Origins of the Speculation Economy: An Interview with Lawrence Mitchell

Multinational Monitor, May-June 2007 | Go to article overview

Origins of the Speculation Economy: An Interview with Lawrence Mitchell


Lawrence E. Mitchell is Theodore Rinehart Professor of Business Law at the George Washington University Law School. After practicing corporate law for several years on Wall Street, Mitchell entered academia and has been a leading corporate and business law scholar for 20 years. He is the author of The Speculation Economy: How Finance Triumphed Over Industry (2007). Other of his publications include: Progressive Corporate Law (editor, 1995); Stacked Deck: A Story of Selfishness in America (1998); and Corporate Irresponsibility: America's Newest Export (2001).

Multinational Monitor: What are the modern origins of the corporate form and corporate law in the United States?

Lawrence Mitchell: A blend of forms, mostly the British joint stock company and ecclesiastical corporations, created the structural characteristics of the American corporation which ultimately assumed its own unique form. It was used primarily for things we would ordinarily consider to be public works--toll roads, canals, that sort of thing, as well as for churches.

As America industrialized, and especially as the railroads began to grow and be financed mostly with debt, the corporate form became especially useful because it protected its shareholders with limited liability--meaning shareholders were not personally liable for the harms caused or debts owed by the corporation. Of course this also led significant numbers of railroad promoters to suck off the debt into their own pockets and leave the railroads without enough operating capital.

At first, the railroads were financed by their founders with some equity, but debt rapidly became the major form of permanent finance. Railroads have huge fixed costs. You've got constant track maintenance and repair, constant needs for rolling stock and the like, and that kind of money just wasn't available in the United States. A lot of railroads, especially right after the Civil War, began issuing bonds abroad. Europeans were comfortable financing railroads; there was something to secure the collateral. And the corporate form gave the founding shareholders limited liability, so they could raise all this debt and if the railroad went under--as many did--the shareholders wouldn't be liable for the consequences. That's really the original, significant use of a corporation.

The corporation doesn't really become important industrially until after the Civil War.

Industrial businesses adopted the corporate form for several different reasons. They were typically very closely held, their financing was local, and they lived principally off retained earnings, even though they may have had 10, 15, 20 shareholders who contributed to basic equity, so the same financial incentives didn't exist as they did for the railroads. But ease of management, a corporate life that lasted beyond its founders, and similar characteristics made the corporate form attractive to industry. Eventually, industrial businesses began to issue debt and appreciate limited liability as well.

MM: In that earlier period, and also running up to the 1880s, what were the legal restrictions on what corporations were allowed to do?

Mitchell: They were fairly intense. New York passed the first general incorporation law in 1812, and states began to follow after that. The general means of incorporation was special chartering: you'd go to the legislature, you'd ask for a charter, you'd get it if you had buddies on the legislature, with fewer restrictions on things like maximum capital, life of the corporation, corporate purpose and other typical limitations. But even with general incorporation laws, the restrictions were fairly tight. They tended to insist upon maximum and minimum capitalization requirements--the maximum was more important because of the lingering, characteristic American fear of monopoly power, and so they tried to prevent corporations from growing too big. Sometimes the corporation was only allowed to exist for a limited life. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

Origins of the Speculation Economy: An Interview with Lawrence Mitchell
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this article
  • Highlights & Notes
  • Citations
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.