The need for capital in foreign trade during the age of exploration led to the creation of joint-stock companies.
The growth and expansion of commerce in Europe during the age of exploration and settlement in the New World created problems that required the adaptation of business organizations necessary to meet the developing conditions. The joint-stock company was created to provide the required capital for large-scale enterprises and skilled management.
The discovery of new trade routes and the opening of direct trade by sea between Europe and other parts of the world, mainly in the seventeenth century, led to new problems that merchants had not previously encountered. Foreign trade, along with mining and shipbuilding, posed the biggest problems for businessmen. The opening of all-water trade routes enabled European merchants to make direct contact with markets and raw materials all over the world. However, the enormous trading opportunities resulting from these new territorial discoveries were not taken advantage of by most European merchants. Few were able to “single-handedly” profit from such developments in the new commercial age.
The developing needs of business in foreign trade led to the creation of the joint-stock company. The joint-stock company and its later development, the corporation, were examples of modern business institutions. Joint-stock companies addressed the needs of large-scale business in three ways. First, the new trading opportunities involved more risk of loss than previous ventures. Despite the prospects of greater profits, the potential danger of losing ships at sea along with the threat of piracy required more investors be involved. Few merchants who were able to raise the necessary capital to prepare a ship for a long journey could afford to lose all they had. The joint-stock company addressed this worry by splitting up the capital invested in a trading venture. The total risk of a venture could thus be shared by many stockholders. Second, the need to raise large amounts of capital was met by selling shares of stock. Thousands of Europeans participated by purchasing shares that they could afford to buy and thereby invest in the venture. Third, adequate and unified management, despite ownership of the business being scattered among many stockholders, was achieved by management policies being determined by a majority vote of the shares. The joint-stock company made management a professional function separate from ownership.
Historically, joint-stock companies did not fare very well over the long term. The English South Sea Bubble and the French Mississippi Bubble (both in 1720) were financial disasters that typified the nature of such speculative ventures and subsequently led to restrictions on the privileges of incorporation and slowed the growth of corporate enterprise. The oldest joint-stock company was chartered in 1555 in England to trade with Russia. The Muscovy Company was given a trade monopoly by the Russian tsar and English king. It survived for more than a century, but fell victim to Dutch competition and uncertain condi tions in Russia. The most successful joint-stock companies were the East India Companies chartered in England in 1600 and Holland in 1602. The Dutch company was a permanent joint-stock company from the beginning, whereas the English company was organized for single voyages until 1657, when the stock was made permanent. Both companies became the wealthiest of their day. The British East India Company continued to rule until 1858, and until 1833 it had exclusive trading rights in India. Chartered in 1670, the Hudson’s Bay Company, which conducted business in Canada, was another prominent joint-stock company organized during the Commercial Revolution. Some others, though far less successful, were the Levant Company, the African Company, the Mines Royal, and the South Sea Company. What enabled many of them to survive was government support rather than corporate investment.
American colonization expanded with the assistance of commercial companies—joint-stock ventures. The London Company and the Plymouth Company were chartered in 1606. The first attempt of the Plymouth Company in what is now Maine was a failure. The London Company’s colonization of Jamestown, Virginia, eventually succeeded despite great financial losses to the company. Crown support to trading companies was the primary factor in the growth of the American colonies throughout the seventeenth and eighteenth centuries. With the creation of the United States, the development of big business occurred in the late nineteenth century. Although the United States had many merchants, it had no desire for large joint-stock trading companies. The mechanization of industry and saturation of markets resulting from the post–Civil War Industrial Revolution led to the rise of big business in the American economy.
Although sole proprietorship was the best kind of arrangement for the merchant manufacturer, businessmen who focused on commerce and trade required so much capital that it was necessary for them to find other forms of business organization. The discovery of sixteenth- and seventeenth-century trade routes during the era of the Commercial Revolution resulted in the creation of the joint-stock company. Although joint-stock enterprises represented a spectacular development in the organization of business enterprise in the modern era, they had compiled “a dreary record of failure.” The family firm and partnership continued to dominate trade and industry well into the nineteenth century.
Charles F. Howlett
See also: British Empire; Mercantilism; United States.
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