Entrepreneurship in American History

John Steele Gordon
Author, An Empire of Wealth: The Epic History of American Economic Power

John Steele GordonJohn Steele Gordon was educated at Millbrook School and Vanderbilt University. His articles have appeared in numerous publications, including Forbes, National Review, Commentary, the New York Times, and the Wall Street Journal. He is a contributing editor at American Heritage, where he wrote the “Business of America” column for many years, and currently writes “The Long View” column for Barron’s. He is the author of several books, including Hamilton’s Blessing: The Extraordinary Life and Times of Our National Debt, The Great Game: The Emergence of Wall Street as a World Power, and An Empire of Wealth: The Epic History of American Economic Power.

By the time of Isaac Singer’s death in 1875, the American economy was being transformed by the emergence of giant corporations, with tens of thousands of employees and thousands of stockholders. Lagging far behind were the rules needed for such an economy to operate for the benefit of all. Many thought a plutocracy threatened, and plutocracy threatens a country’s entrepreneurial spirit quite as much as an overbearing government—especially if the plutocrats and politicians get together, as they are wont to do in their mutual, if short-term, self-interest. This, of course, is the very essence of crony capitalism that has kept so many countries poor and could threaten this country’s prosperity.

Standard Oil was able to muscle many small operators into selling out by threatening ruin if they did not. Standard’s relationship with the railroads allowed them to ship much more cheaply than the smaller refiners, and it often received an under-the-table kickback on the oil the small operators did ship. Standard would always offer what it regarded as a fair price, but it was “take it or leave it”—and leaving it was usually not an option.

The lack of rules sometimes led to theft of the stockholders’ investments in all but name. In earlier times, an organization’s managers were almost always owners as well, and thus had an identity of interest with the owners. But as capital requirements rose, managers often came to be, at best, small shareholders. So the self-interest of management and that of shareholders diverged.

The Union Pacific Railroad, for instance, was chartered by the federal government to build part of the transcontinental railroad. The newly installed management organized a construction company owned by themselves, gave it a fancy French name, Crédit Mobilier, and hired themselves to build the railroad. And guess what? They overcharged. To make sure Congress didn’t make trouble, they cut key members in on the deal, allowing them to pay for Crédit Mobilier stock using the enormous quarterly dividends—often 100 percent of par value—that they were paid. The result was a bankrupt railroad that had been shoddily constructed.

Managers also did not have to make regular reports to their stockholders in most cases and, even when they did, could keep the books as they pleased. Wall Street, with a powerful interest in knowing the truth about the corporations whose securities were traded and underwritten there, began imposing regular accounting rules and quarterly, audited reports. The result was a far more honest capital market, where entrepreneurs could come in search of financing with the certainty that they would be treated fairly and have their risk-taking properly rewarded if the idea was a success. That was a huge spur to entrepreneurship.

Government also sought to police the marketplace, but with far less success than Wall Street. Railroads were brought under a federal regulatory regime that quickly evolved into a cartel called the Interstate Commerce Commission. Trucking came under its control in the 1930s and airlines were regulated by their own cartel, the Civil Aeronautics Board. Cartels and monopolies, of course, prevent competition and thus entrepreneurship. That, in turn, prevents the creative destruction that is so vital to capitalism.

After the ICC and CAB lost their rate-setting and route-allocating powers in the late 1970s, transportation costs—a transaction cost—dropped from 15 percent of GDP to only ten percent, allowing lower prices for almost all goods. At the same time, innovation flourished. Old legacy airlines, unable to compete in the new environment, disappeared. New airlines with new strategies, such as Southwest and Jet Blue, emerged. Entrepreneurship returned to transportation from where it had long been absent.

With the birth of the digital age, there has been a new golden age of entrepreneurship. Thousands of new niches have become available to exploit, many of which can be exploited very cheaply. The result has been the greatest inflorescence of fortune-making—and fortune-making usually implies entrepreneurship—in human history. In 1982 it took $82 million to have a place on the Forbes list. Today it takes over $1.3 billion.