CHAPTER XIX: COMPOUND CAPITAL.

§ 821. Early stages in the genesis of what is now called joint-stock enterprise, are instructive as showing, in several ways, how progress of each kind depends on several kinds of preceding progress; and as also showing how any industrial structure, specialized into the form now familiar to us, arose out of an indefinite germ in which it was mingled with other structures.

The creation of the accumulated fund we call capital, depends on certain usages and conditions. Among peoples who, besides burying with the dead man his valuables, sometimes even killed his animals and cut down his fruit trees, no considerable masses of property could be aggregated. The growth of such masses was also prevented by constant wars, which now absorbed them in meeting expenses and now caused the loss of them by capture. Yet a further prevention commonly resulted from appropriations by chiefs and kings. Their unrestrained greed either made saving futile, or by forcing men to hoard what they saved, rendered it useless for reproductive purposes.

Another obstacle existed. Going back, as the idea of capital does, to days when cattle and sheep mainly formed a rich man’s movable property, and indicating, as the word does, the number of “heads” in his flocks and herds, it is clear that no fund of the kind which the word now connotes was possible. Cattle and sheep could not be disposed of at Edition: current; Page: [527] will. There was only an occasional market for large numbers; and the form of payment was ordinarily not such as rendered the amount easily available for commercial purposes. A money economy had to be well established; and even then, so long as money consisted exclusively of coin, large transactions were much restricted. Only along with the rise of a credit-currency of one or other kind, could individual capital or compound capital take any great developments.

Again, the form of partnership which joint-stock companies exhibit, had to be evolved out of simple partnerships, having their roots in family-organizations and gild-organizations. Fathers and sons, and then larger groups of relatives carrying on the same businesses, naturally, on emerging from the communal state, fell into one or other form of joint ownership and division of profits. And we may safely infer that the gild-organization afterwards evolved, which, considered in its general nature, was a partnership for purposes of defence and regulation, further educated men in the ideas and practices which the joint-stock system implies. Those who constantly combined their powers in pursuit of certain common interests, were led occasionally to combine their individual possessions for common interests—to form large partnerships.

A further needful remark is that these early companies were not wholly industrial but were partly militant. Already, when contemplating gilds, we have seen in them the spirit of antagonism common to all social structures in their days, when nobles fought against one another or joined against the king, when the people of towns had to defend themselves against feudal tyrannies, and when town was against town. Like the gilds, the early combinations of traders which foreshadowed companies, had defence and aggression within their functions. Even now industry is in a considerable measure militant, and it was then still more militant.

§ 822. Scattered pieces of information indicate various dates and places at which these trading combinations first appeared; and indicate also their actions. Italy, which in industry as in art was in advance of the other European nations, had something like a bank in the 12th century: probably of the kind described in the chapter on Auxiliary Exchange, implying an association of traders.

More important and conspicuous, however, were the companies formed for carrying on foreign commerce. Early examples existed in Genoa and Pisa. There the mercantile leagues acquired a political character as a result of their frequent militant operations. So was it afterwards with the Hanseatic League—an association of merchants inhabiting the Hanse towns, who, originally uniting for mutual defence, developed armed fleets with which they carried on successful wars against kings, and which enabled them to put down the hordes of pirates infesting the Northern seas.

The militant character of these bodies was at this stage their predominant character, considered as combinations; since their members were usually not partners in trading transactions, but separately traded under the protection of the aggregate they formed. We read that in England “from very early times, several owners might combine to fit out a ship and buy a cargo, when none of them was able, separately, to risk a very large sum in ventures by sea.” Existing under variously modified names in the 13th century, the first of these, generally called the Hamburg Company, but in Queen Elizabeth’s reign re-chartered as the Company of Merchant Adventurers, had this character in common with other companies of Merchant Adventurers at Exeter and Hull. The title “Merchant Adventurers” in some sort implied that they ran risks in the pursuit of commerce,—risks which, when pirates were prevalent, were often fighting risks. This trait was in a still greater degree possessed by the Russia Company, finally established in 1556, which, having under its charter a political organization, Edition: current; Page: [529] was commissioned to make discoveries and take possession of new lands in the king’s name; at the same time that it was to have, like others of these companies, exclusive privileges of trading within specified limits. Out of indefinite unions, which necessarily possessed compound capital, in some way derived from the contributions of the associated merchants, the change to definite unions possessing compound capital as we now know it, was initiated by the East India Company. But the change was not sudden. At first—

That is, there was a joint-stock company formed for each voyage, which did not commit its members individually to the general fortunes of the Company. However—

Nevertheless the kinship of these forms of organization to earlier forms was still displayed. These companies for carrying on foreign commerce in one or other region, had the character of gilds for external business, possessing certain local monopolies, and being just as hostile to those they called “interlopers” as were the town-gilds to unprivileged competitors. Moreover, the militant character survived, and in some cases grew predominant; for these companies became bodies employing troops and making conquests. Indeed this ancient trait continues down to our own day. The great nations of Europe, called civilized, when they do not themselves invade the territories of weak peoples, depute companies to invade for them; and having aided them in conquering a desirable region, eventually “annex” it—the euphemistic word used for land-theft by politicians, as “convey” was Falstaff’s euphemistic word for theft of money.

Companies formed like these for carrying on foreign Edition: current; Page: [530] trade, whether their capital consisted of indefinite contributions or of definite shares, were not successful. M’Culloch’s Dictionary of Commerce tells us the extent of the failure.

These examples illustrate the truth, illustrated by so many others, that protected industries do not prosper. The case of the East India Company may be taken as typical. Notwithstanding its commercial monopolies and the armed forces behind it, it contracted an enormous debt; and would have been bankrupt long before it was dissolved had it not been for its political connexion.

Once commenced, the system of raising compound capitals by the contributions of many individuals, in definite small portions or shares, spread in various directions. Companies were formed for insurance, for mining, for redeeming lands from the sea, and so on: not a few being “bubble” companies. But out of many dishonest schemes and many honest but unsuccessful ones, there emerged some which became permanent industrial organizations. A natural step from the association of many merchants for defence against pirates, was to the association of many citizens at large to safeguard ship-owners against wrecks: joint-stock insurance societies grew up. Further development led to insurance against dangers of other kinds. Then came unions to work mines: enterprises the uncertainty of which, so great as to deter single individuals, were not so great as to deter combinations of many who shared the profits and losses among them. Very significantly, too, the title “Merchant Adventurers” was paralleled by the title “Mining Adventurers.” The system of compound capital thus extending Edition: current; Page: [531] exhibited, as before, transitional forms; for the shares in these undertakings were of different magnitudes, so that while some held eighths, sixteenths, &c., others held sixty-fourths, and even one-hundred-and-twenty-eighths: a system which was followed by the first water-company, founded by Sir Hugh Middleton.

§ 823. For present purposes details are needless. The things of moment here are the changes of constitution which these industrial institutions have undergone.

That ordinary partnerships, extending from relatives to others, were the germs of joint-stock companies, was suggested above. The suggestion harmonizes with the fact that up to recent times the State continued to regard companies only as partnerships—as overgrown partnerships which it was desirable to repress. The State opposition to them was due in large measure to the perception that without Royal Charters of incorporation, they were doing things which previously could be done only under such charters; and were therefore evading governmental authority. Hence, in 1719, was passed the so-called “Bubble Act:” partly prompted by this feeling but ostensibly to stop the mischief done by bubble companies. Men continued, however, to combine, subject to the unlimited liability of ordinary partners, for the prosecution of various undertakings: the persistence in this course being evidence that among the failures there were successes, and that the system was not bad, as assumed by the legislature. Step by step the obstacles were removed. In 1826 it was made possible for the bodies thus formed to obtain charters which did not absolve their members from their individual responsibilities. Later, such bodies were allowed, without incorporation, to have letters patent which gave them a legal status; enabling them to sue and be sued through a representative. And then in 1844 authority to establish a company was gained by simply obtaining a certificate, and being publicly registered.

Meanwhile on the Continent, in forms somewhat different though allied, joint-stock companies have similarly of late years multiplied. Thus in Prussia, between 1872—1883 inclusive, there were established 1411 companies with a capital of £136,000,000 odd—insurance, chemical works, sugar works, gas and water, textile industries, breweries, metals, railways, &c. France, too, has displayed a kindred spread of these industrial organizations. Their constitutions, differing more or less from one another and from those which are usual in England, need not be detailed. The only remark worth adding about foreign joint-stock companies is that, in their legal forms, they bear traces of the unlike conceptions prevailing here and abroad concerning the relations between citizens and governments. For whereas here the tacit assumption is that there exists in citizens the right to combine for this or that purpose as they please, subject only to such restrictions as the State imposes for the safeguarding of others’ interests, on the Continent the tacit assumption has been that this right does not naturally pertain to citizens, but is conferred on them by the State, in which, by implication, it is latent: a conception indicated by the use of the word “concession.”

The system thus gradually reached by relaxation of restrictions, has led to immense industrial developments which would else have been slow and difficult, if not impossible. When we ask what would have happened had there been none of the resulting facilities for raising masses of compound capital, the reply is that the greater part of the roads, canals, docks, railways, which now exist would not have existed. The wealth and foresight of a man like the Duke of Bridgwater, might occasionally have created one of these extensive works; but there have been few men possessing the requisite means, and still fewer possessing the requisite enterprise. If, again, execution of them had been left to the Government, conservatism and officialism would have raised immense hindrances. The attitude of legislators towards Edition: current; Page: [533] the proposal for the first railway, sufficiently shows that little would have come from State-action. Moreover, the joint-stock system has opened channels for the reproductive use of capital, which else would either have been lying idle or would have been used for less productive purposes. For the goodness of the interest obtained by shareholders, is a measure of the advantage which the public at large derives from the easy distribution of raw materials and manufactured products.

§ 824. The last stage in the development of these industrial associations which have compound capitals has still to be named. In modern forms of them we see the regulative policy, once so pronounced, reduced to its least degree. Both by the central government and by local governments, individuals were, in early days, greatly restricted in the carrying on of their occupations; and at the same time the combinations they formed for the protection and regulation of their industries, were formed by governmental authority, general or local, for which they paid. Of the various hindrances to combinations, originally for regulating industries but eventually for carrying on industries, the last was removed in 1855. Up to that time it had been held needful that the public should be safeguarded against wild and fraudulent schemes, by requiring that each shareholder should be liable to the whole amount of his property for the debts of any company he joined. But at length it was concluded that it would suffice if each shareholder was liable only to the amount of his shares; provided that this limited liability was duly notified to men at large.

Everyone knows the results. Under the limited liability system many bubble-companies, analogous to those of old times, have arisen, and there has been much business under the winding-up Acts: the public has often proved itself an incompetent judge of the projects brought before it. But many useful undertakings have been proposed and carried out. One unanticipated result has been the changing of Edition: current; Page: [534] private trading concerns into limited-liability companies; whether with benefit may be questioned. But the measure has certainly yielded advantage by making it possible to raise capital for relatively small industries of speculative kinds. It has been beneficial, too, in making available for industrial purposes, numberless savings which otherwise would have been idle: absorption of them into the general mass of reproductive capital being furthered by the issue of shares of small denominations. So that now stagnant capital has almost disappeared.

Before leaving the topic it is proper to point out that in this case, as in other cases, coerciveness of regulation declines politically, ecclesiastically, and industrially at the same time. Many facts have shown us that while the individual man has acquired greater liberty as a citizen and greater religious liberty, he has also acquired greater liberty in respect of his occupations; and here we see that he has simultaneously acquired greater liberty of combination for industrial purposes. Indeed, in conformity with the universal law of rhythm, there has been a change from excess of restriction to deficiency of restriction. As is implied by legislation now pending, the facilities for forming companies and raising compound capitals have been too great. Of sundry examples here is one. Directors are allowed to issue prospectuses in which it is said that those who take shares will be understood to waive the right to know the contents of certain preliminary agreements, made with promoters—are allowed to ask the public to subscribe while not knowing fully the circumstances of the case. A rational interpretation of legal principles would have negatived this. In any proper contract the terms on both sides are distinctly specified. If they are not, one of the parties to the contract is bound completely while the other is bound incompletely—a result at variance with the very nature of contract. Where the transaction is one that demands definiteness on one side while leaving the other side indefinite, the law should ignore the contract as one that cannot be enforced.