The Traditional Enterprise in Commerce: Institutional Specialization and Market Coordination

In the half century after the ratification of the Constitution American business enterprise became increasingly specialized in commerce and pro- duction. The trend was particularly evident in commerce. As commerce expanded and as commercial activities became more specialized, the dependence on market mechanisms to coordinate these activities increased proportionally. In the 1790s the general merchant, the businessman who had dominated the economy of the colonial period, was still the grand distributor. He bought and sold all types of products and carried out all the basic commercial functions. He was an exporter, wholesaler, importer, retailer, shipowner, banker, and insurer. By the 1840s, however, such tasks were being carried out by different types of specialized enterprises. Banks, insurance companies, and common carriers had appeared. Merchants had begun to specialize in one or two lines of goods: cotton, provisions, wheat, dry goods, hardware, or drugs. They concentrated more and more on a single function: retailing, wholesaling, importing, or exporting.

Economic expansion and business specialization greatly increased the number of business enterprises operating in the economy. In the 1790s a relatively few merchants living in the eastern ports carried on the major share of the trade beyond local markets. By the 1840s the much larger flows of a greater variety of goods were guided from the producers of the raw materials through the processes of production and distribution to the ultimate consumer by hundreds and thousands of businessmen who had little personal acquaintance with others. The motives of the businessmen were to make a profit on each of the many transactions and such motivation seemed to be enough to assure the successful operation of the economy. Although, as Adam Smith wrote, each businessman “intends only his gain, he is … led by an invisible hand to promote an end which is not his intention.”1 In fact, Smith continued, “by pursuing his own interest he frequently promotes that of society more effectively than when he really intends to promote it.”

If the expansion of the economy brought specialization in the activities of business enterprise, it did little to alter the internal operation or organization of these enterprises or their methods of transacting business. In the 1790s American businessmen still relied entirely on commercial practices and procedures invented and perfected centuries earlier by British, Dutch, and Italian merchants. Stuart Bruchey, in his study of the Olivers, Baltimore merchants of the 1790s, points to the “remarkable” similarities between the nature of their activities and those of the Venetian merchants. The Olivers’ “form of organization, and their method of managing men, records and investments would have been almost imme- diately understood by the fifteenth century merchant of Venice.”2 The Americans of the 1790s and the Italians of the 1390s used the partnership form of business and the same double-entry bookkeeping records, records in which Adventure and Merchandise accounts were conspicuous features. Both sold on their own account and on consignment for standardized commission rates and employed ship captains and supercargoes as con- signees. Americans also made use of institutional arrangements perfected by the Dutch and British, such as formal exchanges to carry out market transactions, more sophisticated instruments of credit, and concepts and usages of commercial law.3

The practices that Americans had inherited remained quite satisfactory until after the 1840s. The Americans adjusted commercial law to meet the needs of a rapidly expanding economy and a federal polity. They made increasing use of the incorporated stock company developed in the sixteenth century by the British to promote overseas trade and colonization and used in the eighteenth century to manage ancillary or utilities operations such as docks, water works, and the like. Traditional forms were refined, but the practices, instruments, and institutions of commercial capitalism which had evolved to meet the growth of trade and the coming of market economies in the Mediterranean basin in the twelfth and thirteenth centuries were not fundamentally altered. Before the 1840s there was no revolution in the ways of doing business in the United States. The great transformation was to await the coming of new technologies and markets that permitted a massive production and distribution of goods. Those institutional changes which helped to create the managerial capitalism of the twentieth century were as significant and as revolutionary as those that accompanied the rise of commercial capitalism a half a millennium earlier.

Source: Chandler Alfred D. Jr. (1977), The Visible Hand: The Managerial Revolution in American Business, Harvard University Press.

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