In 1733, an Irish satirist called Samuel Madden (1687–1765) published an early venture in science fiction. The pamphlet, entitled Memoirs of the Twentieth Century, predicted that two giant companies would dominate the world in that far-off time: the Royal Fishery and the Plantation Company (to be founded by Frederick I and George III respectively).1 As a prophecy of the influence of companies two centuries away, this was oddly prescient—all the more so because Madden was polemicizing against a declining economic organization.

Set beside partnerships and various forms of unincorporated companies, incorporated joint-stock companies (i.e., ones recognized by state statute) fared badly for the next century. The British and the French treated them with suspicion. “They are behind the times,” thundered one governor of Pennsylvania, “they belong to an age that is past.”2 New companies were chartered, of course; but the process of doing so was cumbersome. It was not until a combination of legal and economic changes from the 1820s onward that the modern company began to take shape.3


In Britain, the prejudice against joint-stock companies created by the South Sea Bubble was later reinforced by scandals involving both the Charitable Corporation and the York Building Company. As we have already noted, the ironically named South Sea Bubble Act survived the scandal. It required every joint-stock company to possess a charter from parliament—something that involved huge costs in terms of money, time, and uncertainty. Most British businessmen preferred other sorts of organizations, such as partnerships and various unincorporated companies (partnerships that tried to mimic some of the qualities of companies by making their shares freely transferable and doing something to limit the liability of sleeping partners who were not directly involved in the business).4

There were several frenzies of joint-stock company creation—most notably to build canals. Between 1758 and 1803, 165 canal acts were submitted to parliament. The Napoleonic Wars produced another flurry: in January 1808, forty-two companies were formed, an unusual number of them related to the business of helping the British to get drunk. In the first quarter of 1824, 250 private bills were filed at parliament to set up companies, many of them in the insurance business.5 But it was plainly a cumbersome, sporadic process.

Symptomatically, the two most dynamic and controversial parts of the British economy—the slave trade and the growing industrial sector—both preferred partnerships (and occasionally joint-venture associations) to joint-stock companies. By the eighteenth century, the Royal African Company, like all the other chartered companies set up for slavery, was a financial failure.6 As Britain’s slave trade moved from London to Bristol and Liverpool, the RAC began to give way to partnerships of wealthy traders. In 1750, the government officially opened up the British slave trade, leaving it under the control of a club, the Company of Merchants Trading to Africa, which took over the RAC’s ports and forts.

The newly deregulated business prospered as never before, the slavers soon rivaling the East India nabobs in their wealth. In 1757, the leading contributor to a huge government loan was Richard Oswald, a Glaswegian merchant, political go-between, and slaver who owned property on both sides of the Atlantic (including a share in Bence Island, off Sierra Leone, where his partnership set up a golf course, with kilted slaves as caddies). By 1798, some 150 ships a year were leaving Liverpool for Africa. In the final decade of the eighteenth century, when one prime minister guessed that three-quarters of the country’s overseas earnings were coming from slave-related business, the British shipped some 400,000 slaves.

Yet, the Bristol and Liverpool slavers did their business through small partnerships, just as their rivals did in Bordeaux, Nantes, and Rhode Island. Six or seven merchants, often related to each other, financed most slave voyages. Isaac Hobhouse, a Bristol merchant who financed forty-four voyages between 1722 and 1747, had just seven partners, two of them his brothers. Over in Rhode Island, John Brown brought his brothers into the business. Indeed, slavery in both Europe and America increasingly became, as Hugh Thomas writes in his history of the trade, “a thing of families: the Montaudoins, the Nairacs, the Foäches, the Cunliffes, the Leylands, the Hobhouses, the de Wolfs, the Browns.”7 Even these empires remained fairly small: the biggest, the Montaudoins in Nantes, financed no more than eighty voyages. Typically, the partners were jacks-of-all-trades, with slaves being only one of the commodities the families handled.

Joint-stock companies were also unpopular with early industrialists. To people like Richard Arkwright, Abraham Darby, and Josiah Wedgwood, partnerships made more sense than joint-stock companies. The amount of capital required for manufacturing ventures was not large. A group of Lancashire mill owners could raise enough capital to build a new factory. As for limited liability, that was viewed, to the extent that it was considered at all, as a weakness rather than a strength, because it would lower the commitment of the partner-owners. “It is impossible for a mill at any distance to be managed unless it is under the direction of a partner or superintendent who has an interest in the success of the business,” argued Sir Robert Peel, Britain’s richest industrialist in the 1820s and father of the eponymous prime minister.8 In Elizabeth Gaskell’s North and South, published in the 1850s, the “master” of the mill, Mr. Thornton, deals directly with his workers. His house is in the shadow of the mill: hence his mother’s famous comment about “the continual murmur of the work people” disturbing her no more than “the humming of a hive of bees.”

For the most part, it was remarkable how far the industrialists, like the slavers, were able to keep the ownership and management of their businesses within a small circle. This was certainly true of Boulton & Watt. Matthew Boulton (1728–1809) inherited a small family hardware business in Birmingham. By 1769, through a mixture of graft, intellectual curiosity, and shrewd marriage, he was already, in Josiah Wedgwood’s judgment, “the first manufacturer in England.” His Soho Manufactory, which employed eight hundred workers to turn out metal boxes, buttons, chains, and sword hilts, was so famous that guided tours had to be arranged. (People were equally amazed by Boulton’s centrally heated mansion, Soho House.) Then, in 1774, he went into partnership with James Watt (1736–1819), the Scottish pioneer of the steam engine, whose first partner-backer had just gone bust following a poor mining investment. On March 8, 1776, they demonstrated Watt’s machine in Birmingham: it rapidly became indispensable to the coal industry and then cotton mills. By the time they retired in 1800, handing the business over to their sons, Boulton and Watt counted among the richest people in the country, and Britain was producing 15 million tons of coal a year, about five times the total production of continental Europe.

Again, like the slavers, the industrialists relied on some degree of government sanction. One of Boulton & Watt’s first actions was to obtain patents from parliament—to the fury of their competitors, who complained that the patents were so broad that they could just as well have been for “a nice and warm water closet.” But Boulton & Watt remained firmly a private partnership, run by two men—to the cost of William Murdock, another prodigiously gifted inventor employed by them. Had he been a partner, he might have earned them even more money: in the 1780s, forty years before the Stockton-Darlington Railway, Murdock drew up a plan for a steam locomotive, which Watt dismissed immediately with “small hopes that a wheel carriage would ever become useful.”9


In Britain, the marginal position of joint-stock companies could easily be blamed on the South Sea Company’s abuses. In newly independent America, by contrast, companies had been responsible for the country’s very existence.

The early American states used chartered corporations, endowed with special monopoly rights, to build some of the vital infrastructure of the new country—universities (like America’s oldest corporation, Harvard University, chartered in 1636), banks, churches, canals, municipalities, and roads. The first business corporation was probably the New London Society for Trade and Commerce, a Connecticut trading company chartered in May 1732. Symptomatically, the Connecticut General Assembly revoked its corporate charter within a year, in February 1733. Such shenanigans help explain why business corporations were exceedingly rare before the late eighteenth century; indeed, there were no business corporations whatsoever in the South until 1781.10

After independence, things sped up a little. The Bank of North America was the first wholly American corporation, chartered by the Continental Congress in 1781. The Society for Establishing Useful Manufactures of New Jersey, chartered in 1791, was the first to be formed after the ratification of the American Constitution. In 1795, North Carolina passed an act that allowed canal companies to incorporate, without getting specific permission. Four years later, Massachusetts gave its water-supply companies the same option. By 1800, there were 335 business corporations in the country, nearly two-thirds of them in New England. Transport companies (including canals, toll bridges, and turnpikes) were the most common, followed by banking. Manufacturing and trading companies made up only 4 percent of the total.11

Most of these companies had monopolies, but governments were notoriously fickle, rewriting charters on a whim. In 1792, for instance, the General Court altered the Massachusetts Bank’s charter for purely political reasons. Twenty years later, an attorney successfully argued that “the notion of a contract between the government and a corporation” was “too fanciful to need any observation.” Businessmen could never assume that incorporation granted lasting rights.12 (Conversely, even the most powerful politicians couldn’t rescue a bad idea: the Potomac Company, created in 1785 to make the Potomac River navigable, boasted George Washington as its president and Thomas Jefferson as a director. It still failed.)13

Wall Street’s slow development did not help matters. The curbside markets of New York, which gradually replaced Philadelphia as the main exchange, were notoriously volatile, partly because they depended so heavily on flighty British capital. They also focused on government bonds. Wall Street did not trade a corporate stock until 1798, when the New York Insurance Company came to market. America’s early tycoons, such as John Jacob Astor (1763–1848) and Stephen Girard (1750–1831), were players on the exchange, buying great chunks of government debt. But they ran their own businesses as private partnerships—as did America’s slavers, such as the Browns, and early industrialists such as Eli Whitney (1765–1825).


The fact that business on both sides of the Atlantic was still rooted in partnerships did not make partnerships perfect. Unlimited liability restricted a firm’s ability to raise capital. The untimely death of a key partner or even an heir often killed the firm with it: Mr. Dombey’s problems in Dombey and Son (1848), Charles Dickens’s great novel about a family firm, stem from the death of his son. Partnerships were prey to scoundrels of all kinds. Dombey entrusts the day-to-day running of his business to James Carker, and does not discover how badly he is doing until Carker runs off with Dombey’s wife. Partnerships were fragile creations. Businesspeople stuck to them because they didn’t like bringing the state into their private affairs.

In the first half of the nineteenth century, the state began to step back. It did so first in America—though because of the federal system, it was a much more piecemeal and convoluted affair than in Britain. There were three prompts for change. The most important was the railroad, which we will discuss later. The second was legal. In a ruling about the status of Dartmouth College in 1819, the Supreme Court found that corporations of all sorts possessed private rights, so states could not rewrite their charters capriciously.

The last prompt was political. Concerned that their states were losing potential business, legislatures, particularly in New England, slowly began to loosen their control over companies. In 1830, the Massachusetts state legislature decided that companies did not need to be engaged in public works to be awarded the privilege of limited liability. In 1837, Connecticut went further and allowed firms in most lines of business to become incorporated without special legislative enactment.

This competition between the states was arguably the first instance of a phenomenon that would later be dubbed “a race to the bottom,” with local politicians offering greater freedom to companies to keep their business (just as they would much later dangle tax incentives in front of car companies to build factories in their states). All the same, it is worth noting that the states gave away these privileges grudgingly, often ignoring the Dartmouth College ruling and often hedging in “their” companies with restrictions, both financial and social. The Pennsylvania Coke and Iron Company, chartered in 1831, was compelled to produce five hundred tons of iron within three years using only bituminous coal or anthracite in the process.14 A bank charter in New Jersey required the company to help local fisheries. New York limited corporations to $2 million in capital until 1881 and to $5 million until 1890. In 1848, Pennsylvania’s General Manufacturing Act set a twenty-year limit on manufacturing corporations. As late as 1903, almost half the states limited the duration of corporate charters to between twenty and fifty years. Throughout the nineteenth century, legislatures revoked charters when the corporation wasn’t deemed to be fulfilling its responsibilities.


There was also a fierce debate in Europe about whether to sever the Gordian knot between companies and public works. As the memory of John Law faded, France loosened its rules, albeit fitfully. Alongside the huge, established sociétés anonymes, which had to be authorized by the government, a new form of business was made available to entrepreneurs in 1807—a partnership with transferable shares, the société en commandite par actions. This granted limited liability to its sleeping (inactive) partners and only needed to be registered.15 Another pioneer was Sweden, which gave legal recognition to joint-stock firms as early as 1848.

All the same, only a legal pedant would dispute the boast in Utopia Limited: that Victorian Britain gave birth to the modern company. Throughout the first half of the nineteenth century, the leaders of the world’s most important economy labored to free up its commercial laws. Parliament made the currency convertible to gold (1819), relaxed the restrictive Combination labor laws (1824), opening the East India Company’s markets to competition (1834), and eventually repealed the protectionist Corn Laws (1846).

They also began to tackle the issue of company law. In 1825, parliament finally repealed the vexatious Bubble Act. Reformers called for the statutory recognition of unincorporated companies, but conservative judges were skeptical. Lord Eldon, for example, maintained that it was an offense against the common law to try to act as a corporation without a private act of parliament or a royal charter.16 Despite attempts to speed up the process of obtaining charters, it could still be expensive—one estimate put the cost at £402—and fraught with political risk.17

The crucial change was the railways, and their demands for large agglomerations of capital. In 1830, George Stephenson’s Rocket began steaming down the Liverpool-Manchester line, the world’s first regular passenger railway. By 1840, two thousand miles of track, the bare bones of a national network, had been built—all by chartered joint-stock companies. Acts of Parliament were required for every line: there were five a year from 1827 to 1836, when the number jumped to twenty-nine. In the same year, parliament, trying to stop the growing “railway mania,” limited loans to one-third of the chartered railways’ capital, and it also banned any borrowing until half their share capital had been paid up. In the 1844 Railway Act, the state reserved the right to buy back any line that had operated for twenty-one years—a right that came in surprisingly useful during the nationalization mania a century later. It still did not stop the rush: there were 120 Railway Acts in 1845, 272 in 1846, and 170 in 1847 (involving some £40 million worth of capital).18

Although these companies were publicly traded, most of the real money for railways came from government and local businessmen (who had the most to gain from connecting their town to the network). “We will venture to assert,” decided an 1835 circular to London bankers, “that taking into account all the railways north of Manchester not one twentieth part of the capital was provided by members of the stock exchange.”19 But the importance of tradable equities increased, particularly once the railways started issuing preference shares, which provided a guaranteed dividend rate (making their value easier to work out for investors), yet counted as equity under the government’s debt-to-equity rules: by 1849, they accounted for two-thirds of the railways’ share capital.20

Most of these shares were traded on local exchanges, such as Lancaster—out of reach of Lombard Street, which was still more interested in public debt than private equity. Railway mania was fanned by a growing number of railway papers, such as the Railway Express, Railway Globe, and Railway Standard. In its first issue in 1843, the Economist devoted less than a tenth of its “commercial markets” column to money-market and stock prices. It bitterly condemned the railway speculation, forecasting a “universal domestic affliction.” But in 1845 it launched its own highly profitable nine-page section, the Railway Monitor, professing that no financial paper could be without one.21

The railway was not the only force for change. By 1850, Britain had two thousand miles of telegraph lines. In 1845, Isambard Kingdom Brunel’s Great Britain became the first propeller-driven boat to cross the Atlantic. As the British economy opened up, owner-managers felt less in control. “Competition, competition—new invention, new invention—alteration, alteration—the world’s gone past me. I hardly know where I am myself; much less where my customers are,” Uncle Solomon muses to Walter Gay in Dombey and Son (where the evil Carker, incidentally, is killed by a train). Middlemarch—set in a market town soon to be connected to the railway—was written by George Eliot in the 1870s, but it captures perfectly the sense of panic and possibility that modern technology engendered in the period.


In the 1840s, politicians finally made real headway with Britain’s confused company laws. Early in the decade, legal obfuscation helped produce an outbreak of fraudulent scams, involving not just railways but also the assurance companies that Dickens pilloried in Martin Chuzzlewit (1843). In 1844, William Gladstone, the president of the Board of Trade (and the sponsor of the restrictive Railway Act of the same year), pushed through the Joint Stock Companies Act. The 1844 act allowed companies to dispense with the need to get a special charter, and be incorporated by the simple act of registration.22 But it did not include the crucial ingredient of automatic limited liability.

Limited liability was still anathema to many liberals. Adam Smith, remember, had been adamant that the owner-managed firm was a purer economic unit: the only way the joint-stock firm could compete was through the “subsidy” of limited liability. Some of the industrialists who had helped get rid of the Corn Laws were suspicious.23 Surely entrepreneurs could raise the necessary sums by tapping family savings and plowing back the firm’s earnings? Wouldn’t limited liability just impose the risk of doing business on suppliers, customers, and lenders (a complaint that modern economists later echoed)? And wouldn’t it attract the lowest sort of people into business? The majority of established manufacturers, most of whom were located far from London, were against the new measure.24 So, according to Walter Bagehot, were the rich, who thought the poor would reap the biggest rewards.

There were voices on the other side, too. Denying businesspeople a commercial tool like limited liability was itself illiberal, argued some reformers. “If people are willing to contract on terms of relieving the party embarking his capital from loss beyond a certain amount, there is nothing in natural justice to prevent it,” argued Robert Lowe to the Royal Commission on Mercantile Law.25 John Stuart Mill and Richard Cobden argued that limited liability would help the poor to set up businesses. Mill continued to worry whether professional managers could ever match the zeal of owner-managers, but he decided that for large businesses, the only alternative to the joint-stock system was government control. Christian Socialists also rallied to limited-liability firms, seeing them as a way of both enriching the poor and reducing class conflict.

The government also was concerned about the less abstract question of losing business to foreign countries. In the early 1850s, some twenty English firms were established in France as commandites par actions, even though it cost as much as £4,000 to do this. “So great is the demand for limited liability,” pleaded Edward Pleydell-Bouverie, the vice-president of the Board of Trade in 1855, “that companies are frequently constituted in Paris and the United States.”26 Using these arguments, Pleydell-Bouverie forced through a Limited Liability Act in 1855, which granted the privilege of limited liability to incorporated companies, as defined by the 1844 act, subject to various fiddly capital requirements. How the bill sneaked through parliament is not entirely clear; one theory is that the Palmerston government wanted to claim that it had done something other than vote yet more money for the Crimean War.

Pleydell-Bouverie was then replaced by Robert Lowe, who masterminded the landmark Joint Stock Companies Act of 1856 (which removed the qualifications of the Limited Liability Act). If anyone deserves the title “father of the modern company,” it is Lowe. Lowe was a complicated figure: a serious intellectual who made his career in the rough-and-tumble of politics and a fervent liberal who turned against giving the lower classes the vote during a visit to Australia.27 He once caustically condemned a supporter of universal suffrage as being the sort of person “whose idea of a joint-stock company is one in which everybody is a director.”28 He famously promoted educational reform on the grounds that if Britain must have democracy, “we must educate our masters.” It is a measure of his stature that Gladstone later made him Chancellor of the Exchequer, even though Lowe had ruined his cherished 1867 Reform Act.

Lowe, however, had no doubts about the merits of free markets or of setting companies free from state control. “To 1825 the law prohibited the formation of joint-stock companies,” he declared. “From then to now it was a privilege. We hope to make it a right.” By then, he had rallied much of the liberal press to his cause. In an article entitled “Why Companies Are Now Necessary” (July 19, 1856), the Economist admitted that “it is very probable that companies will be carried to excess … but the state ought no more to interfere to stop the waste of capital, than to stop its judicious employment.” What the paper called “the principle of Liberty” was all important.

Lowe’s 1856 act allowed businesses to obtain limited liability with “a freedom amounting almost to license.”29 Banks and insurers were excluded; but there were no minimums for share capital. All that was needed was for seven people to sign a Memorandum of Association, for the company to register its office, and for the company to advertise its status by calling itself “ltd.” It was this act, slightly modified, that was swept up into the comprehensive 1862 Companies Act that Gilbert and Sullivan celebrated in Utopia Limited.

This new regime was still a long way from modern shareholder capitalism. British law provided remarkably little protection for shareholders (who, for instance, did not need to be given audited accounts till 1900).30 It was not until the case of Salomon v. Salomon & Co. Ltd. in 1897, when the House of Lords ruled in favor of an unsavory leather merchant who had transferred his assets into a limited company, that the separate legal identity of the company, and the “corporate veil” of protection that it offered to its directors, was firmly established in the law. And many companies used partly paid shares—shareholders, for instance, paid in only 10 shillings for each £1 share; that meant that if the firm got into difficulties, the other 10 shillings would be called for. As late as the 1930s, some cotton mills listed on the London Stock Exchange had negative share prices, reflecting this unpaid liability.31 Yet companies now started to appear—and fail—by the thousands. Between the acts of 1856 and 1862, almost twenty-five thousand limited-liability companies were incorporated. In the three years following the 1862 act, new issues averaged £120 million a year. More than 30 percent of the public companies formed between 1856 and 1883 obliged their critics by going bankrupt, many of them in the first five years of their existence.

The most spectacular was Overend, Gurney, a once revered finance house that fell on hard times in the late 1850s. The partners tried to solve their financial problems by floating the firm as a limited-liability company, but they were unable to avoid bankruptcy. The company’s collapse on Black Friday in May 1866 led to a run on the banks and the collapse of a swath of other companies. The Bank of England had to raise interest rates to a crippling 10 percent for three months to deal with the financial mayhem—and some critics tried to reopen the debate about the company. “With its luring but deceptive flag, ‘limited,’ it has been a snare and a delusion,” argued one old opponent, “like the candle to the moth, or gunpowder in the hands of children.”32

Still, Europe’s children were desperate to get hold of the new gunpowder. In May 1863, France, keen for its entrepreneurs to compete on equal terms, passed a law allowing businesspeople to establish joint-stock companies with full limited liability, provided that the capital involved did not exceed 20 million francs. Four years later, the limit was removed and general permission to form sociétés anonymes was granted. In 1870, Germany also made it much easier to found joint-stock companies. The result was a boom in company creation: 203 were set up in 1871, 478 in 1872, and 162 in 1873.33


Two points emerge clearly from all this activity. First, no matter how much modern businessmen may presume to the contrary, the company was a political creation. The company was the product of a political battle, not just the automatic result of technological innovation.34 And the debate forged in mid-nineteenth-century Britain has shadowed the institution ever since: Is the company essentially a private association, subject to the laws of the state but with no greater obligation than making money, or a public one which is supposed to act in the public interest?

Businessmen might see the joint-stock company as a convenient form; from many politicians’ viewpoint, it existed because it had been given a license to do so, and granted the privilege of limited liability. In the Anglo-Saxon world, the state might decide that it wanted relatively little in return: “these little republics,” as Robert Lowe called them, were to be left alone. But other governments would demand more.

Second, the little republics plainly had a political and social impact in the societies that spawned them. As Peter Drucker puts it, “This new ‘corporation,’ this new Société Anonyme, this new Aktiengesellschaft, could not be explained away as a reform, which is how the new army, the new university, the new hospital presented themselves. It clearly was an innovation.… It was the first autonomous institution in hundreds of years, the first to create a power center that was within society yet independent of the central government of the national state.”35 The industrial economy’s need for establishing economies of scale and scope would drive the big company to the forefront of capitalism and society—but it would do so most notably in the United States.

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