The 19th Century Corporate Revolution — From Public Responsibilities to Private Rights
by Stoney Bird
Stoney Bird worked for many years as a corporate lawyer, nurturing corporate privilege and self-seeking against all comers in the garden of corporate law.
This is the fifteenth in a continuing series of articles that began with the January 2014 issue of Whatcom Watch. The series addresses the impediments to democracy and well-being in American society.1
The small family owned and operated farm that was modal if not universal in the agrarian order was now displaced by one of the most radical innovations that mankind has ever invented for economic organization, control, and growth. This was the privately owned and operated business corporation. Through a highly successful case of ideological transfer, the Lockean defense of private property, which in the agrarian order made good sense morally and politically, was shifted over intact to corporate enterprise.
—Robert Dahl, Yale Political Science Professor2
[In the second half of the 19th century] corporations confronted the law at every point; they were the litigants in a larger and larger share of reported cases; they hired lawyers and created whole law firms; they bought and sold governments; other governments came to power for the sole public purpose of pulling their beards. Provisions relating to corporations were a staple of every state constitution after 1850. The rights and liabilities of corporations were, more and more, the real content of constitutional law.
—Lawrence Friedman, Stanford Legal History Professor3
My last article in the July issue left off with the corporations the British crown used to establish its system of hierarchical, violent, theft-based government on the “new” continent. In the 1620s, the King happened to be James I. He desired the colonization to occur but did not have the resources in money or personnel to carry out the task. So, he essentially delegated the work of colonization to the newly constituted corporate owners in return for their promise to fit into both his overall plan and the overall framework of the English common law system.4 These early corporations clearly had a “public” purpose.
After the initial assertion of imperial power, public purpose on a somewhat smaller scale was the continuing theme in the forming of corporations for the rest of the 17th and for nearly all of the 18th century. The corporate form was used for municipalities, for schools and for public works projects including turnpikes, bridges, canals and ports. Purposes related to private enrichment were frowned upon. Part of the reason was the fear of further speculative excesses like the South Sea Bubble of 1721. In the American colonies, where republican ideals came increasingly to play a part, the fear was also of concentrated economic and political power.
After independence the dam burst. The New York Stock Exchange was founded in 1792. By 1827, the distinguished jurist and New York’s Chancellor, James Kent, could observe, “The demands for acts of incorporation is continually increasing, and the propensity is the more striking, as it appears to be incurable; … we seem to have no moral means to resist it.” 5
At least in principle, the individual drops in the great flood of business corporations were carefully controlled. For one thing, each corporate charter required a separate act of the relevant state legislature. Legislatures largely saw themselves as having a twofold task: promoting development for the common good by enlisting private wealth and initiative for public purposes,6 and preventing the sequestration of wealth and power that would have created a new aristocracy. In the early 19th century, corporate charters were increasingly granted but commonly obligated to:
• require a strictly limited corporate purpose;
• provide that the corporation would exist only during a specific term of years;
• place limits on the prices the corporation could charge and on the returns to investors;
• allow for inspection of the corporation’s premises and its books and records;
• forbid corporate ownership of shares in another corporation, in part because this would confuse the corporate purposes of both;
• allow public authority to dissolve the corporation if it exceeded its authorized purposes or violated the law.
By the end of the century, all that had changed.
The states had all passed general incorporation statutes. Now, instead of having to apply for a special act of the legislature, incorporators had only to file incorporation papers with a state office, usually the Secretary of State — more or less as today.
By adopting a series of constitutional and legislative adjustments over the last quarter of that century, New Jersey came to be the incorporation state of choice, especially for the giant multi-company trusts formed in the 1890s, like U.S. Steel and General Electric. Other states had made similar moves, but as one author points out, New Jersey kept its place of pride because of “its reputation for reliability and responsiveness to the concerns of big business, modified importantly by its reputation for being careful and conservative in adopting new promoter-friendly innovations.” 7
By mid-century states had begun adopting incorporation-by-filing laws (instead of individual corporate charters), but did so in piecemeal fashion. New rights and privileges were granted grudgingly if in an ever-increasing stream. New Jersey followed this path beginning in 1875, but in 1896 it recast its corporation laws into a single and coherently conceived code. The new code, was an enabling law not intended to rein in corporate power.8 A corporation could now be formed to conduct “any lawful business or purpose whatever” and to do so in perpetuity. Restrictions on prices were gone, as were restrictions on what investors could earn (although these were now sometimes imposed by external “regulation”).9 Inspections by public officials or by the public were no longer in the cards. Corporations could freely own shares in other corporations. The rights of public officials, the public and even shareholders to force a dissolution had shrunk to nothingness.
With these statutory changes came two large shifts in the way people thought about corporations. Both were controversial — and indeed the public has from time to time attempted to revive the controversy — but both have so far come to hold sway. One was to raise the idea that corporate affairs were “private.” As “private” concerns, the deliberations and actions of corporations could be kept secret and were not to be interfered with by public officials or the public.10
The other was to attribute the republican virtues and rights of individuals to giant corporations.
In the early years of the century, the typical family lived on its own farm and largely supported itself. Collectively these families could resist any incursion by government or by other economic entities and could stand as independent citizens. By the end of the century, much of that had changed. State-sanctioned corporate power bestrode the economy and political life claiming the powers and the rights that had once belonged to individuals. Individuals had not actually lost their rights. It was just that with their money muscle exercised strategically over the long term, corporations could exercise those same rights to much greater effect. Continuing the quotation from Yale political scientist Robert Dahl that heads this article, he goes on:
“This ideological triumph successfully warded off attacks not only from nascent socialist movements opposed to private property in the means of production but also from the historical rear guard defending the old agrarian order, which had at hand no convincing way of distinguishing private ownership and control of one kind of enterprise, the farm, from private ownership and control of a radically different kind, the business corporation. Thus by an extraordinary ideological sleight of hand, the corporation took on the legitimacy of the farmer’s home, tools, and land, and what he produced out of his land, labor, ingenuity, anguish, planning, forbearance, sacrifice, risk, and hope. The upshot was that the quite exceptional degree of autonomy the farmer members of the demos had enjoyed under the old order, an autonomy vis-à-vis both government and one another, was now granted to the corporation.”11
Not only were the affairs of corporations conceived of as “private” in just the way that the affairs of the agrarians had been, but the new corporate lords succeeded to the basic civil rights that the individuals on their farms had enjoyed. There was both the “ideological sleight of hand” that Dahl describes, and actual change in the constitutional position of corporations. Its Santa Clara decision of 1886 launched the U.S. Supreme Court’s sequence of decisions granting ever-expanding civil rights to corporations that has culminated in the Citizens United case in our time.12,13
The radically greater economic power of corporations overturned the balance of power in the nation and states. Corporations were now in charge. In a future article, I will lay out some of the ways in which the very structure of corporations set up by the state laws on incorporation have led to these abuses in our democracy. Another fascinating story is the way in which the legal profession and the courts have become the servant of corporate interests. In essence, since legal “services” are for sale, the legal system itself is for sale. But that is a story for another time.
• Dahl, Robert, “On Removing Certain Impediments to Democracy in the United States,” Political Science Quarterly, Vol. 92, No. 1, Spring, 1977.
• Friedman, Lawrence M., “A History of American Law,” Simon and Schuster, 1973.
• Horwitz, Morton, “The Transformation of American Law, 1780-1860,” Harvard University Press, 1977.
• Kavenagh, W. Keith, ed., “Foundations of Colonial America: A Documentary History, Vol. I – Part 1, Northeastern Colonies,” Chelsea House, New York, 1983.
• Maier, Pauline, “The Revolutionary Origins of the American Corporation,” The William and Mary Quarterly, 3d Series, Vol. L, No. 1, January, 1993.
• Raphael, Ray, “The First American Revolution: Before Lexington and Concord,” New Press, 2002.
• Tarbell, Ida M., “The History of the Standard Oil Company,” New York, 1905, http://www.pagetutor.com/standard/index.html viewed July 15, 2015.
• Yablon, Charles M., “The Historical Race Competition for Corporate Charters and the Rise and Decline of New Jersey: 1880-1910,” The Journal of Corporation Law, Winter, 2007.
1. I had intended delve into the subject of the corporation and slavery with this article, but have discovered that the subject was too deep to be handled in the time that I had to prepare. Many recent publications have concluded that slavery was core to the founding of the corporate, capitalist system. I will return to that subject in a future essay.
2. See Dahl in References, p. 7.
3. See Friedman in Reference, p. 456.
4. The new colonies proceeded to evolve, with an ebb and flow in their powers of self-government. For example, the Massachusetts Bay Company at first elected the governor of the colony on its own. Later, through the Charter of 1691, the British Crown asserted its right to appoint the governor, though allowing the colonials to elect a local council with legislative and judicial powers. The relevant documents can be seen in Kavenagh (References), p. 45, p. 203, and p. 290. In 1775, when Parliament withdrew even these limited powers, the people of Massachusetts rejected the new system, and by direct action canceled British rule in the colony except in Boston, where there was a British garrison. Ray Raphael’s fascinating history of how most of Massachusetts achieved independence through outright civil disobedience before 1776 should be required reading in all U.S. history courses. See Raphael in References above.
5. Quoted in Maier, References, p. 52.
6. As Morton Horwitz points out, this farming out of development projects meant that the state did not need to raise the money for such projects through taxes. The private entrepreneurs would provide capital and personnel. See Horwitz in References, p. 109.
7. See Yablon in References, p. 376. This preference was disrupted for the long term when New Jersey repealed several key provisions of it code in 1913 at the insistence of Woodrow Wilson. After that Delaware became the big-business corporate home of choice.
8. Indeed the state had become a favorite of the biggest businesses because it was thought that incorporating there would protect them from state and federal antitrust laws. See Yablon. The fascinating story of corporate manipulations by John D. Rockefeller’s Standard Oil Company was first revealed in Ida Tarbell’s great work of investigative reporting (see Tarbell in References). Rockefeller had first formed his company in the form of an Ohio trust that owned individual oil companies all over the country. In due course the Attorney General of Ohio sued for dissolution of the arrangement, saying that it was an evasion of Ohio’s rules banning corporate share-owning in other corporations. New Jersey had by then adopted its new corporations code, partly at the behest and with the assistance of Rockefeller’s Wall Street law firm. Rockefeller’s answer to the Ohio threat was to transfer the trust’s assets to a newly formed family of New Jersey corporations. No need for those Ohio ties at all.
9. For example, the Interstate Commerce Commission had been set up in 1887 for the purpose of setting railroad freight rates.
10. See Horwitz in References, p. 111 et seq. As Horwitz has shown, this ideological change was part of a large package of legal changes in the private legal realm (property, torts, commercial law) that collectively effected sub rosa an enormous redistribution of wealth upward.
11. See Dahl in References, p. 7.
12. Santa Clara County v. Southern Pacific Railroad Company, 118 US 394 (1886); Citizens United v. Federal Election Commission, 558 U.S. 310 (2010).
13. There is not space to describe it in detail here, but one of the developments relating to all this during the century was the changing role of lawyers. Before the revolution they had mostly conducted a quiet practice in wills and land transfers. More or less immediately after the adoption of the Constitution, the law came to be seen as a medium for effecting changes that would aid “development” and the interests of the developers. This would if possible be accomplished not by legislatures but in the “apolitical” and certainly more secret domain of the courts. More and more the legal profession whistled the tune that business interests demanded. By the time of the Santa Clara case of 1886 and the merger wave of the 1890s, lawyers had reached new heights of both corporate service and income.