How the Rise of the Speculation Economy Shaped U.S. Corporate Culture

Editor's Note: The following is an edited excerpt from The Speculation Economy:  How Finance Triumphed Over Industry, Lawrence Mitchell's definitive history of the rise of American finance and analysis of how it shaped corporate behavior in the modern era.

During the rise of the "speculation economy" in the early years of the 20th century, business’ focus on production was replaced with business management’s focus on stock prices.

That goal might be consistent with healthy, sustainable and responsible business practices, but it also might not be. Understanding the complex development of American corporate capitalism can help us better improve and sustain the strength of the American economy.

While our current economic crisis is frequently compared to that of the Great Depression, its roots and causes go further back in history -- to the development of the modern American stock market at the turn of the 20th century.

Contrary to popular belief, the public market for industrial securities didn’t finance industrialization -- industrialization had already taken place. Instead, it exploded into existence as a result of trust promoters and investment bankers trying to restrain competition through the creation of giant combinations of corporations and at the same time getting rich quick by dumping the overvalued securities of these giant corporate behemoths onto an emerging middle class eager to share the wealth.

The first major industrial stock market crash followed fast on the heels of its birth.

The formative era of American corporate capitalism took place between 1897 and 1919. The American business landscape of the late 19th century had been characterized by independent factories. No matter what their size, they typically were owned by entrepreneur industrialists, their families and perhaps a few business associates.

But in the first decades of the 20th century, American business transformed into a vista of giant combinations of industrial plants owned directly and indirectly by widely dispersed shareholders.

Business reasons sometimes justified these combinations. But they might never have come into being if financiers and promoters had not discovered that they could be used to create and sell massive amounts of stock for their own gain.

The result is a form of capitalism in which a speculative stock market dominated the policies of American business. The result is the speculation economy.

Historians have studied virtually every aspect of the Progressive Era, including the social and philosophical changes that took place in Americans' ways of living and thinking about their world, the dramatic technological and economic developments that occurred, the rise of big business, the growth in importance of the federal government, the fitful creation of American industrial policy, the establishment of the bargain between labor and capital, the changes in political relations between government and big business, the development of new styles of regulation and America's assumption of its turn as the world's dominant economic power. Many have provided rich pictures of different aspects of the dramatic and related economic, social and political transformations that occurred during that period.

The story I tell in The Speculation Economy:  How Finance Triumphed Over Industry is the economic equivalent of the political creation of the republic. It is a story that needs to be told for many reasons, not least of which is that the corporate economy that emerged during this era has been beset with problems ranging from short-term management horizons that can damage the long-term health of business to the increasing willingness of corporate managers to "externalize" the costs of production for the benefit of their stockholders.