History 479B

Devine

Fall 2012

Study Questions: Mitchell, The Speculation Economy

Prologue

1. What was the significance of the great merger wave of 1897 to 1903? How did it help to bring about the shift to a speculation economy and enhance the power of the stock market over industry?

2. Why does the author believe that at the turn of the twentieth century corporate securities (stocks) became “the new family farm”?

3. As securities regulation developed, it progressed through three phases. What were the different goals of these three phases?

Chapter 1

1. In what ways were the “giant modern corporations” (i.e. U.S. Steel) different than the big businesses of the late nineteenth century (Standard Oil and Carnegie Steel)?

2. How did the emergence of the giant modern corporation change the nature of the American economy? What effect did it have on the number of manufacturing jobs and factories?

3. According to Veblen, what was the difference between “industry” and “business”? How did businessmen realize profits?

4. What does the author mean when he says that American “legal culture” embraced an “outdated ideology”? How did the courts’ position threaten the further development of the U.S. economy?

5. Why was the American Economic Association founded? How did the new generation of economists differ from the previous generation?

6. How were the railroads both the victims of competition and the destroyers of competition?

7. Why did the states restrict corporations and continue to prevent corporate mergers? What were some of the most significant restrictions the states placed on corporations?

Chapter 2

1. How did James B. Dill “change the face of American corporate capitalism”? (39) Why was New Jersey open to Dill’s plan? How did it help the state’s finances?

2. Why did most Americans in the nineteenth century not want corporations to be able to own stock in other corporations?

3. The author notes that holding companies founded under the New Jersey law were “a complete perversion of the nineteenth-century view of the corporation.” (44) Why was this the case? How was the “holding company” different than the “trust”? Why, by the 1920s, did the holding company become the “Holy Grail of cooperative business?”

4. What does “selling stock for property” mean? Why was it so important that the New Jersey corporate laws allowed promoters to buy corporations with the stock of the resulting combination at prices they themselves set? How did this facilitate combination?

5. Why were those selling corporations to the new combinations willing to take payment in stock rather than cash?

6. Why did promoters have an incentive to put high values on the assets they were buying?

7. Why were the courts fairly ineffective in defending New Jersey’s honor and integrity by putting limits on promoters and their valuation of assets?

8. Why were other states reluctant to challenge New Jersey’s loose corporate laws or retaliate with their own laws penalizing corporations incorporated in New Jersey?

Chapter 3

1. What was “overcapitalization” or “watering stock”? Why did promoters pursue these practices and how did they create the modern stock market?

2. Contemporary observers thought that overcapitalization caused what three major problems?

3. Why was the issue of how to put a value on a new corporation at the center of the debate over overcapitalization? Why was it so difficult to determine a corporation’s value?

4. How did the giant modern corporations “water” stock? Why did such “watering” increase when the merger movement began in 1897? What was the difference between “preferred stock” and “common stock”?

5. What is “goodwill”? How did “goodwill” lead to more watering of stock? Why was determining the value of a new corporation more difficult than determining the value of a “going concern”?

6. Why did some promoters, like John Dos Passos, argue that “watering” stock was necessary to encourage the formation of corporations?

7. Why did some believe that promoters’ desire for profits fueled the merger wave? How did the promoters stand to make money on mergers?

8. Why was overcapitalization seen as an antitrust problem? How did overcapitalization hide monopoly power or precipitate rises in prices to the detriment of the consumer?

9. What does “capitalizing earnings” mean? Why did different groups have different views as to whether capitalizing earnings was legitimate in determining the value of a corporation?

Chapter 4

1. How did the boom in agriculture and commodities after 1897 stimulate the speculation economy?

2. Why did financial advisors at the turn of the twentieth century warn investors not to purchase stock?

3. How would “average” Americans buying stock in the great modern corporations restore individualism, empower the buyers, and prevent class warfare and socialism? Why did some claim that stockholding was a “reimagining” of the Jeffersonian ideal?

4. How did the nation’s banking system come to be linked to the performance of the stock market? How did concerns about this link precipitate calls for securities regulation?

5. What was the difference, according to Meade, between “investors” and “speculators”? How did each group decide which kinds of securities to buy?

6. Why did corporations hesitate (or refuse) to release their financial information? Why did some corporations accept releasing information to current stock holders, but not potential stock buyers?

7. Why were Morgan companies more likely to disclose accurate information about their financial status?

8. Even if corporations had disclosed more information, why might it not have been helpful to potential investors?