History of United States Business

History of United States Business, history of business in the United States from the colonial period to the present day. During this period, U.S. businesses grew from small, family-owned farms and merchant trading to global corporations employing hundreds of thousands of workers in industries and services.

United States businesses created the highest standard of living in world history. At the same time U.S. business came under government regulation in response to popular concern about workers’ rights and safety, environmental damage, fair competition, honest accounting, and discrimination against minorities, women, and others. Although it has been credited with creating a high standard of living, it has also been blamed for widening the income gap between the rich and the poor in the United States and exploiting low-wage labor in developing countries.

Throughout its history business in the United States has drawn contrasting views. In 1925 Calvin Coolidge, the president of the United States, declared that “the chief business of the American people is business.” Yet in American motion pictures, literature, and television programs the villains are often businesspeople. The relentless growth in the scale of business has led to more government regulation of business. But at the same time the ability of business lobbyists to influence laws and governmental policy in ways favorable to business has been well documented. If a single narrative runs through the history of American business, it is the story of how government regulation of business has waxed or waned depending on the performance of the economy.

Regardless of how it is viewed, business in the United States plays a key economic, social, and cultural role. Corporations organize most economic activity in the United States today. As part of doing business, these firms undertake the search for new technologies and products. New technologies, in turn, tend to lead to greater productivity and efficiency, which tends to create more wealth and more leisure time. The goods and services produced by American businesses and the method by which these goods and services are advertised shape the culture not only of the United States but also of countries around the world. American business has produced the wealthiest and most powerful nation in the world. Yet, as the 21st century begins, the ethical behavior of American business is also viewed with increasing skepticism. 

II

EUROPEAN FOUNDATIONS OF U.S. BUSINESS

A

Chartered Companies

Business enterprise played a significant role in the European settlement of the North American continent that began in the 1500s. The London Company and the Plymouth Company, for example, received charters from the English crown (monarchy), recruited settlers, and paid the costs of settlement for their American colonies. These chartered companies inherited centuries of innovation in business organization and technique.

One of the most important innovations was the concept of a business enterprise separate from family ownership. With the chartered companies investors who were not necessarily related by family ties pooled their money in anticipation of earning a profit. But to do so required the development of new forms of ownership such as partnerships or corporations. It also depended upon the creation of accounting techniques, notably double-entry bookkeeping, so that business debts and credits could be calculated.

European businesses of the early modern era also had to develop a “spirit of capitalism,” a moral code that permitted parties to enter contracts with some confidence that agreements would be honored. In short, businesspeople needed to create a complex system of rules to undertake large, risky, and long-lived enterprises.

B

Mercantilism

Business in the American colonies developed under the system of political economy known as mercantilism. Mercantilism was based on the theory that the purpose of economic activity was to increase the rising power of a nation-state. In order to build up gold and silver reserves that could be used to pay for soldiers and weapons in time of war, nations sought to export more goods than they imported. To achieve this more favorable balance of trade, government had the right to exercise control over industry and trade. In the case of the American colonies, this meant that business existed to serve the needs of the English crown.

Under the English mercantile system, the monarchy determined who could enter many businesses by giving monopolies to guilds and chartered companies. The crown often taxed these businesses heavily so that it could raise money for armies and navies, especially in the 1600s and 1700s, a period of near constant war. European nation-states promoted certain enterprises so that they could increase their ability to export goods and decrease their dependence upon other European nations. For example, monopolies for shipbuilding assured nations that they would have vessels for their navies, which were also used to protect their trade.

English colonies in the New World offered both a chance to extend national power to new territories and to tap sources of vital raw materials so that the crown did not have to rely upon other potentially hostile nations. Mercantilism encouraged business based upon private ownership of property, but it was not capitalism because the purpose of the activity was to strengthen the crown, not to enrich an individual.

Church authorities also limited free enterprise in the American colonies. For example, following European traditions, Puritans in the early years of the Massachusetts Bay Company placed communal needs before individual profit by setting the prices of goods and wages and prohibiting usury (charging of interest).

III

COLONIAL PERIOD TO THE AMERICAN REVOLUTION

A

Family-run Businesses

Most businesses in the colonial era were small family-run farms or shops. Today we tend to think of households as units of consumption, but in the colonial era they were also units of production. Husbands, wives, and children labored to produce goods for their own consumption and for trade. Even the largest businesses in America at that time—the tobacco, rice, and indigo plantations of the South—were family owned. Profits from the sale of these goods in international markets enabled planters to buy up more land and to staff it with indentured servants and slaves. These businesses, which could include thousands of hectares (thousands of acres) of land scattered across several counties and hundreds of slaves, were often owned by one family.

Those who lived in the Northern colonies did not have such a clear route to wealth and power. The most successful Northern colonists were merchants, which in the colonial era meant that they engaged in international trade. They located markets for the colonists’ exports and imported the textiles, hardware, tea, and other goods that enriched colonial life. These merchants were classic middlemen, arranging financing and shipping services so that the goods could go from sellers to buyers.

Colonial trade involved extraordinary risk. Wars, frequent economic depressions, and intense competition made international trade hazardous, especially for American colonial merchants who lacked sufficient wealth to buffer themselves from misfortune. Just about all merchants went bankrupt or flirted with bankruptcy sometime in their lives. But the rewards were worth it; a few lucrative voyages and a merchant could buy a townhouse, a carriage, perhaps a summer retreat. The merchant could climb the social ladder and circulate among the powerful in this highly materialistic society. This prospect of riches and the honor that accompanied them made American colonists willing to engage in highly speculative enterprises, such as shipping flour to the West Indies or importing goods from England by the thousands without being certain of their ability to resell those goods.

B

Navigation Acts

English mercantilism worked to America’s benefit. The colonial merchants who handled trade among the British colonies benefited especially from a series of English laws known as the Navigation Acts, beginning in the mid-1600s. These acts restricted English trade to English vessels with English crews, and guaranteed substantial markets for American tobacco, ships, flour, and fish. American colonial trade also operated under the protection of the English navy, which was the world’s strongest navy at the time.

IV

THE REVOLUTIONARY ERA

A

‘Reluctant Revolutionaries’

The striving for independence among American colonists during the mid-1700s threatened America’s most successful businesses. Independence promised to disrupt the close economic ties built up with Great Britain over more than 100 years. Colonists faced the prospect of no longer being protected by the world’s most powerful navy, or having preferential access to the huge British markets in the British Isles and the West Indies. As a result many American merchants were characterized as “reluctant revolutionaries,” fearful of losing their prosperity but at the same time angered by imperial Britain’s restrictions on colonial liberties.

Among the first tasks of the newly independent government founded in 1789 were efforts to address the needs of American business. First, the government ensured the civil order necessary to commerce with a provision for raising an army and navy. Property was also protected by guaranteeing the sanctity of contracts entered into before the adoption of the Constitution in 1789. Then, the new government enacted tariffs and taxes so that it could begin to pay off the war debt and restore the nation’s credit. Finally, by placing limits upon the states’ ability to regulate the movement of goods and people, the Constitution ensured that goods could move freely throughout the country, creating the potential for a truly national market.

The new government, however, faced considerable constraints upon its activities, which tended to limit the growth of public enterprises. The separation of powers between the states and the federal government and the system of checks and balances within the federal government limited public enterprises, such as proposals for a national system of roads and canals. Early American statesmen Alexander Hamilton, Albert Gallatin, and Henry Clay all proposed schemes for economic development based upon the exercise of national power, but all these schemes were doomed because of differing interests between the Southern, Northern, and Western regions of the United States.

For example, Northern business interests sought tariffs on trade to protect growing manufacturing businesses, but Southern interests, engaged in exporting their agricultural products, opposed such tariffs for fear that other countries would retaliate. Neither the North nor the South was interested in the road-building needs of Western businesses. By the 1830s the United States government had retreated from plans to sponsor commerce with a national bank, to aid manufacturing with protective tariffs, and to stimulate Western settlement with government-funded canals and railroads.

Since the federal government could not undertake costly investments, the states did. Particularly in the Middle Atlantic and Middle West, states founded banks and built canals and railroads. But most came to regret these activities, because they ended in financial failure. By the 1840s or so, almost all business undertaken in the United States was privately owned and operated.

B

Birth of the Corporation

Yet government was essential to the growth of business. In the 19th century government created and enforced contract law so that entrepreneurs (people starting new businesses) could draw up readily understood agreements among themselves. Perhaps most important, it created the corporation. To this day every corporation has a charter given by a governmental body stipulating the corporation’s privileges and duties.

Americans adopted the corporate form readily. In the early 19th century when England and France had no more than a couple dozen corporations each, Americans had chartered more than 300. The U.S. government also encouraged businesses by limiting the range of penalties they faced. Bankruptcy law enabled businesses that failed to clear the slate and begin anew, while torts (suits for negligence) against businesses were restricted.

Business thrived in this environment. Wars in Europe between 1792 and 1808 created unprecedented opportunities for American merchants who met Europe’s needs for foodstuffs and other goods. As neutrals, American businesses insisted upon the right to carry goods from America to Europe and back, generating millions in shipping revenues. The major port cities of Boston, New York, Philadelphia, and Baltimore boomed. Great fortunes were built by men such as Stephen Girard, John Jacob Astor, Alexander Brown, Archibald Gracie, and Francis Cabot Lowell, who promoted economic development as they invested in banks, insurance companies, textile manufacturing firms, canals, and the Western fur trade.

But when the United States was pulled into the European wars, beginning in the late 1790s, the boom collapsed. Embargoes against American goods and the seizure of American ships by different warring European nations decimated American exports of goods and shipping services. An era had ended. For the next century the leading businesspeople would not be merchants or planters, but manufacturers and railroad owners.

V

THE 19TH CENTURY

A

Transportation and Manufacturing

During the 100 years from 1815 to 1914, business transformed the United States economy. It undertook a transportation revolution, bringing huge sections of the expanding United States into a national economy. But some of the most striking changes came in the creation of a dynamic manufacturing sector as the United States exploited its extraordinary abundance of minerals, such as iron ore and copper, and fossil fuels, such as oil and coal.

To meet the challenges, Americans had to create giant enterprises. Businesses such as Standard Oil and Carnegie Steel brought together huge stocks of natural resources and unprecedented quantities of modern machinery to mass-produce goods for domestic and international markets. In meeting these demands, American entrepreneurs pioneered the development of modern business with its large-scale production and widespread markets, first by developing the railroad industry and then by creating industrial corporations.

The trans-Appalachian railroads, those that ran from the East Coast to the Midwest, encountered a number of challenges. They required millions of dollars in capital (cash for investment), which they raised through the sales of stocks and bonds. Next these railroads had to coordinate the activities of thousands of employees over hundreds of miles. After a few spectacular train wrecks on single-tracked lines, managers recognized that they needed to create a corporate bureaucracy in which employees would be assigned tasks to ensure the safe and efficient operation of the railroads and be held responsible for their effective performance. They also needed staff specialists to devise new and more effective ways to deliver railroad services.

From these changes came a new class of worker, the full-time middle manager. At the top of the organization, executives had to focus upon the long-term well-being of the railroad, plotting expansion, setting rates, and supervising the performance of the middle managers. Finally to handle both the operational (day-to-day) and entrepreneurial (long-term) decisions, railroads had to generate a constant flow of information. They gathered reams of statistics on railroad costs and usage. The stream of information enabled them to run with greater efficiency. To this day, when compared with air, ship, and bus transportation, freight railroads maintain the most precise schedules.

By reducing costs and increasing speed, railroads and the telegraph opened up regional and national markets. As manufacturers sought to reach these larger markets, they altered the way goods were produced. Before the Industrial Revolution, goods were manufactured in small shops, powered usually by hand but occasionally by water. An average firm might hire 10 to 15 workers to produce $15,000 to $25,000 worth of goods. Costs to finance these manufacturing businesses were modest. Most of a manufacturer’s money was tied up in inventory and accounts receivable, not buildings and machinery. Entry into business was easy. A person with knowledge of the manufacturing process and some savings could begin small and build through retained earnings. Exit was easy as well. Most businesses disappeared after a few years either because their owners failed or retired.

B

Modern Business Practices

But by the late 19th century, modern business practices had come to industrial America. Firms invested in huge plants equipped with the latest machines. Rather than produce small quantities of goods on order for local markets, a process known as batch production, these industrial firms fabricated huge quantities for national markets, a process known as bulk production. Investment in the plant and equipment necessary to achieve this scale of production restricted competition because it was difficult to raise the needed capital. The new big businesses carried heavy debt for the construction of their facilities.

Firms sought to minimize the impact of these costs by spreading it over as many units of goods as possible. They found that producing a large amount of goods in a single facility lowered the average cost of producing the goods, yielding what is known as an “economy of scale.” To achieve these economies of scale, businesses had to coordinate the flow of goods through the firm more effectively. Often, in order to assure that vital supplies or machines needed to produce the goods arrived on time or were readily available, some firms bought out suppliers or undertook production of the needed supplies themselves.

With their vastly increased output and costs, firms had to make sure their products sold. Employment multiplied, as firms added new departments such as purchasing, advertising, and sales divisions to supplement their multiplant manufacturing operations. And like the railroads, once manufacturing firms adopted new strategies, they had to adopt new, more rational corporate structures. Middle managers multiplied as firms needed larger numbers of specialists to handle the new functions and coordinate the activities of truly giant enterprises.

C

New Methods of Competition

The drive for low unit costs led firms to adopt new methods of competition. Firms vied to build larger and larger facilities so that they could become the lowest-cost producers in their industry. When the economic cycle turned downward as it inevitably did, firms burdened with debt faced markets too small to pay off the debt. But rather than cut back on production, these firms maintained output and cut prices. Other indebted firms matched the price cuts, which led to round after round of “destructive competition,” until all the firms engaged in this price cutting lost money and faced bankruptcy.

These firms sought relief through cooperation and combination. The 1870s and particularly the 1890s brought sharp depressions that led to attempts to form associations, pools, cartels (business alliances), and outright mergers to reduce competition. Combination peaked at the turn of the century with a great wave of mergers, when thousands of firms formed giant combines such as American Can, International Harvester Company, and the granddaddy of them all, U.S. Steel.

D

U.S. Steel: A Case Study

Steel offers an excellent case study of the rise of big business in America. In the 1860s and 1870s, the United States was a comparatively high-cost producer of steel. With the introduction of the more technologically advanced Bessemer furnace, steel could finally be produced in huge quantities at much lower costs. Quickly replacing wrought iron (a highly refined form of iron) in the rails used in railroads, steel demand soared during the vast expansion of the American railroad network.

American industrialist Andrew Carnegie entered the steel business in 1867 resolved to achieve the lowest unit costs of production. He became famous for establishing huge furnaces and forges and driving his machines, managers, and workers harder than ever before. To assure adequate supplies of high-quality inputs, he bought into the famous Connellsville coalfields in Pennsylvania, leased Lake Superior ores from industrialist John D. Rockefeller, and built his own transportation system of ore boats and railroads to carry the ore to the furnaces. Threatened by Carnegie’s success, major steel finishing producers formed a giant combine and decided to buy their crude steel from sources other than Carnegie. Carnegie responded by launching plans to build his own finished steel firms. J. P. Morgan, the greatest financier of his time, resolved the conflict in 1901 by bringing together Carnegie’s holdings and the steel combines into one giant enterprise, U.S. Steel.

E

The Global Emergence of U.S. Industry

Big businesses such as U.S. Steel made the United States the world’s largest and most efficient producer of manufactured goods. In the 1890s Europeans bemoaned the “American commercial invasion,” by which they meant the rather sudden and remarkably successful U.S. entry into foreign markets. To a considerable extent, far-sighted businessmen such as Carnegie, Rockefeller, and automobile maker Henry Ford made this success possible. These men saw that they could capture domestic and foreign markets by producing the lowest-cost goods. But this rather sudden burst in American international competitiveness stemmed from more than entrepreneurial verve. The United States was fortunate to have vast supplies of raw materials, such as coal, copper, iron, and petroleum, when the world demand for these raw materials and the goods made from them was soaring.

While Americans enjoyed the wealth and international acclaim big business generated, they feared its power. Big business could and did crush smaller competitors, often relying upon their large size to undercut small businesses. These big firms slashed prices in their markets through a practice known as predatory price-cutting. They demanded rebates from the railroads, thus securing much lower transportation costs, and they demanded that stores carry only their products through exclusive selling agreements.

In some of the most important industries such as petroleum, steel, and electrical manufacturing, a handful of firms had sufficient market control to set prices industry-wide. Although industrial wages rose, working conditions deteriorated as new and more powerful machines intensified the pace of work and increased the probability of serious injury or even death. When workers combined to protest, businesses tried to break their unions. American writer Upton Sinclair graphically described the consequences of this system in his famous exposé of the meatpacking industry, The Jungle (1906). Finally, government seemed to be at the beck and call of business. Muckrakers (crusading journalists) highlighted scandals involving business influence in city and state governments and even the Senate of the United States.

F

The Antitrust Reaction

As big business abused its power, Americans demanded reform. In 1890 the U.S. Congress passed the Sherman Antitrust Act to restrict the growth of monopolies and “combinations in restraint of trade.” This law did not stop the formation of still bigger businesses, however. In fact the great merger wave began within a decade after passage of the Sherman Antitrust Act. Ironically, court rulings in antitrust cases encouraged business combination. Although those rulings often targeted anticompetitive actions between firms, the courts for the most part found that mergers themselves were not anticompetitive.

American firms thus tended to combine and became far larger than competitors in other nations. For example, Great Britain and Germany permitted cartels—that is, associations of independent firms that cooperated with regard to prices, output, and terms of sale. The United States did not, and as a result, American businesses sought mergers rather than cartels. The United States government did break up some of the largest combines, such as Standard Oil, DuPont, and American Tobacco. But U.S. Steel, which was four times larger than any other U.S. industrial firm, won its antitrust suit, suggesting that Americans were willing to countenance big business as long as it treated its competitors fairly.

VI

THE 20TH CENTURY

A

The Progressive Era

The Progressive Era, the label given to the years 1900 to 1916, brought more regulation of business. The Interstate Commerce Commission, which had been established in 1887 to regulate railroads, gained a host of new powers to guarantee the fairness of railroad rates. Progressives sought to protect consumers with the Pure Food and Drug Act of 1906. The Federal Reserve Act of 1913 attempted to bring some order to the banking industry. Worried about damage to the environment, progressives began conservation efforts in earnest. And to pay for an expanding federal government, they enacted a corporate income tax.

On the state and local level, public utility commissions scrutinized natural gas, electric power, and telephone companies. Workers gained some protections with laws limiting the hours that women and children could work and the enactment of workman’s compensation laws for those injured or killed on the job. In short, Americans during this period believed that government had a positive role to play in economic affairs. Business was no longer viewed as simply private enterprise; it was in the words of the day “affected with a public interest.”

B

The Post-World War I Period

Business began to pursue new marketing strategies after World War I ended in 1918. A typical example was E. I. du Pont de Nemours and Company, commonly known as DuPont. The world’s leading producer of military explosives faced a serious imbalance between its productive capacity and its markets. With peace, the company’s sales stalled, and it had to figure out how best to use its enormous profits, plant capacity, and cadre of skilled managers and workers. DuPont decided to diversify, to become a broadly based chemical company organized around a number of products such as paints, plastics, ammonia, photographic materials, and rayon. This required heavy investment in research and development; henceforth growth would be based upon DuPont’s ability to develop and market new chemically based products.

In the post-World War I period, diversification became a widely accepted business strategy. While the largest firms in the late 19th century usually produced goods within 1 of 20 standard industrial categories known as SICs, following World War I firms began to fabricate goods in 5 or even 10 different industrial categories.

C

The Great Depression

The period of prosperity that benefited the wealthy and the middle class in the United States following World War I ended with the Great Depression, which began in 1929. Many businesses went bankrupt, and the sudden collapse of the stock market undermined confidence in the American economy. The Great Depression brought demands for governmental action.

Under the New Deal of President Franklin D. Roosevelt, the federal government undertook extensive regulation of banking, stock markets, and transportation. It threw its weight behind unions, insisting that businesses bargain in good faith with unions of the workers’ choice. Most employers had to pay minimum wages. They also had to pay new taxes based upon payrolls for Social Security and unemployment compensation. In spite of all these government programs, full recovery from the depression took place only when massive spending for World War II (1939-1945) began.

D

The Post-World War II Period

American business looked abroad in the post-World War II era. The years from 1945 to 1971 brought unprecedented growth in the world economy, and American companies sought to benefit by locating operations overseas. Virtually all of the major U.S. corporations invested in plants and facilities abroad.

Beginning in the late 1940s, American businesses also began to invest in knowledge and skills rather than just new machines and equipment. Leading companies began to work closely with universities, making the United States the world’s center for chemical and electrical engineering and other technical professions. The government joined universities and corporations in sponsoring scientific research and development. With the investment in university research and company laboratories, American corporations systematized and accelerated the search for new products and ways of doing business.

During the 1950s and 1960s, American business was the envy of the world. Europeans worried about the technology gap, as American investment in research and development more than doubled that of France, Germany, Japan, and the United Kingdom combined. The United States produced some 35 to 40 percent of the entire world output of manufactured goods. With billions in direct foreign investment, the operations of American corporations were visible worldwide.

In the 1960s and 1970s, a sizable share of the profits of U.S. corporations came from their foreign operations. Multinational expansion and diversification resulted in enormous enterprises. The largest of them, the International Telephone and Telegraph Corporation (ITT), employed some 400,000 workers in 70 countries. In addition to its core business of providing telephone services abroad, ITT also operated businesses as diverse as Continental Baking, Cleveland Motels, Avis rental car, Pennsylvania Glass and Sand, and Sheraton Hotels.

At home, millions of students flocked to colleges and universities to prepare for careers in business. In many major industries, blue-collar workers could earn white-collar incomes. Organized into powerful unions, industrial workers secured regular wage increases and improved benefit packages. With these comparatively high wages and salaries, Americans went on a shopping spree, buying more autos, homes, and appliances, and engaging in more travel and recreational activities than ever before.

Businesses continued to diversify in the 1960s. Some decided to buy out other firms to avoid being mired in a declining industry such as textiles, steel, or railroads. Those in stable industries such as autos and electrical appliances sought to apply their financial and managerial expertise to small- and medium-sized companies in competitive industries. The culmination of the merger mania came with the conglomerate movement that acquired companies in unrelated industries. The conglomerate movement was noteworthy because it also coincided with the development of a new breed of university-trained executive, one who specialized in finance and investment and who felt no obligation to be familiar with a company’s product or manufacturing process.

E

The Reckoning of the 1970s

A reckoning came for U.S. businesses in the 1970s. Other nations closed the technological gap. They built new, more modern and efficient factories and staffed them with workers earning low wages, especially in comparison with U.S. workers. American manufacturers began to face withering competition from foreign producers who not only could make goods cheaper, but also could often make them better. And these foreign companies were eager to penetrate the world’s largest market, the United States. Not only did they peddle their wares in the United States, increasingly they assembled them there as well.

American business responded in a number of ways. Some sought subsidy and tariff protection from the U.S. government. Others became more efficient and de-diversified—that is, they sold off many of their subsidiaries in unrelated industries. They also reduced their labor forces in the United States and abroad, shedding layers of management and laying off thousands of production workers. Rather than produce the entire product within the firm, more and more work was outsourced—that is, purchased from other businesses in the United States or abroad.

Foreign competition was not the only challenge business faced. Beginning in the 1960s and continuing in the 1970s, Americans demanded still more government regulation of business. Reformers secured more than 100 laws to protect the environment, ensure on-the-job safety, and guarantee employment opportunity to women and minorities. New agencies were created such as the Environmental Protection Agency (EPA), the Occupational Safety and Health Administration (OSHA), and the Equal Employment Opportunity Commission (EEOC) to enforce the new more stringent laws.

F

The Reagan Era

The 1980s, however, saw a reaction to increased governmental regulation. President Ronald Reagan capitalized on the widely shared belief that government had become too intrusive. Deregulation, begun in the airlines and public utilities, spread to other industries, notably banking and energy. Antimonopoly cases in the courts all but disappeared. Government seemed to become more lenient with the realization that American firms now had to compete with large and successful foreign businesses. Federal, state, and local governments enacted tax cuts on both businesses and wealthy individuals to encourage investment in American business.

G

The 1990s: New Technology and Globalization

The last decade of the 20th century brought a rejuvenated and even more dominant American economy. American firms invested heavily in new technologies, especially computers and computer software, making businesses more productive than ever before. Reduced transportation and information costs led to what has been labeled globalization—that is, increased free trade and a worldwide division of labor.

The Ford Escort, for example, was called the world car, not because it was marketed to the world, but because its parts came from suppliers around the world. The search for greater efficiency also led many American firms to focus more intently upon providing goods and services competitively in the global marketplace. This meant mergers and acquisitions for some, job cuts and de-diversification for others. 

These changes in both the public and private economy had consequences. On the favorable side, American incomes soared, and the poverty rate fell markedly with more than a decade of prosperity during the 1990s. Individual investors reaped huge gains as the stock market reached unprecedented heights during the longest-running bull market in U.S. history. Governments benefited as well, as states were able to cut taxes and increase spending, while the federal government enjoyed a sizable surplus for a brief period.

On the other hand this prosperity was not equally shared. The compensation for American corporate executives skyrocketed, particularly for those who received payment in stock options as well as salary. Real incomes—that is, what people earned after adjusting for increases in the cost of living—rose only modestly for the average American after the mid-1970s, even as this average American faced greater uncertainty about job security and health care and retirement benefits.

VII

THE 21ST CENTURY

A

New Wave of Business Regulation

At the outset of the 21st century, Americans again began to question if corporations should be subject to greater scrutiny. The collapse in 2001 of Enron Corporation, a major energy trading company, and the discovery that it used accounting fraud to disguise business losses prompted a reevaluation of American business practices.

The Enron scandal indicated that control mechanisms in the private economy had failed. Neither the corporation’s board of directors nor its auditors met their legally mandated duties. Government agencies also failed to discover the problem. Management did not have to pay a sufficient price for its poor performance. Many of the top executives at Enron and other bankrupt corporations mired in similar accounting scandals walked away with huge payments, while lower-level workers lost their wages. Those workers who invested heavily in the corporation’s stock lost most of their retirement savings.

In 2002 the U.S. Congress responded to the Enron scandal and other examples of corporate accounting fraud by passing legislation that imposed new restrictions on business. The legislation created stiff criminal penalties for corporate fraud and document shredding, requiring chief executive officers and chief financial officers to affirm the integrity of corporate earnings statements or risk going to prison. The law established an independent board to oversee the accounting industry. Among other measures, it also mandated that accounting firms separate their consulting services and auditing services. The contemporaneous use of these services had created a conflict of interest, making it possible for accounting fraud like that in the Enron scandal to occur.

Even with these new regulations, however, as the United States entered the 21st century, it still had one of the least regulated economies in the world. Government regulation and taxation of business in the United States has been the least restrictive in the industrialized world. Whether that will continue to be true or whether corporate scandals and a declining economy will lead to popular demands for more government regulation remains to be seen.