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The Blog

Vanderbilt and "Dynastic Capitalism"

I'm taking a break from celebrating the National Book Award (see my previous two posts) to examine an issue raised by Steve Fraser, an academic historian who criticized my book in The Nation.

Mr. Fraser asserts that I make excessive claims for Vanderbilt as a pioneer of the modern corporation, and says that Vanderbilt represented "dynastic capitalism," not modern corporate capitalism. I have to disagree.

The key question is whether "dynastic capitalism" is really a different system at all, or just a catchphrase for a company managed by the owner of a majority of its stock (and by his son). Family-owned corporations, and owner-managed corporations, are still a major part of America's capitalist economy. They hardly constitute a separate system from other corporations, even if they are not identical in all respects.

In Vanderbilt's case, he took control of companies with publicly traded stock, stock that continued to be publicly traded under his regime. He also rationalized both the railroad industry and the management of his particular companies.

In reacting to my comments on his review (which you can read here), Mr. Fraser makes much of the fact that Vanderbilt was not hailed as an example of corporate modernization by the great business historian Alfred D. Chandler Jr. Of course not: Chandler had limited information about Vanderbilt, whose career had not been subject to much research prior to my study. And Chandler's work is hardly flawless when it comes to railroads; for example, he confuses fast-freight lines with express companies, two very different things.

In fact, Vanderbilt proved a modernizer in several respects. First, he embarked upon the consolidation of a fragmented railroad network, dotted with small lines originally constructed to meet local needs. Vanderbilt's mergers helped to create one of the first interregional railroad systems. Second, he rationalized the finances of his lines; he largely eliminated floating debt, consolidated outstanding bonds, cleaned out waste and corruption, and generally imposed a sound financial structure on the lines he bought. Third, he and his son William systematized management, creating a new departmental organization, hiring new professional superintendents, and thoroughly rationalizing the management structure of the New York Central & Hudson River Railroad in particular, the core of the empire.

One of the signs of the order, efficiency, and rational management of Vanderbilt's lines could be seen in the fact that, amid the depression that began in 1873, when most railroads halted dividends, the New York Central & Hudson River made them automatic, issued quarterly without a special vote of the board of directors.

Mr. Fraser is correct that we must always watch for excessive claims by biographers. In this particular case, however, he is wrong on the facts when he accuses me of the error.

There was, however, one aspect of Vanderbilt's lines that represented an older model of corporate governance. He was an owner-manager; the Pennsylvania Railroad, on the other hand, separated management from ownership, which would be the prevailing corporate model in the decades to come.

But I raise the question of whether this has proved to be a good thing. The managers of the Pennsylvania also pioneered devices for skimming money out of the company (in which they were not large shareholders). The sometimes excessive bonuses that some of today's corporate executives pay to themselves suggest that this pitfall remains very much with us in this model of corporate governance. Vanderbilt, by contrast, took no compensation as company president, but only collected dividends on his stock. Being a majority owner gave him an incentive to soundly manage the company, with an eye toward long-term prospects and consistent profitability.

That doesn't sound like such a bad model these days.

By the way, on my blog about biography-writing, I discuss the question of how to set the parameters for a biography, a question raised by Mr. Fraser's critique. You can find my comments here.
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