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.
A recent survey of CEOs running major American corporations revealed that almost 80 percent would have at least moderately mutilated their businesses in order to meet financial analysts’ quarterly profit estimates.
Cutting the budgets for research and development, advertising and maintenance, and delaying hiring and new projects are some of the long-term harms they would readily inflict on their corporations. Why? Because in modern American corporate capitalism, the failure to meet quarterly numbers almost always guarantees a punishing hit to the corporation’s stock price.
One lesson of the formative period is that meaningful reform can be achieved only by reforming the market, by reforming finance itself to create the incentives for stockholders, and through them the market, to re-learn the lesson that profits come from industrial production, not from the breeze that blows toward tomorrow. It is a lesson that was often forgotten during these early years, and many times since.
Finally, the story of the creation of American corporate capitalism illustrates the possibilities of capitalism and the variety of forms it can take. Some of these were present in the American corporate economy of the late 19th century.
Closely held industrial capitalism, bank-finance capitalism, capitalism in which publicly held permanent investments like bonds characterized the principal source of corporate finance, even a heavily regulated state-guided capitalism, all were possibilities before the election of Warren Harding. Many of these different forms of capitalism have appeared successfully in different regions, cultures and countries during the 20th century. American corporate capitalism -- stock market capitalism -- was neither the necessary nor inevitable form of the American economy.
The story of the formative period is a story of problems misperceived, transformations not yet understood and misguided regulation. One lesson of this story is that modern American corporate capitalism is the result of human choices. It is a system we maintain out of choice. It is a system that has ramifications beyond the economic that have helped to embed the kind of "hyper-individualism" that interferes with the cooperation necessary for a successful economy and a thriving society. It is within our power either to change it, to modify its rough edges or to accept it as it is. But these choices can only be made with understanding.
Several years into my research on the rise of the speculation economy, I began to see in the formation of American corporate capitalism the reasons for a number of contemporary economic and social problems, problems which so many are trying to solve today without grasping some of the important causes that this history helps to identify. Perhaps as important, I started to see the way our speculation economy affects the norms of American society, how it has pushed American social norms from a vision of collective life that achieved some currency during the Progressive Era to a more atomistic form of individualism that has both recalled an earlier American ideal and driven the future. Nowhere in American society is violent, competitive individualism more rampant than in the modern stock market.
Finally, the story holds important lessons for citizens of other nations, even as the American form of corporate capitalism has affected the different ways many other countries do business. For somewhat over a decade now, many countries have been at a decision point as to whether they will adopt the American way or pursue their own, or even whether they have much choice in the matter.