Adam Smith (1723-1790) predicted the financial crisis of 2008. Well, sort of. He favored numerous small producers over a few large ones, especially where the big companies were corporations, which he loathed because they were generally so poorly governed. After examining the historical record and thinking through the economic incentives involved, Smith concluded that corporations would strive to become monopolies and that they would suffer chronically from agency problems, including the ability of corporate managers to bilk customers and stockholders. Smith would have seen the subprime mortgage and concomitant crises as simply the latest battle in a centuries-long war between principals (owners) and their agents (employees, in this case management). Managers won this time by paying themselves huge irrevocable bonuses on the basis of ephemeral paper profits. It was not the first time managers were able to expropriate significant value from stockholders and it certainly will not be the last.
While corporate malfeasance cannot be completely eradicated, it may be possible to reduce it far below current levels. The quality of corporate governance—the ability of stockholders to keep their companies’ profits out of the grasping clutches of management and to prevent industries from imploding—has waxed and waned over history and is now at a low ebb. By examining periods when corporate governance was better, policymakers can improve their chances of making lasting improvements to our current, clearly creaky system. Digital archives can improve policy making by lowering the costs of conducting such historical analyses.
Old-fashioned research combined with new-fashioned digital searching techniques, especially in Readex’s newspaper and imprints databases, shows that U.S. corporate governance was relatively strong in the seven decades between ratification of the Constitution and the Civil War. Beginning in 2006, Richard Sylla and I obtained several grants from New York University, the Berkley Center for Entrepreneurial Studies at the Stern School of Business, and the National Science Foundation that allowed us to hire a platoon of research assistants tasked with finding and coding corporate charters in state session laws (alas, on microfiche) prior to the Civil War. They found over 22,000, clearly establishing America as the world’s leading “corporation nation” in the first half of the nineteenth century.
The numbers emanating from our corporation database, however, would have been of little help to policymakers without the context provided by other sources: the account books, letters, memoirs, and diaries that I discovered at the Filson Historical Society in Louisville, the Virginia Historical Society in Richmond, the New Bedford Whaling Museum in Massachusetts, and elsewhere, but also scads of newspaper articles, industry analyses, and corporate annual reports, offering prospectuses, by-laws, and proxy pamphlets found quickly and cheaply in digital archives. 1
For example, approximately one in every five early U.S. corporations employed what is called a “prudent mean” voting rule. Instead of each stockholder getting one vote per share owned, as is the case in the vast majority of corporations today,2 larger stockholders received fewer votes than shares held with the clear intent of encouraging wide dispersal of ownership and control. Such rules can be difficult to visualize, so I searched Early American Imprints, Series II, and soon found the following telling table:
Louisiana Planters' Bank, page 8 (1810).
Early American Imprints, Series II.
Digital archives had an even more profound impact by helping us to track individual corporations over time to see if they quickly died, thrived for decades, or more likely experienced something in between. After obtaining their initial charters and perhaps an amendment or two, corporations rarely appeared in the legislative record. Many, however, appeared in the newspaper and imprint records in advertisements, opinion editorials, and business pamphlets. Dividends or stock prices are available in some cases, as are annual or technical reports, all with just a few clicks of the mouse.
Digital archives also enabled us to investigate entire industries. When our research assistants turned up several beet sugar manufacturing corporations, for example, I was able to use Readex’s and other databases to fill out part of a chapter in my One Nation Under Debt (2008 – discussed in Readex Report Vol. 1 Issue 3 under its tentative title “Birth of a Capital Market”). Similarly, I recently was able within just a few hours to sketch the sordid early history of a relatively obscure type of insurance on livestock with the help of early newspaper articles such as the following:
America's Historical Newspapers.
New York Weekly Herald (10 November 1849), 360.
America's Historical Newspapers.
Digital archives also helped me to track numerous other early failures of corporate governance with relative ease and dispatch until interesting patterns emerged. I discovered, for example, that the best governed early corporations were generally small and localized enough to be closely monitored by their stockholders and customers or large enough to be scrutinized daily by the capital markets, or in other words the agglomeration of the views of numerous investors buying and selling shares. Troubles occurred most often at medium-sized companies that were too large and complex to be monitored by numerous small, distant shareholders but too inconsequential to have their shares regularly traded in the securities markets of Boston, New York, Philadelphia, Baltimore, or other early financial centers. Alert newspaper editorialists like that featured above sometimes identified shady or shaky companies, allowing stockholders to make sweeping changes before the companies collapsed amidst scandal. Other times, however, news of impending financial doom came too late.
Before the Civil War bad corporate governance remained localized but today it can take down entire industries. Antebellum bank scandals caused a few failures and local distress but did not create anything like the S&L crisis of the late 1980s or the investment banking fiasco of 2008. That’s because most early corporations were well governed. Knaves could infiltrate a few insurance companies or banks in the at-risk medium-size category but could not control the entire system because stockholders were too numerous, attentive, and, thanks to prudent mean voting and other rules, powerful to lose their grip on most companies. Today, most stockholders, even many large, institutional ones, are mere shills, not even tigers on paper much less in reality.
It isn’t my place as an academic to tell policyholders how to use those or other historical insights, but they were produced much more inexpensively than they would have been without digital archives. As the cost of historical research declines due to increased access to digitized primary sources, policymakers should find the cost of acquiring historical literacy and context much decreased. If they imbibe with Clio more often and more deeply, they should soon find themselves making better policies.
1 Some librarians and administrators complain that digital archives are unaffordable. I suspect such complaints have more to do with budgeting issues – who pays – than considerations of economic efficiency. I would have busted my travel budget many times over if I had to travel to Worcester, Massachusetts or some other distant archive to do the work that I completed online. Moreover, online research is much more convenient and can be completed over many small blocks of time. Travel requires dedicated blocks of time away from teaching and family. If all the costs of physical travel were properly accounted for, digital archival fees would begin to look very modest I suspect.
2 In most of the exceptions, some stockholders enjoy super voting rights that empower them with many more votes than shares owned thereby allowing them to maintain control of the corporation.