A Random Walk in the History of Economic Thought, 1900–1950
Chapter 4: Thorstein Veblen and Credit Risk
In the 1890s, a very active merger movement among industrial corporations took place. Despite the passage of the Sherman Act banning monopolies, business leaders felt larger sized firms would give them a way to attain a more consistent control over their financial results. Consolidation through merger offered significant benefits from vertical and horizontal integration. These mergers created a new form of finance and added to public interest in the stock market. Instead of using cash to effect these mergers, organizers of the new giant firms used financial securities, stocks and bonds, to pay for the acquisition of other firms. The largest merger of the period, the formation of the US Steel Corporation in 1902, resulted in the issuance of one billion dollars in new securities. In response to this new way of doing business, there was a popular outcry about the abuses of the new financial methods, added to by books such as Thomas Lawson’s Frenzied Finance (Lawson 1968), published in 1905. At the same time, scholars started investigating large corporations and their activities to understand better their function in a competitive economy. In particular, they became interested in the new forms of finance corporations were using. This chapter describes the analysis of these new financial methods that was produced and inspired by Thorstein Veblen. VEBLEN’S BACKGROUND At first glance, Veblen does not seem a likely candidate for inclusion in this study. His reputation as a maverick economist and an iconoclast of capitalism would be inimical to the approach typical...
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