The Traditional Enterprise in Commerce: Managing the Specialized Enterprise in Commerce

Because of these technological constraints on the speed and volume of moving goods through the economy, not even the rapid expansion of that economy and its resulting specialization in business activities brought specialization within the business enterprise itself. Nor did the expanding economy lead to the integration of several operating units into a single large firm. No managerial hierarchies appeared. The size of business enterprise did not grow beyond traditional limits. Its internal administration continued to be carried out along traditional lines. Therefore, although the increased volume of American commerce brought modifications and improvements of existing business methods, instruments, and institutions, it did not stimulate the invention of new ones.

Until well after 1840 the partnership remained the standard legal form of the commercial enterprise and double-entry bookkeeping its basic accounting system. The partnership, normally a family affair, consisted of two or three close associates. It was a contractual arrangement that was changed when a partner retired, died, or decided to go into another business or join another associate. A partnership was often set up for a single voyage or venture. And one man could be involved in several partnerships. The partnership was used by all types of business, from the small country storekeepers to the great merchant bankers who dominated the Anglo-American trade.

The most powerful business enterprises of the day were international interlocking partnerships. Thus, the Brown family was represented by Brown, Shipley & Company in Liverpool; Brown Brothers & Company in New York; Browns and Bowen in Philadelphia; and Alexander Brown & Sons in Baltimore. The Ogden New York connection was Ogden, Ferguson & Company; the Liverpool representative, Bolton, Ogden & Company.53 The name and makeup of all these interlocking partnerships changed constantly over time. Even John Jacob Astor’s American Fur Company, one of the few incorporated commercial enterprises, remained a partnership. Astor held the large majority of the shares in this company. His partners received payments from profits in accordance with the number of shares held. The contractual arrangements between partners in incorporated companies were for a specific period of time, usually five years. In the case of the American Fur Company, the partners and shares held changed at each renewal. Except in forming enterprises that provided supplementary services requiring the pooling of capital (namely banks, insurance, turnpike, and canal companies), American merchants did not yet feel the need for a legal form that could give an enterprise limited liability, the possibility of eternal life, or the ability to issue securities. Even when an enterprise was incorporated it remained a small single-unit firm run in a highly personal manner. In the commercial capitalism of the 1840s, owners managed and managers owned their enterprises.

Not even in New York City, which by 1840 was one of the most active commercial centers in the world, was the press of business enough to cause a merchant to delegate any of his tasks. J. A. Scoville, a New York merchant and chronicler of his class, indicates the pace and nature of a merchant’s activities by sketching a particularly busy day:

To rise early in the morning, to get breakfast, to go down town to the counting house of the firm, to open and read letters—to go out and do some business, either at the Custom house, bank or elsewhere, until twelve, then to take a lunch and a glass of wine at Delmonico’s; or a few raw oysters at Downing’s; to sign checks and attend to the finances until half past one; to go on change; to return to the counting house, and remain until time to go to dinner, and in the old time, when such things as “packet nights” existed, to stay down town until ten or eleven at night, and then go home and go to bed.54

Inside the counting house—the term first used by the Italians for a merchant’s office—a business was carried on in much the same manner as it had been in fourteenth-century Venice or Florence. The staff included only a handful of male clerks.55 There were two or three copiers, a bookkeeper, a cash keeper, and a confidential clerk who handled the business when the partners were not in the office. Often partners became responsible for handling one major function. At N. L. & G. Griswold, one of the most active of the older New York mercantile partnerships, one brother was responsible for the buying and shipping of goods, and the other took care of financial affairs. The organization and coordination of work in such an office could easily be arranged in a personal daily conversation.56

The partners’ task was, of course, to initiate and carry out the com- mercial transactions involved in the buying, selling, and shipping of goods. Transactions with local businessmen were negotiated in the counting house or on the merchants’ exchange, a building designated as a place to carry out such business dealings. For those carried out in distant commercial centers, partners had to rely on their correspondents, merchants with whom they contracted to do their work on a commission. If the partnership still owned or chartered ships, its ship captains or supercargoes, who usually owned shares and were partners in the voyage or venture, handled the transactions. Although merchants wrote long and detailed letters of instruction to correspondents, captains, or supercargoes, they had little control over the actions and decisions of their agents in distant ports or on distant seas. Letters took weeks and sometimes months to reach their destinations. Only the man on the spot knew how to adjust to changing local market conditions. For these reasons the choice of agent had been for centuries one of the most important decisions a merchant had to make. Since loyalty and honesty were still more important than business acumen, even the more specialized merchants continued to prefer to have sons or sons-in-law, or men of long acquaintance, as partners or agents handling their business in a distant city.

The specialization of business in the early nineteenth century actually eased the merchant’s tasks. He handled more transactions and dealt with more suppliers and customers than did the older general merchants, but the transactions were more of the same kind and with men in much the same business. Transactions became increasingly routinized and systema- tized. Information on a single trade in a few ports was easier to come by than that for many trades in many ports. Specialization in this way reduced transactions and information costs.

The function of a merchant’s system of accounts was to record the transactions he carried out. The most advanced accounting methods in 1840 were still those of Italian double-entry bookkeeping—techniques which had changed little over five hundred years. The major difference between the accounting practices of colonial merchants and those of the more specialized mercantile firms of the nineteenth century was that the larger number of transactions handled by the latter caused them to keep their books in more meticulous manner.

There were still three standard accounting books used.37 Actual trans- actions were recorded in the day, work, or waste book at the time that they were made. At the end of each month these figures were transferred to the journal where accounts for sums paid out or goods sold were credited and the goods and monies received were debited. This chronological record of transactions was, in turn, transferred to appropriate accounts in the ledger including those for “adventures” or voyages, for “vessels,” for “commodities,” as well as those for each individual or firm having trans- actions with the enterprise. Often, too, there were “merchandise” accounts for miscellaneous items carried in smaller quantities as well as pages for “notes receivable,” “notes payable,” and “commission sales.” Under the normal accounting practices of the day, the partners’ household effects and property were also included in the list of assets.58 The ledger was generally “balanced” by “being closed to profit and loss” at the end of each year. Such closings were often made at the end of a voyage or planting season, or when a partnership was being dissolved. The resulting profit was then listed for each partner in proportion to his share in the business.

Accounts of the traditional enterprise provided a historical record of financial transactions, together with information essential for orderly housekeeping routine. As stated in one of the most widely used late- eighteenth-century texts on accounting: “A merchant… ought to know, by inspecting books, to whom he owes, and who owes him, what goods he purchased; what he has disposed of, with the gain or loss upon the sale, and what ready money he has by him; what his stock was at first; what al- terations and changes it has suffered since, and what it now amounts to.”59 If he were acting as a factor or an agent, his accounts for his principal should show: “What commissions he has received, how he has disposed of them, what returns he has made, what of his employer’s goods are yet in his hands, or in the hands of debtors.”

By checking his accounts a merchant knew his operating income and outgo and the working capital he had on hand, but he would have found it difficult to calculate his net gain or loss. From the special “venture,” commodities, and ship accounts, he could determine the outcome of single ventures, ships, or commodities, but only by utilizing information from a number of interrelated accounts. The Olivers of Baltimore, for example, followed standard practice when they listed the value of cargo, insurance, and loading expense in the venture accounts, and the cost of a ship and its outfitting and insurance under a separate account.60 Their commodity accounts listed price received and paid, but often included certain expenses as well. All three accounts—venture, vessel, and commodity—were closed separately to profit and loss. These merchants made no attempt to determine the precise cost, say, of shipping coffee from a given Latin American port to Baltimore. Not surprisingly, then, early and even mid- nineteenth-century texts on accounting said practically nothing about cost accounting or capital accounting, but concentrated almost wholly on the proper way to record financial transactions.61

One reason merchants made so little effort to analyze their costs was because such information could have little effect on their business deci- sions. Since commodity prices fluctuated, a look at the past year’s records could tell little about next year’s gains. Prices were set by current supply and demand. Markets could be quickly glutted, and sources of supplies and commodities just as quickly depleted. The business information the merchants wanted came from external sources not internal records. To quote Stuart Bruchey: “Experience was of far lesser importance than fresh news.”62

In the early nineteenth century, therefore, businessmen were more inno vative in reducing information and transactions costs than in refining traditional accounting practices or developing new ones.63 The existing exchanges in the older commercial cities set up rules and regulations to further routinize transactions. The merchants in the new centers organized their exchanges along the same lines as earlier American exchanges, which were patterned after those set up in Holland and Britain centuries earlier. The demand for fresh news contributed to the success of the packet lines. It caused merchants to press for faster mail service which was steadily improved after reforms in the postal system in the Jacksonian administration.64 In the 1830s, too, shipping and mercantile firms built private semaphore systems at various landfalls for relaying messages from incoming ships to counting houses in the port cities.

This mercantile demand for quicker, cheaper information was reflected in the nature of American newspapers.65 Until 1815 the small number of newspapers had been more political than commercial organs. Then as they grew in number they began to devote an increasing amount of space to commercial news. Besides listing ship arrivals, departures, sales, auctions, and prices, they also included advertisements of merchants, giving types, amounts, and prices of goods for sale. The very names of the papers indicate what had become their primary function: The Commercial Advertiser, The Mercantile Advertiser, and The Journal of Commerce in New York City; the Daily Advertiser and Commercial Gazette in Boston; the North American Advertiser and the Commercial and Maritime Register in Philadelphia. By the 1830s, Prices Current and Shipping Lists were published in those three cities as well as in Baltimore and New Orleans. Similar to those first printed in Amsterdam in the early sixteenth century, the papers gave prices of a wide variety of goods and commodities and listed the shipping movements in local ports.

By adopting and perfecting long-established business institutions and procedures, American merchants lowered transactions and information costs and further reduced the cost of distributing goods in the United States. Improved market mechanisms permitted “the invisible hand” of market forces to coordinate and monitor more effectively the flow of goods through the economy. American merchants, however, felt no need to alter the ancient ways of doing business.

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

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