The Evolution of Financial Practices and Financial Structures Among American Manufacturers, 1875-1905: Case Studies of the Sugar Refining and Meat Packing Industries

Two salient features of late nineteenth century American economic development were the appearance of a multitude of large, horizontally or vertically integrated manufacturing corporations, and the emergence of a sophisticated market for industrial securities. According to most economist and economic historians, both of these developments can be attributed primarily to increased deficit financing requirements among late nineteenth century American manufacturers. This was presumed to have resulted largely from technological innovations in manufacturing that increased both total capital requirements and the minimum size of the required initial investment in many industries. These developments were thought to have necessitated the creation and sale of new securities to a large, experientially and geographically diverse pool of investors, and the establishment of new, more efficient market mechanism to facilitate the flow of funds between surplus and deficit spending units. Analysis of the financial histories of the meat packing and sugar refining industries during 1875-1905 casts considerable doubt on this account of the relationship between American financial and business development. Practically all physical capital expenditures of the large vertically or horizontally integrated corporations which came to dominate each industry were funded in the same manner as the partnerships and proprietorships out of which such corporations emerged-through short-term bank borrowings and retained earnings. The innovation of new business devices, financial institutions, and financial practices, as my interpretation of the financial histories of both industries suggests, can be largely attributed to the emergence of a new phenomenon, "strategic finance." "Strategic finance" involved the use of securities, corporations and holding companies to facilitate the reorganization and combination of independently organized, already existing productive capacity. The reconfiguration of independent, though functionally related business units eliminated the difficulties created by the characteristics of "sunkeness" and indivisibility of invested capital in manufacturing enterprises organized along partnership, proprietorship or primitive corporate lines. The institutions that facilitated the process of "strategic finance" had little to do with funding the establishment of new productive capacity or the financing of ongoing operations.