinds of manufacturing concerns with less than $100,000
States independent of other nations” (quoted in Davis, p.
of capital. Connecticut, in 1817, and Massachusetts, in
362).
1830, granted limited liability, which was the first step in
The requisite capital was indeed raised, with most of movement for general incorporation acts. The intent of
the subscriptions secured in New York. Shortly thereafter, such acts was to encourage the financing of entities
panic ensued because the new enterprise was not progress- through the corporate structure and to protect the public
ing as intended. Leading officers and directors were that might be inclined to invest in these new enterprises.
involved in the speculative boom and had not given atten- In the same period, the government was significantly
tion to the actual business of the new enterprise. There- involved in the financing of businesses. As Thomas C.
after, the leaders, who were in possession of most of the Cochran noted:
paid-in funds, went bankrupt. This story reveals the lure
The capital needs of banking and transportation
of becoming wealthy quickly and of general incompetence
brought state participation in business organiza-
among leadership. There were virtually no rules to restrain tion. Few such pioneer enterprises seemed possi-
the behavior of the leaders; they readily, therefore, appro- ble without substantial state, county, or municipal
priated the funds for their own personal use. purchases of stocks and bonds. The credit of the
The society was saved by a loan of $10,000 from the state was generally substituted in part for that of
the private company by issuance of state bonds
Bank of New York, and there is evidence that the secretary
and use of the proceeds to buy the company’s
of Treasury was responsible in securing this financing.
securities. (1966, p. 219)
Nevertheless, there continued to be serious financial prob-
lems, throughout the period when facilities for the envi- At the same time, Cochran noted some of the serious
sioned textile mills were being constructed. The newly drawbacks of the new ownership:
appointed treasurer was supposed to be bonded, but he
Free and secret transferability of corporate owner-
refused. He continued in the position nonetheless. When
ship encouraged grave abuses on the part of
he retired in 1796, the treasurer’s books and the funds
unscrupulous financiers. It was possible for man-
were supposed to be left with the deputy-governor. The aging groups to profit personally by ruining great
books, though, were never recovered. It is not clear companies and then selling out before the situa-
whether all the funds were recovered. The operations were tion became known. (p. 219)
unprofitable and were discontinued in the same year.
Nevertheless, there were conscientious men who were
R. E. Wright (2002) presents an interesting analysis
interested in productive efficiency as well as the quest for
of colonial business behavior using the framework of the
wealth. Among the individuals Cochran identified was
theory of asymmetry in the principal/agent relationship.
Nathan Appleton:
Wright concluded “that colonists did little to reduce
moral hazard in colonial financial markets. Borrowers Nathan Appleton … turning from mercantile
often acted in ways that were not in the best interests of pursuits in 1813, joined with some of the Lowells
and Jacksons, put his capital into large-scale tex-
lenders” (p. 27). It is Wright’s position, however, that most
tile manufacture.… Appleton came to be looked
colonial banks in the early national period learned to limit
upon as the business leader of Massachusetts.…
moral hazard by monitoring depositors’ accounts and not- By 1840 he and his Boston associates had created
ing the use of funds that had been provided through in eastern Massachusetts a miniature of the corpo-
loans. rate industrial society of the twentieth century.

304 ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION