THe Visible Hand: Managerial Revolution in American Business

ALFREDD. CHANDLER, JR.The Visible HandThe Managerial Revolutionin American BusinessThe Belknap Press ofHarvard University PressCambridge, Massachusettsand London, EnglandCopyright 1977 by Alfred D. Chandler, Jr.All rights reservedPrinted in the United States of AmericaFifteenth printing, 1999Library of Congress Cataloging in Publication DataChandler, Alfred Dupont.The visible hand.Includes bibliographical references and index.1. Business enterprises-United States-Management-History. 2. Industrial organization-i-Unired States-History. 3. United States-Industries. I. Title.HFS343CS846584'0097377-1529ISBN 0-674-94051-1(cloth)ISBN 0-674--9405z-() (paper)To Fay-with loveAcknowledgmentsThis book had its beginnings some fifteen years ago, when the late ArthurC. Cole, Thomas C. Cochran, and I agreed to write a three-volume seriesonthe historyof Americanbusiness. Colewastoreviewtheevolvingstructure oftheAmericanbusiness system. Cochran was toexamine theplace of business in its broader culture, and in1972published Business illAmerican Life. Iwas tostudychanging business practices, particularlythoseconcernedwith themanagement ofthefirm.My own study acquired its first focus when I received a grant from theAlfred P. Sloan Foundationtoexamine therise ofbigbusiness andthepublic response to it. By concentrating on the coming of modern businessenterprise I believed that I could broaden my contribution to the series bydescribingthechangingprocesses ofproductionanddistribution intheUnited States andthe ways in which they have been managed, since theeighteenth century. The second part of the Sloan Foundation project, thatdealing with the public response to big business, was carried out by LouisGalambos, who publishedhis results in1975 in The Public1111age of BigBusinessin America, 1880-194. TheworkI beganunder the SloanFoundation grant was completed with assistance fromthe Division of Re-search, Graduate School of Business Administration, Harvard University.I am greatly indebted to the officers of the Sloan Foundation and to DeanLawrence E. Fouraker andtheheads ofthe Divisionof Research at theSchool who provided fundstopayfortime and facilities so necessary tothe completion of such an extended study.The research and writing of this history was carried out in a traditionalmanner. It has beenpiecedtogetherfromreading business recordsandsecondary works, andfromcountlessdiscussions with students andcol-leagues. Noteamsofscholars or computerizeddata were involved. Ilearnedmuch from graduate students, particularly thosewho wrote dis-sertationsontopicsrelatedtothethemesinthisbook. TheseincludedWilliam H. Becker,Charles N. Cheape III, Russell I. Fries, Harold Live-say, Edwin J. Perkins, P. Glenn Porter, and Mary A. Yeager. I am espe-..VIIviii ] Acknowledgments~ i a l l y grateful to Chuck Cheape who, as my research assistant, carried outthelaboriouswork of compiling andcollating thedatafor Appendix Aand other tables. Without the major contributions of these young scholarsthe study would have been far less complete.As valuablewerethoselongtalks withacademiccolleagues, many ofwhom were willing to plow through parts or all of the lengthy manuscriptat different stages of its completion. Fred V. Carstensen, Herman Daems,Louis Galambos, Thomas K. McCraw, H. Thomas Johnson, and P. GlennPorter read large parts of the manuscript. Stuart Bruchey, Alfred S. Eich-ner, Stanley Engerman, Max R. Hall, Albro Martin, and Peter T emin readit frombeginningtoend. All providedinvaluablesuggestionsthatcor-rected errors of fact, refinedinterpretations, and improved thepresenta-tion of the data. I am especially indebted to Stuart Bruchey who, in givingthe manuscript its final going-over, forced me to sharpen and define moreprecisely my terms and concepts and to Max Hall who worked with suchcareandpatiencetoimprovetheorganization/ofthechaptersandtheclarity of theprose.Essential toowerethemany persons who transcribedpages of rough,almost illegibletypescript andcheckedandrecheckedthefinal pages.Jane Barrett, Eleanor Bradley, VioletteCrowe, Rose Giacobbe, PeterGrant, HilmaHolton, JuneKingsbury, WilliamLaPiana, andAnneO'Connell carriedout theseoneroustaskswithgreat cheerfulnessandcare.Without theconstant encouragement of my wife, Fay, and her abilitytoassure thebest of working conditions at home where all but thebasicarchival and library research was done, I could never have completed thisor any of my other historical studies.Many have contributed, but the final product is mine andforit I takefull responsibility.Alfred D. Chandler, Jr.Cambridge, MassachusettsI2ContentsINTRODUCTION: TheVisible Hand IModern Business Enterprise Defined 1SomeGeneral Propositions 6PART I The Traditional Processes ofProduction and Distribution I 3TheTraditional EnterpriseinCommerce I 5Institutional Specialization and Market Coordination 15The General Merchant of the Colonial World 17Specialization in Commerce 19Specialization in Finance and Transportation 28Managing the Specialized Enterprise in Commerce 36Managing the Specialized Enterprise in Finance andTransportation 40Technological Limits to Institutional Change in Commerce 48The Traditional Enterprise in Production 50Technological Limits to Institutional Change in Production 50The Expansion of Prefactory Production, 1790-1840 51Managing Traditional Production 62The Plantation-an Ancient Form of Large-Scale Production 64The Integrated Textile Mill-a New Form of Large-ScaleProduction 67IX3456x] ContentsThe Springfield Armory-Another Prototype of the ModernFactory 72Lifting Technological Constraints 75PART II The Revolution in Transportationand Communication 79The Railroads: The First Modern Business Enterprises,I 850s-1 860s 81Innovation in Technology and Organization 81The Impact of the Railroads on Construction and Finance 89Structural Innovation 94Accounting and Statistical Innovation 109Organizational Innovation Evaluated 120Railroad Cooperation andCompetition, 1870s-1880s 122New Patterns of Interfirm Relationships 122Cooperation to Expand Through Traffic 124Cooperation to Control Competition 133The Great Cartels 137The Managerial Role 143System-Building, 1880s-19005 145Top Management Decision Making' 145Building theFirst Systems 148System-Building inthe 1880s 159Reorganization and Rationalization in the 1890S 171Structures for the New Systems 175The Bureaucratization of Railroad Administration 185Completing the Infrastructure 188Other Transportation and Communication Enterprises 188Transportation: Steamship Lines and Urban TractionSystems 189Communication: The Postal Service, Telegraph, andTelephone 195The Organizational Response 203789Contents [xiPART III The Revolution in Distributionand Production 27Mass Distribution 209The Basic Transformation 209The Modern Commodity Dealer 209The Wholesale Jobber 215The Mass Retailer 224The Department Store 225The Mail-Order House 230The Chain Store 233The Economies of Speed 235Mass Production 240The Basic Transformation 240Expansion of the Factory System 244The Mechanical Industries 249The Refining and Distilling Industries 253The Metal-Making Industries 258The Metal-Working Industries 269The Beginnings of Scientific Management 272The Economies of Speed 281PART IV The Integrationof Mass Productionwith Mass Distribution 285The Coming of the Modern Industrial Corporation 287Reasonsfor Integration .287Integration by Users of Continuous-Process Technology 289Integration by Processors of Perishable Products 299Intergration by Machinery Makers Requiring SpecializedMarketing Services 32The Followers 312xii]10 Integration by the Way of Merger 315Combination and Consolidation 315The Mergers ofthe 1880s ~ 2 0Mergers,1890-19 3 33IThe Success and Failure of Mergers 337Contents1 I1213Integration Completed 345An Overview: 190-1917 345Growth by Vertical Integration-a Description 348Food andTobacco 348Oil and Rubber 350Chemicals, Paper, andGlass 353The Metal Fabricators 356The Machinery Makers 357Primary Metals 359Growth by Vertical Integration--an Analysis 363The Importance of the Market 364Integration and Concentration 365The Rise of Multinational Enterprise 368Integration and the Structure of the American Economy 370Determinants of Size and Concentration 372PART V The Management and Growthof Modern Industrial Enterprise 377Middle Management:Function and Structure 381The Entrepreneurial Enterprise 381American Tobacco: Managing Mass Production and Distributionof Packaged Products 382Armour: Managing the Production andDistribution of PerishableProducts 391-Singer and McCormick:Making and Marketing Machinery 402The Beginnings of Middle Management in American Industry 41 ITop Management: Function and Structure 415The Managerial Enterprise 415Contents [xiiiStandard Oil Trust 4I 8General Electric Company 426United States Rubber Company 433E.1. Du Pont de Nemours Powder Company 438The Growing of Managerial Enterprise 45014 The Maturing of Modern Business Enterprise 455Perfecting the Structure 456The Professionalization of Management 464Growth of Modern Business Enterprise Between the Wars 469Modern Business Enterprise Since194I 476The Dominance of Modern Business Enterprise 482CONCLUSION: Tl)e Managerial Revolutionin American Business 484General Patterns of Institutional Growth 484The Ascendancy of theManager 490The United States:Seed-Bed of Managerial Capitalism 498Appendixes 503Notes 515Index 587TablesI. Form of accountsrecommended bytheconvention of railroadcommissionersheldatSaratoga Springs, NewYork, June10, 1879 113-1152. Albert Fink: classification of operating expenses and computation of unitcosts 118-1193. Railroad systemswith capitalization in excess of $100 million, 1893 1684. Railroad systems with capitalization in excess of $100 million, 1906 1695. Manufacturers'trade associationsin thehardware trades, 1870S and1880s 3186. The success andfailure of 11lergers, 1888-1906 340-3447. Petroleumcompanies withassets of $20 million ormore, 1917 35I8. Iron and steel companies with assets of $20 million or more, 1917 3609. Percentageoftotal product value producedbyoligopolistswithinindustrialgroups, 1 9 o ~ 1 9 1 9 36610. American multinationals, 1914 368I I. Thelocationofthelargest manufacturingenterprises, 1929, 1935, 1948, 196037Appendix A. Industrial enterprises with assets of $20 million or more, 1917 53-512Appendix B. Railroad systems with assets in excess of $200 million, 19I 7 513FiguresI. The basichierarchical structure of modern businessenterprise 22. Simplified organization chart of a large railroad,1870S 1083. Floor plan of Washburn automatic, all-roller, gradual-reduction mill, June1879 2514. Flow chart ofWashburnexperimental flourmill,June1879 2525. Flow chart, Pratt Refinery, 1869 2556. Plan of the Cambria Iron Works, 1878 2617. Plan of the Edgar Thomson Steel Works,ca. 1885 263-2658. Organization chart of Armour & Company, 1907 394-3959. Organization chart of UnitedStates RubberCompany,September 190 2 436-43710. Organization chart of United States Rubber Company, January1917 440-441I I. TheDu Pont Company: relationshipof factors affectingreturnon invest-ment 447xvxvi]12. The multidivisional structure: manufacturing 45813. Themultidivisional structure: retailing 478MapsRates of travel, 1800, 1830, 1857 84-85The Pennsylvania Railway System, 1876 152FiguresIntroduction: The Visible HandThe title of this book indicates its theme but not its focus or purpose.Itspurpose is to examine the changing processes of production and distribu-tion in the United States and the ways in which they have been managed.To achieve this endit focuses on thebusiness enterprise that carried outthese processes. Becausethe large enterprise administeredbysalariedmanagers replaced the small traditional family firm as the primary instru-ment for managingproductionanddistribution, thebookconcentratesspecifically onthe rise of modern business enterprise and its managers. Itis a history of a business institution and a business class.The theme propounded here is that modern business enterprise took theplace of market mechanisms in coordinating the activities of the economyandallocating its resources. Inmany sectors of theeconomy the visiblehand of management replacedwhat AdamSmithreferred to astheinvisible handofmarket forces. Themarket remainedthegenerator ofdemand for goods and services, but modern business enterprise took overthefunctionsofcoordinating flows of goodsthrough existing processesof production and distribution, and of allocating fundsand personnel forfuture productionand distribution. Asmodernbusinessenterpriseac-quiredfunctionshitherto carried out by themarket, itbecame themostpowerful institution in the American economy and its managers the mostinfluential group of economic decision makers. The rise of modernbusiness enterprise in theUnited States, therefore, brought with it man-agerial capitalism.Modern business enterprise definedModern businessenterprise iseasilydefined. As figure I indicates,it hastwospecificcharacteristics: it containsmanydistinct operatingunits and it is managed by a hierarchy of salaried executives.Each unit withinthemodern multiunit enterprise has its own admin-I2 ] The VisibleHandFigureI. The basic hierarchical structure of modern business enterprise(each boxrepresents an office)--- c:c:c:,n.r:.CDCDCD.. 01.::EEEc:"'oCD CDCDCD--0~ ~... 0E ~ Oas CD asCD CD (I)c..C: :gc: ~ c... c..'lJoas .-as oaso ~ cI-E :EE-JE LLcnasThe VisibleHandistrative office. Each is administered by a full-time salaried manager. Eachhas its own set of booksandaccountswhich canbeauditedseparatelyfrom those of the large enterprise. Each could theoretically operate as anindependent business enterprise.Incontrast, thetraditional Americanbusiness firmwasa single-unitbusiness enterprise. In such an enterprise an individual or a small numberof owners operateda shop, factory, bank,or transportation line out of asingle office. Normally this type of firm handledonly a single economicfunction, dealtin a single product line, andoperated in onegeographicarea. Before the rise of the modern firm, the activities of one of these small,personally ownedandmanagedenterpriseswerecoordinatedandmon-itored by marketandpricemechanisms.Modern enterprise, by bringing many units under its control, began tooperateindifferent locations, oftencarrying ondifferent typesof eco-nomicactivitiesandhandling different lines ofgoodsand services. Theactivitiesofthese unitsandthetransactionsbetween themthusbecameinternalized. Theybecamemonitoredandcoordinatedbysalariedem-ployees rather than market mechanisms.Modern business enterprise, therefore,employsa hierarchy of middleand top salaried managers to monitor and coordinate the work of the unitsunder its control. Suchmiddleandtopmanagersforman entirely newclass of businessmen. Sometraditionalsingle-unitenterprisesemployedmanagers whoseactivities were similar tothose of thelowest level man-agers in a modern business enterprise. Owners of plantations, mills, shops,and banks hired salaried employees to administer or assist them in admin-istering the unit. As the work within single operatingunits increased, thesemanagers employed subordinates-foremen, drivers, and mates-to super-vise the work force.But as late as 1840 there were no middle managers intheUnited States-that is, therewerenomanagerswhosupervisedtheworkofother managersandinturnreportedtoseniorexecutives whothemselves were salaried managers. At that time nearlyall topmanagerswere owners; theywereeither partners or majorstockholdersintheenterprise they managed.The multiunit enterprise administered by a set of salaried middleandtopmanagers can then properly be termed modern. Such enterprises didnot exist in theUnited States in1840. By World War I this type of firmhadbecome the dominant business institutioninmanysectors of theAmerican economy. By the middle of the twentieth century, these enter-prises employed hundreds and even thousands of middle and top managerswho supervised the work of dozens and often hundreds of operating unitsemploying tens and often hundreds of thousands of workers. These enter-prises were owned by tens or hundreds of thousands of shareholders andThe VisibleHandcarried out billions of dollars of business annually. Even a relatively smallbusiness enterprise operating in local or regional markets had its topandmiddlemanagers. Rarelyinthe historyof theworldhas aninstitutiongrown tobeso important andso pervasive in so short a period of time.Describing andanalyzing therise of an institution anda class of suchimmensehistorical andcurrentsignificanceprovidesa fascinatingchal-lengetoa historian of theAmerican economy. Because this institution isso easy to define and because it came into being so recently, the scholar haslittle difficultyinansweringthe historian'sspecial questions of when,where, andhow. Hecanrecordwithprecisionat what dates, inwhatareas, and in what ways the newinstitutionfirst appeared and thencontinuedtogrow. Insodoing, hecandocument the riseofthe newsubspecies of economic man-the salaried manager-and record thedevelopment of practicesandproceduresthat havebecome standard inthemanagement of American production anddistribution. Oncehehasanswered the historical questions of when, where, andhow, he can beginto suggest the reasons whythis institution first appeared and then becameso powerful.Thechallengeisparticularlyattractive becauseit hasnot yet beentaken up. For all its significance, the history of this institution has not beentold.Scholars have paid surprisingly little attention to its historical devel-opment. Beforethe 1930S economists only grudgingly acknowledged itsexistence, andsince then they have looked on large-scalebusiness enter-prise with deep suspicion. Much basic economic theory is still groundedon theassumptionthattheprocesses of production anddistributionaremanaged, or atleast shouldbemanaged, by small traditional enterprisesregulated by the invisible hand of the market. According to such theory,perfect competition canonly exist between suchsingle-unit enterprises,and such competition remains the most efficient way to coordinateeconomic activities and allocateeconomic resources. The modern, multi-unit enterprise, byits veryact of administrative-coordination, bringsimperfect competition and misallocation of resources. Since many econo-mists haveforsolongconsideredthemodernbusiness enterpriseas anaberration, and an evil one at that, fewhave taken the trouble to examineits origins. For them the desire for monopoly power has provided an ade-quate causal explanation.Until recentlyhistorians aswell haveconcentrated little systematicattentiononthe riseofmodernbusinessenterpriseandthe managerialclass that came to administer it. They have preferred to study individuals,not institutions. In fact, few businessmen have appeared in general Ameri-can histories except those who founded modern business enterprises.Historianshavebeenattractedbyentrepreneurs, but theyhaverarelyTheVisible Handlooked closely at the new institution these entrepreneurs created, at howitwasmanaged, what functions itcarried out, and how the enterprise con-tinued to compete and grow after the foundershad left the scene. Insteadthey have argued as to whether these founding fathers were robber baronsorindustrial statesmen, that is, bad fellows orgoodfellows. Most his-torians, asdistrustful astheeconomistsabout theenterprisesthesemenbuilt, agreedthat they werebad. These samehistorians, however, madefew valuejudgments either way about the new class of managers whoseactions were so influential in the continuing development of the Americaneconomy.In recent years economists and historians have increasingly turned theirattentiontomoderneconomicinstitutions. EconomisrssuchasEdwardS. Mason, A. D. H. Kaplan, John Kenneth Galbraith, Oliver E. William-son, WilliamJ. Baumol, RobinL. Marris, Edith T. Penrose, Robert T.Averitt, and R. Joseph Monsen, following the pioneering work of AdolphA. Berle, Jr., andGardiner C. Means, havestudiedthe operationsandactions of modern business enterprise. They have not attempted, however,to examine its historical development, nor has their work yet had a majorimpact on economictheory. Thefirmremainsessentiallya unit ofpro-duction, and the theory of the firma theory of production.Economists with a historical bent have only just begun to studyinstitutional change and its impact on industrial organization. Douglass C.North has been the innovator here.' Inhis work with Lance E. Davisheoutlinedamost useful theoryofinstitutional changeandappliedit toAmericaneconomic growth. Inhis study withRobertPaul Thomashedernonsrratedhowthechanging industrialorganizationaffectedtheriseofthewest. TheworksofNorthandhiscolleaguesusethissweepingpanorama of historytotest, buttress, andrefine their theory. Theyhavenot yet focused on a detailed analysis of the historical development of anyspecific economic institution.Historiansof theAmericanexperiencehave alsomovedto thestudyof institutions. Such scholars as Robert H. Wiebe, Morton Keller, SamuelHays, andLeeBenson havetakena closelook at the changing nature ofpolitical, social, and economic organizations. Theyhave pioneeredinwhat oneanalyst ofrecent writinginAmericanhistoryhascalled the"new institutionalism.l" Fewhistorians, however, havetriedtotracethestory of a single institutionfromitsbeginnings toitsfull growth. Nonehave written about the rise of modern business enterprise and the brand ofmanagerial capitalism that accompanied it.This study is an attempt to fill that void by concentrating ona specificrimeperiod and a specific set of concerns. It centers on the years betweentheI 840S and theI 92os-when the agrarian, rural econonlY of the United6] The Visible HandStates became industrial and urban. These decades witnessed revolution-ary changes in the processes of production anddistribution in the UnitedStates. WithinthistimeperiodIexamine thewaysinwhichtheunitscarrying out these changing processes of production anddistribution-includingtransportation, communication, and finance-were admims-tered and coordinated. I have nottried todescribe the work done by thelabor forcein these units or the organization and aspirations of the work-ers. Nor do I attempt to assess the impact of modern businessenterprise onexistingpolitical andsocial arrangements. I deal withbroadpolitical,demographic, and social developmentsonlyas they impingedirectly onthe ways in which the enterprise carriedout the processes of productionand distribution.Some general propositionsThis studyisahistory. It moveschronologically. It isfilledwithdetails about men and events, about specific processes, policies, andprocedures, and aboutchanging technologies and markets. It attempts tocarry out the historian's basic responsibility for setting the record straight.That record, in turn, provides the basis for the generalizations presented.The data have not been selected to test and validate hypotheses orgeneral theories. I hope that these facts may alsobe useful to scholars withother questions and concerns other than those relevant to the generaliza-tions presented here.BeforeIenterthecomplexitiesof thehistorical experience, it seemswisetooutlinea list ofgeneral propositionstomakemoreprecisetheprimary concernsof the study. They give some indication at theoutsetofthenature ofmodern business enterprise and suggest why thevisiblehand of management replacedthe invisible hand of market mechanisms.I set theseforthas a guidethrough theintricatehistory of interrelatedinstitutional changes that follows.Thefirst proposition is that modernmultiunitbusiness enterprise re-placed small traditional enterprise when administrative coordinationpermitted greater productivity, lower costs, and higher profits thancoordination by market mechanisms.Thispropositionis deriveddirectlyfromthedefinitionof a modernbusiness enterprise. Such an enterprise came intobeingand continued togrow by setting upor purchasing businessunitsthat weretheoreticallyable to~ p e r a t e as independent enterprises-in other words, by internaliz-The VisibleHanding theactivities that had been or could be carried on by several businessunitsandthetransactions that had been or could be carried onbetweenthem.Such an internalization gave the enlarged enterprise many advantages,"Byroutinizingthe transactionsbetweenunits, thecostsofthesetrans-actions werelowered. Bylinking theadministration of producing unitswith buying anddistributing units, costs for information on markets andsources of supply were reduced. Of much greater significance,the inter-nalization of many units permitted the flow of goods from one unit to an-othertobeadministrativelycoordinated. Moreeffectiveschedulingofflows achieved a more intensive use of facilities and personnel employed inthe processes of production and distribution and so increased productivityandreducedcosts. Inaddition, administrativecoordinationprovidedamorecertaincashflowandmorerapidpaymentforservicesrendered.Thesavingsresultingfromsuchcoordinationweremuchgreaterthanthose resulting from lower information and transactions costs.The secondproposition is simply that theadvantages of internalizingtheactivitiesof many business unitswithin a single enterprise could notbe realized until a managerial hierarchy had been created.Suchadvantagescouldbeachievedonlywhenagroupofmanagershad been assembled to carry out the functions formerly handled by priceandmarket mechanisms. Whereas theactivities of single-unit traditionalenterprises were monitored andcoordinated by market mechanisms, theproducing anddistributing units within a modern business enterprise aremonitored and coordinated by middlemanagers. Top managers, in addi-tion toevaluating andcoordinating thework ofmiddlemanagers, tooktheplace of the market in allocating resources forfuture production anddistribution. Inorder tocarry out thesefunctions, themanagershadtoinvent newpractices and procedures whichin time becamestandardoperatingmethodsinmanagingAmericanproductionanddistribution.Thus the existence of a managerial hierarchy is a defining characteristicof themodernbusiness enterprise. Amultiunitenterprisewithout suchmanagers remains littlemore thanafederationof autonomousoffices.Sucli federations were formed to control competition between units or toassure enterprises of sources of raw materials or outlets for finished goodsand services. The owners and managers of the autonomous units agreed oncommonbuying, pricing, production, andmarketingpolicies. Iftherewere no managers, these policies were determined and enforced bylegislative andjudicial rather than administrative means. Such federationswere often able to bring small reductions in information and transactions8] The Visible Handcosts, but theycouldnot lower coststhroughincreasedproductivity.They could not provide theadministrative coordination that became thecentral function of modern business enterprise.The third proposition is that modern business enterprise appeared forthe first time in history when the volume of economic activities reached alevel that made administrative coordination more efficient and moreprofitablethanmarket coordination.Such an increase in volume of activity came with new technology andexpandingmarkets. Newtechnologymade possibleanunprecedentedoutput and movement of goods. Enlarged markets were essential toabsorb such output. Therefore modern business enterprise first appeared,grew, and continuedto flourishinthose sectors and industries char-acterized by new andadvancing technology andby expanding markets.Conversely in those sectors and industries where technology did not bringa sharp increase in output and where markets remained small and special-ized, administrative coordination was rarely moreprofitable than marketcoordination. In those areas modern business enterprise was late in appear-ing and slow in spreading.Thefourthproposition is that oncea managerial hierarchyhadbeenformedandhadsuccessfullycarriedout itsfunctionof administrativecoordination, the hierarchy itself became a sourceof permanence, power,and continued growth.InWerner Sombart'sphrase, themodernbusiness enterprise took on"alifeof itsown.?' Traditional enterpriseswerenormallyshort-lived.They were almost alwayspartnerships which were reconstituted ordis-bandedat thedeath o ~ retirementofapartner. If a soncarriedonthefather's business, he found newpartners. Often the partnership wasdisbandedwhenone 'partnerdecidedhewantedtoworkwithanotherbusinessman. On theother hand, thehierarchies that came to manage thenewmultiunit enterprises had a permanence beyond that of any individualor groupof individuals whoworkedinthem. Whenamanagerdied,retired, was promoted, or left an office, another was ready and trained totake his place. Men came and went. The institution and its officesremained.The fifthproposition is that thecareers of thesalaried managerswhodirected these hierarchies became increasingly technical and professional.Inthese new business bureaucracies,as in other administrativehierar-chies requiring specialized skills, selection and promotion became increas-inglybasedon training, experience, and performance rather thanonTheVisible Handfamily relationship or money. With the coming of modern businessenterprise, the businessman, for the firsttime, could conceive of a lifetimecareer involving aclimbupthehierarchicalladder. In such enterprises,managerial trainingbecame increasinglylonger and more formalized.Managers carrying out similar activities indifferententerprises often hadthe sametype of training andattendedthe sametypes of schools. Theyreadthesame journalsandjoinedthesame associations. Theyhadanapproachtotheir workthatwas closer tothat of lawyers, doctors, andministers than that of the owners andmanagers of small traditional busi-ness enterprises.The sixth proposition is that as the multiunit business enterprise grewinsizeanddiversityandas itsmanagers becamemoreprofessional, themanagement of the enterprise became separated from its ownership.Theriseofmodernbusiness enterprisebrought a newdefinitionofthe relationship between ownership and management and therefore a newtypeof capitalismtotheAmericaneconomy. Beforetheappearance ofthemultiunitfirm, ownersmanagedandmanagersowned. Evenwhenpartnerships began to incorporate, their capital stock stayed in the handsof a few individuals or families. These corporations remained single-unitenterpriseswhichrarelyhiredmorethantwoor threemanagers. Thet r a d i t i o ~ a l capitalist firmcan, therefore, beproperlytermedapersonalenterprIse.From its very beginning, however, modern business enterprise requiredmore managers than a family or its associates could provide. In some firmstheentrepreneur andhisclose associates (andtheirfamilies) whobuiltthe enterprise continued to hold the majority of stock. They maintained aclose personal relationship with their managers, and they retained a majorsay in topmanagement decisions, particularly those concerning financialpolicies, allocation of resources, and the selection of senior managers. Sucha modern business enterprise may be termed an entrepreneurial or familyone, and an economy or sectors of an economy dominated by such firmsmay be considered a systemof entrepreneurial or family capitalism.Where the creation and growth of an enterprise required large sums ofoutside capital, the relationship between ownership and managementdiffered. Thefinancial institutionsproviding thefundsnormallyplacedpart-time representatives on the firm's board. In such enterprises, salariedmanagers had to share top management decisions, particularly thoseinvolvingtheraisingandspending of largesumsofcapital, with repre-sentatives of banks and other financial institutions. An economy or sectorcontrolled by such firmshas often been termed one of financial capitalism.In many modern business enterprises neither bankers nor familieswereI a] The VisibleHandincontrol. Ownershipbecamewidelyscattered. Thestockholdersdidnothavetheinfluence, knowledge, experience, or commitmenttotakepart in the high command. Salaried managers determined long-term policyas well as managing short-term operating activities. They dominated topas wellas lower andmiddlemanagement.Suchan enterprisecontrolledbyitsmanagerscanproperlybeidentifiedas managerial, anda systemdominated by such firms is called managerialcapitalism.Asfamily- andfinancier-controlledenterprisesgrewinsize andagethey became managerial. Unless the owners or representatives of financialhouses became full-time career managers within the enterprise itself, theydidnot have the information, thetime, or theexperience to playa dom-inantroleintop-leveldecisions. Asmembersoftheboardsofdirectorstheydidholdvetopower. Theycouldsayno, andtheycouldreplacethesenior managers with other career managers; but they were rarely ina position toproposepositive alternative solutions. In time, thepart-timeowners and financiers on theboard normally lookedonthe enterprise inthe same way as did ordinary stockholders. It became a source of incomeandnot a business tobe managed. Of necessity, they left current opera-tions and future plans to the career administrators. In many industries andsectorsof theAmericaneconomy, managerial capitalismsoonreplacedfamily or financial capitalism.Theseventhpropositionisthat inmakingadministrative decisions,careermanagers preferredpoliciesthat favoredthelong-termstabilityandgrowth of their enterprises tothose that maximized current profits.For salaried managers the continuing existence of their enterprises wasessential totheir lifetimecareers. Theirprimary goal wastoassure con-tinuing use of and therefore continuing flow of material to their facilities.They were far more willing than were theowners(the stockholders)toreduceor evenforegocurrentdividendsin order tomaintainthelong-term viability of their organizations. They sought to protect their sourcesof supplies and their outlets. They took on new products and services inorder to make more complete use of existing facilities and personnel. Suchexpansion, in turn, led to the addition of still more workers and equipment.If profits werehigh, theypreferredtoreinvest themintheenterpriseratherthanpaythemout individends. Inthis waythe desireofthemanagerstokeeptheorganization fullyemployed becamea continuingforcefor its further growth.Theeighthandfinal proposition is that as thelargeenterprisesgrewand dominatedmajor sectors of theeconomy, theyalteredthe basicstructure of these sectors and of theeconomy as a whole.The VisibleHand [ I IThe newbureaucratic enterprises did not, it must be emphasized,replace the market as theprimary force in generating goods and services.The current decisions as toflows and thelong-term ones as toallocatingresources were based on estimates of current and long-termmarketdemand. What the new enterprises did do was take over from the marketthecoordination andintegrationof theflow of goods and services fromthe productionof the rawmaterials throughthe several processesofproductiontothe saleto the ultimateconsumer. Wheretheydid so,productionanddistributioncametobeconcentratedinthe handsofafewlarge enterprises. At first this occurred inonlyafewsectorsorindustries where technological innovationand market growthcreatedhigh-speed and high-volumethroughput. As technologybecame moresophisticatedandas marketsexpanded, administrativecoordinationre-placed market coordination in an increasingly larger portion of theeconomy. Bythemiddle of thetwentieth century the salaried managersof a relatively small number of large mass producing, large mass retailing,and large mass transporting enterprises coordinated current flows of goodsthroughtheprocessesofproductionanddistributionandallocatedtheresources to beusedfor future productionand distributioninmajorsectorsofthe Americaneconomy. Bythen, the managerial revolutionin American business had beencarried out,"These basicpropositionsfall intotwoparts. Thefirst threehelptoexplain the initial appearance of modern business enterprise: why it beganwhenit did, whereit did, andinthe wayit did. Theremainingfiveconcern its continuing growth: where, how, and why an enterprise oncestarted continued to grow and to maintain its position of dominance. Thisinstitutionappearedwhenmanagerial hierarchieswereabletomonitorand coordinate the activities of a number of business units more efficientlythan did market mechanisms. It continued to growso that these hierarchiesofincreasinglyprofessional managers might remainfullyemployed. Itemerged and spread, however, only in those industries and sectors whosetechnology and markets permitted administrative coordination to be moreprofitable thanmarket coordination. Because these areas were at thecenter of the Americaneconomy and because professional managersreplacedfamilies, financiers, ortheirrepresentativesas decisionmakersin these areas, modern American capitalism became managerial capitalism.Historical realities are, of course, far more complicated thanthesegeneral propositions suggest. Modernbusinessenterpriseandthe newbusiness class that managed it appeared, grew, and flourished in differentways even in the different sectors and in the different industries they cameto dominate. Varyingneeds and opportunitiesmeant that thespecificI 2 ] The VisibleHandsubstanceofmanagerial tasksdifferedfromonesectortoanotherandfrom one industry to another. So too did the specific relationships betweenmanagers and owners. And oncea managerial hierarchy was fully estab-lished, thesequence of its development varied from industry toindustryand from sector to sector.Nevertheless, thesedifferences canbe viewed as variations ona singletheme. Thevisible handofmanagementreplacedtheinvisiblehandofmarketforces whereandwhennewtechnologyandexpandedmarketspermitted a historically unprecedented high volume and speed of materialsthroughthe processes ofproductionanddistribution. Modernbusinessenterprisewasthustheinstitutional responsetotherapidpaceof tech-nological innovationand increasingconsumer demand in the UnitedStates during the second half of the nineteenth century.PARToneThe Traditional Processes ofProduction and DistributionMost historieshavetobeginbeforethebeginning. Thisis particularlytruefor onethat focusesoninstitutionalinnovation. Ahistoryof themodern businessenterprise has to start by examining the ways in which theprocesses of production and distribution were carried out before it cameinto existence, before administrativecoordination became moreproduc-tive and more profitable than market coordination. It has to identify thespecific conditions that led to the rise of the institution and its continuinggrowth. Ananalysisofinnovationrequires acloseinspectionof thecontext in which it occurred.Let us therefore first look at the changing processes of production anddistribution fromthe I 790S to the I 840s, from the time when the ratifica-tion of the Constitution provided the legal and political underpinnings ofa national economy until thedecade when a new source of energy, coal,began to be used extensively in production and the railroad and telegraphbegan to provide fast, regular, all-weather transportation and communica-tion. Let us begin by examining changes in distribution broadly conceivedas commerce and then focus on themanagement of production.1314] Traditional Processes of Production and DistributionAlthoughthe Americaneconomygrewrapidlybetween 1790 and1840, the size andnature ofbusiness enterprises were littlechanged. Asthepopulationrosefrom3.9 millionto I 7. I millionandas Americansbegan tomovewest acrossthe continent, the total volume of goodsproduced anddistributed andthetotal number oftransactions involvedin suchproduction anddistribution increased enormously. Neverthelessthe businessenterprises carryingout these processesand transactionscontinued to be traditional single-unit enterprises. Their numbers multi-pliedat an impressive rate, andtheiractivities became, as AdamSmithwould have predicted, increasingly specialized. Yet they were still man-aged by their owners. They operated in traditional ways using traditionalbusiness practices. LittleinstitutionalinnovationoccurredinAmericanbusiness before theI 840s.Why was this so? As long as the processes of production and distribu-tion depended on the traditional sources of energy-on man, animal, andwind power-there was little pressure to innovate. Such sources ofenergy simply couldnot generate a volume of output in production andnumber of transactions in distribution large enough to require the creationof a largemanagerialenterpriseortocall forthedevelopment ofnewbusiness forms and practices. The low speed of production and the slowmovement of goods through the economy meant that the maximum dailyactivityat eachpoint of productionand distributioncould beeasilyhandled by small personally owned and managed enterprises.c H ApT E R 1The Traditional Enterprise inCommerceInstitutional specialization andmarket coordinationIn the half century after theratification of theConstitution Americanbusiness enterprise became increasingly specialized in commerce and pro-duction. The trend was particularly evident in commerce. As commerceexpanded and as commercial activities became more specialized, thedependence on market mechanisms to coordinate these activities increasedproportionally. Inthe 1790S thegeneral merchant, thebusinessman whohaddominatedthe economy of thecolonial period, wasstill thegranddistributor. He bought and sold all types of products and carried out allthe basic commercial functions. He was an exporter, wholesaler, importer,retailer, shipowner, banker, and insurer. By the 1840s, however, such taskswere being carried out by different types of specialized enterprises. Banks,insurance companies, and common carriers had appeared. Merchants hadbegun to specialize in one or two lines of goods: cotton, provisions, wheat,dry goods,hardware, or drugs. They concentrated moreandmoreonasingle function: retailing,wholesaling, importing, or exporting.Economicexpansionandbusiness specializationgreatly increasedthenumber of business enterprises operating in theeconomy. In the 1790S arelatively fewmerchants living in theeasternports carried on themajorshareofthetradebeyondlocalmarkets. Bythe 1840S themuch largerflows of a greater variety of goods were guided from the producers of theraw materials through the processes of production anddistribution to theultimateconsumer by hundredsandthousands ofbusinessmen whohadlittlepersonal acquaintance with others. The motives of the businessmenwere to make a profit on each of the many transactions and such motiva- .tion seemed to be enoughto assure the successful operationof theeconomy. Although, as AdamSmith wrote, eachbusinessman"intends1516] Traditional Processes of Production and Distributiononly his gain, he is ... led by an invisible hand to promote an end which isnot hisintention."! In fact, Smith continued, "bypursuinghis owninterest hefrequentlypromotes that ofsocietymore effectivelythanwhen he really intends topromote it."If the expansion of the economy brought specialization in the activitiesof business enterprise, it did little to alter the internal operation ororganization of these enterprises or their methods of transacting business.Inthe I790SAmericanbusinessmenstill reliedentirelyoncommercialpractices and procedures invented and perfected centuries earlier byBritish, Dutch, and Italian merchants. Stuart Bruchey, in his study of theOlivers, Baltimoremerchantsof the 1790s, pointstothe "remarkable"similarities between the nature of their activities and those of the Venetianmerchants. The Olivers' "formof organization, and their methodofmanaging men, records andinvestments wouldhave beenalmost imme-diately understood by thefifteenthcenturymerchant of Venice."? TheAmericans of the I 790S and the Italians of the I 390S used thepartnershipform of business and the same double-entry bookkeeping records, recordsin which Adventure and Merchandise accounts were conspicuous features.Bothsoldontheirownaccount andonconsignment for standardizedcommissionratesandemployedshipcaptainsandsupercargoesas con-signees. Americans also made use of institutional arrangements perfectedby theDutch andBritish, such as formal exchanges tocarry out markettransactions, moresophisticated instruments of credit, andconceptsandusages of commercial Iaw,"The practices that Americans had inherited remained quite satisfactoryuntil after theI 840s. The Americans adjusted commercial law to meet theneeds of a rapidly expanding economy anda federal polity. They madeincreasing use of the incorporated stock company developed in thesixteenth century by the British topromote overseas trade andcoloniza-tionandusedintheeighteenthcentury tomanageancillaryorutilitiesoperationssuchas docks, waterworks, andthelike. Traditional formswere refined, but thepractices,instruments, and institutions of commer-cialcapitalismwhichhadevolvedtomeetthegrowthof tradeandthecoming of market economiesintheMediterraneanbasininthetwelfthand thirteenth centuries were not fundamentally altered. Before the I 840sthere was no revolution in the ways of doing business in the United States.The great transformation was toawait thecoming of new technologiesand markets that permittedamassiveproduction and distributionofgoods. Those institutional changes which helpedto create the managerialcapitalism of thetwentieth century were as significant andas revolution-ary as thosethat accompanied therise of commercial capitalisma halfamillennium earlier.The Traditional Enterprise in Commerce [ 17The general merchant of the colonial worldIn1790 general merchants still ruled the economy. In this economy thefamily remained the basic business unit. The most pervasive of these unitswas the family farm. In 1790 only 202,000 out of the 3,930,000 Americanslived in towns and villages of more than 2,5, and of the2,881,000 work-ers, 2,069,000laboredonfarms.' Onlyinthesouth, wherecropswerecultivated by slave labor, did the production of staples become more thana familyaffair. Inthe production of crops, only on the plantationdidaclass of managers appear.The smallamount of manufacturing carried on outside thehome wasthe work of artisans in small shops. In the towns, the artisan often had theassistanceofoneor twoapprenticesorjourneymen, whowereusuallytreatedas part of thefamily. Intheports, somewhat larger, thoughstillverysmall, shipyards, ropewalks, candlemanufactories, andrumdistil-leriesoperated. AsSamBass Warner wroteof Philadelphiaontheeveof the American Revolution: "The core element of the town economy wasthe one-man shop. Most Philadelphians labored alone, some with a helperor two.?"Otherresources besides landwereexploited, but on alimitedscale.Lumbering continuedto be a by-product of land clearing, althoughMaine andNorth Carolina suppliedtimber regularly for both the RoyalNavyandtheWest Indiantrade. Local farmers providedmost ofthelumber that went into the making of masts, spars, barrels, staves, as well asbeams, shingles, andpaneling for houses, churches, warehouses, and otherbuildings. The output of the only coal minesin the colonies, in Virginia,was hardly 1,000tons ayear."Except for some iron, all metalswereimported. The largest business unit either in mining or manufacturing wasthe "iron plantation," where the iron ore was mined, wood converted intocharcoal, iron ore refined into pigs, and the pigs forged into wrought iron.Theseplantations, withtheirrural setting, theseasonal natureoftheirwork, andtheuseof indenturedservantsandoccasionallyslaves, wereoperated in many ways like the rice and tobacco plantations of thesoutherncolonies.Theactivities of theseproducing unitswerecoordinatedthrough thebusinesstransactionsof themerchants who resided inthe port and rivertowns.The resident merchant distributedandmarketedtheproducts ofthese small enterprises andsuppliedthemwith rawmaterials, tools, andfurnishings. For thisreason, thisall-purposebusinessmandominated theeconomy." He exported, imported, and soldall types of products at retailand atwholesale. He took title to the goods hepurchased for his regular18] Traditional Processes of Production and Distributioncustomers. He also acted as correspondent or agent for merchants in otherp ~ r t ~ , takingtheirgoods onconsignment andsellingfor afixedcom-mission.The resident general merchant acted as the community's financier andwas responsible for the transportation as well as the distribution of goods.Heprovided short-term loans tofinancestaplecropsandmanufacturedgoods when they were in transit, and he made long-term loans to planters,farmers, andartisanstoenablethemtoclearlandortoimprove theirfacilities.Usually in cooperationwith other merchants, hearrangedforthehandling of shipsneeded tocarry these goodsandoften, with otherpartners, was a shareholder in these ships. With other merchants, he alsoinsuredshipsandcargoes. Againwithothers, hebuiltwharves fortheships. In thesame port town, he helped to finance theconstruction, bothby himself andwith others, of rum distilleries, candle works, ropewalks,and shipyards-that is, thosemanufacturing industries not carried on bycraftsmen in small family shops.Inall theseactivities, thecolonial merchant knewpersonallymost ofthe individuals involved. He tried, where possible, to have members of hisown family act as his agents in London, the West Indies, and other NorthAmericancolonies. Ifhecouldnot consignhis goods andarrangeforpurchase and sale of merchandise through a familymember or through athoroughly reliable associate, the merchant depended on a ship captain orsupercargo(hisauthorizedbusiness agent aboardship) tocarry out thedistant transactions.Even then, thelatter was oftena sonor a nephew.The merchant knew theother resident merchants in his town, whocol-laborated with him in insuring and owning ships, as he did the shipbuilders,ropemakers, andlocal artisans whosuppliedhispersonal as well as hisbusiness needs. Finally, he was acquainted with theplanters, thefarmers,and country storekeepers, as well as the fishermen, lumbermen, and othersfrom whom he purchased goodsand to whom he provided supplies.Between Baltimore andCharleston, where" there werefew ports withresident merchants, asomewhat different patternof commerce devel-oped." In Maryland and Virginia, and to some extent farther south,planters boughtdirectly fromtheBritish merchants. Factors inLondonarrangedfor the saleof their tobaccoandrice andat the same timepurchased any supplies they needed. The planters, in turn, often providedtheir smaller neighbors with the same type of services they received fromthe British factors. As tobacco planting moved inland in the mid-eighteenth century, Scottish merchants began tosendfactorsand agentsto set up permanent stores, where tobacco could be collected and finishedgoods sold to theupland farmersand planters. Farther south, the residentmerchants in thetowns of Charleston and Savannah began tohandle theThe Traditional Enterprise in Commerce [ I 9tradeof their region inmuchthesame wayas didnorthern merchants.With thecoming of political independence, thispersonal family busi-ness world began to change. The break with Britain disrupted old tradingpatternsandledtothe openingofnewareastoAmericanmerchants,including the Baltic, theLevant, China, India, andtheEastIndies. Thecontinuing growthof population and the rapid expansion west intoKentucky andTennessee, north into Maine, and southwest into Georgiaenlarged domestic markets, as did the growing seaport towns themselves.After the outbreakof thewars ofthe FrenchRevolution, tradewithEurope and the West Indies, which had been cut off since the Revolution,again boomed. Far more important, however, for the American economythan the after-effects of the political revolution in France was the advanc-ingindustrial revolutioninGreat Britain. For the newUnitedStatesbecamealmostovernight themajor source of supply of theraw materialand the major market for the products of thenew machine-made textiles.The coming of thesenew tradeswas themost important single factor inbringing specializationtobusinessenterpriseandimpersonalization intobusiness activities.Specialization in commerceEven without the boom in cotton and textiles, specialization in commer-cial business enterprises certainly would have come to the United States inthe fifty years after 1790. Before the Revolution specialization was alreadyappearing inthedistributionof goodsinNew York, Philadelphia, andother largetowns, Thedistinction betweenmerchantsandshopkeeperswasbecomingclear. Theformer continuedtosell at retail as well as atwholesale, but the shopkeepers sold only at retail, buying fromthemerchants rather than directly from abroad." By 1790, the merchants werealso beginningtospecializeincertainlinesof trade. Specializationwascoming, too, inmanufacturinginNewEngland, andpossiblypartsofthe middlestates, withthe beginningof adomesticor "putting-out"system, andthefirst useofsimplemachines.!? Well beforethe 1790s,shoes, boots, andevenfurniturewere being manufacturedfor the WestIndianandother distant markets by entrepreneurs who"put-out" workintothe homesof farmers andtowndwellers. Nevertheless, the rapidreorientation and expansion of American commerce andtherapid devel-opment of specialized business institutions resulted directly from the newand unprecedented high volume of cotton exports and new machine-madeimports.Theimpactof cottononAmericancommercedidnotbecomefully2 ] Traditional Processes of Production and Distributionapparent until after1815, although it had begun to make itself felt in the1790S. The French Revolution andtheNapoleonic Wars kept theolderWest IndianandEuropeancarryingtrades booming until I 807. Then,for the next eight years, embargoes, trade restrictions, and wars shut downpractically all trade except for a brief period in1810 and181I. The warsandwartimecommerceovershadowedthe riseof the brandnewandprofoundly significant cotton trade.As thenew cotton textilemachinery in Britain went intoproduction,Americans responded quickly.'! Cotton was first grown commercially intheUnitedStates in1786. By1793, theyear Eli Whitney inventedthecotton gin, annual exportswerealready 488,000 pounds. By1801, theyreached 20.9 million pounds, by1807, 66.2 million, and by1810 (the yearwhentraderestrictionsweretemporarily lifted), 83.8million. In 1815,83.0millionpoundsexportedwasvaluedat $I 7.5million.By I 825, thevalueofcottonexports hadrisen to $37million, andby1840to $64million. Between 182I and 1850, the UnitedStates providedover 75percent of Britain's annual supply of raw cotton. Thevolumeandvalueof these exports contrast sharplywith the modest expansion of theolder crops, namely, tobacco, rice, sugar, and wheat. Exports of tobacco,for- example, werevaluedat $8 million in1815 andonly$10 millionin1840 Cotton brought commercial agriculture tobroad regionsof the southwhere, because of climate and soil, other staple crops were unable to grow.Moreover, cotton moved westward in the south a generation before wheatmoved west in the north. As the cotton plantations in the lower MississippiValley were coming into production, they provided an important initialmarket to thefarmersin the new western settlements at a time when thelack of transportationfacilities made it costly toshipwhiskey, hogs,horses, and mules to the east or to Europe."The spread of commercial agriculture in the south encouraged commer-cial specialization intheeast. The unprecedented volume of thecottontrade helped to make New York the nation's leading city and initiated theswift decline of the all-purpose general merchant." The cotton trade washandled increasingly by specialized firmsthat preferred not totaketitletothegoods (except when they wanted tospeculate) andwere insteadpaid for their services by fixed commissions. Because they had no controloverthefluctuating pricesset by theinternational forcesofsupply anddemand, these andother merchantswho were becoming specialized dis-likedtherisk of taking titletothegoods, preferring the morecertain5percentcommission. Forthefirst timein theUnitedStatesmerchantsbegantosell muchmoreoncommissionthanontheir ownaccount.The first cotton traders were new ratherthan existing merchants." InThe Traditional Enterprise in Commerce [ 2INew York they were at the start agents of British textile firms who cameto sell cloth and tomake arrangementsfor obtaining raw cotton. Theyweresoonjoinedby young men, many of themNew Englanders,whobegantheir business life in this trade. New Englandersalso went to thesouth. There they and local merchants in the cotton ports and in the newtowns in theinterior-Columbia, Augusta, Macon, Montgomery, Jack-son, and Natchez-became factors for planters whohad recently clearedthe landintherichblack belt ofAlabama andGeorgia and thebottomlands along the Mississippi River.Although thedistinction between commission andcommercialhousesis often not a clearone, the census figures suggest the importance of thecommission business totheforeigntrade."Inthecensus of I 840, 381commission houses and only 24 commercial houses were listed as engagedin foreigntrade in Louisiana where commodities completely dominated.For New York (where the commodity trades were major) the divisionwas1,044 commission houses and469commercialhouses; in Boston(wheresuchtradeswereof much less significance), there were241 commercialhouses andonly 123 commissionhouses. By 1840, too, theolder, lessspecializedhouseshadcome to concentrateoncottonor someothercommodity andtotrade oncommission.The first man in the chain of the new middlemen fromtheplanter tothe manufacturerwasthe cottonfactor." Henot onlymarketedtheplanter'scrop, but also purchasedhissuppliesandprovidedhimwithcredit. Relations between the two were close and personal. In purchasingsupplies, equipment, andhouseholdgoods for theplantation,thefactorpurchasedlocallyandnormallytraveledtwiceayeartobuyinNewYorkandothercommercial centersof thenortheast. Inmarketingtheplanter's cropinthe impersonal international market, the factor solddirectlytotheagentsof manufacturersorshippedonconsignmenttoother middlemeninnearbyriver or coastalports, ortoothersin NewYork and other coastal cities, and still others in Liverpool and continentalports. Thesemiddlemen, inturn, solddirectlyor onconsignment tomanufacturers in theUnited States as wellas in Britainoroften toyetanother set of middlemen. In addition, the factor made arrangements forthe transportation of the crop, the payment of insurance, storage, drayage,and, where necessary, the payment of duties, wharf fees, and the like. Onall ofthese different transactions, he receiveda commission. And intheprocess both of buying and of selling, the factor usually made thecreditarrangements.The distribution system was alsoa credit network, with the credit basedon the crop in transit. The cotton trade was financed largely by advances.Cotton moved in one direction andtheadvances against its shipment in22 ] Traditional Processes of Production and Distributiontheother. On theAmerican side, as Harold Woodman, thehistorian ofthe factor, has written: "Anyone with cotton on hand could easily get anadvancefromthe merchant towhomhechosetoconsignit, bethatmerchant in the interior, in the port cities, or in the North, or in Europe."OntheBritishside, acommissionmerchant in I 833statedthat itwasvirtuallyimpossibleto get goods onconsignment without givingad-varices." These advances were usuallyfromtwo-thirds tothree-fourthsthe value of thecurrent crop. The providing of advances did,therefore,carry a certain risk, for if the price fell during transit, as it often did whilethe annual harvest was being completed, the house,providing the advancemight have to sell at a loss.Thecreditsystem, acomplexone, reliedontraditional instruments:the promissory note and the bill of exchange. Planters,factors, or river orcoastal port merchants were rarely paid in cash but in promissory notes orbills of exchangepayable in60, 90, oreven 120daysat 7 or 8 percentinterest. If theadvance was given before thedelivery of thecrop, it wasmadeintheformofa promissorynote, whichwasoftenrenewedifitbecame duebeforethe actual sale wastransacted. Ifthepaymentwasmade at the time of delivery, it was made in the formof a bill of exchange,drawn on thehouse providing thecredit. Such transactions were furthercomplicated by theneed to convert pounds sterling into dollars. A simplesale, involving two middlemen, could give rise to as many as four differenttransactionsandfourdifferent bills of exchange. Woodmanprovidesarevealing example fromthe correspondence of WilliamJohnson, aMississippiplanter, andhis factor, WashingtonJackson&CompanyofNew Orleans:In the 1844-1845 season, Johnson had theNewOrleans firmsell part of hiscotton in Liverpool through Todd, Jackson and Company, the Liverpool branch ofthefirm. After shipping his cotton to New Orleans, Johnson drew on WashingtonJacksonand Company, therebycreatingadomesticbill for discount. TheNewOrleans firmreimbursed itself for this advance by drawing on the Liverpool houseafter shipping the cotton there, thus creating a second bill fordiscount. When a salewasmade inLiverpool, Todd, JacksonandCompanysentasterlingbill for theproceedsoverandabovetheadvancedrawnuponthem. The NewOrleansfirmsold thesterlingbill toabank forlocalcurrency andthenauthorizedJohnson todraw anotherbill tocover his returns over the advance he haddrawn originally.ISIt was in providing advances andin discounting bills of exchange thattheolder resident merchantscametoplaytheir most important roleinthenew cottontrade. Some, indeed, soonbecamespecialists in finance.Thosewiththelargest resourcesbecame, throughthefinancingof thecotton trade, the most influential businessmen ofthe day. They were, forThe Traditional Enterprise in Commerce [ 2 3themost part, Britishbusiness houses inLiverpool andLondon. Theystoodat the end of the longchain of credit stretching from thebanks oftheMississippi toLombard Street.In the major ports, the volume of trade was large enough to permit therise of another type of specialized enterprise-the brokerage house. Notattachedtoanyspecificset ofclients, it brought togetherbuyersandsellers of cottonfor acommission."Thebasic distinctionbetweenthebroker and the factor was that the former did not, as did the latter, buy orsellon his principal's account or, moreprecisely, did not make contractsin his own name that were binding on his principal. The broker's functionwastohelpfactorsor other merchants or manufacturingagentsobtainthe cotton necessary to fill out a shipment or order and dispose of odd lotsafter the completion of a major transaction.As the farmingfrontier movedwest acrossthe mountains intotheMississippi Valley, a somewhat different network evolvedtomove pro-visions (corn, pork, and whiskey), some cotton, and then wheat and othergrains fromthewest tothesouth andeast. Where the soil was tilled bymany small farmersrather than a fewlargeplanters, thecountry store-keeper took the place of theplantation factor as the first businessman onthechainofmiddlemenfromtheinterior totheseaport." These store-keepers, the economic descendants of the pre-RevolutionaryScottishfactorsinVirginiaandof thestorekeepersscatteredintheinterior ofcolonial Pennsylvania and NewEngland, marketed and purchased for thefarmer much as thefactorsdid fortheplanters. They differed fromthefactors, however, inthattheybought andsoldprimarilyontheir ownaccount.Intheearlyyearsof western settlementtheoutgoingcrops andtheincoming goods movedalong different routes.Tobacco, hemp, lead, andproduce went down theriver toandthrough NewOrleans totheeastand the finished goods came westward across the mountains to Pittsburghand then down theOhio. Storekeepers, and at first evenfarmers, accom-paniedtheir cropssouth. Ina short time, however, they madearrange-ments with commission merchantsin New Orleans and other river pons-Cincinnati, Louisville,St. Louis, Memphis, andNashville-to receivetheir cropsandsell them, or toforwardthemtoothermerchants, toprovide advances, and tosendpayments."Thestorekeepers, liketheplantationcottonfactors, went east normallytwiceayear topurchasetheir stocksof finished goods, coffee, tea, sugar, and other staples. Therethey had to work out complex arrangements for the transportation of theirgoods west and for their warehousing, drayage, and loading at the differ-enttransshipment points along theway. Thewestern storekeepers were24] Traditional Processes of Production and Distributionsoon relying on credit more from the eastern wholesalers from whomtheypurchased their supplies than from thecommission houses through whichthey sold their produce.Withtheopening oftheErieCanal inthemid-r Szosandthecom-pletion of the Ohio and Pennsylvania canal systems in thenextdecade,anew trade sprang up, creating still another string of middlemen to handlethe transactions and transshipments involved in moving the crops. Prior to1830, littlewheat hadbeenraisedinthe Mississippi Valley. Tobacco,hemp, provisions, horses, and mules, rather than wheat and flour, were theregion'smajorexports. Then, sincethecanal providedashorter routethroughacooler part ofthe country (wheat andflour sent viaNewOrleans often rotted or soured), production expanded. In1839 Clevelandreceived2.8 million bushels of wheat and flour, or87 percent morethanNew Orleans." In the same year, New York received three times as muchwheat as New Orleans.Thepattern of specializationinthegraintradefollowedthatof theprovisions andcottontrades, yet becauseof itssmaller volume beforeI 840, it was less systematized and specialized than that of cotton. Cleve-land, Buffalo, and other lake ports, including the new village of Chicago,became transshippingcenters similar to NewOrleans and the othercotton ports. As in the cotton trade, advances and the discounting of noteson goods in transit came toplaycritical roles in financing the movementof crops. Western millers, storekeepers, local merchants who built ware-houses, andoccasionally thefarmersthemselves consigned their grain orflour tocommissionhouses andmorespecializedfreight forwardersinthe lake ports, particularlyBuffalo. Inreturntheyreceivedadvanceswhich they usuallydiscounted for cash. The Buffalo merchants, in turn,sent graintothemillers of Rochester, or grainor flour toNewYorkmerchants-such as Eli Hart & Company; Suydam, Sage & Company; orChouteau, Merle& Standford-whohadpreviously providedadvances.Whenever thefinal purchase was not designated, theshipment was sentontoa commission house or appointedagent in theeast for final sale."That agent might ship it on consignment to a commission house in Liver-pool or Riode Janeirofor sale on the foreignmarket. These merchantsshippingoverseas obtainedfunds for advancesfrominternational mer-chant banking houses suchas the Barings. The grain trade differed fromthecottontrade, however, inthat it marketedprimarily intheUnitedStates and therefore was financed by American rather than British capital.Moreover, the trade had hardly been fully establishedbeforeit wasradically transformed in the18505 by thecoming of the railroad and thetelegraph. Thecottontrade, on, the otherhand, continuedtooperaterelatively unchanged for several decades.The Traditional Enterprise in Commerce [ 2 5Theriseof specializedcommercial enterprisetohandle theflowofagricultural products out of the interior to the east andEurope wasparalleledby a comparablespecializationof enterprisetobring finishedgoodsand staples intothecoastal ports andthence tothe interior. After1815, imports ofmanufactured products-dry goods, metals, hardware,and drugs-grew to .an impressive volume. The expanding economy alsoincreasedthedemandfor coffee, tea, sugar, andmolasses, products thatgrew in tropical or semitropical countries, and wines and spirits that wereproduced in Europe." Before18I 5many of the commission houses whichexported cotton also imported a widevariety of goods fromEurope andthe West Indies. But as the new patterns of trade evolved, they tended toconcentrateoncottonexportsanda smaller variety ofmorespecializedimports."Inimporting standardizedgoods, they increasingly gavewayto the specialized importer who purchased directly in Europe and sold tolocal manufacturers, retailers, andwholesalers. Importersdifferedfromexpo!ters, since theyo ~ t ~ n took title to goods, rather than selling them onconsignment or comrrussion.Theexperienceof NathanTrotterof Philadelphiaprovides agoodexample of the new specialized importer." When Trotter joined a familypartnershipin 1802, thefirmwasstill importingandexportingawidevariety of goods. During theNapoleonic Wars thepartnership concen-tratedonimportingfromEuropedrygoods, felt, leather, andmetals,muchof whichwasreshippedandsoldtotheWest IndiesandLatinAmerica. Thefirmalso shippedsugar, molasses, rum, andcoffeetotheUnited States andto Europe. Then, in I 816, when Nathan Trotter tookover the firm, he began to concentrate on importing a single line of goods-iron, copper, and other metals. These he purchased directly in Britainandnorthern Europe. Asdomestic tariffsappeared, raisingthepriceofmetals, he begantobuy intheUnited States. He sold some of themorefinished goodstolocal retailersandjobbers. But thelargestshare of histradewent totraditional artisans (blacksmiths, tinsmiths, andcopper-smiths), toartisans who were beginning tospecialize in making a singleline of goods (stoves, grates, furnaces, lamps, gasfixtures, andsteamengines), andtonew typesofcraftsmen(roofersandplumbers). Else-where in the metals trade, Trotter's story was paralleled by that of AnsonG. Phelps, James Boorman, and Joseph Johnson in New York, and DavidReeves and Alfred Hunt in Philadelphia."In the years after 1815a new type of specialized middleman appeared intheeastern seaports. This was thejobber who, unlike theimporter, pur-chasedat home and who, more thanthe importer, soldhisgoods toplantationfactors andstorekeepers fromthe southandwest. Jobberswere, in thewords ofan1829 report of theNew York state legislature,26] Traditional Processes of Production and Distribution"an intermediate grade of merchants, between the wholesale and import-ing merchants and the retail shopkeepcrs.?" They "purchased largely atauctions, at package sales, or wholesale importers, and in other such waysthat they canobtain merchandise inreasonable ways." They then brokedown large lots into smaller more varied ones,to meet the needs of localretailersandofcountrystorekeepersandplantationfactors whomadesemiannual purchases in their shops.As thequotationsuggests, theriseofthejobberwas closelyrelatedtotheuse of auctionsinthe marketing of imported goods." Auctioningbeganonalargescale whentheBritishdumpedtheir textilesin NewYorkand, to alesser extent, otherports uponthereopeningoftrans-atlantic trade at the end of the War of181 2.In Philadelphia and Bostonestablished merchants wereableto restrict the useof auctions by meansof local and stateordinances. In New York similar attempts failed. Theextensiveuse of auctionsduring the 1820S helped tomakeNew York amecca forthe countrytradeandbrought aconcentration ofjobberstothatcity. Although used'primarily inthe marketing of textiles, auctionsemployedintheotherbasic trades aswell. Duringthedecadeauction sales in New York City amounted to$160million or40percent of thevalueof that port'stotalimportsandone-fifth of thevalue of the entire nation's imports. In1820, for example, out of a total of$I 0.'4 million worth of goods soldat auction inN ew York, $7.0 millionwere textiles ($0.7million of which were American made); $1.9 milliongroceries, hardware, anddrugs; $1.0millionteas, silks, andchinawarefrom distant seas; and $0.4 million wines and spirits largely from Europe.?"In the1830S andI 840s jobbers began to rely less on auctions and began topurchase more directly from agents of manufacturers, at first buying fromdomestic and then foreign producers.Acheckofcitydirectoriesemphasizeshowpredominantspecializedbusinessenterprisehadbecome bythe I840Sinthemarketinganddis-tributing of goods inthe eastern ports. It also shows inwhich trades thejobber had become most influential. For example, Dogget's DirectoryforNew York City in 1846 indicates that the number of specialized businessenterpriseswashighest indrygoodsandgroceries, with3I 8establish-mentsinthefirst and 22 1inthesecond. China, glass, andearthenwarecame next with '146, hardwarewith91, drugs with83, wines and spiritswith 82, silks and fancy goods with 74, and watches with 40.31 There weremorejobbersthanimporters indrygoods, groceries, china, glass, andearthenware,and about the samenumber indrugs and wines and spirits.On the other hand, importers continued todominate the hardware, fancydrygoods, andclothingtrades. All40watchdealerswereimporters. Aquick andrelatively superficial check of directoriesinothercitiesindi-The Traditional Enterprise in Commerce [ 2 7cates that, until the1850S, jobbers and importers-that is, wholesalers whotook titleto their goods insteadof selling on commission-were concen-tratedintheeasternportsofNewYork, Philadelphia, andBaltimore.In these many ways the specialized impersonalized world of the jobber,importer, factor,broker, andthecommission agent of the river and porttowns replaced thepersonal world of the colonial merchant. Cotton hadpaced the transformation. The massive exports of the new crop providedpaymentsfor greatlyexpandedimportsof manufacturedgoodsandoffoods and beverages that could not be grown or produced in this country.The flows in and out of the nation and across the ocean came to be handledby a network of specialized middlemen. Nearlyevery plantation, farm,andvillage intheinterior cametohave direct commercial access tothegrowingcitiesof the east as well as tothe manufacturingcentersofEurope. The output of millions of acres moved every fall over thousandsof miles of water. Dry goods fromManchester, hardwarefrom Birming-ham, iron fromSweden, the teas of China, and thecoffees of Brazil wereregularly shipped totowns and villages in a vast region which only a fewyears before was still wilderness.This quickly created continental commercial network was coordinatedalmost entirely by market mechanisms. Goodsproducedfor other thanlocal consumption moved through the national and international economyby a series of market transactions and physical transshipments. The cotton,as it traveled fromtheplantation totheriverports(Memphis, Natchez,Huntsville, Montgomery, and Augusta), to the coastal ports (NewOrleans,Mobile, Savannah, Charleston), to the northeastern ports (NewYork and Boston), to the continental ports' (Liverpool, Le Havre, Ham-burg),and finallytothecotton textilemanufacturers in New England,old England, and the continent, required at the very least four transactions(between planter,factor, manufacturer's agent, andmanufacturer), andoften several more. And it passed through at least four transshipments andoftenseveral more. Provisions fromthe west moved southand eastthrough a similar network. Grain from the northwest also went through acomparable number of transactions and transshipments as it traveled fromthe farmer to the country store, to the interior town, river, or lake port, totheeasternseaport, andthensometimesoverseas. Theflowof finishedgoodsinvolvedsimilar sets of buyers, sellers, andshippersinEuropeancities, American seaports, and river towns. The granting of credit andthemaking of payments required a still different and even more complex setoftransactionsandflows.In the agrarian economy of the first decades of the nineteenth century,theflowof goodswas closelytiedtotheplanting andharvesting ofthecrops. The merchantswhocarried out thecommercial transactions and28] Traditional Processes of Production and Distributionmade the arrangements to move the crops out and finished goods in did soin order to make a profit on each transaction or sale. The American econ-omy of the 1840S provides a believableillustration of the working of theuntrammeled market economy so eloquently described by Adam Smith.Specialization in finance and transportationTheexpansion of trade inthe first decades of the nineteenth centurycaused business enterprises to specialize in the financing and transportationof goods as well as intheir marketing anddistribution. Specialization infinance and transportation, unlike that in distribution, led to an importantinstitutional development: thegrowth of incorporatedjoint-stock com-panies. Merchantscontinued touse thepartnership as the legalformforshipping and financing ventures, as they didfor their trading firms.Onlywhentheyfoundit advantageous to pool largeamounts ofcapital toimprovefinancial andtransportation services by setting upbanks, turn-pikes, andcanalsdidtheyturntothecorporation. At first theylookedon the corporation as the proper legalform for what they consideredtobe"privateenterpriseinthe public interest.":" They usedit toprovideessential specialized ancillary services to support their profit-making com-mercial activities. When the pooling of local capital in a corporation wasnotenoughtoprovidetheseservices, themerchantsdidnot hesitatetoseek funds from public sources., Specialization in financewas a natural concomitant of specialization inother commercial activities. As trade expanded, the older resident generalmerchantsoftenturnedtofinance. Thealternativewastospecialize' intradewithmoredistant regions, particularly China, India, andtheEastIndies, wherethelow volumeof tradeandhigh valueof goodsmade itpossible to continue the oldpatterns of commerce. For someyears aftertheWarof 1 8I 2 the Perkinses, Forbeses, andLees of Boston, andtheGriswolds, Howlands, andGrinnellsof NewYorkcontinuedto reapprofitsfromthese moreexotictrades. Formost general merchantstheold ways were no longer rewarding. They suffered fromthe same experi-ence as theBrowns of RhodeIsland. As James B. Hedges has recorded:"The story of the shipping interests of Brown and Ives from18I 5 to1838is anti-climactic, a doleful story of gradual decline and decay."?"For many, the more profitable alternative was to concentrate onfinance. JohnJacob Astor, Nathaniel Prime, StephenGirard, SamuelWard, theBrownsofProvidence, andthe BrownsofBaltimorewereresident general merchantswhosebusinessincreasinglybecamethat ofgranting credit to and discounting exchanges for other merchants." Later,The Traditional Enterprise in Commerce [ 29evensuccessful specialized merchants like Trotter carried on such bank-ingactivities. Andby the 1820S younger menwere entering business asspecialized private bankers and brokers. Fitch &Company of New York,Thomas Biddle& CompanyofPhiladelphia, andOelrich &LurmanofBaltimore were fromtheir beginnings specialized bankingenterprisesrather than general mercantile firms.Themost powerful financiersintheAmericaneconomyafter 18I 5were, however, thosesame menwhohadonceheldthemostinfluentialpartnerships in trade:moving cotton out of and, to a lesser extent, finishedgoodsintotheUnitedStates. Theseweretheenterprisesthat providedthecredit advances so essential tothefinancing ofthecotton trade. AsBritain was thecenter of financeandhad greater capital resources, thesefirmswereBritishratherthanAmerican. At first theywereLiverpoolenterprises, including such firms as Cropper, Benson & Company;Crowder, Clough & Company; Bolton Ogden & Company; and Rathbone& Company." After1820, leading London firms like Baring Brothers andthe threeW's (ThomasWilson& Company, GeorgeWildes & Com-pany, andThomasWiggins&Company) enteredthetrade.. TheonlyAmerican-basedfirmto become one of the leading Anglo-Americanmerchantbankers wastheBrownsof Baltimore, andthisfirm's centralpartnership was housed in Liverpool.With the merchants and merchant bankers financing interregional andinternational movements of trade, the incorporatedbankserved localneeds. Bypooling oflocalcapital in statechartered banks, businessmenincreased sources for long-termloans, basedonmortgages, securities,and even personal promissory notes(if the latter had the additional signa-ture of a co-maker). In the United States early commercial banks became,therefore, more providers of long and medium capital needs than sourcesofshort-termcommercial loans. AsoneBritishcommentatornotedin1837about American banks: "Their ruleis our exception, our rule theirexception. They prefer accommodation paper, resting on personal secur-ityand fixedwealth, to real billsof exchange, restingon wealthintransition from merchants and manufacturers to consumers.T" In additionstate chartered banks issued bank notes which became the standard circu-lating mediumin theUnited States. This was because theUnited Statesgovernment issued almost no paper money until I 862andonly a limitedamount of coin and because bills of exchange were not as abundant as theywere in Europe where they served as the basic medium of exchange. Banksprovided other services. They were relatively safe places to deposit funds.Their stock could be purchased as an investment at a timewhen invest-ment opportunities in other than landandnonliquid assets were limited.Finally, by incorporating a bank, local merchants were able to turn over30] Traditional Processes of Production and Distributiontheday-to-day work in providing specialized financial services toa full-time salaried employee, who usuallyhad the title of cashier.The need for such services was strong enough to bring the incorporatedbank quickly toall partsof thenation. The first was the Bank of NorthAmerica in Philadelphia charteredin178I. In1790, six more banks wereoperating in the major American ports: New York, Philadelphia, Boston,Baltimore, and Charleston. In1791, Congress approved Alexander Hamil-ton's proposal fora federally chartered bank with headquarters in Phila-delphia and branches in the larger towns. The chartering of banks boomedin the 1790S andagain after thecharter of theFirst Bank oftheUnitedStates expired in .18 I I. BetweenI 8I I andI 8I 5 the number increased from88 to206.37With theexpansion of the economy after 181 5, the numberjumped again. In1816alone, 40 banks were chartered, and by 1820 therewere 307. In the lateI 820S and the earlyI 830s, a period during which theSecond Bankof theUnitedStateswasproviding excellent services, thenumber leveled off. In those two decades, however, local banking businesshad expanded enough to encourage theopening of even more specializedfinancial institutionsinthe UnitedStates, includingsavingsbanks andtrust companies."By1830, the Second Bank of the United States was not only providinghighquality localbanking services but also operating ona national andindeed international scale. Fora brief period it competedmostsuccess-fully with the merchant bankers in the financingof the flow of domesticandinternational trade. It didsobecauseit was theonlycommercialinstitution to have a number of branches-twenty-two located in all partsofthecountry by1830. Noother financial institutionoperatedonthisscale. Merchant bankers oftenhadinterlockingpartnershipsbut thesepartnerships rarely operated in more than three commercial centers.Merchant bankers continued to handle their businessin distant portsalmostwholly through correspondents,other merchants who werepaidby commission.NicholasBiddle, whobecame the SecondBank's president in 1823,fullyappreciatedthe valueof usingitsbranchestofinanceAmericantrade. He realizedthat thebranches provided an administrative networkthat permitted the transfer of funds and credit throughout the country bymeans of a series of accounting transactions between branches controlledandsupervisedby thePhiladelphiaheadquarters. He indicated how thiswas accomplished whenhedescribedtheactivitiesoftheNew Orleansbranch to a congressional committee in1832.T h ~ course of thewesternbusinessis tosendtheproducetoNewOrleans, todraw bills on the proceeds, which billsare purchasedatthevariousbranches, andremittedto thebranchat NewOrleans. Whenthenotes issued bytheseveralThe Traditional Enterprise in Commerce [ 3Ibranches find their way in thecourse of trade to the Atlantic branches, the westernbranchespaythe Atlanticbranchesbydraftsontheirfunds accumulatedat thebranch atNewOrleans, which pay the Atlanticbranches bybills growing out ofthe purchases made inNewOrleans on account of the northern merchants ormanufacturers, thus completingthecircleofoperations. This explains the largeamount of business done at that branch.P?Foreign exchanges were handled in much the same way. Payments madeby the British and Europeans for American cotton and other commoditieswere deposited, normallywithLondonmerchant bankers, andbecamethe source of funds and credit for American merchants purchasing goodsabroad. The Second Bank is an early and highly successful example of theadministrativecoordinationof monetaryflows.Suchcoordinationper-mitted Biddle to increase the bank's domestic exchange business from $1.8milliona month in1823, to $5.02millionin1828, and$22.6million in1832. At the same time,thebank came todominate thenation's foreignexchange business."The Second Bank was, however, short-lived. Its concentrated economicpower and its roleas thefederal government's banker made its activitiesand evenits veryexistence amajor political issue. In 1832, AndrewJacksonvetoedabill torecharterthe bankin 1836. Theveto, whichprobably helped to re-elect Jackson tothe presidency, assured the end ofthe Second Bank of the United States. After its demise in 1836, merchants,particularly the more specialized merchant bankers,continuedto financethe long-distance trades. The state incorporated banks continued to servelocal communities and domestictrade, increasing in number from506 in1834to91in1840. TheBarings, theBrowns, anda small number oflesser survivors handledthefinancingof amajorportionof Americanimports and exports after the financial panics of 1837 and1839 destroyedseveral of the British merchant banking houses, including the three W'S.41The historyof insurance companies in the United States parallelsclosely that of the state incorporated banks. By pooling resources in an in-corporated insurance company, resident merchants, importers, exporters,and a growing number of specialized shipping enterprises were able to getcheaper insurancerates. At the same time, salaried employees of the newinsurance firms (appraisers and inspectors) could concentrate on themore technical and routine aspects of the business. Again, as in the case ofbanks, the insurancecompaniesprovideda sourcefor long-termloans,primarily based on mortgages, and their stocks were held as investments.Their number grew quickly. The first American company to insure shipsand their cargoeswas incorporated in1792. By1800, there were twelvemarine insurance companies in the United States and by1807, forty." Asin the case of thebanks, the numbers leveled off inthe1820S, with New32 ] Traditional Processes of Production and DistributionYorksupportingaroundtwentyand other ports asomewhat smallernumber. Nearlyall thesecompanies handledonlythebusiness of localshippers and ship owners. Fire insurance was slower in developing. Untilthegreat NewYork fire of1835, fire insurance waswrittenona smalllocalscale, oftenbymarineinsurancecompanies. Asforlife insurance,scarcely a handful of firms operated in the United States before the mid-I840s, whenthefirstmutual life insurancecompany wasformed. Onlyafter the countrybegantoindustrialize andurbanizerapidlydid theissuing of life insurance become a significant business.Intheearly yearsoftherepublic, merchants regardedtransportationcompanies as they did financial instirutions.IThey were primarily vehiclesfor providing services vital tothefurtherance of their commercial activ-ities. The incorporation ofturnpikeandcanalcompaniesmadepossiblethepooling of capital requiredtoimprove overland rights of way. Andwhen the capital pooled by incorporation was not enough to complete thenewoverlandrights-of-way, Americanbusinessmenquicklyturnedtolocal, state, andnational governmentsfor thenecessaryfunds. Ontheother hand, they rarely suggested that the government operate thecommoncarriersthat usedtheturnpikesandcanals. Theseenterprisescontinuedto beoperatedbyindividuals andpartnerships but not bycorporatIons.Inthecolonial period, theonly common carriers (that is, enterprisesspecializingwhollyintransportinggoodsandpassengers, withservicesavailable toany user) were a small number offerries, stagecoaches, andwagonlines. Thestagecoaches, carryingpassengersandmail, but verylittle freight, ranonthemost informal schedules. The wagon lines wereevenmore unscheduled. Teamsters, usuallylocatedincountrytowns,picked uploads fromstorekeepers and brought them tothelarger ports.There theteamsters waited until the city merchant had a return shipmenttotheirhometowns. Thismethodcontinuedtobe useduntil theearly1830S evenin Philadelphia, a city whoselargehinterland was servedbythe best turnpike system in the nation.As theroads wererelatively few and travel over them a bone-shakingexperience, most passengers andnearly all freight movedbywater. Themost impressive growth of common carriers came, therefore, in thedevelopment of shipping lines on waterways. During the colonial period,there were no common carriers on water routes except for an occasionalferry. Merchants who owned or who had shares in ships often "rented"space to other merchants. The former, however, were under no obligationto carry another merchant's goods and did so only when they themselveshad no need of the space. Moreover, in the eighteenth century, ships didnot followanyspecificschedules or plybetweentwotermini. TheyThe Traditional Enterprise in Commerce [ 33normally moved between regions, suchas between New England or themiddle colonies and the West Indies or between these colonies and GreatBritain or southern Europe. Within these areas the ships went from portto port as trading opportunities appeared."As the transatlantic tradeexpanded, shipsbecame "regulartraders"runningbetweenports, sayNewYorkandLiverpool, or PhiladelphiaandLondon." Andas ships becameregular