History of United States Business

Article Outline

Introduction; European Foundations of U.S. Business; Colonial Period to the American Revolution; The Revolutionary Era; The 19th Century; The 20th Century; The 21st Century

Navigation Acts

English mercantilism worked to America’s benefit. The colonial merchants who handled trade among the British colonies benefited especially from a series of English laws known as the Navigation Acts, beginning in the mid-1600s. These acts restricted English trade to English vessels with English crews, and guaranteed substantial markets for American tobacco, ships, flour, and fish. American colonial trade also operated under the protection of the English navy, which was the world’s strongest navy at the time.

The Revolutionary Era

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‘Reluctant Revolutionaries’

The striving for independence among American colonists during the mid-1700s threatened America’s most successful businesses. Independence promised to disrupt the close economic ties built up with Great Britain over more than 100 years. Colonists faced the prospect of no longer being protected by the world’s most powerful navy, or having preferential access to the huge British markets in the British Isles and the West Indies. As a result many American merchants were characterized as “reluctant revolutionaries,” fearful of losing their prosperity but at the same time angered by imperial Britain’s restrictions on colonial liberties.

Among the first tasks of the newly independent government founded in 1789 were efforts to address the needs of American business. First, the government ensured the civil order necessary to commerce with a provision for raising an army and navy. Property was also protected by guaranteeing the sanctity of contracts entered into before the adoption of the Constitution in 1789. Then, the new government enacted tariffs and taxes so that it could begin to pay off the war debt and restore the nation’s credit. Finally, by placing limits upon the states’ ability to regulate the movement of goods and people, the Constitution ensured that goods could move freely throughout the country, creating the potential for a truly national market.

The new government, however, faced considerable constraints upon its activities, which tended to limit the growth of public enterprises. The separation of powers between the states and the federal government and the system of checks and balances within the federal government limited public enterprises, such as proposals for a national system of roads and canals. Early American statesmen Alexander Hamilton, Albert Gallatin, and Henry Clay all proposed schemes for economic development based upon the exercise of national power, but all these schemes were doomed because of differing interests between the Southern, Northern, and Western regions of the United States.

Birth of the Corporation

Yet government was essential to the growth of business. In the 19th century government created and enforced contract law so that entrepreneurs (people starting new businesses) could draw up readily understood agreements among themselves. Perhaps most important, it created the corporation. To this day every corporation has a charter given by a governmental body stipulating the corporation’s privileges and duties.

Americans adopted the corporate form readily. In the early 19th century when England and France had no more than a couple dozen corporations each, Americans had chartered more than 300. The U.S. government also encouraged businesses by limiting the range of penalties they faced. Bankruptcy law enabled businesses that failed to clear the slate and begin anew, while torts (suits for negligence) against businesses were restricted.

Business thrived in this environment. Wars in Europe between 1792 and 1808 created unprecedented opportunities for American merchants who met Europe’s needs for foodstuffs and other goods. As neutrals, American businesses insisted upon the right to carry goods from America to Europe and back, generating millions in shipping revenues. The major port cities of Boston, New York, Philadelphia, and Baltimore boomed. Great fortunes were built by men such as Stephen Girard, John Jacob Astor, Alexander Brown, Archibald Gracie, and Francis Cabot Lowell, who promoted economic development as they invested in banks, insurance companies, textile manufacturing firms, canals, and the Western fur trade.

But when the United States was pulled into the European wars, beginning in the late 1790s, the boom collapsed. Embargoes against American goods and the seizure of American ships by different warring European nations decimated American exports of goods and shipping services. An era had ended. For the next century the leading businesspeople would not be merchants or planters, but manufacturers and railroad owners.

The 19th Century

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Transportation and Manufacturing

During the 100 years from 1815 to 1914, business transformed the United States economy. It undertook a transportation revolution, bringing huge sections of the expanding United States into a national economy. But some of the most striking changes came in the creation of a dynamic manufacturing sector as the United States exploited its extraordinary abundance of minerals, such as iron ore and copper, and fossil fuels, such as oil and coal.

To meet the challenges, Americans had to create giant enterprises. Businesses such as Standard Oil and Carnegie Steel brought together huge stocks of natural resources and unprecedented quantities of modern machinery to mass-produce goods for domestic and international markets. In meeting these demands, American entrepreneurs pioneered the development of modern business with its large-scale production and widespread markets, first by developing the railroad industry and then by creating industrial corporations.

The trans-Appalachian railroads, those that ran from the East Coast to the Midwest, encountered a number of challenges. They required millions of dollars in capital (cash for investment), which they raised through the sales of stocks and bonds. Next these railroads had to coordinate the activities of thousands of employees over hundreds of miles. After a few spectacular train wrecks on single-tracked lines, managers recognized that they needed to create a corporate bureaucracy in which employees would be assigned tasks to ensure the safe and efficient operation of the railroads and be held responsible for their effective performance. They also needed staff specialists to devise new and more effective ways to deliver railroad services.

From these changes came a new class of worker, the full-time middle manager. At the top of the organization, executives had to focus upon the long-term well-being of the railroad, plotting expansion, setting rates, and supervising the performance of the middle managers. Finally to handle both the operational (day-to-day) and entrepreneurial (long-term) decisions, railroads had to generate a constant flow of information. They gathered reams of statistics on railroad costs and usage. The stream of information enabled them to run with greater efficiency. To this day, when compared with air, ship, and bus transportation, freight railroads maintain the most precise schedules.

By reducing costs and increasing speed, railroads and the telegraph opened up regional and national markets. As manufacturers sought to reach these larger markets, they altered the way goods were produced. Before the Industrial Revolution, goods were manufactured in small shops, powered usually by hand but occasionally by water. An average firm might hire 10 to 15 workers to produce $15,000 to $25,000 worth of goods. Costs to finance these manufacturing businesses were modest. Most of a manufacturer’s money was tied up in inventory and accounts receivable, not buildings and machinery. Entry into business was easy. A person with knowledge of the manufacturing process and some savings could begin small and build through retained earnings. Exit was easy as well. Most businesses disappeared after a few years either because their owners failed or retired.

Modern Business Practices

But by the late 19th century, modern business practices had come to industrial America. Firms invested in huge plants equipped with the latest machines. Rather than produce small quantities of goods on order for local markets, a process known as batch production, these industrial firms fabricated huge quantities for national markets, a process known as bulk production. Investment in the plant and equipment necessary to achieve this scale of production restricted competition because it was difficult to raise the needed capital. The new big businesses carried heavy debt for the construction of their facilities.

Firms sought to minimize the impact of these costs by spreading it over as many units of goods as possible. They found that producing a large amount of goods in a single facility lowered the average cost of producing the goods, yielding what is known as an “economy of scale.” To achieve these economies of scale, businesses had to coordinate the flow of goods through the firm more effectively. Often, in order to assure that vital supplies or machines needed to produce the goods arrived on time or were readily available, some firms bought out suppliers or undertook production of the needed supplies themselves.

With their vastly increased output and costs, firms had to make sure their products sold. Employment multiplied, as firms added new departments such as purchasing, advertising, and sales divisions to supplement their multiplant manufacturing operations. And like the railroads, once manufacturing firms adopted new strategies, they had to adopt new, more rational corporate structures. Middle managers multiplied as firms needed larger numbers of specialists to handle the new functions and coordinate the activities of truly giant enterprises.

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