How the Business World Has Been Transformed, From the Democratization of Capital to the Rise and Fall of Labor

WALL STREET JOURNAL REPORTS: LEADERSHIP
125 Years of Change in the U.S. Economy—and the Dow

How the Business World Has Been Transformed, From the Democratization of Capital to the Rise and Fall of Labor

By JOHN STEELE GORDON
July 7, 2014

For the past 125 years, The Wall Street Journal has been covering the evolution of the American economic ecosystem and the businesses that make it up. It has thus chronicled the most extraordinary period of economic change and growth in world history.

A DIFFERENT WORLD

Indeed, the business world of 1889 today seems almost something from an alien planet.

Offices were nearly totally masculine preserves. About the only jobs for women outside the home were as teachers, nurses and telephone operators. Almost all large corporations were run by members of the WASP establishment. Ledgers were mostly handwritten, as were most invoices and even many contracts. There were no standardized rules for keeping books, and almost no government regulation of business.

The balance between capital and labor was greatly in favor of capital, and a series of bloody strikes ensued as labor fought for better wages and working conditions. In 1892, the strike at Carnegie Steel's Homestead Steel Works resulted in the death of nine steelworkers and the near-assassination of Henry Clay Frick, the president of Carnegie Steel, in revenge.

On Wall Street, meanwhile, brokerages were small and catered almost exclusively to the rich, who owned almost all corporate securities. Research as often as not consisted of little more than lunch with one's brother-in-law. Insider trading was routine.

But, even in 1889, powerful trends were under way that would radically reshape the business world. The mechanization of the workplace, for instance. The telephone, patented in 1876, had been quickly adopted by business, especially businesses such as stockbrokers who needed the latest prices. The typewriter had been evolving since the early 1870s and reached practicality by the 1880s. The Burroughs adding machine was patented in 1888.

By the turn of the 20th century, the clicketyclack of typewriters, the ca-chung of adding machines and the ringing of telephones had become the ambient noise in American offices. That would remain so until the microprocessor came of age in the 1970s. By the turn of the 21st century, the personal computer had replaced the adding machines and typewriters and, thanks to email, many phone calls. Offices were much quieter—and more productive.

Office demographics changed as well. By 1950, women had become commonplace in offices across the country, but mostly in low-level positions such as secretaries. The 1960s saw the feminist movement take off and women begin to climb corporate ladders. Today, while there's plenty of room for improvement, 22 of the Fortune 500 companies are headed by female CEOs, including IBM, Lockheed-Martin and Duke Energy.

At the same time, other ethnic groups also began to make their presence felt in American corporations, particularly after the GI Bill made college educations much more widely available. Today the WASP hegemony in American business is a distant memory.

Labor also gained ground over the decades, and flourished with the passage of the Wagner Act in 1935, which created a much friendlier environment for the union movement. By the early 1950s, 35% of the American workforce was unionized. That picture changed, though, as the number of workers in manufacturing began to fall. Today, the percentage of unionized workers is lower than it was in 1900. And strikes have nearly disappeared. In 1937, as unionization was in full swing, there were 4,740 strikes in the U.S. In 1970, there were 370. In 2010, only 11.

LAYING DOWN THE RULES

The ways of doing business have also evolved considerably in the past 125 years. Just consider accounting.

Until the 1880s, how a business handled its books was up to the business itself, and most used whatever accounting system made the management look best. Most publicly owned businesses did not even issue annual or quarterly reports. When the New York Stock Exchange asked the Delaware, Lackawanna & Western Railroad for information on its finances, it was curtly informed, "Railroad makes no reports and publishes no statements."

The Erie Railway, because many of its bond issues were backed by New York state, did have to issue an annual report. Regardless, Horace Greeley harrumphed in the New York Tribune in 1870 that if the report that year bore any resemblance to the truth, then "Alaska has a tropical climate and strawberries in their season."

But as Wall Street surged in size and power as a capital market, the stock exchange and the increasingly important Wall Street banks wanted accurate and timely information on the companies being listed and underwritten. They wanted all corporate books kept according to a fixed set of rules and to be certified as honest and complete by independent accountants.

By the time of World War I, certified public accountants and generally accepted accounting principles were standard throughout the business world. But accounting itself, of course, has continued to evolve. Cash flow, for instance, is now regarded as one of the most important indicators of corporate viability. But the term was coined only in 1954.

The federal government also began to take a larger oversight role. In 1887, it made its first foray into business regulation outside of banking, creating the Interstate Commerce Commission. Its mandate was to oversee railroads, then the largest business category in the country.

Many other regulatory agencies followed, producing a veritable alphabet soup in Washington and an army of lobbyists to try to influence the regulators. Of most concern to Wall Street, of course, was the establishment of the Securities and Exchange Commission in 1933.

The Wall Street crash of 1929 was widely, if erroneously, blamed for the Great Depression. Wall Street was also seen, this time correctly, as corrupt and self-serving. To everyone's astonishment, President Roosevelt appointed the notorious speculator Joseph P. Kennedy to be the SEC's first chairman. But the canny Roosevelt knew that Kennedy's own ambitions would lead him to do a good and honest job and that he certainly knew where the bodies were buried on Wall Street.

Kennedy got the agency off to a good start, but it would be under Chairman William O. Douglas, later a Supreme Court justice, that the SEC brought real change to Wall Street. With the conviction and imprisonment for embezzlement in 1938 of Richard Whitney, former president of the NYSE and the best-known broker in the country, the stock exchange was fundamentally reformed.

Wall Street also grew more democratic over time. Small investors plunged into the market, and men like Charles Merrill brought "Wall Street to main street" with his brokerage service. By the 1950s, pension funds and mutual funds were beginning to dominate stock trading.

Volume picked up so much that in the late 1960s there was a back-office crisis, with brokers unable to handle the increasing paperwork. It would be computers that solved that problem. In 1975, the SEC ended the practice of fixed commissions that had ruled Wall Street since 1792, and volume soared still further as commission rates fell sharply.

The New York Stock Exchange had seen its first million-share day in 1883. In the crash of 1929, a volume record of 16 million shares was set that stood until 1968. Today, 16 million shares are traded in the first seconds after the opening bell.

But the floor of the New York Stock Exchange—although it is still used as a backdrop for TV stock reports—is a quiet place today compared with what it was even 30 years ago. Much of the trading has been computerized or handled in-house by brokerage houses that are now far larger and better capitalized than in earlier times.

BY THE NUMBERS

Tracking all of that activity required another innovation. In the 1880s, as Wall Street was rapidly becoming the equal of London as a financial market, many newspapers published daily stock tables. But there was no way to see how the market as a whole was doing and thus the American economy as a whole. Charles Dow, one of the founders of The Wall Street Journal, observed, "The stock market is in the nature of a barometer which reflects the rise and fall of general conditions."

On May 26, 1896, he introduced a way to read that barometer at a glance, the industrial stock index. The Dow Jones Industrial Average originally had 12 stocks in it, and the index, determined once a day with paper and pencil, was nothing more than the prices of the 12 stocks added up and divided by 12. (It would be increased to 30 stocks in 1928.)

On its first day, the Dow closed at 40.94. It then proceeded to go right in the tank, declining by 30% over the next three months to a low of 28.48. But as William McKinley's victory over William Jennings Bryan began to look probable in the presidential election that year, the Dow recovered. Within 10 years it reached 100, and would go on to chart the ups and downs of the American economy right up to the present day, now continuously calculated by computers.

On July 8, 1932, reflecting "the rise and fall of general conditions," it reached its bottom in the Great Depression, closing at 41.22, barely a quarter-point above where it had first closed 36 years earlier. Last week the Dow reached 17000, more than 400 times above its first close, without adjusting for inflation.

But the Dow would also, in a way, chart the rise and fall of various industries as the American economy evolved from one dominated by railroads and heavy industry to one dominated by consumer goods, financial services and digital technology. Fifty years ago, there were two steel companies in the Dow, Bethlehem and U.S. Steel. Today there is no steel company in the Dow, and Bethlehem no longer exists.

In 1964, retailing was represented by Woolworth and Sears Roebuck. Today, it is represented by Wal-Mart and Home Depot. There were no banks on the 1964 list. Today, J.P. Morgan Chase, Goldman Sachs and American Express are all on the list. The only companies that were components of the Dow in 1964 that are still in the Dow are DuPont and General Electric, which, indeed, was an original Dow component in 1896. (But GE was off the Dow Industrials from 1901 to 1907.)

Over the past 125 years, the American economic ecosystem has been characterized by ever-increasing mechanization and then digitization of the workplace, the democratization of the workplace and of capital, the rise and fall of great industries, the rise and fall of the labor movement. The next 125 years are likely to be even more dramatic and change-filled.

Mr. Gordon is the author of "An Empire of Wealth: The Epic History of American Economic Power."