Corporate finance, which is the acquisition and use of funds by business entities, has evolved as the scope of business enterprises has changed and as American society has become increasingly successful in achieving its economic goals. The history of finance in the United States is a story that began with rudimentary, unregulated means of securing funds in the early years of the newly established nation and reached in the closing decades of the twentieth century, a level of advanced innovation that made the United States the financial leader in the global community. The success of the finance function in corporate America is the result of a combination of business innovation in the design and strategies of securing funds and of governmental regulations that assure integrity in financial markets. Significant aspects in this development are discussed in the sections that follow.

EARLY AMERICAN FINANCE

In the colonial United States, businesses were, for the most part, small and self-financed. However, the first settlers, who had been British subjects, were well acquainted with the corporate form of organization. As Davis (1917) noted, "before the end of the colonial period a considerable number of truly private corporations had been established for ecclesiastical, education, charitable, and even business purposes" (p. 4).

Many of these early efforts were unsuccessful, and those individuals who invested in them often lost their total contributions. The nature of financing problems in these early efforts is illustrated by the story of an organization called The Society for Establishing Useful Manufacturers. In November 1791, the legislature of New Jersey passed an act incorporating this enterprise, which likely manufactured various products including paper, textiles, pottery, and wire. Davis (1917) identified this company as "one of the pioneer industrial corporations of the United States and the largest and most pretentious of these" (p. 349). Plans for the new corporation were publicly announced, including the much-criticized strategy of raising capital by issuing public stocks. The emphasis on developing domestic industry and reducing dependence on imports was appealing to potential investors, and private citizens were getting encouragement from the newly formed federal government to undertake business activity on a broader scale than had been common at the time. At the time the prospectus for this new enterprise was being circulated, Alexander Hamilton, the secretary of the Treasury, presented his Report on Manufacturers, which was prepared in response to President Washington's direction "to prepare and report to the House, a proper plan for the encouragement and promotion of such manufactories as will tend to render the United States independent of other nations" (quoted in Davis, 1917, p. 362).

The requisite capital was indeed raised, with most of the subscriptions secured in New York. Shortly thereafter, panic ensued because the new enterprise was not progressing as intended. The leading offices and directors were deeply involved in the speculative boom that was widespread at the time and had not given attention to the actual business of the new enterprise. Thereafter, the leaders, who were in possession of most of the paid-in funds, went bankrupt. This story reveals the lure of becoming wealthy quickly and of general incompetence among leadership. There were virtually no rules to restrain the behavior of the leaders, and they appropriated the funds for their own personal use.

The society was saved by a loan of $10,000 from the Bank of New York, and there is evidence that the secretary of Treasury was critical in securing this financing. However, there continued to be serious finance problems, throughout the period when facilities for the envisioned textile mills were being constructed. The newly appointed treasurer was supposed to be bonded, but he refused. He continued in the position nonetheless. When he retired in 1796, the treasurer's books and the funds were supposed to be left with the deputy-governor. The books, though, were never recovered. It is not clear whether all the funds were recovered. The operations were unprofitable and were discontinued in the same year.

FINANCE IN THE 1800s

On the brink of the nineteenth century the United States had a dismal record of successful corporations, as illustrated by the effort in New Jersey discussed above. The country was a world of small mercantile businesses. As of 1790, for example, there were only three banks, three bridge companies, a few insurance associations, and a dozen canal companies (Williamson, 1951). However, some businesspeople began to see the value of the corporation: The risks of manufacturing made the limited liability of the corporation appealing. Several states enacted useful laws. In 1811 New York enacted a law that allowed for the incorporation of certain kinds of manufacturing concerns with less than $100,000 of capital. Connecticut, in 1817, and Massachusetts, in 1830, granted limited liability, which was the first step in movement for general incorporation acts. The intent of such acts was to encourage the financing of entities through the corporate structure and to protect the public that might be inclined to invest in these new enterprises. In the same period, the government was significantly involved in the financing of businesses. As Cochran (1966) noted:

The capital needs of banking and transportation brought state participation in business organization. Few such pioneer enterprises seemed possible without substantial state, county, or municipal purchases of stocks and bonds. The credit of the state was generally substituted in part for that of the private company by issuance of state bonds and use of the proceeds to buy the company's securities. (p. 219)

At the same time, Cochran (1966) noted some of the serious drawbacks of the new ownership:

Free and secret transferability of corporate ownership encouraged grave abuses on the part of unscrupulous financiers. It was possible for managing groups to profit personally by ruining great companies and then selling out before the situation became known. (p. 219)

However, there were conscientious men who were interested in productive efficiency as well as the quest for wealth. Among the individuals Cochran (1966) identified was Nathan Appleton:

Nathan Appleton … turning from mercantile pursuits in 1813, joined with some of the Lowells and Jacksons, put his capital into large-scale textile manufacture …. Appleton came to be looked upon as the business leader of Massachusetts …. By 1840 he and his Boston associates had created in eastern Massachusetts a miniature of the corporate industrial society of the twentieth century. They controlled banking, railroad, insurance, and power companies as well as great textile mills scattered all over the state. It was the large "modern" corporation controllable by strategically organized blocs of shares, and virtually self-perpetuating boards of directors that made this concentration of power possible, but it must be remembered that it was also this device for gathering together the savings of thousands of small investors that had produced the great development. (p. 220)

There had been remarkable developments throughout the 1800s. Baskin and Miranti (1997), for example, pointed out that the "last quarter of the eighteenth century saw the start of a great economic expansion that changed corporate finance in fundamental ways" (p. 127). It was during this period that there was extensive development of railroads, which independently became strong bastions of finance capitalism. During this period, preferred stock and debt became popular means of financing corporations. During the final decades of the 1800s, relatively widely distributed financial journals and newspapers began to appear.

THE ROLE OF BANKS FROM THE LATE 1800s THROUGH THE 1920s

Bankers are critical to economic development. Schumpeter, in his theory of economic development, highlighted the role of bankers as the source of funds for enterpreneurs, who themselves often lack financial resource. Schumpeter (1934) noted: "In an economy without development there would be no such money market … the kernel of the matter lies in the credit requirements of new enterprises … thus, the main function of the money or capital market is trading in credit for the purpose of financing development"(p. 122-127).

Schumpeter undoubtedly was fully aware of the U.S. experience and the influence of American bankers in the impressive growth of the American economy from the mid-1800s through the early decade of the twentieth century. Possibly the most impressive of the bankers were the Morgans. As Chernow (1990), in his history of the Morgans, concluded: "The old pre-1935 House of Morgan was probably the most formidable financial combine in history. It financed many industrial giants, including U.S. Steel, General Electric, General Motors, Du Pont, and American Telephone and Telegraph" (p. xi).

At the end of the 1800s, banks were the critical source of funds for U.S. enterprises. Their role, however, changed during the twentieth century, as businesses became larger and the types of financial institutions increased.

CHANGES IN FINANCIAL STRUCTURE

The financial structure in the United States changed during the twentieth century. Gold-smith's (1969) study provided a comparison of the main types of U.S. financial institutions in 1900 and 1963, shown in Table 1.

As Table 1 shows, in 1900, 62.9 percent of total assets of all the financial institutions were held by commercial banks; by 1963 that percentage was 32.2. While thrift institutions, including mutual savings banks, savings and loan associations, credit unions, and postal savings systems, maintained approximately the same percentage of total assets (18.2 percent in 1900; 16.9 percent in 1963), mutual savings banks held 15.1 percent of total assets in 1900 but only 5.1 percent in 1963. Savings and loan associations, which had3.1 of total assets in 1900, held 10.9 percent in 1963. In 1900 a group of institutions identified as "miscellaneous" included only mortgage companies and security dealers. By 1963, the "miscellaneous" category included those that had existed in 1900, plus finance companies, investment companies, land banks, and government lending institutions (Goldsmith, 1969).

Goldsmith's analysis revealed that financial superstructure grows more rapidly than the infrastructure of national product and national wealth. He noted that in less than two hundred years within the world community there had developed what he identified as a financial system of the modern type, characterized by:

the existence of several basic forms of financial institutions (banks of issue and deposit, savings banks, mortgage banks, and insurance companies) and of financial instruments (scriptural [nonmetallic] money, bills of exchange, accounts receivable and payable, bank deposits and loans made by financial institutions, life insurance and pension contracts, mortgages, government and corporate bonds, and corporate stock.) (Goldsmith, 1969, 99. 10-11)

Financial Institutions in 1900 and 1963

A parallelism between economic and financial development is observable if periods of several decades are considered. Goldsmith's (1969) data showed that "as real income and wealth increase, in the aggregate and per head of the population, the size and complexity of the financial superstructure grow" (p. 48).

Shares of assets held by banks and thrift institutions continued to decline. While the two types of financial institutions held 55.0 percent of total assets in 1963, the two types held only 22.7 per cent by the end of 1999, as reported by the Federal Reserve Board.

IMPETUS FOR REGULATION OF SECURITIES IN THE UNITED STATES

Prior to 1929, there was little support for federal regulation of securities markets in the United States. The optimism of the post-World War I period, with promises of easy credit and instant wealth, was not a time of restraints imposed by regulation. As noted by the Securities and Ex change Commission (SEC), "During the 1920s, approximately 20 million large and small share holders took advantage of post-war prosperity and set out to make their fortunes in the stock market. It is estimated that of the $50 billion in new securities offering during this period, half became worthless." (SEC, www.sec.gov/)

Public confidence shifted dramatically with the stock market crash of 1929. For the economy to recover, the public's faith in the capital markets needed to be restored. The outcome was the passage of two acts by Congress, the Securities Act of 1933 and the Securities Exchange Act of 1934. These laws were established to provide structure in the functioning of financial markets and to provide government oversight.

THE SECURITIES AND EXCHANGE COMMISSION

The Securities Exchange Act of 1934 included the establishment of the Securities and Exchange Commission, which was charged with enforcing the newly passed securities laws, promoting stability in the markets, and protecting investors.

The Securities and Exchange Commission operates on the premise that all investors should have access to certain basic facts about investments prior to purchase. The key means of achieving this is through requiring that all publicly owned companies disclose relevant financial and other information to all citizens.

The SEC oversees key participants in the financial world, including stock exchanges, broker-dealers, and investment advisers. Through its enforcement authority, the SEC brings civil enforcement actions against individuals and companies that violate securities laws. Typical infractions relate to insider trading, accounting fraud, and providing false or misleading information about securities and the companies that issue them.

THE ROLE OF STOCK EXCHANGES

Stock exchanges have played a significant role in the financing of U.S. business enterprises through providing a means of buying and selling securities. The first stock exchange in the United States was established in 1790 in Philadelphia. Two years later, in 1792, the New York Stock Exchange was formed when twenty-four stockbrokers signed an agreement to trade with one another beneath a buttonwood tree outside what is now 68 Wall Street. The New York Stock Exchange (NYSE) is the largest stock exchange in the world.

The NYSE's first client, in 1792, was the Bank of New York, and its first office, set up in 1817, was a rented room at 40 Wall Street. It achieved its first million-share day on December 15, 1886, and its first billion-share day on October 28,1997.

A study of all securities markets by the SEC in 1961 revealed that the over-the-counter securities market was fragmented and obscure, leading the SEC to propose to the National Association of Securities Dealers, that it develop an automated over-the-counter securities system. Such a system was completed and began operations in February 1971; it is known as the National Association of Securities Dealers Automated Quotation—or NASDAQ—system. The world's first electronic stock market, by the end of 1999 it ranked second, below the New York Stock Exchange, among the world's securities markets in terms of dollar volume.

CLOSING DECADES OF THE TWENTIETH CENTURY

With the passage of new laws, the financial industry is being restructured. The scope of services provided by type of institution is not as limited as was the case earlier.

The impact of technology. As the twenty-first century got under way, the ways in which stocks were bought and sold began to receive intensive attention. Stock markets, including the regional ones in the United States, began considering the ways in which current and emerging technologies would affect how they function.

The Federal Government also became involved in assessing the implications of electronic commerce during the final years of the twentieth century. Hearings were held by committees in both the House of Representatives and the Senate. Among those making presentations at hearings of the Senate Banking Committee were leaders of banks and stock exchanges. Traditional firms in these industries assured the members of such committees that they could meet the challenges of the new technology and continue to be viable players in the financial marketplace.

One example of the appeal of electronic commerce in financial services is the extent of such commerce as of mid-2000. On-line spending in financial services, primarily the buying and selling of securities, was 28.9 percent of all expenditures in this category. A year earlier, the extent of such transactions was 14.6. (as reported in The Wall Street Journal, July 17, 2000. "Clicks and Mortar." William M. Bulkeley, p.R4. Source was cited as Boston Consulting Group).

There is considerable interest in developing the rules and regulations to enhance the effectiveness and efficiency of financial transactions electronically. An important new ruling for e-commerce that will allow on-line signatures was passed by Congress in June 2000 and will take effect as of October 1, 2000.

Continuing development of the theory of finance. In the final third of the twentieth century, there were impressive developments in the theory of finance. Although the Nobel Prize was first awarded in 1901, the category "economic science" was not added until 1969. Several leading theorists in the field of finance have been among the recipients of the Nobel Prize in economic science.

The globalization of financial activity. The transformation of capital markets from the national level to the global level increased considerably during the final decade of the twentieth century, fueled by economic progress and supported by rapidly developing technological capabilities. Leadership was provided by an association of the world's securities regulators, the International Organization of Securities Commissions (IOSCO), which was organized in the early 1970s. The IOSCO in 1993 described a core set of standards that would be needed to provide a comprehensive body of accounting principles for companies undertaking cross-border securities offerings. In May 2000, the IOSCO approved the core standards developed by the International Accounting Standards Committee (IASC). In the meantime, the International Accounting Standards Committee designed a new structure for an international accounting standard-setting body, which was accepted by the membership in May 2000 with implementation anticipated in January 2001.

These developments are promising for the development of a functioning global financial marketplace.