Corporations in the Womb

In light of the recent Supreme Court ruling in Citizens United v. FEC, I thought I’d share another reminder of the genesis of the modern conglomerate business corporation.

In the second half of the nineteenth century, when major investors in the United States found themselves in a confounding situation.

On one hand, as part of a boom economic historians call The Grand Traverse, railroad construction and rapid urbanization created an unprecedentedly good business climate. Indeed, after being interrupted by the carnage of the Civil War, in the immediate post-war years, not only did “both gross and net investment rates jump sharply above any levels hitherto seen and continue to rise,” but new technologies and managerial insights “exerted upward pressure on the real rate of return…to all conventional property.”i At the same time, economic conditions were unstable. September of 1873 saw the arrival of “an economic crisis of unparalled severity. Economic historian Richard B. DuBoff described the ensuing Long Depression:

The contraction was the longest in American history, pasting 65 months….Just as firms were starting to compete in an increasingly national market, and just as they began to invest more heavily in fixed capital, they found that they were expanding their productive capacity faster than the demand for their products….From the viewpoint of businesses caught in this trap, adjustments were made more imperative and more difficult to achieve by price levels that fell nearly 30 percent between 1873 and 1896….The blow could not easily be forgotten.

Among investors, the response was an intensive new search for organizational responses that could diminish price competition while preserving the new basic profitability or large and growing businesses. Again, DuBoff relates the basic history:

A look at the first stage of this process, to the early 1880s, is revealing. “Pools,” “gentlemen’s agreements,” and other informal market-sharing arrangements were the first reactions to the protracted depression of 1873-1878 and outbreaks of cutthroat price competition. But they were legally unenforceable and unstable as well (“ropes of sand,” John D. Rockefeller called them). As the experience of the railroads was also demonstrating, something more durable was needed. The cutting edge of the movement to control prices and markets was a new form or an old device – the trust agreement, worked out between 1879 and 1882 by Samuel C. T. Dodd, Standard Oil’s attorney. Owners of each member firm deposited their common stock in the trust in return for certificates entitling them to share in the combined profits. Voting rights were delegated to the trustees who could then fix prices and divide up the market for the member firms, each of which remained a legal entity.

Trusts were not only organizationally unwieldy, but they provoked mounting public ire. As a result, business interests continued their search for heightened protection for their monies. “Investors are asserting themselves,” reported The New York Times in an October 19, 1889 cover story titled “Trusts Are Bound to Go.” “The Times has ample authority for its statement that the Cotton Oil Trust is to be wiped out, and at once,” wrote the paper. “The present intentions of the millionaire magnates in this trust are not newly conceived,” it continued. “As long ago as last Winter they had so far discerned and appreciated the drift of public sentiment regarding trusts as to become convinced that they had much to be gained by the abandonment of the trust idea, with its secrets and mysteries.” The transition the millionaire magnates of the Cotton Oil Trust were overseeing was, in the Times‘ phrasing, the dissolution of the Trust and its re-organization “under the laws of New Jersey [as] a corporation known as the Cotton Oil Company of New Jersey,” chaired by “lawyer William Nelson Cromwell.”ii

It was no accident that Cromwell’s name appeared in the Cotton Oil Company’s story. Having represented many trusts in their ultimately losing legal and public opinion battles, Cromwell, a founding partner of Sullivan and Cromwell, which remains one of the world’s leading corporate law firms, spearheaded an upper-class drive to convince state legislatures to drop traditional legal restrictions on corporations’ rights to enter into activities not defined in their charters and to buy one another’s stock. As recounted by legal historian Morton Horwitz, Cromwell and the New Jersey statehouse were on rather intimate terms. When it came to changing New Jersey’s corporation law:

Several corporation lawyers connected with Cromwell’s firm “were among those active in the drafting of this amendment.” The New Jersey Law of 1889, which permitted incorporation “for any lawful business or purpose whatever,” was among the first the allow one corporation to own the stock of another, thus legalizing the holding company and making the trust device unnecessary. Cromwell himself seems to have been the first lawyer to use the New Jersey provisions.iii

As Horwitz notes, not least because after it passed, “the entire expenses of the state of New Jersey were paid out of corporation fees,” “passage of the New Jersey Corporation Law [was] followed by the rapid capitulation of many other states.” The ensuing deregulatory race to the bottom “marked the end of all serious efforts to use corporation law to regulate consolidation.”iv Just as the Sherman Act was driving a stake through the trusts, the vested interests behind the trusts were making themselves a new and improved way to enjoy the benefits of conglomerated investments. The trusts were busted, but the modern, minimally regulated “holding company” corporation strode happily out of the ashes.

Millionaire magnates were not slow to seize the legal and organizational victory Cromwell had crafted. None other than Thomas Alva Edison was among those who stopped to explain elite thinking to journalists of the day. In a February 21, 1892 article titled “Mr. Edison is Satisfied,” The New York Times reported that Edison’s satisfaction with the pending merger of Edison Electric and Thomson-Houston Electric to form the General Electric corporation was rooted in his prior dissatisfaction with competitive business conditions. Edison’s quote ran as follows:

Recently, there has been a sharp rivalry between the companies, and prices have been cut so that there is little profit in the manufacture of electrical machinery for anybody. The consolidation of the companies will give the added advantage that a large concern has over a small one. It will give a larger working capital. It will do away with a competition that has become so sharp that the product of the factories has been worth little more than ordinary hardware….I do not know that there will be any increase in prices, but there should be an increase of 3 or 4 percent in the profits by the simple advantage of placing all of the interests under one management….I simply want to get as large dividends as possible from such stock as I hold.

Edison’s statement is important not just as powerful evidence of the motivations behind one of human history’s most significant transitions, but also because, in it, Edison actually mentions the three great advantages giant corporations have since bestowed upon their shareholders: reduced price competition, financial and organizational size, and management.

As they were intended to do, major corporations have distinctly altered the normal course of prices in the capitalist economy. Throughout the nineteenth century, price inflation was rare. In the United States, inflation occurred in only 21 of the 100 years from 1800 through 1899.v Since 1900, con­versely, there have been 21 non-inflationary years in the United States economy, only three of which have occurred since 1940. Even in the year 2009, well into the worst economic contraction since the Great Depression of the 1930s, the U.S. Consumer Price Index fell only four-tenths of one So, corporate capitalism has been highly successful at meeting millionaire magnates’ hopes for tamping down price competition.

The same is certainly true of the new order’s facilitation of investors’ drive for size and the added advantages that a large concern has over a small one. From the time of the 1889 New Jersey Corporation Law, relative handfuls of very large businesses have increasingly dominated the U.S. and world economies. By the first decade of the twentieth century, 300 corporations already controlled 40 percent of U.S. manufacturing assets.vii In the year 2000, there were more multinational corporations than national GDPs among of the worlds l00 largest economic flow centers.viii In 2008, in a $70 trillion world economy, the largest 2,000 corporations took in $32 trillion in sales revenues, while employing only 75 million of the planet’s 6.7 billion people.ix Overall, in the words of ecologist and political economist John Bellamy Foster, by the end of the twentieth centu­ry, because of steady corporate growth and unceasing merger waves, few, if any, of the giant firms [were] confined to a single industry. As a result, the entire system of industrial classification has lost much of its meaning,” and conventional statistics on concentration within single industries were, be­cause of the size and reach of huge conglomerate corporations, “a poorer and poorer . . . measure of [corporate] power.

As Edison hoped, the triumph of giant corporations as dominant vehicles of capitalist invest­ment also triggered a managerial revolution, which both made busi­ness management a distinct profession and astronomically expanded the amount of money and number of people engaged in it. Because systemat­ic management has become so widespread and familiar, it is easy to forget that before corporate capitalism business bossing was done by individual proprietors with tiny or no staffs, on the basis of traditional arrangements, rules of thumb, and sheer guesswork. By contrast, within two decades of passage of the New Jersey Corporation Law of 1889, managerial accountants and mechanical engineers – new sorts of bureaucrats paid to work full-time refining the operations feeding corporate bottom lines – were numerous and specialized enough to have founded their own professional societies. Like­wise, business management, first taught as a serious academic discipline in 1881 at the University of Pennsylvania, was, by 1916, taught at 115 other col­leges and universities, including Harvard, Dartmouth, NewYork University, and the Universities. of Chicago and California.” The net effect has been that, as major firms have grown in size, avoided full price competition, and taught them­selves to reorganize the human and mechanical processes feeding their coffers, they have become able to spend more and more money on new managerial endeavors. Whenever such new endeavors have promised not only to repay their own costs but to add significantly to the firm’s bottom line, they have been undertaken. Even off-the-job behaviors now increasingly fall within the scope of big business management.x

iRichard B. DuBoff, Accumulation and Power: An Economic History of the United States (Armonk: M.E. Sharpe, 1989), pp. 29, 31.

ii“Trusts Are Bound to Go: American Cotton Oil Sets its Fellows an Example,” unsigned article, The New York Times, October 19, 1889, p. 1.

iiiMorton J. Horwitz, The Transformation of American Law, 1870-1960: The Crisis of Legal Orthodoxy (New York: Oxford University Press, 1992), p. 83.

ivIbid., p. 84.

vFederal Reserve Bank of Minneapolis, “Consumer Price Index (Estimate) 1800-2008, <>.

viU.S. Bureau of Labor Statistics, “Table Containing History of CPI,” <>.

viiDuBoff, Accumulation and Power, pp. 57-58.

viiiSarah Anderson and John Cavanaugh, “Top 200: The Rise of Corporate Global Power,” <>.

ixSteve Kichen, “The Big Picture,” <>.

xMichael Dawson, The Consumer Trap: Big Business Marketing in American Life (Urbana: University of Illinois Press, 2003).

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