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Wednesday, April 6, 2011

On the Birth in 1869 of Corporate Social Responsibilty amid Excessive Corporate Power in Government

Referring to the speculation in gold that was engineered by Jay Gould and others in 1869 to enrich themselves and the Erie Railroad, Henry Adams (1838-1918), a grandson of John Quincy Adams and great grandson of John Adams, wrote at the time:

“For the first time since the creation of these enormous corporate bodies, one of them has shown its power for mischief, and has proved itself able to override and trample on law, custom, decency, and every restraint known to society, without scruple, and as yet without check. The belief is common in America that the day is at hand when corporations far greater than the Erie [Railroad] — swaying power such as has never in the world’s history been trusted in the hands of mere private citizens  . . . — will ultimately succeed in directing government itself. Under the American form of society, there is now no authority capable of effective resistance.” (1)

Gould had wanted the price of gold to rise not only because he had bought some to sell at a higher price, but also because as a stockholder of the Erie, he would benefit from the railroad transporting more wheat from the Midwest to the east coast for export. A higher price in gold meant a lower dollar. Wheat being based in dollars, a lower dollar meant more exports. The strategy was essentially to devalue the dollar, which Gould assured President Grant would be in the national interest economically. As the price of gold rose to $165 in 1869, Grant, fearing a bubble, pulled the plug by having the Treasury sell $4million in gold.  The collapse in the gold market triggered a drop in the stock-market. Even if it might have been in the short term interest of the speculators and railroads, the manufactured bubble was not in the national interest after all. Gould’s bribes of administration officials had been in vain.

Henry Adams saw the imprint of corporate power eviscerating both societal norms and democracy in the scandal.  In other words, the new-found corporate power eventuated in the birth of the need for corporate social responsibility amid capitalism eclipsing democracy. In academic terms, corporate social responsibility and (corporate) business & government, although discrete fields, were both first publicly recognized in 1869.

The corporate power occasioning Adam’s recognition was a novelty at the time, according to Brands, because the large corporation had only come into being as the railroads incorporated in the 1850s. Looking back after the Civil War, Henry Adams observed, "The last ten years had given to the great mechanical energies — coal, iron, steam — a distinct superiority in power over the old industrial elements -- agriculture, handwork, and learning." (2)  The power of steam in particular translated into large, publicly-held, corporations first in the railroad industry.

On account of their size and scope, and the associated equity capital requirements given the risk faced by lenders, the railroads were the first large American corporations to be publicly traded. The diffusion of ownership — a consequence of the large capital demands — led to a separation of ownership from control and to a new ownership interest: that of the short-term-oriented speculator. A short-seller, for example, seeks lower corporate earnings in the future, while a long-term investor hopes for higher dividends, and thus profits. Managers can exploit this difference in order to pursue their interests in the name of the corporation at the expense of societal norms and democratic governance.

Undergirding the managerial basis in skill, the railroads were the first companies to develop the methods of corporate administration. For example, there were supervisors over supervisors—in other words, multilayered organizational charts. Furthermore, dovetailing with the need for safety and efficiency (given the competition), the railroads developed precise management of their operations, including the development of standards for measuring performance. In short, the railroads were the first to develop a cadre of managers specialized in administration in the particular industry. (3)

Regarding the private power based on technique (i.e., managerial power), Henry Adams announced in 1869 that there was no authority, whether in society or government, capable of resisting it. The normative call for corporate social responsibility and the political call for a resurgence of democracy amid the encroaching capitalism were born. In other words, with great power came a recognition of a need for great responsibility. The corporate social responsibility movement began as precisely this recognition even as the modern large corporation was in its second decade.

Punctum Saliens, the large corporate type of commercial organization itself is inherently powerful relative to societal norms and even potential governmental or regulatory restraints. That is to say, the invention of the large corporation may have been inherently problematic, essentially involving systemic risk to the republic itself on account of the private power of the managements. To paraphrase Nietzsche, power cannot be but powerful. To unleash an inherently powerful feeding machine and expect it not to eat the grass is naive, if not patently irresponsible. To expect the managements of extremely wealthy corporations to be willingly socially responsible when their economizing and power-aggrandizing nature is to run through such non-constraints is simply ideological, if not fanciful. Fundamentally, the problem with corporate management is its inherent proclivity to bristle at any external constraint. It is the underlying maximizing egoism that is innately antithetical to the limiting natures of government regulation and corporate social responsibility.

Footnotes:

1.      Henry Adams, “The New York Gold Conspiracy,” in Charles F. Adams, Jr. and Henry Adams, Chapters of Erie (Ithaca: Cornell University Press, 1956), pp. 135-36.
2.      Henry Adams, The Education of Henry Adams (1907; Boston: Houghton Mifflin, 1961), p. 238.  
3.      H. W. Brands, American Colossus: The Triumph of Capitalism 1865-1900 (New York: Doubleday, 2010), pp. 22-23.