Quakerism & Capitalism — Transition (1895-1920): The Limited Liability Corporation
June 30, 2011 § Leave a comment
When London Yearly Meeting approved the Foundations of a True Social Order after discussing the report of the Committee on War and the Social Order during the 1918 sessions, the sense of the meeting was that the social order—that is, capitalism—had played a key role in causing the war that was still crippling an entire generation. In the Foundations, one can see this relatively new awareness of capitalism as a system with potentially horrible social consequences reaching beyond a narrow focus on the war to include labor and industrial relations as well (the British Labour Party was constituted in the same year). In fact, British Friends declared that nothing less than the ‘personality’—the personhood of the human—was at risk in the ways that the system treated its participants.
Personhood was central to the discussion in part because full legal ‘personhood’ had been conferred decisively upon the limited liability corporation in Britain and America only twenty years before. In that short time, the new technology had completely transformed the capitalist system. It was also completely transforming British Quakerism.
It’s hard to exaggerate how momentous this innovation was. The modern corporation, wrote Peter Drucker, the preeminent business thinker of the 20th century, “was the first autonomous institution in hundreds of years, the first to create a power center that was within society yet independent of the central government of the national state.” * (The Company: A Short History of a Revolutionary Idea, John Micklethwaite and Adrian Wooldridge, Modern Library Edition, New York, 2003)
The idea was not new. The Limited Liability Act of 1855 (in Britain) had granted limited liability to companies incorporated under the Joint Stock Companies
Act of 1844, subject to some capital requirements. The earlier act had done away with the need to get a special charter from Parliament to form a company, requiring only simple registration. The system was further rationalized under the Joint Stock Companies act of 1856, requiring only seven people to sign a Memorandum of Association and to put “ltd” at the end of the company’s name. However, the final block was put in place when, in 1897, in Salomon v. Saloman & Co., Ltd., the House of Lords (which was then Britain’s Supreme Court) finally firmly established the separate legal identity of a company and conferred upon its directors—not just its shareholders—the ‘corporate veil’ of protection. The corporation had become the equivalent of a person before the law.
Limited liability meant that shareholders were only financially liable for the value of their own investment in the company and that, when someone sued the company, they were suing the company and not its owners or investors. It essentially made the company in some ways the equivalent of a person in terms of the law. This affected not just financial liability; it also simplified a host of other financial, legal and management problems: by wrapping responsibility up in the fiction of corporate ‘personhood’, a company’s business relations and transactions no longer had to be conducted with each of its individual shareholders as owners. All this made it possible to raise the capital necessary to form the kind of large companies that the mature industrial economy required and to run them with managerial efficiency.
The proceedings of LYM’s 1918 sessions reveal that some members of the Meeting were nervous about the very essence of this innovation: was it morally right to relieve the owners of a business from responsibility for its actions? This seemed inconsistent with moral principle. It also struck at the heart of the Protestant Spirit that had dominated Quaker business practice for two centuries (and which had only just been defined in Max Weber’s landmark book, The Protestant Ethic and the Spirit of Capitalism), in which one viewed one’s business as an expression of one’s religious calling. That only worked if you owned and ran the business yourself. It didn’t work if untold numbers of people owned the business through investment shares who then relegated the business’s operations to directors and managers, and whose legal responsibility for its actions were now severely limited.
But that debate about limited liability went nowhere. In the proceedings of the 1918 sessions, you see some Friends arguing forcefully for the moral contradictions involved, which even the supporters of the new technology had trouble refuting. But it was too late. The modern corporation had already completely taken over. It was obvious to everyone that it was now, not just a fait accompli, but also actually indispensable to the new social order.
This fact was literally demoralizing to those Friends who considered it. At just the moment when Friends had become aware for the first time of capitalism as a system with mixed moral consequences, they were forced to accept its amoral (was it actually immoral?) character. In retreat, London Yearly Meeting resolved to reform the system as best they could, responding with one of the signature acts of modern liberal Quakerism—they formed a committee. The Committee on Industry and the Social Order went on to do some of the most searching and challenging work in the history of Quaker social testimony. But Friends had effectively abandoned any direct challenge to capitalism itself on moral grounds.
Moreover, the limited liability corporation did more than challenge the moral identity of British Friends. It also destroyed their sizable fortunes. Many Quaker business owners held onto their family ownership for a long time, but eventually they virtually all went public. Cadbury, Rowntree, Lever Brothers, Barclay—one by one, Quaker owners became managers in firms that had been in their families for generations. Gradually over the course of the 20th century, the great Quaker fortunes of Great Britain dwindled in size and importance. For two centuries, Quakers had been the wealthiest, or one of the wealthiest, communities in the United Kingdom. Between the triumph of the limited liability corporation and later the influx of convinced Friends from the middle middle class, the social demographics of British Quakerism dramatically changed for the second time in its history: from yeoman farmers and small trades people in the 1650s, to industrialist tycoons during the 18th and 19th centuries, and then back again towards the middle classes during the 20th.
In America, things were quite different. The United States embraced the limited liability corporation earlier and with greater enthusiasm than the Brits, seeing the innovation as democratizing and recognizing early on how it served the already famous American entrepreneurial spirit. But corporate law was mostly a matter for the states to write, so the technology grew for a long time in a haphazard way as states variously began legalizing it and then began competing with each other for business. First New Jersey, and then, ultimately, Delaware, made corporation-friendly law a hallmark of state identity. As in Great Britain, these laws first emerged in the middle of the 19th century and finally coalesced into some sense of national policy toward the end of the century, but states have always retained the power of incorporation.
With the Sherman Act (1890) and subsequent anti-trust legislation, the federal government began finally to seriously regulate corporations for the first time and these efforts figured prominently in the rise of Progressivism in America. Then came the New Deal. But these developments hardly affected Quakerism in America, which had always been more economically diverse than in Great Britain. The rich Quakers of Philadelphia had not played the central role in creating capitalism that their British brethren had, they were not by and large industrialists, and they represented only a small portion of the American Quaker population, let alone of the American wealthy and power elite. Even as early as the War for Independence, Philadelphia Quakers had ceased to be very important to the nation’s economy. By the time of the second transition in Quaker economics at the end of the 19th century, the final codification and rationalization of corporate law had no real impact on Quaker culture in America.