The Traditional Enterprise in Commerce: Technological Limits to Institutional Change in Commerce

The specialization of enterprise in commerce, finance, and transporta- tion is, then, the central theme of the institutional history of the American economy during the first half century after the ratification of the Consti- tution. Such specialization brought an end to the personal business world of the general merchant of the colonial era and replaced it with the increasingly impersonal world of the commission merchant. Although personal relations remained important in arranging specific shipments and sales and above all in the extension of credit, the importer, exporter, jobber, auctioneer, bank cashier, insurer, and broker dealt daily with buyers and sellers with whom he had little personal contact. Rarely did a merchant know both the producer and consumer at either end of the long chain of middlemen, transporters, and financiers who moved the goods through the economy.

The concomitant of such specialization was thus a reliance on imper- sonal market coordination. Between the 1790s and the 1840s the mechan- isms for such coordination were steadily improved. As commercial centers grew in size, their businessmen set up exchanges similar to those in the larger coastal ports. Their newspapers were filled with commercial infor- mation. Their merchants were served by a growing number of specialized ancillary enterprises—banks, insurance companies, shipping lines, and freight forwarders. Specialization lowered information and transactions costs as well as the costs of financing and transporting the flow of goods through the American economy.

On the other hand, expansion and specialization in trade and commerce failed to bring institutional innovation.93 Existing procedures and practices remained fully adequate for handling the activities within the commercial enterprises and the transactions between them. Even the most significant institutional development—the widespread use of the corporation to permit the pooling of capital in banks and insurance companies and in those constructing and operating transportation rights-of-way—did not lead to new ways of doing business between or within enterprises. These corporations came to be administered by one or two salaried managers, who stayed in close personal contact with representatives of the owners, or the state, or the boards of directors, or the commissioners.

Business enterprises remained small and personally managed because the volume of business handled by even the largest was not yet great enough to require the services of a large permanent managerial hierarchy. The overall management of the Second Bank of the United States, the nation’s foremost financial firm and its most powerful economic institution, required only the services of Nicholas Biddle and two assistants. On the largest and most used canals, only the canal engineer and possibly the canal clerk could qualify as middle managers. Before 1840, two or three men could administer all the activities any enterprise involved in the distribution of goods might be called upon to handle.

Modern multiunit business enterprise did not make its appearance before 1840 for technological reasons. A steadily increasing population was spreading across the continent. The volume of trade through the economy increased concomitantly, but the speed or the velocity of the movement of that trade did not. As a result, as the population grew in numbers and expanded geographically, the number of units handling the trade grew rapidly and became increasingly specialized. The number of transactions between units multiplied. But the amount of goods and the number of transactions handled by an individual unit within a given time period remained much the same. As long as the movement of goods through the economy continued to be powered by the traditional sources of energy— wind and animal power—the volume of business an individual enterprise was called to handle was not extensive enough to bring either a subdivision within the firm or the internalization of several small units within a larger enterprise.

Theoretically, technological limits on speed and volume of movement of goods did not have to limit the size of the firm. Theoretically, the volume generated by the market could have been extensive enough to bring into being the large multiunit enterprise. Indeed, in Europe, where the urban markets were bigger and closer together than they were in the United States and where water transportation—coastal and inland— was more regular and more reliable, such subdivided and integrated enterprises had begun to appear. Even so, the large multiunit enterprise was still a rarity in the Europe of the 1840s. In the rural, agrarian economy of the United States, where cities were small and commercial centers far apart, and where inland transportation was closed down during the winter months, slow speed of movement remained the most powerful constraint on the growth of business enterprise and on the coming of institutional change in commerce.

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

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