Academic journal article Proceedings of the American Philosophical Society

How the American Corporation Evolved over Two Centuries 1

Academic journal article Proceedings of the American Philosophical Society

How the American Corporation Evolved over Two Centuries 1

Article excerpt

What we think we know is shaped by statements that we hear over and over until we become convinced that they must be true. Of the American business corporation, we often hear the following statements. The corporation is a legal person, with rights and obligations like those possessed by other persons such as us. Unlike us, the corporation has perpetual life. Its owner-shareholders have limited liability. Each share is entitled to one vote in the governance process that elects directors and makes other shareholder decisions. The purpose of the corporation is to produce and market goods and services in such a way as to maximize profits and share price, or what is often termed shareholder value or shareholder wealth.

These truisms embody purposes that are thought to benefit us as individuals, as well as our economy, polity, and society. Legal personhood and perpetual life allow the corporation to make contracts and avoid having to reorganize whenever an owner dies. Limited liability encourages us to pool our capital in corporations that can achieve economies of large-scale production and distribution in ways impossible for sole proprietorships and partnerships; the corporate shareholder knows that he or she cannot lose more than the amount invested even if the corporation fails with debts greater than its assets. One share, one vote strikes us as just a fair and equitable way to govern corporations. Maximizing profits and shareholder value is good for shareholders but also strikes many people as good for society because it indicates that the corporation has deployed its assets to create the most value and thereby contribute to economic growth and rising living standards over time.

One of the uses of history in general, and of economic history in particular, is to remind us that what we believe-what we take for granted today-was not always the case. The institutions and organizations of our modern economy were not given to us by stone tablets delivered from on high, or even delivered to posterity in the form of declarations and constitutions written by great statesman long ago. Rather, they are the result of an evolving historical process. Here, I briefly survey that process over more than two centuries of U.S. history to show how we arrived at our current corporate forms. Since there are currently many doubts about whether the interests of our corporations are aligned with those of American society, we might be interested to know that corporations in the past were often quite different from what they are now. Armed with that knowledge, we can consider how corporations can further evolve in ways that better align their operations with larger societal goals.

I will give more attention to the earlier eras of corporate development. My fellow panelists in this symposium will focus more on recent and current developments.

Early U.S. Corporations: 1790s-1860s

Although the United States borrowed many of its economic and financial institutions-taxes, forms of money, banks and central banks, securities markets, and so on-from earlier, mostly European models, it led the world in developing the modern corporation as a form of competitive business enterprise. In Europe, up to middle of the nineteenth century, the typical corporation was a privileged monopoly created by rulers in return for favors promised by the company, and few such entities existed. Early America was not so different. It appears that only seven business corporations were created in the Thirteen Colonies, and another twenty eight up to 1790.

Contrast those numbers with the United States after 1790. Recent research reveals that in the period from 1790-1860, U.S. state legislatures chartered more than 22,000 corporations by individual acts of their legislatures, and an estimated 7,000-8,000 more under general incorporation laws enacted mostly from the 1840s on.2 Impressive as that is when contrasted with the Old World, it was just a start. …

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