Partner to Plutocrat: The Separation of Ownership from Management in Emerging Capital Markets - 19th Century Industrial America
Christian C. Day
Syracuse University - College of Law
University of Miami Law Review, Vol. 58, p. 525, 2004
The industrialization of the United States in the nineteenth century provides a model for successful emerging capital markets. After the American Revolution, the new nation was a maple syrup republic. By 1900, the United States was an industrial giant. The early republic needed massive amounts of capital to conquer the continent. American capital markets and their Big Businesses (such as railroads) created great liquidity and a monitoring system that protected diverse domestic and foreign investors - funneling even more capital to Wall Street.
This article traces the development of capital markets in the United States and the coincident critical separation of ownership from management. Investors in the early eighteenth century were primarily family members, partners, friends, and local people who could directly oversee the operations of the enterprise and who had enough knowledge to ensure it was properly run. As enterprises grew larger, especially canals and railroads that tied large areas together, capital needs exceeded local resources and the management required could not depend on only one person or family.
Investors in large enterprises, removed from direct observation and more sophisticated in their operation than one person or family could manage, required alternate mechanisms to guarantee that investments were being used advantageously and investors' interests were being protected. The key effective capital utilization mechanisms that evolved in the United States were professional management hierarchies, with regular reports and oversight, and a corporate structure of holding rights in the enterprise, with shares that could be freely bought and sold. Additionally, the vital capital accumulation and protection mechanisms that developed were local and national banks, merchant bankers like J. P. Morgan & Co., bond markets and stock exchanges with self-policing policies, and representation of shareholder interests on the corporate board.
The American experience demonstrates how separation of ownership from management, sophisticated industrial monitoring, and equally sophisticated monitoring of capital markets can lead to enormous economic growth.
Number of Pages in PDF File: 44Accepted Paper Series
Date posted: July 13, 2004
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