CHAPTER V
The Rise of the Corporation¹

THROUGH the latter half of the 19th century corporations multiplied and increasingly displaced other forms of business concerns, and took over more and more of the control of the industrial system. By this move the conduct and control of industrial production has more and more become a matter of corporation finance. Writers on Industrial History who deal with that period will commonly arrange their narrative and descriptions in the form of life-histories of the greater corporations and corporation financiers of the time, backed with supplementary matter on the movement of population and the state of the industrial arts.² Which makes it a history of business enterprise rather than of industry, and with which it is not usual to find fault on that account.

The corporation (or “company,” in English usage) is a business concern, not an industrial unit. It is a business concern which has been created by a capitalisation of funds, and which accordingly rests on credit; in which it differs, at least in a marked degree, from the private firms and partnerships which it has superseded as the ordinary type-form of concern doing business in industry and commerce. It is an incorporation of absentee ownership, wholly and obviously. Hence it is necessarily impersonal in all its contacts and dealings, whether with other business concerns or with the workmen employed in the industry. It is a business concern only, and in the nature of the case its activities as a corporation are limited to business transactions of the nature of bargain and sale, and its aims are confined to results which can be brought into a balance-sheet in terms of net gain. The corporation’s control and direction of industry is a financial control and direction; which always and necessarily takes effect in industry at the second remove only, by means of a business transaction which is of the nature of a bargain; in pursuit of a businesslike outcome which is statable in terms of outlay and income.

A corporation which does business in industry will employ technical experts to manage the work and oversee the processes into which its outlay goes and out of which its income is (indirectly) drawn ; but such a corporation is not itself an organisation of technical personnel, nor can its corporate activities be stated in terms which have a technological meaning. Its end and aim is not productive work, but profitable business; and its corporate activities are not in the nature of workmanship, but of salesmanship. If it is an “industrial” corporation, so called, it will make use of technical ways and means, processes and products ; but it makes use of them as ways and means of doing a profitable business. It has only an absentee beneficiary’s interest in the work to be done. It is a pecuniary institution, not an industrial appliance. It is an incorporation of ownership to do business for private gain at the cost of any whom it may concern.

This is not said by way of finding fault or raising an issue. The rise of the corporation toward the middle of the century, and its subsequent growth, was not due to any access of iniquity ; nor on the other hand does it appear to have resulted in increased hardship. It came on by force of circumstances, because the conditions and methods of business were maturing into such shape as to head up in this outcome. The incentives which drove on to this outcome were the sound and laudable incentives of greater expedition and larger net gains to be got by a more exhaustive use of credit. Corporation business is quite like any other form of business enterprise in being a quest of net profits at the cost of any whom it may concern. It is only that at this juncture in the advance of technology and population, and consequently of trade and industry, business conditions were falling into such shape that larger net gains could be got by use of the corporate form of business organisation than by the methods and forms of procedure previously in use.

It has been usual, indeed it has long been an inveterate habit, among economists and public writers, to assume and say that the corporation came into use as a means of increasing the scale on which industry was carried on, by providing larger assemblages of material appliances and drawing them together into larger working units. Doubtless there is much truth in that opinion, or at least the facts will bear that construction. It is, e. g., strongly borne out by the visible results in such an industry as railroading, and evidence to the same effect is not wanting in other lines of production and service. Butfthe use of a larger scale of production is a technological device, whereas the corporation is a business arrangement.? The incentives which gave rise to the corporation and which have made it the dominant form of business organisation must accordingly be incentives of business; that is to say incentives of pecuniary gain, of increased net gain per cent, on the investment.

Safe and sane business men would go in for incorporation only on a good prospect of getting a little something more for nothing by following that lead, or on the promise of incurring a margin of net loss by failing to follow the lead. To employ a larger scale of production is a sound business proposition only so long as this larger scale will bring an increased net gain in the aggregate price of the output; which will be the outcome within limits and within certain lines of industry, and which doubtless held true and had its effect in some appreciable degree at the time when the corporation was coming into its dominant position in modern industrial business.³

But the corporation is always a business concern, not an industrial appliance. It is a means of making money, not of making goods. The production of goods or services, wherever that sort of thing is included among the corporation’s affairs, is incidental to the making of money and is carried only so far as will yield the largest net gain in terms of money,—all according to the principle of “what the traffic will bear,” or of “balanced return” which underlies all sound business, and more particularly all corporation business.

This principle has come to be formally recognised and accepted as good and final ever since the corporation came into general use as the standard form of business concern. Doubtless, and obviously, the spirit of it has always been present and decisive wherever men have done business, from time immemorial, but in concession to ancient prejudice it used to be decently covered over with professions of something else. It is only since the dominant interest of the civilised nations has shifted from production for a livelihood to investment for a profit, that this principle of net gain has come to stand out naked and unashamed, as the sound and honest rule that should govern and limit the production of goods for human use. And the corporation incorporates this underlying principle of business enterprise more singly and adequately than any form of organisation that had gone before. Business enterprise may be said to have reached its majority when the corporation came to take first place and became the master institution of civilised life.

It is also a part of the folklore of Political Economy that the corporation—jointstock company—has exerted, and continues to exert, a creative force in productive industry, in that it draws out of retirement many small accumulated hoards of savings, and so combines them and puts them to work when they would otherwise remain idle. By this means the active capital is augmented by so much ; which is believed to augment the materials and appliances of industry by so much, and thereby to increase the volume of work and output in a corresponding degree. This faith in the creative efficiency of capital funds and capitalised savings is one of the axioms of the business community. It is a safe presumption that no sound business man would question it. Savings will produce goods so soon as they are invested and capitalised. A more attentive scrutiny of this proposition should throw some light on the nature and uses of corporation finance.

The savings which are to be drawn out and mobilised, turned to use by corporation finance, are held and brought out in the shape of funds—money, coin, banknotes, savings-banks deposits, money borrowed on collateral, and the like. They are not material goods that can be employed in production. In practical fact, the savings in question have existed and continue to exist only in the form of records of ownership, commonly evidences of debt. What is transferred in the transactions by which the savings are taken over into corporate capital is commonly some form of credit instrument; and the transactions result in an augmentation of the volume of outstanding credit instruments. Whether there are any physically useful goods anywhere held in store back of these funded savings—physical goods which are in any special sense “represented” by these funds—is an open question, with the presumption running strongly to the contrary. Apart from warehouse receipts and the like, which play a negligible part in these premises, the saved up funds foot up to an absentee claimant’s undifferen-tiated claim on a share in the outstanding stock of merchantable goods at large. Any multiplication of such claims, or any mobilisation of an added number of them, adds nothing to the stock of goods on hand; it only reduces the share per unit of effectual claims, to answer to the increased number of units. An immediate consequence of the mobilisation of savings by corporation finance, therefore, will be an inflation of general prices, a depreciation of the currency.

In any case it is not the underlying goods, if any, that are mobilised in such a financial transaction, but the funds. It is the funds that go to swell the capitalisation. Capitalisation is a transaction in funds, not a physical operation. The transaction is concluded in a transfer of funds and the creation of a corresponding credit obligation, not in any corporeal transfer and delivery of productive goods. It is a transaction in credit, in the nature of a loan, by which the corporation financier comes in for the use of additional funds and is enabled to increase the capitalisation and the purchasing-power of the business concern for which he acts. These funds may be invested in industry—materials, equipment, wages; in which case they constitute an addition to the purchasing-power which is thrown into the market for these things, without making any corresponding addition to the store of purchasable goods in hand which this increased power is to buy. If all goes well there follows a transfer of goods bought, but at a higher price than the same goods would have brought in the absence of the new purchasing-power which has been brought into the market by this transaction in corporation finance. And that is all that can be counted on for a certainty.

The total of useful goods in hand is the same as before, as counted by weight and tale ; but the total wealth in hand has been increased by a rise of prices, by some multiple of the added purchasing power, as counted in money-values. Measured by physical units or physical usefulness the total effect is nil, at the best ; but measured in money-values there has been an appreciable addition to the total wealth, represented immediately by the corporate capital in which the funds in question have been invested and indirectly by the enhanced level of prices. There has been a creation of funded wealth without an increase of material goods.

So far the result would appear to be quite unsubstantial. Money-values have been inflated by an inflation of credit, which has been capitalised. But men do not see it in that light; use and wont prevents them. In all these civilised countries where the price system has gone into effect men count their wealth in money-values. So much so that by settled habit, induced by long and close application to the pursuit of net gain in terms of price, men have come to the conviction that money-values are more real and substantial than any of the material facts in this transitory world. So much so that the final purpose of any businesslike undertaking is always a sale, by which the seller comes in for the price of his goods; and when a person has sold his goods, and so becomes in effect a creditor by that much, he is said to have “realised” his wealth, or to have “realised” on his holdings. In the business world the price of things is a more substantial fact than the things themselves. Therefore in all these civilised nations, where net gain in price is the master passion and where the corporation has come to be the master institution, the endless ⁴ use of credit has enabled the wealth in hand to multiply far and away out of proportion to the increased production of goods due to the advance of the industrial arts.

But corporation finance, even in that simple and obvious form in which it first went into action during the middle half of the nineteenth century, is not a small and easy matter, to be disposed of in a passing paragraph. It has, in fact, occupied many able writers through many well-considered volumes.⁵ Yet there is a little something to be said here in the way of additional comment on the work of the corporation considered as the master institution of the business world during the period when the business situation was maturing into the shape which it has taken on in more recent times.

If the nature and uses of the corporation be considered in terms of that earlier and simpler business practice out of which the corporate form of organisation arose, the case will stand somewhat as follows. The corporation arises out of a collective credit transaction whereby funds supplied by the stockholders (shareholders) are entrusted to the corporation as a going concern, to be administered for their benefit under certain specified limitations. The company so organised is, therefore, an impersonal incorporation of liabilities to the stockholders, and by employing these liabilities as collateral (formally or informally) it will then procure further capital by an issue of securities (debentures, typically bonds) bearing a stated rate of income and constituting a lien on the assets of the corporation. The securities outstanding make up the capitalisation, and the stated income rates borne by these securities are fixed charges on the corporate earnings. Such is the simplest case of corporation finance, neglecting certain minor facts that do not materially affect the typical working-out of the corporation’s control of industry; which is the point of interest here.

Two main and consequential facts are obvious on the face of things: (a) an inflation of credit; and (b) a capitalisation of funds, essentially liabilities, with fixed charges. The inflation of credit has been spoken of above, as well as its immediate consequence in the inflation of prices. It may be worth while to note here in the same connection that the continued advance of the industrial arts during the same period has constantly been at work to offset or minimise that advance of prices which the credit operations of corporation finance have constantly been at work to produce. So that any statistical presentation of the actual course of prices during the period will not show in any adequate fashion how greatly the inflation of credit has acted to inflate prices. At the same time the inflation of credit has broken down from time to time in the way of crises and depressions, whereupon the process of inflation has had to begin over again. All of which confuses the case.

A further effect of the inflation should also be noted briefly. Inasmuch as in any community that is given to business enterprise men habitually rate their wealth and their gains in money-values, any inflation of money-values will bring on what is called “buoyancy” throughout the business community and lead to a heightened business activity and a spirit of confident adventure. Such a situation presents a promise of an uncommonly wide margin of something for nothing, and by the simple money-value logic of business it results in an increased volume of transactions and a consequent release of the industrial forces controlled by the business community. There results a period of prosperity, during which productive industry is speeded up to meet the larger demands of the market; so that for a time the industrial equipment and man-power may be allowed to run at something approaching full capacity. The eventual consequence of such a period of prosperity in that past era which is here in question was, as a matter of course, “overproduction,” glut, depression, and commonly crisis with disastrous liquidation; but the prosperity would be no less actual for the time being, and it is to be set down to the credit of the credit-inflation out of which such a run of industrial activity has arisen. In later times the more perfect and comprehensive control of credit on a unified plan, and by collusion of the greater credit institutions, has virtually done away with these unadvised fluctuations of prosperity and depression; although even yet a general liquidation may be, and a general depression already has been, brought on by a credit-inflation of such unexampled sweep as to exceed the capacity of that apparatus of control that has been made and provided for the stabilisation of this business.

Throughout the period dominated by corporation finance the use of credit, therefore, has had much, if not all, to do with periodically speeding up business, and so speeding up production for the market; and the corporation, which has been the chief embodiment and vehicle of credit in the nineteenth century, has had its share in that work. It is true, there was always bound up with this periodical business prosperity a corresponding periodical liquidation and depression, which always brought curtailment and retardation in industry. And it is at least doubtful if the one could have been had without the other. The history of that period is a history of rythmically recurring fluctuations between prosperity and depression, recurring so constantly and typically as to argue that the two are inseparable phases of the same movement ; which in turn would argue that any prosperity so brought on by credit inflation—also called “returning confidence”—can not have furthered the growth of industry or increased the volume of production in the long run, since each recurring wave of prosperity was always and unavoidably followed and offset by an equivalent wave of depression and retardation due to the same set of causes, leaving no net gain traceable to this cause. All of which leaves the point in doubt.⁶

But while the long-term use and value of credit inflation as a creator of prosperity is left in doubt, there is at least one other point, of a similar bearing, at which the long-term effect of corporation finance on industry is not similarly doubtful. The corporation is an incorporation of credit, capitalised on the basis of the funds invested and to the amount of its prospective earning-capacity. It carries fixed charges to an amount corresponding to its capitalisation—charges formally enforceable in the case of bonds and preferred stock (preference shares) and insisted on with tenacity in the case of the common stock. There is no provision for a shrinkage of assets, and but a slight and doubtful provision for a shrinkage of earnings. In other words, the corporation is organised for prosperity, not for adversity, and it is somewhat helpless in the face of adversity. It is not designed to carry on in a falling market. Fixed charges must be met, on pain of insolvency, and earnings can accordingly not be allowed to fall off materially. More particularly since it is the practice in sound corporation finance to capitalise any increase of earnings that looks at all promising, and cover them with an issue of securities bearing fixed charges. The principle involved in this practice has been called “Trading on the Equity.” ⁷

The reason for “trading on the equity” and so increasing the issue of securities with fixed charges as far as the corporation’s earnings will bear, is the urgent need of more capital. The need of more capital in business is insatiable, or “indefinitely extensible,” because funds are a means of competition and business is competitive. This abiding need of more capital has commonly beset the common run of corporations in brisk or ordinary times, and it may rise to the point of desperation in times of depression. All of which holds true in a particular degree for that earlier date which here is in question, before the present, twentieth-century, phase of corporation finance had come into action. There is always a disposition to trade on a thinner equity, to cover more nearly all assets with an issue of securities with fixed charges; which constitute a lien on the corporation’s assets, and which will bring the concern to insolvency so soon as the earnings fall off materially, as they are likely to do in dull times. And the reason for this abiding need of more capital is the competitive use of funds in a rising market ; the rise of the market being itself in the main caused by this competitive use of funds.

The competitive use of funds may, though it need not, involve .a competitive increase of the production of goods. In brisk times there is likely to be something in the way of a competitive increase of the volume of output, but in ordinary times such an effect is not commonly to be observed. It remains true, of course, that the corporations are business concerns, and the competition between them is a business competition; that is to say, it is a competitive endeavour to realise the largest net gain in terms of price. So that the competitive endeavour always centers finally on salesmanship; and the stress of competition may accordingly fall on increased production in case and so far as an increased output can be counted on to bring an increased net return in terms of price, and not otherwise,—according to the well-known business principle of what the traffic will bear.

Witness the present situation (1923) as it has stood since the Armistice in 1918; the generality of business concerns are and have all this time been seeking additional funds, but evidently not to increase the output of goods, since neither the equipment controlled by these concerns nor the available man-power are or have been employed to much more than one-half their capacity.

Indeed, increased production of goods regardless of market conditions—i. e., regardless of what the traffic will bear—could have gone into action on very few hours notice and on an unexampled scale at any time during these years of unemployment and Watchful Waiting since the Armistice; but while such increased production has been quite feasible, technically, and quite urgently desirable as a matter of the consumptive need of goods, it would be suicidal as a matter of business. During all this time the traffic would not bear an increased production of goods. The result would, it is believed, be a calamitous liquidation, in which a greatly inflated credit situation would collapse, and would involve a cancellation of, perhaps, one-half of the money-values now carried on the books of the business community,—which is not to be contemplated, not to say with equanimity. It is true, the community, aparf from the business concerns, would be that much better off in respect of useful goods and the other material amenities of life; but in any civilised nation the needs of business are paramount, and according to business principles (net gain in terms of price) it still is good and right that the popular need of work and goods should wait on the business need of net gain computed on outstanding credits.

This situation that has prevailed since the Armistice and has stood over as a product of that season of spectacular waste and profiteering covered by the War, is the same in kind as the situation which prevailed at any period after corporation finance first came into control of the leading industries in the nineteenth century. It is only an exaggerated case of that with which all civilised men are most familiar, in much the same measure in which they are civilised, and for the maintenance of which they have undergone unexampled sacrifices and are ready to undergo as much more. In short, it is business as usual, only more of it. It is business as usual under the régime of corporation finance. And such has been the nature of business-as-usual ever since and so far as corporation finance has taken over the control of industry ; in the nineteenth century in such measure as the petty circumstances of the nineteenth century permitted, and in the twentieth century on that magnificent scale of unemployment, privation, and underfeeding that is now to be seen all over the place, rising here and there to the pitch of famine and pestilence. It is not possible, on sound business grounds, to let the industrial forces of the country go to work and produce what, in the physical sense, the country needs ; because a free run of production would, it is believed, be ruinous for business; because it would lower prices and so reduce the net business gain below the danger point—the point below which the fixed charges on outstanding obligations would not be covered by the net returns. Hence what is conveniently called capitalistic sabotage or businesslike sabotage on industry.

Corporation finance has always proceeded on a capitalisation of credit, with fixed charges, carried as far as circumstances would permit. And circumstances have permitted this capitalisation of credit to go farther the more widely inclusive the scheme of corporation finance has become and the more capable the apparatus for stabilising credit has become. Which comes to saying that the need of a businesslike sabotage on industry, occasional or habitual, has grown measure for measure as the scope and volume of corporation finance has grown, and as the equilibrium of make-believe carried forward in the outstanding securities has grown more inclusive and more delicately balanced.

And all the while the industrial arts have grown more efficient in detail, at the same time that the range of industries and products which have come under the rule of the mechanical industry has grown greater; new details and new ramifications have been added to the mechanical technology; new materials and new natural resources have continually been added to what was already in hand, and the whole has all the while been falling into a more close-knit system of interlocking industrial processes. All of which has gone, together, progressively to heighten the productive capacity per capita of an ever increasing and increasingly workmanlike population.

So the continued progress of the industrial arts has become a continued menace to the equilibrium of business, has forever threatened to lower the cost per unit and to increase the volume of output beyond the danger point,— the point written into the corporation securities in the shape of fixed charges on funds borrowed for operation under industrial conditions that have progressively grown obsolete. For the ceaseless advance of the mechanical technology has also the effect of lowering the production cost of the necessary equipment, as also the (physical) cost at which raw materials may be had. And the remedy by which this inordinate productivity of the industrial arts is to be defeated or minimised is always a businesslike sabotage, a prudent measure of unemployment and a curtailment of output, such as will keep prices running above that salutary minimum that is required to pay fixed charges on the funded make-believe and allow a “reasonable profit” on investments.

Something can always be done toward this end by a campaign of salesmanship, and quite as much has been done in that way as one would like to admit. But the greater work and the greater expenditure on salesmanship has come at a later date, later than that early phase of corporation finance with which the argument is immediately occupied here; so that any fuller discussion of salesmanship and its place in the economy of business will come more fittingly at a later passage. But the rise of salesmanship into the first rank among the matters with which business is concerned dates back to the same general period that saw the early rise of corporation finance. And salesmanship and sabotage have grown up together and have always been bound together in the strategy of business during all this time, so that the two may fairly be spoken of as the twin pillars of the edifice of business-as-usual in recent times. Salesmanship being the end and animating purpose of all business that is done for a price, that is to say business-as-usual, sabotage on production may even properly be counted as one of the expedients of salesmanship, although it is so greatly the first among these expedients as to put it in a class by itself among the duties of business enterprise. To increase sales and curtail the output is the appointed way of maintaining prices and increasing the net gain, which is the whole end and duty of business enterprise.

That period which has here been called the “era of free competition” was marked by a reasonably free competitive production of goods for the market, the profits of the business to be derived from competitive underselling. It is for such a “competitive system” that the economists have consistently spoken, through the nineteenth century and after, and the rehabilitation of it is still the abiding concern of many thoughtful persons. In practical effect it tapered off to an uncertain close in England about the middle of the century, in America something like a quarter-century later. So that it is a past phase. It meant a competition between producing-sellers, and so far as the plan was operative it inured to the benefit of the consumers.

Doubtless, such freely competitive production and selling prevailed only within reasonable bounds even in the time when it may be said to have been the rule in industrial business, and with the passage of time and the approaching saturation of the market the reasonable bounds gradually grew narrower and stricter. The manner of conducting the business passed by insensible degrees into a new order, and it became an increasingly patent matter-of-course for business enterprise in this field consistently to pursue the net gain by maintaining prices and curtailing the output.

It is not that competition ceased when this “competitive system” fell into decay, but only that the incidence of it has shifted. The competition which then used to run mutually between the producing-sellers has since then increasingly come to run between the business community on the one side and the consumers on the other. Salesmanship, with sabotage, has grown gradually greater and keener, at an increasing cost. And the end of this salesmanship is to get a margin of something for nothing at the cost of the consumer in a closed market. Whereas on the earlier plan the net gain was sought by underselling an increased output of serviceable goods in an open market. The old-fashioned plan, so far as it was effective, might be called a competition in workmanship; the later plan, so far as it has gone into effect, is a competition in publicity and scarcity.

In the workday actualities of the business the contrast between the ancient plan, that ruled the days before the coming of corporation finance, and the practice of later times is neither so broad nor so sheer as this characterisation would make it; but the difference is after all sufficiently visible, and it runs to the effect implied in this characterisation.

1: Joint-stock Company, Societé anonyme, Aktiengesellschaft.

2: Cf., e. g., Burton J. Hendrick, The Age of Big Business

3: Mr. Dewing discusses this point in a very competent fashion under “The Law of Balanced Return.”—see A. S. Dewing, The Financial Policy of Corporations, vol. iv, ch. ii.

4: Endless in the sense that in the ordinary course of business no transaction of any consequence terminates in anything else than a new credit arrangement. And when one sells out and “realises” on his holdings the “reality” which he comes in for is invariably some form of fiduciary paper, some evidence of debt. Indeed, even if it were practicable to close out and “realise” in cash—say, in coin—it would not be sound business; it would be a losing game, except conceivably in the case of a banking concern which might have use for a store of specie on the basis of which to extend its credit transactions.

5: Cf., e.g., E. S. Meade, Corporation Finance; H. W. Lyon, Corporation Finance; A. S. Dewing, The Financial Policy of Corporations.

6: Cf. W. C. Mitchell, Business Cycles.

7: Cf. Lyon, Capitalisation, ch. ii.