Monday, May 20, 2013

Incorporating the self-made man

What we think of as the essence of the capitalist system -- competition -- was anathema to the way corporations were originally created and operated.

The following post is part of an ongoing series on the self-made man in U.S. history. 

Nowhere was the the emergence of a modern industrial economy in the 19th century more clear than in the new meaning and uses of a longstanding institution: the corporation. Prior to 1800, corporations were created – “chartered,” to use the technical term – by governments for the purpose of promoting economic activity in the name of the public good. This was how, for example, the colonies of Virginia and Massachusetts had been established (the latter smuggling in a religious agenda its directors hoped royal authorities would overlook). Corporations were licensed monopolies granted to aristocrats, natural and otherwise, for what was assumed to be plural benefit. Members of the corporation received a unique right to trade – and the right to bar anyone else from trading – in a particular commodity, territory, or both. In return, the corporation would, in terms of tax revenue and political loyalty, support the national interest against other imperial rivals or domestic miscreants who attempted to trade without government supervision and permission.

Today we think of economic competition as the very essence of a healthy economy. That’s because we live in a capitalist society. But in the mercantilist world of colonial America, competition was a problem, not a solution – something that fostered conflict and distraction from the common good. This notion was subject to increasing pressure – the colonists considered the East India Company as a locus of oppression and launched the Boston Tea Party to attack it – and a growing sense that corporations functioned as instruments of private corruption. But a belief in the viability of, even need for, the traditional corporation survived Revolution. It was especially prevalent among the old Federalist elite. In 1810, retreating Federalists in Massachusetts succeeded in turning Harvard College into a private corporation to protect it from what they feared would be the rising Jeffersonian mob mentality.

One can see both the persistence of this corporate ideal and its erosion in the career John Jacob Astor (pictured above), a merchant who amassed one of the great private fortunes in American history. In 1808 the federal government granted him a charter for the American Fur Company. For Astor, the new corporation was a crucial instrument in consolidating his growing power in the lucrative fur trade, furnishing him with the basis of a commercial empire that would span Europe, Asia, and the North American continent (he established an outpost he called Astoria in what became the Oregon territory). For the U.S. government, Astoria’s company was a vehicle for contesting British domination of the fur trade and establishing commercial links with Russia and China.

Astor was a good example of one of those people Parrington described as “strange figures, sprung from obscure origins.” Born in Germany in 1763, he migrated to London when he was 16 and began working for his brother, who manufactured musical instruments. He came to the New York in 1784 and gravitated toward the Hudson fur trade, where his fierce commitment and sound instincts soon paid dividends. In this sense one might say Astor was a natural aristocrat, but he had little sense of civic virtue. In the words of one recent biographer, “He felt no compassion toward the larger community or for the country that gave him so much. He might be butcher’s son, but he scorned Thomas Jefferson’s ideals of equality for white men. He stood outside the narrow circle of landed families who controlled New York politics, but like them he believed only members of the gentry and self-made men were capable of discerning the common good … Liberty, he believed, gave a man of humble birth a chance to advance himself, but to give the common worker a voice in political affairs was wrong and fraught with danger.” Astor also became increasingly impatient with what he regarded as government meddling in his business. He resisted federal efforts to prevent the exploitation of Indians by establishing non-profit trading posts where the sale of liquor to Indians would be banned, because alcohol was his chief bargaining chip in dealing with Indians.

By the time of Jefferson’s presidency, a full-scale rebellion against the paternalist premises in the corporate ideal was underway. As historian Johan Neem explains, “Jefferson, like other Americans, believed that permitting the spread of voluntary associations and corporations would threaten civic equality by allowing a small minority, a cabal, to exercise disproportionate influence over public life.” But given the growing desire and need for such institutions in a society where the reach of government was relatively limited – here I’ll pause to note Frenchman Alexis de Tocqueville’s famous observation in Democracy in America (1835/40) that Americans were instinctive joiners with a near-mania for founding associations – the solution of this problem, counterintuitively, was indicated by Jefferson’s great lieutenant James Madison, who argued in the Federalist Papers #10 that the great bulwark against minority rule was allowing a profusion of interests and factions. If private corporations threatened the state, the goal should be to have more, not less of them, and in so doing dilute their power.

Perhaps ironically, this imperative intersected with another that was more characteristic of Jeffersonian opponents like Alexander Hamilton: to affirm the supremacy of the federal government over that of the states. His goal was to create a gigantic free trade zone with the same language, law, and financial system. Hamilton of course passed from the scene after his assassination in 1804, but his mantle was picked up by another Jeffersonian adversary, Supreme Court justice John Marshall.

The point where these two imperatives converged – a convergence so apt because it embodied the spirit of the quickening industrial revolution – were steamship companies. The turn of the nineteenth century was truly an epochal moment in the history of seafaring because it marked the transition from the age of muscle and wind to that of wood (later coal), burned to generate the steam that could drive propellers and paddlewheels. The crucial figure here was Robert Fulton, who is not only credited with developing the first commercially viable steamboat, but who also was an important figure in the early passenger business. That’s because Fulton married Harriet Livingston, the niece of Robert Livingston, a commercial magnate in one of the most powerful New York families of the Revolutionary era. Fulton and Livingston received a corporate charter that granted them monopoly control over a series of ferrying routes across various bodies of water in metropolitan Manhattan (and beyond). In those cases where their hold on a route was less than secure, the Livingston interests would either buy off competitors or sell them franchises. Such practices were (and would remain) widespread an industry where multiple carriers in a given market were perceived to be more the exception than the rule. Price wars would erupt, rivals would be ousted, and equilibrium would be re-established. Again, competition was the problem, not the solution.

Next: Cornelius Vanderbilt, master of the new order.