The stock market plays a key role in determining the success of American corporations and their top executives. But there was a time when the management of U.S. businesses was focused on producing goods and services rather than on manufacturing and selling stock. Mitchell's new book deals with the formative years of this “speculation economy,” from the growth of the giant modern corporation and the stock market that it produced, to the federal efforts to regulate them both.

For historians accustomed to slowly evolving processes, this transformation happened in the blink of an eye. It started in 1897 with the fusion of businesses during the merger wave that ended in 1903, which was often driven by the desire of creating and selling stock for profit. Faced with a small capital market, financers needed a sufficient population of investors to profit from these deals. The market developed quickly. By 1919 the middle class was participating heavily, and the stock of industrial corporations was widely accepted as an appropriate investment security. The business of America was finance (p. 248).

In the late nineteenth century, the combination of smaller firms into large businesses (mainly as an attempt to take advantage of economies of scale and new production and marketing technologies) was hindered by the difficulty of sustaining cooperation in a legal environment fearful of monopolies. These enforceability problems were resolved when New Jersey established the holding company as a legal device in the 1890s. Taking advantage of surplus capital searching for investment opportunities and the New Jersey law, financiers and trust promoters were able to form giant firms with little cash by flooding the market with stock. Financiers overcapitalized firms, steadily transforming the stock market by increasing the volume of securities and the dispersion of stocks among a wider group of shareholders.

During the merger wave, the stock market was mainly a territory for informed professional investors. The average person was advised to keep the money in the bank, and those who did invest held mostly safer securities (railroad bonds and, later on, preferred stock). These securities were considered fitting investments because they promised a predictable return for long-term holders in search of a steady income stream. Perhaps surprisingly, the ownership society expanded from the Panic of 1907 to the beginning of World War I. Small investors started to become active participants in the market, even buying riskier but higher return securities. As attitudes towards speculation changed, American men (and women!) invested in common stocks looking for price growth and the uncertain prospect of future wealth (p. 206). It took a war for the transformation to be completed. Prompted by the government's need for financing, the Liberty Bond drives created both a new set of investors and a new way of marketing securities. To sell Liberty Bonds, banks expanded their prior experience in the securities business to a large scale, thereby educating middle-class Americans in investing in securities. By the end of World War I, these new investors were actively trading in corporate stock and bonds. The change from long-term, safer investments to the more speculative common stock put pressure on managers and their businesses, which had to generate profits to satisfy the demands of disperse shareholders. From then on, Mitchell argues, the stock market dominated business decisions.

Mitchell is at his best when he discusses the issues less central to his argument. The several failed attempts by the federal government to regulate the market described in chapters 5, 6, and 9 provide the fascinating background history of modern securities regulation. During the merger wave, these attempts focused on controlling monopolies, whereas the concern from 1907 to 1914 was to protect the stability of the banking system. After the war, Wilson's objective was to ensure an efficient market by providing disclosure of financial information to individual investors. Although it only took its modern form in the Securities Act of 1933, the importance of investor protection as the key component of securities legislation was already understood by 1919.

In an important contribution to the history of economic thought, chapter 3 presents the gripping struggles of lawyers and economists to define the value of the firm. Financiers' ability to issue watered stock was not entirely due to naïve or uninformed investors, but rather to a lack of agreement on valuation methodologies. It was only in the 1930s that the valuation of future discounted cash flows, a concept central to modern corporate finance, was commonly accepted, and that the problems of overcapitalization began to go away.

One of the main shortcomings of the book is the limited use of quantitative information. The few statistics presented are mostly marginalized to the “Notes” section, and the variety of inconsistent sources makes comparing over time rather futile. Mitchell's failure to resort to primary sources is a pity, but also a reflection of a broader problem in business history: the lack of systematic long-run data on essential issues, such as the concentration of ownership (do we really believe that managers and families had controlling stakes in most large firms in the 1950s and 1960s?), the organization of corporations, and participation in the stock market.

Perhaps more worrisome is Mitchell's assertion that “American corporate capitalism” (in which stock prices drive managers' and firms' decisions, and investors trade stocks frequently as they speculate on price changes) is fundamentally flawed, and that other models, such as ownership, control, and compensation structures that insulate managers from the market, are preferable (p. 278). Thirty years of empirical research in corporate finance indicate that pyramids, dual-class shares, family ownership, low-powered compensation schemes, antitakeover legislation, and other mechanisms that separate firms' decisions from the market exacerbate agency problems and, more often than not, destroy value and hinder economic growth. This is, after all, why the federal regulatory efforts during the New Deal aimed at eliminating pyramidal business groups. Regardless of how one feels about the interpretation of his findings, which sometimes seem to veer from objective empirical research, Mitchell has successfully constructed a highly engaging book about a fundamental but somewhat unexplored period in U.S. financial market history.