Corporations and American Democracy 9780674977686

Citation preview

Corporations and American Democracy

Corporations and American Democracy Edited by NAOMI R. LAMOREAUX WILLIAM J. NOVAK

CAMBRID GE, MAS SA CHU SET TS, AND LOND ON, ENGLAND

2017

Copyright © 2017 by the Tobin Project All rights reserved Printed in the United States of America First printing Library of Congress Cataloging-in-Publication Data Names: Lamoreaux, Naomi R., editor. | Novak, William J., 1961– editor. Title: Corporations and American democracy / edited by Naomi R. Lamoreaux, William J. Novak. Description: | Includes bibliographical references and index. Identifiers: LCCN 2016046006 | ISBN 9780674972285 (alk. paper) Subjects: LCSH: Corporation law—United States—History. | Corporate power— United States—History. | Civil rights of corporations—United States—History. | Corporations—Political activity—Law and legislation—United States—History. | Democracy—United States—History. Classification: LCC KF1384 .C67 2017 | DDC 346.73/066609—dc23 LC record available at https://lccn.loc.gov/2016046006

Contents

Preface

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Corporations and American Democracy: An Introduction 1 by NAOMI R. LAMOREAUX and WILLIAM J. NOVAK

I: Corporate Origins 1 Early American Corporations and the State 37 by ERIC HILT

2 Corporations and Organizations in the United States after 1840 74 by JESSICA L. HENNESSEY and JOHN JOSEPH WALLIS

II: The Turn to Regulation 3 The Dissociation of Incorporation and Regulation in the Progressive Era and the New Deal 109 by DANIEL A. CRANE

4 The Public Utility Idea and the Origins of Modern Business Regulation 139 by WILLIAM J. NOVAK

5 Corporate Taxation and the Regulation of Early Twentieth-Century American Business 177 by STEVEN A. BANK and AJAY K. MEHROTRA

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III: The Changing Corporate Form 6 From Fiscal Triangle to Passing Through: Rise of the Nonprofit Corporation 213 by JONATHAN LEVY

7 The Supreme Court’s View of Corporate Rights: Two Centuries of Evolution and Controversy 245 by MARGARET M. BLAIR and ELIZABETH POLLMAN

8 Corporations and the Fourteenth Amendment 286 by RUTH H. BLO CH and NAOMI R. LAMOREAUX

IV: Modern Corporate Challenges 9 Two Cheers for Vertical Integration: Corporate Governance in a World of Global Supply Chains 329 by NELSON LICHTENSTEIN

10 Citizens United, Personhood, and the Corporation in Politics by ADAM WINKLER

Notes

389

Acknowledgments Contributors 495 Index

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Preface

This is the first comprehensive history of the relationship between American democracy and the corporation. The rights, responsibilities, and influence of corporations are frequently discussed in popular media and political campaigns, but these accounts seldom recognize the full extent of the corporation’s role in American democracy. Since the founding era, corporations have been created and regulated in a variety of ways to address the recurring challenges of democracy. Yet from the development of general incorporation laws to judicial decisions about corporate rights, solutions to one problem have at times sown the seeds from which new and unforeseen problems have grown. Although this volume is a work of history and not a roadmap for future policy, it nonetheless can help us make more informed decisions about our present moment. In tracing how corporations have both created and addressed problems of democracy, this work provides context that enables us to make better sense of the risks and opportunities that confront Americans’ choices about corporations. Corporations and American Democracy is a product of scholars coming together through the Tobin Project to undertake new research aimed at identifying and addressing American democracy’s most pressing problems. The Tobin Project is organized around the belief—articulated many times by the Nobel economist James Tobin—that outstanding scholarship on important questions can make a profound difference in society. The authors of this volume took up Professor Tobin’s call, and devoted their time and energy to participate in this work, which spanned several years of collaboration, research, writing, and editing. Other policy makers, practitioners, and scholars helped to shape the questions that motivated this research and to refine the answers provided in the pages ahead. The Tobin Project is grateful to all who contributed to this work, and we look forward to engaging a vii

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growing community in building a clear and rigorous understanding of the most important challenges facing our democracy. The Tobin Project Cambridge, MA

Corporations and American Democracy

Corporations and American Democracy An Introduction NAOMI R. LAMOREAUX and WILLIAM J. NOVAK

The United States Supreme Court’s decisions in Citizens United and Hobby Lobby have once again thrust controversies about the proper role of corporations in American democracy onto the national stage.1 Debates about corporate personhood, corporate power, and corporate responsibility proliferate throughout the public sphere—from political stump speeches to newspaper editorial pages, from the televised verbal wrestling of cable news to the distinctly untelevised sparring in Supreme Court opinions and dissents. To date, however, the level of discourse has remained primarily political if not polemical. Participants have made bold assertions about the nature of corporations and corporate rights without much empirical support. Moreover, they have legitimized their positions by grounding them in claims about the history of corporations in the United States that are at best outdated, if not entirely lacking in scholarly foundation. The purpose of this volume is to provide a better historical foundation for these impor tant debates and discussions. Although much has been written about corporations and American democracy over the last century—from Louis Brandeis’s Other People’s Money to John Commons’s Legal Foundations of Capitalism to Adolf Berle and Gardiner Means’s The Modern Corporation and Private Property to John Kenneth Galbraith’s American Capitalism—impor tant aspects of the history, law, and economics of corporate policymaking remain poorly understood.2 What was the original understanding of the corporation at the time of the American founding? When and where did the corporation first begin to proliferate as a preferred mode of organization for businesses and other associations? What rights, privileges, and obligations attended the corporate form? And how and why did these change over time? To what extent over the course of American history have the rights of corporations as legal persons been differentiated from those of human persons? Should all corporations be 1

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Introduction

treated the same, or are there vital differences that demand recognition between for-profit and not-for-profit corporations, public ser vice corporations and private manufacturing corporations, media corporations and incorporated charities or religious associations? What were the factors driving changes in the relationship between the corporation and American democracy over time? The chapters that follow begin fi lling in answers to these questions. The first essays document the fundamental nature of the shift from special charters to general incorporation in the first half of the nineteenth century; the last provide historical context for the Supreme Court’s recent decisions in Citizens United and Hobby Lobby. In between, they detail the development of new types of corporations, new types of regulatory initiatives, and the interaction between the two. Although the chapters cover different time periods and topics with distinctive authorial voices, taken together they offer a remarkably coherent perspective on the relationship between the corporation and American legal, economic, and political institutions. Here, we highlight three major themes that thread through the volume. Theme one concerns Americans’ long-standing love / hate relationship with the corporation—their enthusiastic embrace of the corporation as an engine of opportunity and prosperity, and their simultaneous skeptical distrust of it as a source of corruption and driver of inequality. This deep ambivalence has shaped public policy concerning the corporation throughout American history. On the one hand, the corporation has long been seen as a useful and alluring vehicle for harnessing and distributing the collective energies of individuals—an engine of economic growth and a bulwark of democratic prosperity. On the other hand, that same corporate vehicle has been viewed with suspicion as a potentially dangerous threat to that same democracy—a site of coercion, monopoly, and the agglomeration of excessive social, economic, and political power. Competing visions of the corporation as alternatively a source of extraordinary public material benefit and a font of democratically unaccountable private power have animated much of the history of the corporation in America. Distrust was there from the beginning. It originated in the habit of monarchs, as well as America’s first state legislatures, of doling out corporate charters to reward political favorites. The desire to distribute access to such privileges more equitably and democratically fueled opposition to the enactment of special charters in the Jacksonian period. The general incorporation laws that followed were rooted in the aspiration of allowing anyone who

Introduction

wanted to form a corporation to do so without special dispensation from the legislature. Nonetheless, the democratic worry remained that the playing field was not level and that the wealthy and powerful were better positioned to use the corporate form to perpetuate private advantage. Consequently, most early general incorporation laws were laden with regulatory restrictions. As larger and larger American corporations emerged in the late nineteenth century, this regulatory apparatus expanded beyond states’ direct powers over charters, as first the states and then the federal government pioneered new ways of regulating corporate behav ior—from special commissions to tax policy. At the same time, the unprecedented rise of big business raised the specter that corporations would use their economic power to manipulate the political system. This discovery “that business corrupts politics” spurred a series of early twentieth-century campaign finance laws barring corporations from contributing to candidates running for election.3 These strict corporate campaign finance laws posed no constitutional problems at the time because corporations were not thought to have the same set of rights as human persons. The second major theme of this volume underscores this basic fact: historically, American corporations were never granted the same legal and constitutional rights as natural persons or individual citizens. To be sure, corporations always had some aspects of legal personhood. The whole reason for forming them was to allow an association of human persons to hold property and sue and be sued in their collective name. But corporations did not thereby gain the full panoply of rights belonging to human persons. Chief Justice John Marshall laid out the basic principle in the famous Dartmouth College case in 1819, and that principle remained the basic governing rule deep into the twentieth century: A corporation is an artificial being, invisible, intangible, and existing only in contemplation of law. Being the mere creature of law, it possesses only those properties which the charter of its creation confers upon it, either expressly, or as incidental to its very existence.4 Corporations were also, of course, composed of human beings, and the courts sometimes found it necessary to extend constitutional protections to corporations in order to safeguard the rights of the people who formed them. Until the mid-twentieth century, however, they only intervened in this way to protect the associates’ rights in corporate property. Although the famous Santa Clara case is often mistakenly cited as extending Fourteenth Amendment protections to corporations per se, the decision had the much

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more limited aim of protecting citizen shareholders from discriminatory taxation on their property, and the Court applied the precedent narrowly, subsequently ruling that the liberty guaranteed by the Fourteenth Amendment “is the liberty of natural, not artificial persons.”5 Only in the second half of the twentieth century, in cases such as NAACP v. Alabama, did the Supreme Court move to extend broader constitutional protections to corporations.6 But again, the goal was to protect the human beings associated in these corporations—in these instances from violent retaliation for their involvement in Civil Rights organizations—and the corporations involved were incorporated advocacy associations rather than more conventional business corporations. This second theme has an important corollary that also threads through the volume. The dominant American legal tradition concerning corporations not only denied them the same rights as individuals but also held them to a higher standard of public care, public responsibility, and public accountability. Along with the special privileges that the corporate form offered its associated members came special duties. From the regulations written into special charters to the regulatory provisions in general incorporation acts to the rise of the independent regulatory commissions to the emergence of new kinds of social regulations amid the rights revolutions of the late twentieth century, Americans have determinedly held corporations to higher obligations. The persistent growth in the scale and scope of the largest business corporations frequently challenged extant regulatory rubrics—most famously with the development of interstate trusts and holding companies in the late nineteenth century. But Americans proved surprisingly creative and versatile in generating new legal, administrative, and regulatory tools to bring even the most powerful corporations under a modicum of democratic control. The corporation has never, however, been a form used just by large-scale businesses or even just by businesses. The third major theme of the volume is the diversity of the organizations that took the corporate form. From the beginning, corporate advantages were sought by many types of associations, from cities to businesses, charities to banks, libraries to bridges, and use of the form has only become more widespread and heterogeneous over time. When the Internal Revenue Ser vice first began to collect corporate income taxes in the second decade of the twentieth century, there were already about 300,000 business corporations operating in the United States, some enormous but many of them very small.7 Over the next century, the number multiplied fifteen-fold to approximately 4.5 million, meaning that

Introduction

there is now about one business corporation for every seventy men, women, and children in the country.8 There are also around 1.5 million nonprofit corporations (not counting churches). The corresponding number of religious congregations is only about 300,000, so even nonprofit corporations today are much more ubiquitous than churches.9 Although the number, size, distribution, and variety of corporations have changed dramatically over time, the basic legal framework within which they have operated has remained fairly constant: corporations were artificial entities that governments allowed human beings to create in order to accomplish certain ends; and governments had the authority to determine not only the ends for which corporations might be created but also the means by which they attained those ends. By the early twenty-first century, however, this framework was subjected to unusually severe stresses as new types of advocacy organizations challenged long-standing rules that prevented business from corrupting politics and evading regulatory standards. Here, the volume’s three major themes come together to highlight the radical break with the past that the Supreme Court’s recent decisions in Citizens United and Hobby Lobby represent. Contrary to the claims of several of the justices in the majority, these decisions reflected neither the Framers’ original position on corporations nor the vision of corporate rights articulated by Marshall in his early nineteenth-century Dartmouth College opinion. Nor, contrary to the assertions of many critics of these decisions, did they represent the culmination of precedents set in motion by the Court’s interpretation of the Fourteenth Amendment in Santa Clara. To the contrary, as the essays in this volume collectively show, the Court’s recent decisions mark an aggressive and unprecedented assertion of corporate rights and authority—a sharp break with two centuries of history that has sent the relationship between corporations and American democracy reeling off in a new direction. There were other possible ways the Court could have moved—other ways to adapt the law to the growing heterogeneity of corporations in American society. It is our hope that, by recovering the long and contested history of corporations in the United States, we can recapture a sense of possibility—a sense of what else might have been and still can be.

English and American Origins The essays in this volume pick up the story of corporations and American democracy in the early nineteenth century. But the narrative to which the

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essays contribute really starts much earlier. Corporations were already a contentious political issue in early modern England—coveted for their advantages and feared for their special powers. On the one hand, corporate charters offered towns, guilds, universities, and similar self-governing bodies an important degree of autonomy from the King. On the other hand, they constituted a set of privileges that monarchs could grant to ensure loyalty or as a quid pro quo for loans or other public and private favors. Battles between the King and Parliament were often waged over such privileges. After Parliament enacted the Statute of Monopolies of 1624, prohibiting the King from making outright grants of monopoly except as temporary rewards for technological innovation, corporate charters became an important, though unreliable, way of evading the restriction. James I and Charles I took advantage of challenges to the status of the East India and other chartered trading companies to try to extract revenue. By the 1630s, royal meddling with the companies’ trading privileges was such a hot-button political issue that it reinforced lines of division within elites, leading shareholders in Parliament to provide key support for measures that precipitated the English Civil War.10 After the Restoration, James II’s efforts to gain control of local parliamentary elections by revoking the charters of a number of incorporated boroughs played a similar role in sparking the Glorious Revolution.11 Although the settlement that followed the Glorious Revolution guaranteed the boroughs’ autonomy, corporations remained a lightning rod for political and social conflict. Supporters of the new regime deployed antimonopoly rhetoric to attack charters that the Stuarts had awarded to their favorites. Some corporations such as the Royal African Company saw their privileges eroded. Others managed to hold on through intense lobbying efforts and by joining forces with challengers.12 The East India Company, for example, lost its charter in 1697 to a new company formed by rivals, but by making some large, strategically timed payments to the government, its officers were able to effect a merger of the two groups.13 The Bank of England, chartered in 1694 in the aftermath of the Glorious Revolution, soon faced an attempt to form a competing institution. It not only defeated the challenge but secured (in exchange for substantial loans to the government) an explicit monopoly on banking.14 In 1720, Parliament, at the behest of the South Sea Company, passed the Bubble Act, requiring joint stock companies to secure charters from the government before they could raise capital on the market. Newcomers henceforth found it more difficult to form corporations.15

Introduction

Opposition to such “corrupt” corporate privileges mounted in Britain in the eighteenth century and spread from there to the colonies, where it helped fuel the American Revolution.16 Virtually every tax or regulatory act that the colonists protested in the 1760s and 1770s involved some sort of favored economic interest. The most obvious example was the Tea Act of 1773, which had the joint purpose of bailing out the East India Company and asserting Parliament’s right to tax the colonies. Writing under the pen name Causidicus, one dissenter complained that the Tea Act was a case of “taxation without consent and monopoly of trade establishing itself together. . . . Let the trade be monopolized in particular hands or companies, and the privileges of these companies lye totally at the mercy of a British ministry and how soon will that ministry command all the power and property of the empire?”17 The concern that corrupt ruling elites would use corporate privileges to solidify political control would persist in American politics long after the Revolution.18 As much as American colonists feared corporations as vehicles of oppression, however, they also embraced them as bulwarks against British interference. Many of the early colonies, especially in New England, took the form of chartered companies, and they were repeatedly forced to defend their corporate privileges against attacks by the Stuarts. The most serious assault came in the 1680s, when James II revoked the charters of Massachusetts, Connecticut, and the other New England colonies and sought to consolidate them into a new Dominion of New England under the authority of Sir Edmund Andros, James’s governor-general. After Andros was overthrown, the colonies regained their charters, but often with strings attached. Massachusetts, for example, had to accept a royal governor.19 There was also ongoing uncertainty about the status of towns and other corporations (especially colleges like Harvard and Yale) that had been chartered by colonial governments without explicit authorization from the King, an uncertainty exacerbated by the extension of the Bubble Act to the colonies in 1741.20 As colonists defended the corporations they had created and petitioned the King formally to ratify their grants, they articulated a more positive view of the form. Incorporation, as one New York lawyer put it, was “the only way to render the project permanent, to secure wisdom and council equal to the work, to defend it against opposition, and to encourage future donations.”21 After independence, the idea that corporations were a practical way to fund socially useful endeavors such as public works grew in popularity. The new state governments faced insistent demands to provide their citizens with

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the infrastructure they needed for economic development, from transportation improvements to financial ser vices. Popular aversion to taxes, itself a heritage of the Revolution, led many states to finance such projects by incorporating private groups of citizens to undertake them.22 Most early charters were for religious, educational, and charitable purposes, but over time a growing proportion went to these so-called public ser vice franchises— transportation companies, utilities, and banks.23 Although states justified awarding charters for these businesses on grounds of public interest, it was well understood that shareholders would only invest in them if they could earn an attractive rate of return. Consequently, states often included in such acts an array of special privileges as inducements. Charters for turnpike, bridge, and canal companies, for example, typically conveyed a monopoly right to levy tolls, as well as powers of eminent domain. Perks granted to incorporators of the Society for Useful Manufactures—a textile company chartered in New Jersey in 1791—included permission to raise funds through a public lottery and exemptions for the company’s employees from taxes and military ser vice. Bank charters conveyed the right to issue currency in the form of bank notes and thus privileged access to cheap credit.24 The special privileges that legislatures awarded to recipients of corporate charters reawakened old fears of inequality, monopoly, and corruption. Resentment mounted in particular against banks’ control of the currency and the rising tolls of transportation companies. Sometimes opposition was strong enough to force governments to respond. In Massachusetts, for example, objections to the 1784 charter of the Massachusetts Bank led the legislature to pass an “Addition” in 1792 that placed greater limits on the bank’s operations. In the face of similar challenges, Pennsylvania’s assembly repealed the charter of the Bank of North America in 1785 and then later reincorporated the bank on more restrictive terms.25 After the Virginia General Assembly chartered the Richmond James River Company in 1804, a deluge of complaints led the legislature to amend the charter and exempt small boats from having to pay tolls.26 The famous Charles River Bridge case originated when Massachusetts chartered a company in 1828 to build a bridge directly next to that of a rival company that had an exclusive right to collect tolls.27 Such legislative tinkering was not limited to business corporations. Conflict over the disestablishment of the Anglican Church led the Virginia legislature in 1786 to repeal an act incorporating the Episcopal Church it had passed just two years earlier. Disestablishment also spurred an effort to amend the charter of the College of William and Mary so as to shift control

Introduction

of the institution from the Anglican Church to the state legislature. After Harvard’s Board of Overseers became increasingly Unitarian and Federalist in the early nineteenth century, a Federalist state legislature passed a statute changing the makeup of the Board. When Democratic Republicans subsequently took control of the statehouse, they repealed the statute. King’s College (Columbia) in New York, Yale College in Connecticut, the College of Philadelphia in Pennsylvania, the University of North Carolina, and Dartmouth College in New Hampshire all faced similar legislative intervention in this early period.28 The Dartmouth College case, of course, ended up in the U.S. Supreme Court, where Chief Justice John Marshall famously declared in 1819 that a corporate charter was a contract that the state could not unilaterally abrogate.29 The case is often taken to have put a stop to ex post government interference with corporations. But state legislatures quickly learned to imbed reservation clauses in charters that enabled them to impose new regulations on corporations in the future.30 Moreover, not long afterwards, in the Charles River Bridge case, the Court under the leadership of Chief Justice Roger Taney signaled its intent to construe corporate privileges in the narrowest possible terms, giving state legislatures even more scope for regulation and control.31 Both the Dartmouth College and Charles River Bridge cases arose at a time when most charters required special acts of the legislature, and thus corporations were in a very immediate sense creatures of the states that gave them existence. In his Dartmouth College opinion, Marshall defined a corporation as “an artificial being, invisible, intangible, and existing only in contemplation of law.”32 Taney shared this view. Neither decision constrained in any way states’ powers to create corporations with special privileges or to regulate what corporations could do, so long as both the privileges and the regulatory authority were laid out in the charters. In combination, therefore, the two decisions focused political attention squarely on state legislatures and the policies they pursued in chartering corporations. By the middle of the nineteenth century, this heightened attention would bring about significant changes in what legislatures were able to do. In state after state, egalitarian pressures led to new constitutional provisions that stripped legislatures of their power to enact special corporate charters.

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From Special Charters to General Incorporation The shift from special charters to general incorporation wrought a profound change in the relationship between corporations and American democracy. The first two essays in this volume—by Eric Hilt and by Jessica Hennessey and John Wallis—investigate the complexities of this important transformation.33 Although the number of corporations in the United States increased steadily after the Revolution, it did not prove easy for Americans to strip the corporate form of its ancient association with special privilege and allow all comers to take out charters.34 First, elites who benefited from the special charter system vigorously opposed broadening access. Second, to the degree the corporate form remained bound up with monopoly, many reformers pushed in the opposition direction, making it more difficult, if not impossible, to obtain charters, or even enacting outright prohibitions on certain types of corporations. The fraught struggle to enact general incorporation laws was a response to this impasse and, in the end, revolutionized the way American government functioned by stripping the legislature of the power to pass private laws of all types.35 Because general incorporation was such a contentious issue, the earliest enactments applied, not surprisingly, to popular types of nonbusiness associations that were flooding legislatures with charter petitions. Pennsylvania, for example, passed a statute in 1791 enabling associations for “any literary, charitable, or for any religious purpose” to incorporate by a simple registration process, aiming thereby to reduce “the great portion of the time of the legislature [that] has heretofore been employed in enacting laws to incorporate private associations.”36 New York sought to ease the “great difficulties” imposed on public worship by “the illiberal and partial distribution of charters of incorporation” in 1784 by allowing all religious denominations in the state to appoint trustees and constitute themselves “a body corporate.”37 It followed that act with a general incorporation law for colleges in 1787 and for medical societies in 1806.38 Even in these relatively easy cases, however, concerns about potential abuses of the corporate form led legislators to imbed safeguards and restrictions into the statutes. Churches organized under New York’s 1784 law, for example, were not permitted to earn more than £1,200 a year in rent off their real estate; and local medical societies, according to the 1806 law, could not hold more than $1,000 in real and personal estate. As late as the 1830s, religious and charitable corporations organized under Pennsylvania’s general laws were limited to $2,000 in real and personal estate.39

Introduction

If the general incorporation of churches, schools, and charitable associations was relatively uncontroversial, banks were another story. A bank charter was a valuable concession, not least because those who were able to secure one gained privileged access to credit in an economy where capital was still very scarce and expensive.40 In the increasingly competitive political environment of the early republic, factions struggling to hold on to power used control over bank charters to reward supporters and bolster political coalitions. Thus, the fi rst banks orga nized after the Revolution—the Bank of North America (in Pennsylvania), the Bank of New York, and the Massachusetts Bank—were all dominated by prominent members of what would become known as the Federalist Party. In “Early American Corporations and the State,” Hilt details the story for New York, but the broad outlines were much the same in Massachusetts, Pennsylvania, and elsewhere.41 The Bank of New York, founded by Alexander Hamilton in 1784 and chartered in 1791, gave the Federalists a monopoly of banking in the state until DemocraticRepublican Aaron Burr took advantage of a loophole in the charter for a water works to found the Manhattan Bank in 1799.42 When power finally shifted to the Democratic-Republicans on the eve of the War of 1812, Martin Van Buren’s faction used the party’s new control over bank charters to build a powerful political machine, the “Albany Regency,” that dominated state politics for a quarter century. During the economic boom of the 1830s, the New York legislature received on average about seventy petitions for banks a year, but under the machine’s tight control only about 10  percent of that number ultimately received charters. When the collapse of the banking system in the Panic of 1837 finally brought the Regency down, the opposition (now called the Whig Party) responded to this pent-up demand for charters by passing New York’s famous free banking law in 1838, thereby insuring that bank charters would never again be awarded for political purposes. To counter worries that open access to banking would undermine the soundness of the banking system, the legislature included an important regulatory provision in the act that required banks fully to back their currency issues by investing in specific categories of government bonds. The result was a dramatic expansion in the number of banks and a decline in the number of bank failures.43 New York’s successful experience with free banking pointed the way to change elsewhere, although as Hilt points out, some states initially moved in the opposite direction and either prohibited banking outright or made charters more difficult to obtain. Only with the passage of the National Banking Acts in 1862–1864—a product of the federal government’s dire

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need for funds during the Civil War—would general incorporation in banking spread throughout the nation. Banking was one of the few sectors in which the federal government chartered corporations. As Daniel Crane’s essay shows, in the absence of such a national emergency, later moves to secure a federal general incorporation law for other types of businesses failed.44 Manufacturing was an intermediate case between banking and churches or schools. New York enacted the first general incorporation statute for manufacturing in 1811, but not until the 1840s and 1850s did the movement gain momentum. By 1850, fourteen states had enacted such statutes, and by 1860 twenty-seven states had done so.45 One reason for the slowness to pass these laws was the ongoing fear that the corporate form would exacerbate privilege and inequality. Not surprisingly, therefore, most early general incorporation laws were full of regulations that imposed strict limits on what corporations could do, how big they could grow, how long they could last, and what forms their internal governance could take. Ohio’s 1846 law, Massachusetts’s 1851 statute, and Illinois’s 1857 act, for example, all placed ceilings on the amount of capital a corporation could raise (though New York and Pennsylvania did not). Pennsylvania set the term of a corporate charter at 20 years, Ohio at 40 years, and New York and New Jersey 50 years (while Massachusetts allowed corporations perpetual life). All of these states except Ohio limited the amount of debt that corporations could take on to some multiple of their capital stock (usually one). General incorporation laws typically prescribed the number of directors, sometimes requiring them to be shareholders and / or citizens of the state. The laws of New York, Ohio, and Pennsylvania mandated one share, one vote (though in Pennsylvania, no shareholder could vote more than a third of the total number of shares), and statutes often imposed additional liabilities on shareholders, particularly in cases where companies owed workers back wages.46 Because early general incorporation laws were so restrictive, businesses continued to petition the legislature for special charters in the hopes of securing better terms. Five years after the passage of Pennsylvania’s 1849 general law for manufacturing, for example, less than a dozen companies had incorporated under it. Yet in 1855 alone, the legislature passed 196 private bills chartering or amending the charters of for-profit business corporations.47 As Hennessey and Wallis describe in Chapter 2, this spate of special charters in the shadow of general laws convinced corporate critics of the need for state constitutional amendments mandating general incorporation. The push for these reforms in turn mushroomed into a more general move-

Introduction

ment to prohibit legislatures from passing private bills or granting exclusive privileges for many purposes, including granting divorces, authorizing adoptions, settling estates, absolving insolvents, and exempting property from taxation. It is difficult to imagine such a fundamental restructuring of the workings of American democracy without the spur provided by opposition to corporate privilege.48

A Race to the Bottom? As Hennessey and Wallis point out, however, the movement to abolish special legislation came with a catch. The general laws that enabled anyone to form a corporation were often laden with regulatory provisions, yet in most states it was no longer possible to get around the rules by seeking special charters, even when there were good economic reasons to create exceptions. Some states, however, had more lenient regulatory rules than others. Although such state-by-state differences often had idiosyncratic origins,49 this variation would become increasingly salient with the development of large firms in the capital- and resource-intensive industries of the Second Industrial Revolution. Before the last quarter of the nineteenth century, it was relatively uncommon for a company to secure a corporate charter from a state other than the one in which it had its principal place of business. Large firms were still disproportionately found in sectors (such as finance, transportation, and utilities) where successful operation depended on special rights and prerogatives (such as permission to issue bank notes or powers of eminent domain to secure essential rights of way) that states typically conferred in corporate charters. However, as manufacturing firms grew in size during the late nineteenth century and acquired operating units in different parts of the country, the benefits of securing a charter from a state with more permissive laws increased. New Jersey’s relatively liberal general incorporation statute of 1875, which imposed no ceilings on capital or restrictions on the type of businesses in which corporations could engage, had already induced a growing trickle of firms to take out charters in the state.50 In 1888 and 1889, the legislature famously moved to increase New Jersey’s attractiveness to large out-of-state enterprises. Until that time, most states prohibited corporations from buying stock in other corporations, so the only way one firm could acquire another was for the second firm’s stockholders to dissolve their company and sell off its assets to the acquiring firm. New Jersey’s 1888–1889

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amendments eliminated this problem by allowing corporations to hold stock in other corporations and by creating a set of procedures that routinized corporate mergers. These changes made New Jersey an attractive domicile for the many consolidations formed during the period’s merger wave. And the state, which taxed corporations on the basis of their authorized capital stock, found its public revenues soaring.51 New Jersey’s flush treasury inspired a number of other states (most notably Delaware, but also West Virginia, Maryland, Maine, and New York) to enter the competition for corporate charters. At the same time, the surge of giant corporations taking out New Jersey charters set off alarm bells in the state, stimulating a resurgence of anticorporate politics that helped elect Democratic candidate Woodrow Wilson governor in 1910 and climaxed with the passage of a set of antitrust statutes in 1913 that effectively undid the amendments of the late 1880s. When New Jersey’s revenues from chartering corporations plunged, the legislature reversed course again. But the state never regained its previous position, and Delaware, which had done little more than enact New Jersey’s law with lower fees, emerged victorious from the charter-mongering competition.52 As more and more large fi rms took out charters in New Jersey and Delaware, legislatures elsewhere reacted to the resulting loss of revenue by liberalizing their own general incorporation laws, generating fears of a regulatory “race to the bottom” as discussed in Daniel Crane’s essay.53 This much-discussed race, however, was less full-throttled than is generally recognized. For one thing, many states did not even bother to race, as only small states like Delaware could actually cut incorporation fees and still gain enough revenue to make the competition worthwhile.54 For another, states did not lose the power, or the will, to continue to regulate the business of corporations that shifted their chartering homes out-of-state, becoming so-called “foreign corporations.”55 To the contrary, the rise of large corporations and their move to escape restrictive general incorporation laws provoked a strong democratic counterreaction. At least thirteen states passed antitrust laws by July 1890, the month Congress passed the Sherman Antitrust Act, and the passage of the federal act did not slow the pace of state activity. By 1929, all but eight states (not surprisingly, Delaware and New Jersey were among the laggards) had enacted antitrust laws, written antimonopoly provisions into their constitutions, or both.56 In addition, the U.S. Supreme Court issued a series of opinions in the late nineteenth century that bolstered the regulatory powers of states over cor-

Introduction

porations. The popular notion that the Supreme Court’s Santa Clara decision stripped states of their regulatory authority over corporations is simply incorrect. As Ruth Bloch and Naomi Lamoreaux show in Chapter 8 of this volume, Santa Clara was only one of a number of decisions handed down by the Court during this period that laid out the parameters of state regulatory authority over corporations. Just as significant was the Court’s determination, first in Paul v. Virginia in 1869 and then in Pembina Consolidated Silver Mining v. Pennsylvania in 1888, that corporations did not possess the privileges and immunities of citizens under either Article Four of the original Constitution or the Fourteenth Amendment.57 Justice Stephen J. Field recognized that if states were required to grant free access to corporations formed in other jurisdictions—if they had to allow foreign corporations, as a matter of course, the privileges and immunities of citizens—the result could well be a race to the bottom. Instead, he used the power of the Court to prevent this outcome from occurring. The Supreme Court’s support for the states’ antitrust efforts built directly on these precedents. Beginning with Waters-Pierce Company v. Texas in 1900, a case that arose from an attempt by a Standard Oil affiliate to appeal its ouster for violating Texas’s antitrust laws, the Supreme Court handed down a long line of decisions upholding the constitutionality of state antitrust laws against charges that they violated the equal protection clause of the Fourteenth Amendment or took property without due process.58 This stream of cases petered out by the 1920s, not because the Court became less willing to uphold state regulatory authority but because states found it increasingly difficult to move against corporations whose operations were national in scope without harming their own economies.59 Not coincidentally, a turn to national legislative and administrative regulation had already begun that would reshape the relationship of the corporation and American democracy in the next century.

The Progressive Roots of Modern Corporate Regulation Legal and economic historians have long considered the late nineteenth and early twentieth century to be a pivotal era in the development of new and modern forms of corporate regulation.60 Indeed, most commentators equate the enactment of the Interstate Commerce Act (1887), the Sherman Antitrust Act (1890), and the Federal Trade Commission Act (1914) with the actual birth or origin of regulation in America.61 But, as the preceding discussion

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makes clear, the regulation of corporations on behalf of a larger set of public interests was already a constant feature of American economic and political history. The dominant American legal tradition involving corporations was not only one of restricting corporations to a more limited set of rights than humans. It also consisted, from the very beginning, of a more affirmative objective: that is, holding corporations to higher standards of action, purpose, accountability, and public responsibility. The early American corporation regime just discussed, in both its special charter and general incorporation guises, was not merely concerned with creation, proliferation, and access. It was preoccupied as well, from beginning to end, with regulation. As the chapters by Hilt and Hennessey and Wallis make clear, special charters and general incorporation statutes were filled with legislative conditions, political reservations, and special regulatory mandates.62 Corporations were “artificial beings,” existing only “by force of law,” and consequently subject to a range of legislative restrictions and regulations.63 Such special regulatory provisions for bridge, turnpike, canal, railroad, insurance, and banking corporations were the basis for Willard Hurst’s influential observation that most early American corporations were essentially public ser vice franchises.64 So, it would be a historical mistake to suggest that corporate regulation in America began in the late nineteenth or early twentieth century.65 To the contrary, it has always been there. Nonetheless, it is important to recognize and explain the significant shifts in legal and political technology that occurred as the United States moved from a corporate regulatory regime focused primarily on state special charters and general incorporation laws to the brave new world launched by the emergence of public utilities, antitrust law, modern competition policy, and regulatory taxation.66 For, a new and distinctive mode of regulation did emerge in the late nineteenth and early twentieth centuries as corporate regulatory policy moved steadily from particularity to generality. Here, the story of the corporation and democracy becomes intimately linked with the historical rise of the modern legislative police power—that is, the power of the state to regulate private property, contract, conduct, and interest in the name of general public health, safety, and welfare. This story too has roots in the antebellum period. Ernst Freund, the most important theorist and chronicler of American police power, found in the original nineteenth-century regulatory bargain between state and corporations the beginnings of what he dubbed “an enlarged police power.” As his vast work

Introduction

on the emergence of American legislation and regulation made clear, nothing in the legal nature, source, status, or rights of the American corporation ever exempted corporations from the general operation of general regulatory laws.67 The classic early American corporate police power case in this regard was not Dartmouth College or Charles River Bridge, it was Thorpe v. Rutland and Burlington Railroad Company (1855). At issue in that case was an 1849 Vermont police regulation requiring railroads to fence their lines and maintain cattle guards at farm crossings. The railroad corporation claimed explicitly that its 1843 corporate charter insulated it from such costly and ex post regulatory statutes, viewing the corporate charter as granting “immunity and exemption from [subsequent] legislative control.” The argument stood little chance of success in a nineteenth century in which state regulatory police power was expanding almost at the same rate as corporations. Vermont Chief Justice Isaac Redfield, an early authority on corporation and railway law, dispensed with the rights claim from corporate status handily, citing both Marshall and Taney to the effect that corporate grants had to be construed narrowly and always “in favor of the public.” Incorporation did not abridge or restrict the general “lawmaking power of the state,” Redfield argued. Rather, through the police power, the state legitimately subjected property and corporations to a “thousand” kinds of “restraints and burdens” so as “to secure the general comfort, health, and prosperity of the state.” 68 Little in the “race to the bottom,” in state general incorporation laws, or in the Supreme Court’s decision in Santa Clara changed this regulatory foundation. Surely by the late nineteenth century, certain earlier regulatory techniques, especially rules embedded in state corporate charters, were less effective. And many state initiatives were more generally displaced by the increasingly interstate (and international) character of corporate commerce, as well as by the rapid rise of more national independent regulatory agencies.69 They were also challenged by the unprecedented scale and scope of the new concentrations of corporate wealth that characterized the period before and after the so-called great merger movement.70 But, despite persistent myths about the so-called “Gilded Age” and “Lochner Era” as periods of conservative constitutional retrenchment in an “age of enterprise,” not much blunted the continued expansion of the regulatory impulse to assert democratic control over newly expansive forms of corporate power and concentration.71 To the contrary, this volume documents the rise of an entirely new era in the history of corporate regulation during this period. From muckraking texts like Frank Norris’s The Octopus to public appeals like Brandeis’s

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Introduction

Other People’s Money to influential academic treatments like Berle and Means’s The Modern Corporation and Private Property, this era was simply saturated with public (and sometimes polemical calls) for something to be done about corporate power, corporate consolidation, and corporate domination.72 And a new regulatory response was swift in coming. The essays by Dan Crane, William Novak, and Steven Bank and Ajay Mehrotra move us from the specific issue of the corporate charter and corporate status to the new mechanisms of democratic control and corporate regulation that emerged in the late nineteenth and early twentieth centuries—the years of early Progressive and pre-New Deal reform. In this period especially, the impulse to regulate corporations became even more historically thoroughgoing and transparent. Indeed, from politically charged populist and agrarian efforts to control the expanding economic power of railroad corporations to the diverse and widespread political movements to gain control over trusts and corporate monopolies, the relationship of the corporation and American democracy assumed center stage from 1867 to 1937 with an unprecedented degree of public visibility, political controversy, and democratic debate.73 Older traditions of “public trust,” “public franchise,” “public ser vice,” and “public responsibility” took on new forms in a revolutionary spate of legislative and administrative innovation, much of it intent on curbing and regulating the new and threatening structures of corporate power. From state railroad and public utility commissions to the Interstate Commerce Act and Sherman Antitrust Act, from new proposals on federal incorporation and corporate taxation to the establishment of the Federal Reserve, the Federal Trade Commission (FTC), the Federal Power Commission, and the Securities and Exchange Commission, the legal site, scale, and scope of corporate regulation changed as a modern American administrative and regulatory state burst into a new legal self-consciousness and national political visibility. The corporate regulatory impulse animating and reanimating Franklin Roosevelt’s ever-changing New Deal had deep roots precisely in the major public law innovations of this formative period. Crane opens the door on this new era of corporate regulation in his essay, “The Dissociation of Incorporation and Regulation in the Progressive Era and the New Deal.” He explores the fate of regulation via corporate charter through a discussion of that regulatory technology’s last gasp—two failed efforts at federal incorporation in the early twentieth century, the Hepburn Bill of 1907 and the Borah-Mahoney Bill of 1937. In the late nineteenth century, when the increased interstate competition for chartering revenues

Introduction

allowed incorporators to shop around for the lowest state tax rates and the most permissive state regulations, advocates of reform began to push in powerful new directions. One of the most ambitious reform proposals involved an effort to use federal (rather than state) incorporation to achieve the comprehensive federal regulation of corporations. As Crane suggests, “Progressives believed that federal charter of large interstate corporations would create a framework for comprehensive federal regulation of large business enterprises that were thus far subject to only piecemeal regulation under state and federal law.”74 If the federal government had the ultimate power to create large numbers of national corporations, the argument went, it would also have the constitutional power to regulate them. Such comprehensive efforts at national incorporation ultimately failed with, Crane argues, important ramifications for the future—most notably, the increased susceptibility of national corporate regulation to constitutional challenges like those involved in Citizens United. But Crane also suggests, in sync with the other essays in this section, that the failure of federal incorporation did not mean the end of corporate regulation per se. Far from it. Rather, some of the very same goals of the national incorporation movement were pursued and ultimately achieved through alternative regulatory techniques. The essays by Novak and Bank and Mehrotra highlight two of those important alternatives: public utility regulation and tax policy. Novak’s “The Public Utility Idea and the Origins of Modern Business Regulation” recounts the legal and intellectual origins of the public utility concept. He argues that “the public utility idea” was self-consciously re-created in the late nineteenth century as a direct response to the transformation of the state special charter and general incorporation regimes. As regulatory objectives were disentangled from the issue of the corporate charter or originating statute, they coalesced again in the powerful and comprehensive notion of public utilities or public ser vice corporations—corporations affected with a public interest. Whereas, traditionally the public utility concept has been treated as a residual technique for dealing with a subset of specialized “public” corporations, Novak argues that progressive reformers used the idea of public utility to pioneer a more general and robust conception of economic and corporate regulation in the public interest. From Munn v. Illinois (1877) to Nebbia v. New York (1934), reformers consciously and constructively used the legal idea of public utility to enlarge the concept of state police power, moving beyond old common law and new constitutional limitations in an extraordinary era of democratic political struggle and corporate regulatory innovation.75

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Introduction

If the public utility idea was central to the creation of the modern American administrative and regulatory state, tax policy was key to its perpetuation. Indeed, most of the basic techniques of modern administration and corporate regulation were first hammered out in the law concerning public utilities and tax policy. And they continue to this day to shape American regulatory and corporate policy across the board. Bank and Mehrotra’s “Corporate Taxation and the Regulation of Early Twentieth-Century American Business” picks up this theme and describes the intentions of fiscal reformers at a key moment in the development of U.S. corporate taxation, when a constitutionally sanctioned income tax was first put in place. Their essay chronicles the discussions through which political economists, jurists, and lawmakers from across the political spectrum generated a new conception of the tax code as a technique of public control over corporate power. There was general agreement that corporations had a civic duty to contribute to the common welfare. But there was also general agreement about tax policy’s potential as a tool of reform. As President William Howard Taft himself proclaimed, a well-designed corporate income tax could curb rampant abuses of corporate capitalism. Taken together, these essays make clear that the story of democratic control of the American corporation did not come to a halt after the chartermongering race to the bottom in the late nineteenth century. To the contrary, new methods of regulation were quickly invented and deployed in a fairly continuous effort to deal with the rapidly changing conditions of corporate consolidation, concentration, and expansion. Some, like the effort at federal incorporation, failed. Others, like the public utility regime, performed important work before giving way to even more capacious regulatory changes in the New Deal and Great Society eras. Still others, like corporate taxation, remain important sites for the ongoing democratic control of corporations to this very day. The early New Deal was in many ways the culmination of the kind of structural, vertical, and systemic regulation of American corporations in the antimonopoly, public utility, and unfair competition modes pioneered in the late nineteenth and early twentieth centuries. And the administrative regulatory road from the Interstate Commerce Commission, the Sherman Act, and the FTC to the National Recovery Administration, the Securities and Exchange Commission, and the Temporary National Economic Committee ran fairly straight if not so narrow.76 Beyond the distinctive economic emergency posed by the Great Depression, the growth and concentration of

Introduction

industry through incorporation remained a first-order concern of New Deal democracy just as it fueled earlier progressive regulatory innovations. By 1931, for example, the Aluminum Company of America essentially controlled the entire domestic market for bauxite. The International Nickel Company owned more than 90 percent of the world’s nickel resources, and Texas Gulf Sulphur and Freeport Sulphur together nearly matched that percentage in sulphur. Almost one half of American copper reserves were owned by four companies—Anaconda, Kennecott, Phelps Dodge, and Calumet & Arizona Mining—and a handful of entities predominated in lead and zinc. United States Steel Corporation single handedly owned 50 to 75  percent of iron reserves and, together with Bethlehem Steel, controlled over 50  percent of steelmaking capacity. Examples could be extended out across the economy as corporate concentration persisted as a public policy problem. As Thomas McCraw noted, “Almost half of the largest American firms at the close of the twentieth century (manufacturing and other types as well) originated during the period 1880–1930.”77 As they had since the original great merger movement, such conditions were met again with regulatory innovations—in this case, the bold federal initiatives of the New Deal. Bank and Mehrotra suggest the degree to which the early New Deal brought an aggressive new attitude to corporate regulatory taxation through the interventions of Berle, Rexford Tugwell, the Pecora Hearings, and the Revenue Act of 1935. For Bank and Mehrotra, the New Deal’s corporate tax policy from 1935 to 1937 reflected a regulatory approach in sync with progressive critiques of large-scale business corporations. Similarly, in the area of securities regulation, the Securities Act of 1933, the Securities Exchange Act of 1934, and the Public Utility Holding Company Act of 1935 were something of a regulatory trifecta in this regard, signifying the consolidation, nationalization, and expansion of earlier techniques of corporate regulation. Though frequently overlooked, the Public Utility Holding Company Act—aimed at the intense concentration and the perceived unfair pyramidal structures and securities practices associated with public utility holding companies—was an especially prime indicator of the potential extent of New Deal corporate regulation. As one senator opened his discussion of the bill, “The people of this Nation have been regaled with stories of the railroad manipulation of politics, but in their palmiest days the railroad kings were cheap pikers compared to the clever, ruthless, and fi nancially free-handed political manipulators of the power trust. Compared to them, all the so-called ‘lobbyists and political fi xers’ of all time are as moonlight

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Introduction

unto sunlight and water into wine.”78 The final act essentially turned over to the Securities and Exchange Commission the restructuring of the entire public utility industry. As a recent secretary of the Commission explained, “People forget about it, but it really was epochal. . . . Imagine today if Congress gave a government agency the authority to study the entire high-tech industry and the responsibility to reorganize it.”79 As the essays of Bank and Mehrotra—as well as Jonathan Levy and Nelson Lichtenstein—suggest, the New Deal cemented in place certain fundamental aspects of the symbiotic relationship between government and corporations that would continue well into the postwar period. Levy places the New Deal at the center of the story of the creation of a “new fiscal triangle” involving the increasingly close relationship between the federal government, forprofit corporations, and nonprofits. Lichtenstein describes how, at the height of the New Deal, many large corporations like General Foods and General Electric themselves adopted progressive reform rhetoric, “describing themselves not so much as a competitive business entity but as an ‘institution’ infused with all of the connotations of civic beneficence characteristic of other non-market entities, including hospitals, foundations, and even government agencies.”80 Yet, already by the late New Deal, the seeds of change were being planted. The outlines of a new approach to the corporation and regulation were already being drawn in ways that continue to influence our present.

From New Deal Liberalism to the Neoliberal Corporation As Alan Brinkley’s provocative title The End of Reform suggests, the priority given to democracy over economy in the Progressive and New Deal eras was increasingly challenged in the decades surrounding World War II. The basic relationship between government regulation and corporate form was reinterpreted and readjusted yet again, leading directly to some of the fraught terms that dominate current debate on corporate responsibility and corporate constitutional rights. As the New Deal increasingly moved from welfare state to “warfare state,” the Progressive / New Deal model of corporate regulation in a mixed economy came under increased strain.81 On the one hand, a close partnership between government and corporation, public sector and private sector, developed as wartime public spending fueled an unprecedented wave of private corporate expansion and innovation in Franklin Roosevelt’s “arsenal of democracy.” From vast domestic

Introduction

infrastructure projects like the Grand Coulee Dam to the extraordinary expansion of the Kaiser Shipyards to the incipient emergence of large multinational construction firms like Bechtel, postwar economic expansion was in many ways underwritten by the extension of webs of public-private collaboration rooted in New Deal policy initiatives.82 At the same time, a certain strand of progressive skepticism regarding the corporation (emphasizing public interest, public ser vice, and regulatory and administrative oversight) proliferated into the postwar era—most notably in works like those of John Kenneth Galbraith on American capitalism, countervailing power, and the industrial state, and C. Wright Mills on the power elite.83 On the other hand, an unmistakably new chapter was opening in the long and conflicted American conversation about corporate virtue and corporate vice, corporate power and corporate rights. As early as 1939, Friedrich Hayek had already thrown down the gauntlet in a short University of Chicago pamphlet on Freedom and the Economic System substantially reversing the prevailing progressive penchant for democracy over economy: “It is often said that democracy will not tolerate capitalism. If ‘capitalism’ here means a competitive society based on free disposal over private property, it is far more important to observe that only capitalism makes democracy possible. And if a democratic people comes under the sway of an anti-capitalist creed, this means that democracy will inevitably destroy itself.”84 Hayek’s reevaluation of the basic relationship of capitalism and freedom was an integral part of what Edward Purcell called a “crisis of democratic theory,” and what Angus Burgin has more recently synthesized as “the great persuasion”—the beginnings of the road to contemporary neoliberalism.85 A product of the veritable intellectual revolution that accompanied the American ideological confrontation with totalitarianism (from a hot war against fascism to a cold war against communism), the implications of this fundamental shift in perspective for attitudes and policies vis-à-vis the American corporation reverberate to this very day. Gary Becker made clear the dramatic reversal in perspective in an audacious five-page essay on “Competition and Democracy” in the very first issue of the Journal of Law and Economics in 1958, asking, “Does the existence of market imperfections justify government intervention?” “The answer would be ‘no,’ ” he contended, “if the imperfections in government behavior were greater than those in the market. . . . It may be preferable not to regulate economic monopolies and to suffer their bad effects, rather than to regulate them and suffer the effects of political imperfections.”86 In coming years, more legal and economic scholars would come to support Becker’s

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Introduction

basic reprioritization of economy over polity. And for the moment, political democracy seemed to take a back seat to market economy. As the essays of Adam Winkler, Nelson Lichtenstein, and Jonathan Levy describe, the postwar conception of the nature and purpose of the corporation (and consequently the proper scope of governmental regulation) began a slow and steady transformation in turn. Both the nineteenth-century vision of the corporation as a distinctly “artificial entity”—a “creature of the state”—as well as the administrative-regulatory apparatus of Progressive and New Deal political economy came under sustained intellectual critique. Ronald Coase distanced himself from the empirical, institutionalist legacy of the likes of Thorstein Veblen, Walton Hamilton, and Berle and Means with his famous quip that “the American institutionalists were not theoretical but anti-theoretical. . . . Without a theory they had nothing to pass on except a mass of descriptive material waiting for a theory, or a fire.”87 Such forceful critiques of a previous generation’s work on corporations, democracy, and political economy were but prelude to a new effort to reconfigure the nature of the corporation for a new age. As Lichtenstein and Winkler contend, Ronald Coase’s pioneering “theory of the firm” soon gave rise to an entirely new view of corporate governance wherein the corporation was no longer seen primarily as an artificial state entity, but as a “nexus of contracts”—“a web of voluntary agreements among corporate stakeholders.”88 Part of the more general reorientation of law and economic thinking associated primarily with Mont Pelerin and the Chicago school, this new perspective on corporate management, finance, and regulation squared more completely with the revival of neoclassical price theory and the return of free market competition as a lodestar of American political economy. In place of the progressive emphasis on economic power, corporate concentration, monopoly, and the unequal distribution of wealth, scholars like Eugene Rostow, Milton Friedman, and Henry Manne returned to contract, property rights, competition, and economic efficiency as the fundamentals with which to rethink the corporation and its place in American democracy. Shareholder democracy or, better yet, “shareholder primacy” emerged as the new paradigm in law and corporate governance circles, where maximizing profit and shareholder value was treated as the proper goal of corporate enterprise. As Milton Friedman succinctly entitled his influential noncommunist manifesto in the New York Times: “The Social Responsibility of Business is to Increase Profits.”89 This long and powerful intellectual transformation had direct and consequential corporate policy effects. Alan Brinkley dates the beginning of the

Introduction

end of reform to 1937 with a general turn in policy away from progressive antitrust, critiques of corporate capital, and demands for regulation, administration, and planning in the direction of a more Keynesian, fiscally oriented, capital-friendly, and “compensatory” liberalism. Thus, Richard Hofstadter was able to ask poignantly circa 1964, “What Happened to the Antitrust Movement?”90 Levy corroborates this basic idea, noting the Tocquevillian celebration of voluntarism and “civil society” during and after World War II— part of a fundamental redefinition of the nature of Americanism and the basic relationship of public and private sectors in American history. And Mehrotra and Bank highlight a similar shift by the end of World War II away from “a more punitive approach to corporate taxation” and toward programs “designed to improve the cash position of business” as early as 1945.91 Indeed, many histories of American corporate and economic policymaking continue to associate the postwar period primarily with the rise of various new forms of deregulation and privatization and the slow, but perhaps inevitable, demise of old-school techniques of Progressive and New Deal regulation, administration, and planning. And from the early genesis of Chicago school critiques of public utility and regulatory capture to more public interest attacks on airline and trucking regulation to the more global assault on planning and public ownership that accompanied the so-called “end of history” in 1989, there is no mistaking a historical turning away from some of the basic assumptions that guided earlier American regulatory efforts vis-à-vis the corporation.92 Something of the global aspirational spirit of that reorientation was perhaps captured in the World Development Report of the World Bank in 1996 entitled simply “From Plan to Market.”93 And in the wake of Citizens United and Hobby Lobby, even critics seem to concede an unprecedented shift in perspective, asking things like, “Is the First Amendment Being Misused as a Deregulatory Tool?”94 But it would be a mistake to overstate the general turn away from corporate regulation in this most recent period. As David Vogel, among others, has reminded us, the period after World War II was just as notable for the rise of new and bold forms of regulation and administration—what he dubs “the new social regulation.”95 The development of a new wave of crosscutting, economy-wide regulations regarding worker safety, consumer safety, environmental protection, and civil rights continued greatly to affect corporate policymaking long after the demise of the Civil Aeronautics Board and the Interstate Commerce Commission. Indeed, Cass Sunstein has characterized the extraordinary expansion of the American administrative and regulatory state in the 1960s and 1970s as involving nothing less than “a

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Introduction

rights revolution.”96 Similarly, the emergence of new techniques of corporate self-regulation and co-regulation in the same period also expanded the repertoire of corporate regulatory techniques.97 In the field of American labor law, amid the enormous challenges posed by globalization and deindustrialization, new methods of corporate and regulatory control continue to persist.98 Once again, the story of this most recent historical period is not a simple, linear tale of deregulation or corporate ascendancy, but yet another recalibration of the underlying relationship of the corporation to American democracy. Once again, impor tant innovations in corporate form and corporate governance were joined by repeated and sustained attempts by the polity to regulate and keep corporations and their economic and political power under some form of democratic control. The complex implications of this new postwar dispensation are perhaps on best display in Lichtenstein’s essay, “Two Cheers for Vertical Integration: Corporate Governance in a World of Global Supply Chains.” Lichtenstein sees the most recent era in the history of the American corporation as characterized by a seismic shift in the organization of corporate and market power and control. Megacorporations like Wal-Mart, he argues, exercise immense market power through their capacity to operate through international supply chains rather than through the vertical integration techniques of industrial corporate capitalism. Such international supply chains—together with the increased predominance of forms of subcontracting and contracting out—pose major challenges to traditional forms of governmental and democratic control. This is especially the case with regard to unionization and labor law, where the jurisdictional focus and force of traditional restrictions and protections was eclipsed as corporations moved their labor beyond the borders of the United States and the reach of the conventional countervailing powers of unions, legislatures, and regulators. Yet even here, Lichtenstein suggests, new international (as well as national) forms of control proliferated in the guise of innovations like “jobbers agreements” and the international Accord on Fire and Building Safety. Lichtenstein’s chapter captures both the challenges of the new structure of international corporate governance and organization as well as the continued struggle of democratic constituencies to influence corporate behav ior in a newly globalized and divided economic environment. The postwar transformation of corporate governance and regulation also sets the stage for the final set of issues engaged by this volume—the new Supreme Court constitutional jurisprudence in Citizens United and Hobby

Introduction

Lobby. As Winkler makes quite clear in Chapter 10, “Citizens United, Personhood, and the Corporation in Politics,” the road from this more general reconsideration of the nature of the corporation and its responsibilities to contemporary constitutional struggles over constitutional rights and corporate personhood runs straight and narrow. For Winkler, Justices Antonin Scalia, Anthony Kennedy, and Samuel Alito’s views on the corporation and constitutional rights as developed in the post-Bellotti cases that run from Austin to Hobby Lobby were rooted originally in the transformation of corporate theory and corporate law in the shadow of law and economics in the postwar period. As Winkler provocatively concludes, “The empowerment of shareholders undermined shareholder protection as a rationale to justify government interference with both the economy and election financing.”99 And it is perhaps this explicitly legal and constitutional development that is in some ways the most unprecedented in the history of the corporation and American democracy.

Varieties of Corporations and the Emerging Problem of Citizens United and Hobby Lobby From the early nineteenth century on, the kinds of businesses and associations taking the corporate form have ranged from small, closely held “incorporated partnerships” to larger enterprises with dispersed ownership interests. Over the course of the twentieth century, however, the differences between firms across the spectrum and at both ends of the size distribution have only increased dramatically, posing challenges for the treatment of corporations in constitutional law as well as the protection of the rights of the persons making up such diverse legal institutions. Margaret Blair and Elizabeth Pollman’s essay, “The Supreme Court’s View of Corporate Rights,” examines the Supreme Court’s jurisprudence surrounding corporate rights. For most of U.S. history, they suggest, the Court treated corporations as artificial persons whose rights and responsibilities were determined by the specific statutes that created them. To the extent that the Court found it necessary to look beyond statute and decide questions involving corporations on constitutional grounds, it based its decisions on the rights of the individuals who associated with each other in corporations, not on any abstract idea that corporations themselves were rights-bearing legal persons. Thus, they show that the 1886 Santa Clara decision was only one in a long line of nineteenth-century cases in which the justices looked

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Introduction

through the corporation to assess the extent to which injury was inflicted on shareholders. Bloch and Lamoreaux make a similar point in Chapter 8, suggesting in addition that when the Court did look through the corporation to the shareholders, it focused primarily on property interests and not on other constitutional rights. As Justice Field described the basic distinction: “The lives and liberties of the individual corporators are not the life and liberty of the corporation.”100 The Court’s “associational” approach, Blair and Pollman argue, made sense in the nineteenth century, when most corporations were small and relatively closely held and constitutional questions mainly concerned protections for contract and property interests. But that fit has gotten worse over time, exacerbated in the late twentieth century by the development of First Amendment jurisprudence and its extension to corporations. Although it was perhaps reasonable to think of all the shareholders in a corporation as having a common property interest in protecting their companies from the kinds of discriminatory taxation at issue in Santa Clara, it is not at all clear that shareholders (especially shareholders in large-scale enterprises characterized by a separation of ownership from control) have a similar interest in allowing managers to use company funds to “speak” politically on their behalf, even when the speech involves matters directly related to the business of the company. To the contrary, as Winkler shows, the fi rst federal campaign finance law (the Tillman Act of 1907) was a reaction to the revelation that shareholders’ money was being used to elect candidates who opposed regulatory reforms that were obviously in the shareholders’ interest.101 Recently, this problem has been further complicated as the use of the corporate form in the twentieth century has spread to so many new types of entities. Throughout history, of course, the corporate form has always been used for many purposes other than business—in the early modern period for towns, universities, churches, and charities; in the early nineteenth century for libraries, scientific associations, fraternal societies, social clubs, and moral reform organizations. In the twentieth century, however, use of the corporate form broadened further still to include advocacy organizations ranging from the Ku Klux Klan (KKK) to the National Association for the Advancement of Colored People (NAACP).102 The latter, in particular, raised new issues concerning the constitutional rights of the incorporated. The Supreme Court’s refusal to contemplate the consequences for corporate-rights jurisprudence of the variety of different types of organizations that increasingly took the corporate form posed new legal and

Introduction

constitutional problems in the 1950s and 1960s. As Bloch and Lamoreaux show, a series of cases came before the Court in which states were using their regulatory powers over corporations to suppress civil rights organizations. Until this point, the Court had consistently applied its nineteenthcentury precedents to corporations of all types. As late as 1939, for example, while upholding a suit brought by individuals against a Jersey City ordinance restricting the right of assembly, the justices had denied a similar challenge by the American Civil Liberties Union (a corporation) on the grounds that liberty and privileges and immunities clauses of the Fourteenth Amendment applied to “natural persons,” not corporations, so “only the individual respondents may . . . maintain the suit.”103 However, when faced with southern states’ attempts to exploit these same precedents to block desegregation efforts by the NAACP (a corporation), efforts that the Court was already on record as supporting, it reversed its position. Looking through the corporation to its members, it handed down a series of decisions granting the organization standing to assert rights claims on behalf of its constituents. But it did so, again, without articulating how this par ticu lar corporation might differ from other types of corporations—most importantly, those organized for business purposes.104 These mid-twentieth-century decisions expanding corporations’ ability to claim constitutional rights without seriously considering the types of corporations involved—not an original understanding of corporations, nor even the late-nineteenth-century Court’s interpretation of the Fourteenth Amendment—lie at the heart of current controversies over the role of corporations in American democracy. As Winkler, Blair and Pollman, and Bloch and Lamoreaux all show, the effect can be clearly seen in the area of campaign finance law, when in 1978 in First National Bank v. Bellotti, the Court first posed constitutional objections to statutory restrictions on corporate political speech. Justice Lewis  F. Powell, who wrote the majority opinion, refused to address directly the question of “whether and to what extent corporations have First Amendment rights.” That, he insisted, was “the wrong question,” because the First Amendment served broader “societal interests” in protecting the free flow of information to members of the electorate.105 Nonetheless, Powell confused the issue by insisting—and citing the NAACP cases and other decisions pertaining to freedom of the press— that “freedom of speech and the other freedoms encompassed by the First Amendment always have been viewed as fundamental components of the liberty safeguarded by the Due Process Clause, . . . and the Court has not

29

30

Introduction

identified a separate source for the right when it has been asserted by corporations.”106 Writing in dissent, Justice William H. Rehnquist chastised Powell for not understanding the special nature of the corporations involved in those cases.107 He did not prevail, however, and the same elisions show up in later cases, most notably Citizens United. Here again, Justice Kennedy, writing for the majority, based the Court’s opinion on the public’s right to uncensored information. Quoting Powell, he asserted that “political speech does not lose First Amendment protection ‘simply because its source is a corporation,’ ” and, like Powell, he cited the NAACP and freedom of the press cases. Refusing again to take note of the special features of the corporations involved in those cases, he pushed the implications further still. The Court, he claimed, “has recognized that First Amendment protection extends to corporations.”108 This last assertion was quoted in the headnotes to the case and quickly found its way into new legal actions seeking to expand corporate rights. A good example of its proliferating effect is the suit brought by Hobby Lobby Stores, Inc., a for-profit retailer seeking a religious exception from the contraception mandate in the Affordable Care Act. In finding in favor of the company, the Court’s majority dodged the constitutional issue and instead claimed to base its finding on statute, the Religious Freedom Restoration Act (RFRA) of 1993.109 Writing for the majority, Justice Alito also claimed to distinguish among types of corporations. The ruling, he wrote, was limited in its application to closely held, family-run corporations whose members share sincere religious beliefs. However, at various points in his opinion, Alito indulged in a more expansive logic, suggesting that the decision had larger constitutional ramifications and that it potentially applied to corporations whose members disagreed about religious matters and even to large, public companies. In determining, for example, that RFRA’s definition of a person included corporations, Alito asserted that “no known understanding of the term ‘person’ includes some but not all corporations.” Also speaking generally, he pointed out that “a corporation is simply a form of organization used by human beings to achieve desired ends,” and that when the courts extend rights to corporations (“whether constitutional or statutory”) the purpose is to protect the rights of the people who make them up. “Protecting the freeexercise rights of corporations like Hobby Lobby, Conestoga, and Mardel protects the religious liberty of the humans who own and control those companies,” he proclaimed, just as “protecting corporations from government seizure of their property without just compensation protects all who have a stake in corporations’ financial well-being.”110

Introduction

In other words, under the guise of extending a statutory protection to owners of closely held corporations, Alito took logic that historically had rationalized the extension of constitutional protections to corporations in order to safeguard their members’ property and analogized it so as to provide (perhaps all) corporations with constitutional protection for a much broader set of rights. In combination with Citizens United, the decision challenges one of the key legal pillars that had supported government regulatory authority over corporations since the nation’s beginning. As the response that greeted these decisions indicates, moreover, they have certainly opened up a new chapter in the centuries-long conflict over the relationship between corporations and American democracy.

Conclusion As the essays in this volume make clear, the relationship between the American corporation and American democracy has been anything but simple, singular, or uniform. Not only has this relationship developed and changed since the founding of the republic, but so have both corporations and democracy. The Framers could never have foreseen the scale and economic power (globally as well as nationally) attained by today’s largest business corporations. Nor would they have been able to imagine the diversity of uses to which the corporate form has been put, or the role that corporations formed for advocacy purposes have come to play in American society. As much as they abhorred the privilege-based factions of their own time, they would have been bewildered by the mass media-driven politics that ultimately replaced them. And they would never have been able to predict the innovative legal and political technologies that policy makers would devise to control, regulate, and hold corporations accountable to the people, as both democracy and the corporation evolved. The essays in this volume document the contours of this ever-changing relationship, but they also show that there were parameters that defined the boundaries of change. One is the persistent double vision that has always been at the heart of American attitudes toward the corporation. As Dorothy Thompson wrote in the New York Times at the height of the New Deal: “Two souls dwell in the bosom of this Administration, as indeed, they do in the bosom of the American people. The one loves the Abundant Life, as expressed in the cheap and plentiful products of large-scale mass production and distribution. . . . The other soul yearns for former simplicities, for decentralization, for the interests of the ‘ little man,’ revolts against high-pressure

31

32

Introduction

salesmanship, denounces ‘monopoly’ and ‘economic empires,’ and seeks means of breaking them up.”111 Or as Morton Keller put it perhaps more accurately, “The land of trust was also the land of antitrust.”112 Americans have alternatively seen the corporation as both a bulwark of democracy and its persistent menace. On the one hand, they have long embraced corporations as vehicles to achieve a wide variety of purposes, ranging from the efficient production of goods and ser vices to the effective promotion of social and political goals. And they have vigorously participated in them as employees, managers, investors, and consumers, members, organizers, donors, and followers. On the other hand, from the Jacksonian critique of special privilege to the Progressive worry about the political consequences of market power to today’s concern with the millions of corporate dollars flowing into political advertising, they have continued to view the corporation as a potentially undemocratic form of unaccountable private power. The other parameter that the essays in this volume underscore is the long and largely uninterrupted history of regulating corporations in the public interest. In contrast to popu lar American rhetoric about natural rights or neoliberal economics or originalist constitutionalism, the fact of the matter is that the history of the American corporation has been bound up from its inception with continuous, insistent, and rigorous forms of state intervention and regulation. This seems to have been the American way. Although the history of corporations in America has passed through different regimes of regulation—from the special charter to general incorporation and from public utility to the new social regulation—it has never been a simple story of the defense of private rights or laissez-faire or of granting corporations the rights of natural persons. Rather, from 1787 to the recent past, the dominant American legal tradition has been to hold corporations to higher standards of public trust, public ser vice, and public responsibility—to hold them accountable to the democracy. Though we currently live in an era when that tradition, and that regulatory state built to enforce it, have come in for rather sustained criticism, it would be a mistake to underestimate its historic strength and its future potential. Finally, the essays in this volume highlight the importance of the history of American democracy to the history of the American corporation. At almost every stage of its development—from the founding period to the present—the American corporation has been shaped, cultivated, regulated, and restrained by the force that is American democracy. For most of American history, as Oliver Wendell Holmes  Jr. reminded his Supreme Court

Introduction

colleagues in his classic dissent in Lochner, democracy was given priority over economy, and the people successfully defended their right to “embody their opinions in law.”113 In the Jacksonian, Progressive, and New Deal eras, questions of the scale of corporations, their rights, their possibilities, and their corruptions spurred the demos to push for structures of accountability—for general incorporation statutes and regulatory legislation—that harnessed corporate powers for the public good. Today, these same questions remain on the front burner of American policymaking. We do not yet know how the demos will ultimately respond, but the history of the corporation and American democracy makes one thing clear. Since the founding, corporations have been the creations of we, the people. The future direction of corporate power, possibility, and responsibility still remains in our hands.

33

PA R T I

Corporate Origins

CHAPTER 1

Early American Corporations and the State ERIC HILT

The Supreme Court’s Citizens United decision has provoked rancorous debates about the legal rights of corporations and the appropriate role of the corporation in society. Some of these debates have focused on the early history of the corporation in America, and the extent to which those enterprises were regulated or constrained by the law. The Citizens United decision itself included a strident exchange on this issue.1 In his dissenting opinion, Justice Stevens noted that early corporations could only be created by special legislative acts, and that those acts often included strict limitations on the size, internal governance, and powers of corporations. Stevens argued that this practice reflected early Americans’ unease with corporations in general and their potential to exert political influence in particular, citing the words of Thomas Jefferson as evidence of the latter.2 Stevens concluded that “the Framers . . . took it as a given that corporations could be comprehensively regulated in the ser vice of the public welfare,” and that it is “implausible” that the Constitution’s protection of free speech would have prevented the government from regulating corporate influence on elections.3 Justice Scalia’s concurring opinion addressed Stevens’s argument by noting that early state governments granted corporate charters in enormous numbers, which is inconsistent with significant political hostility toward the form, and that anticorporate sentiment “was directed at the state-granted monopoly privileges that individually chartered corporations enjoyed.” Scalia pointed out that modern corporations are created through general laws, rather than special legislative acts, and do not enjoy such privileges. He concluded that “most of our enterprising Founders—excluding, perhaps, Thomas Jefferson”—would have “favored” modern corporations.4 The debate between Stevens and Scalia reflects the complex and contradictory role of the corporation in early American society. On the one hand, the American states granted charters of incorporation to businesses quite 37

38

Corporate Origins

liberally, in order to promote economic development. The official imprimatur of a charter was seen as conferring quasi-public status on those businesses, effectively making them instrumentalities of the state. This special legal status was justified by the ser vices early corporations provided to the government and to the public, such as those related to banking, or the creation and operation of transportation infrastructure. Other corporations were created to pursue new industries or new modes of production that would spread prosperity throughout the community. “Charters in steadily mounting volume,” according to a prominent history of the early economy, “clothed with living tissues the skeletal hopes for an economy to serve the common interest.”5 On the other hand, early American politics was riven by debates over business corporations, and what exactly constituted the “common interest.” Until the mid-nineteenth century, most state governments held discretion over access to incorporation and the exclusive legal privileges granted in corporate charters. Control over incorporation brought control over the allocation of substantial economic rents, which was sometimes exploited for political gain.6 Critics of early corporations characterized them as “aristocracies,” and saw them as instrumentalities not of a benevolent state, but of powerful interests that could “subdue republican notions” and undermine democracy.7 Early governments struggled to develop the capacity to regulate the corporations they created and, in fact, many efforts at regulation were aimed principally at protecting the monopoly franchises of incumbent corporations. Ultimately, Jeffersonian and Jacksonian reformers concluded that the best way to eliminate the corrupting influence of corporations was to liberalize access to incorporation. By granting charters liberally, and ultimately implementing general acts that made incorporation freely accessible, the exclusive privileges of incumbent corporations were undermined, and the corruption produced by discretion over incorporation was ended. However, concerns regarding corporate power did not end with the transition to general incorporation. General statutes often imposed regulations on the corporations they created that were quite strict relative to the terms of many special charters. This essay analyzes the relationship between early American business corporations and the state. Drawing on newly available data on early corporations and their shareholders, and newly collected evidence on general incorporation statutes, I document the evolution of the legal and political status of business corporations in the first half of the nineteenth century, and

Early American Corporations and the State

the changing role of corporations in the economy and in politics. The analysis indicates that legislative authority over access to corporate charters was one of the principal mechanisms by which wealthy and politically connected elites protected their interests. And general incorporation acts, which made incorporation freely accessible, did not free corporations from regulation or control by the state, but rather eliminated a mechanism by which incumbents could stifle new entry. By opening access to incorporation, a powerful instrument of corruption was blunted. American corporation law is primarily state law, and each state has its own legal traditions and institutions. Studies of early corporations must choose between the breadth of the jurisdictions analyzed, and the depth of the analysis: it is not possible to analyze the details of the history of the corporation across large numbers of states without resorting to imprecise generalizations. Several elements of the analysis of this essay aim for depth rather than breadth, and focus primarily on the experience of one state, New York. It therefore complements the many detailed analyses of early corporations focused on particular states.8 New York was the most populous of the early states, and of course contains New York City, the nation’s preeminent center for trade and finance. The study of the chartering and regulation of New York’s banks is the study of the earliest legal regime governing Wall Street, which is of independent interest. More importantly, New York was a great innovator in corporation law, and its statutes were often adopted in part or in their entirety by other states. New York was also the first state to adopt a general incorporation statute for manufacturing firms, and the first to successfully adopt and retain a general incorporation act for banks.9 In much of the discussion that follows, I begin with a detailed analysis of the case of New York, and then follow the evolution of the law in other states. The opinions of Stevens and Scalia in Citizens United were informed by prominent academic studies of early corporations, and this essay challenges some of the conclusions of those studies. Several accounts of the early history of the business corporation have argued that scrutiny over access to the corporate form through special charters restricted its use to firms that would serve the public interest. For example, J. Willard Hurst’s influential study of corporation law argued that “public-interest undertakings practically monopolized the corporate form,” and Oscar and Mary Flug Handlin’s study of the origins of the corporation in Massachusetts concluded that it was “conceived as an agency of government, endowed with public attributes . . . and designed to serve a social function for the state.”10 Although it was the

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Corporate Origins

case that the earliest American corporations were seen as public instrumentalities, whether or not they served the public interest was a vigorously contested issue at the time. This essay also challenges the view that early corporations were closely controlled under the regime of special-act charters, and that the turn toward general incorporation freed corporations from supervision that had protected the interests of the public. This view has been quite influential. For example, one of the foundational works in the modern academic literature on corporate governance, Adolph Berle and Gardiner Means’s The Modern Corporation and Private Property, characterized early corporate charters as “state-controlled” agreements, “since the various legislatures were required to approve every item in the transaction, and in fact they used their power to regulate severely the arrangements entered into.”11 Berle and Means argued that the regulations written into charters protected the general public, as well as the creditors and shareholders of early corporations, whereas the supervisory power of the state was eliminated from the incorporation process when general statutes replaced special-act charters.12 In contrast, the analysis of this essay suggests political discretion over access to charters and their contents often served the interests of incumbent firms and powerful political factions, rather than the public. Finally, popu lar critics of modern corporations have claimed that the legal regime of the early American republic forced early corporations to serve the public good and offers a model that should be reintroduced today in order to restrain corporate power.13 The analysis presented in this essay suggests that those critics are far too sanguine about the consequences of such a change, and underestimate the potential of incumbent firms to manipulate the political process for their own benefit. The outcomes produced by political control over incorporation in the early nineteenth century were the opposite of those desired by modern critics of corporate power.

Politics and American Business Corporations, 1781–1830 From the colonial era up through 1791, only thirty-two businesses received corporate charters from the American states.14 The majority of these were created to provide transportation infrastructure through the construction and operation of canals and bridges. The remainder included a handful of water companies, banks, insurance companies, and manufacturing companies. Many of these early corporations, which included the Bank of North

Early American Corporations and the State

America, the Society for the Establishment of Useful Manufactures, and the Bank of New York, were profoundly controversial. Together with the Bank of the United States, which was chartered by the federal government in 1791, these firms were the largest business enterprises that had ever been created in the United States, and were endowed with valuable legal privileges that were not accessible to other firms. The political struggles over the creation of these institutions contributed in no small measure to the factional divisions that led to the emergence of the Democratic-Republican Party, in opposition to the Federalists. The founders of virtually all of these enterprises argued that they would provide impor tant ser vices and create prosperity that would be shared throughout the community, which justified their special legal status. For example, the preamble of one manufacturing company’s charter mentions “furnishing employment for the honest and industrious poor”; the act to incorporate an insurance company boasts that it would “alleviate the distress of, and afford immediate relief to, sufferers” from fire damage; and a bank charter mentions that its establishment “will probably be of great public utility.”15 Critics recoiled at the prospect of granting exclusive legal privileges to those businesses. Corporate charters, which were accessible only to those politically connected enough to persuade the legislature to pass a law on their behalf, were seen as creating powerful enterprises whose dominant positions in their industries were all but permanently established. The legal privileges granted to business corporations sometimes included monopoly franchises, such as the right to build and operate a bridge over a particular body of water, or the right to enter an industry in which only chartered firms were legally authorized to operate, as was often the case in banking. Thus, modern commentators often argue that the rhetoric of anticorporate critics, which characterized corporations as “monopolies,” reflected “confusion” between grants of corporate status and grants of monopoly franchises.16 But critics of early corporations were not confused. Their understanding of the concept of a legal monopoly was quite broad, and encompassed any special legal privileges granted to particular individuals or firms.17 The privileges granted in corporate charters went beyond special-action franchises and included some characteristics generally associated with the corporate form itself, such as the shielding of investors from personal liability for the firms’ debts. The anticorporate political economist Daniel Raymond, for example, argued that “the object of a business corporation is to give to the

41

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Corporate Origins

members an artificial power that they would not other wise possess, or to exempt them from some liability,” and pointed out the advantages corporations enjoyed as a result of the protection of their investors from personal liability. Raymond concluded that “the very object then of the corporation is to produce inequality, either in rights or in the division of property.”18 Given that most early entrepreneurs could never hope to obtain a charter for their businesses, these powers were seen as a form of monopoly that infringed on the rights of ordinary citizens. The political economist Thomas Cooper argued in 1831 that corporate charters “confer privileges and immunities on one class of citizens not only not enjoyed by the rest, but at the expense of the rest. This is always done on the pretense of promoting the general welfare.”19 In the eyes of their critics, those enterprises not only dominated economic life, but also corrupted the political process, and undermined popular democracy. They argued that corporations, and the system that produced them, were “adverse to the spirit of republicanism,” could “controul [sic] the freedom of popular suffrage,” and threatened to “destroy liberty, and create a power unfriendly to human happiness.”20 By using their vast resources, large corporations could bribe the legislature and block attempts by competitors to enter their industry. But more importantly, the founders and investors in the corporations often included politicians, making bribery unnecessary. Even more dangerous for democracy, incumbent corporations could form alliances with a political party or faction. By systematically denying petitions for new charters, the party could serve the interests of the incumbent corporations. But the enormous economic rents generated through the restriction of access to charters could also be used to serve the interests of the party, and potentially entrench them in power. For example, the shares of any corporation actually created would become extremely valuable, and by apportioning some of those shares to influential political figures or factions, the party could buy their loyalty, and give them an incentive to support the party and maintain further restrictions on subsequent corporate charters. As an anonymous pamphlet from 1827 put it, “the means of corruption are absolutely created by the act which calls [corporations] into existence.”21 Early business corporations were often quite political, and their partisan affi liations were widely known. When necessary, they fi nanced bribes of other legislators, or devoted resources to intervening in elections. But over time, as the institutions of popular democracy became stronger, the role of

Early American Corporations and the State

corporations in American politics began to change. At first, this often meant that new political parties with broader bases of constituents took power, and adopted a somewhat more liberal approach to granting corporate charters. This served the interests of their supporters both by granting them access to incorporation, and by undermining the power and influence of the incumbent firms. Ultimately, this process of change often culminated in the adoption of general incorporation acts, which fully liberalized access to incorporation. The political power of early corporations, and the evolution of their role in the economy and society, are illustrated vividly in the case of the state of New York. In recent years, a wealth of data on New York’s early corporations has been uncovered. These data offer unparalleled insight into the role of the corporation in society, and into the effects of the democratization of  the state’s politics on its corporations.

The Ownership of New York’s Corporations, 1791 In the 1780s and 1790s, aristocratic landowners, along with some wealthy urban merchants, dominated New York State politics. The families that owned manorial estates along the Hudson River had controlled the colonial government and continued to exert overwhelming influence in the Early National period.22 The state’s conservative 1777 constitution protected their position, partly through property qualifications for voting and partly through limitations on the powers of the legislature—and of voters.23 Deeply hierarchical cultural norms, and widely held beliefs regarding the superiority of aristocratic elites, formed the ideological foundations for these institutions.24 New York’s elites were apparently entitled to pursue private gain while in office, and some held multiple offices simultaneously.25 In the Early National period, New York’s government did not grant many petitions for corporate charters. By 1791, the state had permitted only two businesses to incorporate: the New-York Manufacturing Society and the Bank of New York, both of which were located in New York City. Both were typical of the business corporations of their time, in that they were created to serve quasi-public purposes: the bank served as a depository for the state government and issued banknotes that served as circulating media, and the manufacturing company was created in part to develop and promote domestic manufacturing. Their operational performance was also typical of early corporations in their industries, in that the bank enjoyed immediate

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Corporate Origins Table 1.1. New York City Stockholders Compared to the Population, 1791 Occupation

Artisan Merchant Professional Public Official Retail Ser vices Other All (mean) All (median)

Assessed Wealth (means)

Population, %

Stockholders, %

Population

Stockholders

39 18 2 2 11 23 5

17 59 2 8 13 1 0

735 2,803 1,388 1,924 1,288 377 659

2,093 3,505 1,125 5,828 2,494 — —

1,287 569

3,247 1,875

Source: Eric Hilt and Jacqueline Valentine, “Democratic Dividends: Stockholding, Wealth, and Politics in New York, 1791–1826,” Journal of Economic History 72, no. 2 (2012): 332–363.

success, whereas the manufacturing firm failed within a few years. The NewYork Manufacturing Society was supported by a coalition that included both Federalists and Democratic-Republicans who sought to promote the development of mechanized textile manufacturing.26 This likely reflected the uncertain prospects faced by the firm; there was little to be gained politically from attempting to cartelize an industry that had never been successfully pursued. But the highly profitable Bank of New York was founded and dominated by Federalists, and its supporters vigorously opposed subsequent attempts by members of the Democratic-Republican Party to found their own bank in New York City.27 Aside from their partisan divisions, the characteristics that the founders and stockholders in both enterprises shared were their elite status and vast wealth. New York’s government was dominated by aristocratic elites, and its chartered corporations were owned by many of those same elites. Lists of stockholders for both corporations survive, and the owners that resided in New York City can be compared to random samples of the population from the city directory, which listed the occupations of household heads.28 The city’s tax assessment lists from this period survive as well, and can be used to observe individuals’ assessed wealth.29 Table  1.1 presents these data from 1791. At the time, only 6  percent of New York City households owned shares of corporate stock, and these stockholding households were

Early American Corporations and the State

far different from average households. The data in the table indicate that the occupations of stockholders tended to be quite concentrated within the category with the highest average level of assessed wealth, “merchants”—the elite of the world of commerce. Stockholders were also much less likely than the population as a whole to be artisans, ser vice providers (for example, tavern keepers), or to hold other occupations with low average levels of assessed wealth. And within all the occupational categories except “professionals,” which includes attorneys and doctors, the stockholders were far wealthier than the population average. There were, for example, artisan stockholders, but those artisans were clearly much wealthier than their peers. The average assessed wealth of stockholders was about 2.5 times greater than that of the population. Given that becoming a stockholder required making a substantial investment, it may have been inevitable that the ownership of early corporations would be dominated by the wealthy.30 But the stockholders of these enterprises were more than wealthy. They included many of the most important city, state, and federal officeholders. A striking feature of the data in Table 1.1 is that the wealthiest stockholders by far were public officials—their average assessed wealth, $5,828, was 4.5 times that of the population as a whole, and was more than 50  percent higher than that of merchants, the next wealthiest group. Among the stockholders of note were Governor George Clinton (taxed at $2,500); U.S. senator Aaron Burr ($7,500); U.S. senator Rufus King, who was also a director of the Bank of New York ($1,500); Chief Justice of the U.S. Supreme Court John Jay ($8,700); New York City mayor Richard Varick ($2,425); New York State senator Isaac Roosevelt, who was president of the Bank of New York ($29,050); and U.S. treasury secretary Alexander Hamilton ($3,000). The very men who held discretion over access to corporate charters were significant owners of the corporations that they created. That petitions for charters from individuals or factions not politically aligned with those in power were routinely denied clearly indicates the politicianshareholders acted in their own self-interest through their control over corporate charters. Th is provoked fierce objections from the elements of society that perceived their own economic and political influence to be threatened. Typical of the anticorporate rhetoric so endemic to American politics at the time is this 1792 letter from “Anti-Monopolist,” condemning the proposed Society for the Establishment of Useful Manufactures in New Jersey, and

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Corporate Origins

the present prevailing propensity for corporations and exclusive privileges, a system of politics well calculated to aggrandize and increase the influence of the few at the expense of the many. Wealthy speculators of all denominations are incorporated and vested with exclusive privileges, partial laws are made in their favor, the benefit of which others do not enjoy; and they are exempted from the common burthens imposed on the rest of society. This propensity for corporations is very dangerous to the liberties of the people; it raises up various bodies of men of the most influential description in the community, and separates them from the mass of the people; at the same time by distinguishing them with the peculiar marks of favor, it attaches them to the ruling powers by the common ties of gratitude and self-interest, and therefore gives an additional, or rather an artificial weight to government which our Constitution does not warrant. . . . 31

Incorporations in New York, 1791–1826 Although the claims made by “Anti-Monopolist” are generally accurate, the elites who controlled access to corporate charters were not able to permanently entrench their position in government or in the economy. The American Revolution had initiated a process of democratization of society and political institutions that they could not fully contain. Beliefs in “inherent, irradicable differences among men,” which helped form the basis of the old hierarchical order of society, were increasingly rejected.32 Popular participation in politics expanded, and the old aristocracy saw its influence in New York’s government gradually fade.33 Particularly following the election of 1800, the influence of the Federalist Party waned, and various Republican factions vied for control. In 1821 a new constitution was adopted that effectively eliminated property qualifications for voting by adult white males.34 To be sure, many aristocratic landowners and merchants remained important figures in the state’s politics, but individuals of more modest levels of wealth demanded and received greater influence. During those years, the economy of the state was transformed as well. Transportation networks expanded and developed—with steamboats accelerating travel between major cities and the Erie Canal opening a waterway to the West—thereby accelerating economic integration. New York City became the nation’s largest port, its most populous city, and its most important banking center. Large-scale manufacturing enterprises proliferated

Early American Corporations and the State

along the Hudson and the Erie Canal, and began to replace household production of many goods. Markets expanded, and economic opportunity abounded. Many individuals, including some who would have been excluded under the state’s less democratic governments of earlier years, sought to exploit those opportunities by forming new business corporations. And the state became increasingly willing to accommodate their requests for charters. This represented a new responsiveness to the interests of broad segments of society. But it also represented a deliberate effort to undermine the status of the earliest corporations. The notion that charters conferred rights that were to be protected from competition was increasingly rejected by legislators, and began to erode among jurists as well.35 Petitioners for charters explicitly recognized that further incorporations eroded the monopolistic privileges of earlier charters; one appealed to the New York legislature with the statement that “in proportion as the legislature extends a privilege, in that proportion the monopoly which grows out of its exclusive enjoyment is diminished.”36 There was certainly an element of partisan politics behind this change as well; if the earliest corporations were controlled by Federalists, later Republican governments sought to check the power of those institutions by introducing a new wave of Republican corporations to compete with them. “If they could not extirpate monopoly,” wrote Bray Hammond, the Republicans “could at least reduce its inequities by seizing a share of its rewards.”37 Petitioners for charters under Republican governments often sought to signify their allegiance to Republican ideals with the names they chose: there were Farmers Banks, Farmers Turnpike Roads, Farmers Bridges, Farmers Manufacturing Companies, Farmers Insurance Companies, and Farmers Breweries, not to mention the many enterprises named for mechanics, butchers, drovers, and tradesmen. The result was an unprecedented expansion in the creation of business corporations, especially in New York. Figure 1.1 presents total business incorporations in the United States and in New York, scaled by population. In the years following 1790, the pace of incorporations began to accelerate, with 250 chartered between 1791 and 1800, 868 chartered between 1801 and 1810, and 1,615 incorporations between 1811 and 1820. By 1830, at least 4,492 businesses had been incorporated in the United States.38 As presented in the figure, total incorporations per hundred thousand people in the United States rose from essentially zero in 1790 to thirty-five in 1830. By that time,

47

48

Corporate Origins 60 50 40 30 20 10 0 1780

1790

1800 New York

1810

1820

1830

United States

Figure 1.1. Incorporations per Hundred Thousand People, 1780–1830 Sources: Data on incorporations from Joseph S. Davis, Essays in the Earlier History of Corporations (Cambridge, MA: Harvard University Press, 1917); William C. Kessler, “A Statistical Study of the New York General Incorporation Act of 1811,” Journal of Political Economy 48 (1940): 877–882; Richard Sylla and Robert E. Wright, “Corporation Formation in the Antebellum United States in Comparative Context,” Business History 55, no.  4 (2013): 653–669; and Eric Hilt, “When Did Ownership Separate from Control? Corporate Governance in the Early Nineteenth Century,” Journal of Economic History 68, no. 3 (2008): 645–685. Population data is from the decennial Federal Census.

business corporations had become a familiar part of economic life in many parts of the United States. The figure also illustrates incorporations in New York; by 1830, that state alone was responsible for 23 percent of total incorporations in the United States, but only 15  percent of its total population. Both lines in Figure 1.1 appear to change slope at the year 1800, although the change in the line for New York is much more dramatic than that of the rest of the United States. This reflects the greater willingness of the Republicans to grant corporate charters, relative to their Federalist predecessors. By 1830, New York alone had incorporated more than a thousand businesses. Table  1.2 presents detailed information on those enterprises, by industry. The majority were created to provide transportation infrastructure (such as turnpike roads, toll bridges, and canals) or provide ser vices that generally fall within the category of public utilities (gas, water, ferries). The

Early American Corporations and the State Table 1.2. Business Incorporations in New York, 1790–1830 Industry Manufacturing and Mining Banks Insurance Canals Toll Bridges Turnpike Roads Water Gas Ferry and Steamboat Other Total

Number of Incorporations

Average Capital ($)

293 70 73 33 97 347 37 6 32 25

102,444 594,167 387,121 143,208 21,587 36,584 116,868 387,500 124,000 687,500

1,013

139,163

Source: Author’s calculations from the charters in Laws of New York, and for incorporations pursuant to the state’s 1811 General Incorporation Act, from records of the New York Comptroller, New York State Archives, Albany, NY. Average capital is calculated from the charters where capital was specified; for many of the turnpike road companies, no specific capital is specified.

state also incorporated nearly 300 manufacturing and mining companies, as well as 73 insurance companies and 70 banks.39 We can assess the degree of change in the process by which corporations were created by reexamining the wealth and status of stockholders in the 1820s. Table 1.3 presents the same data on New York City stockholders and the general population that were included in Table 1.1 for 1791, only it does so for 1826, when there were 282 corporations operating in the state. In 1826, at least 11  percent of households in New York City owned corporate stock. The average assessed wealth of households in the city had grown nearly threefold since 1791, a clear sign of rising prosperity in the city, and the increasing property values that accompanied that prosperity. The average taxable wealth of stockholders also grew by the same proportion, and the ratio of the stockholders’ wealth to the population’s wealth remained essentially constant, at about 2.5:1.40 Among the stockholders, the occupational distribution was also similar to the 1791 values, with two important exceptions. First, the share of professionals increased substantially. This group included many individuals whose livelihoods depended on corporations either directly (such as bank cashiers) or indirectly (such as attorneys). The large size of this group potentially

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Corporate Origins Table 1.3. New York City Stockholders Compared to the Population, 1826 Occupations

Assessed Wealth (means)

Population, %

Stockholders, %

Population

Stockholders

36 26 4 1 15 14 4

14 56 11 2 13 3 2

1,713 6,491 3,289 1,807 3,174 2,163 1,430

4,651 11,849 7,133 7,670 6,990 6,650 4,153

3,532 1,683

9,429 5,500

Artisan Merchant Professional Public Official Retail Ser vices Other All (mean) All (median)

Source: Hilt and Valentine, “Democratic Dividends.”

Table 1.4. Corporate Characteristics by Year of Incorporation Assessed Wealth, (Thousands) Date of Incorporation Pre-1811 1811–13 1814–16 1817–19 1820–22 1823–25

% of Stockholders

Directors

Stockholders

Merchants

Artisans

% of Stockholders Residing in Wealthiest Ward

41 22 19 20 16 12

24 16 18 12 12 11

85 67 69 69 66 63

4 11 8 12 13 10

100 96 77 69 66 60

Source: Hilt and Valentine, “Democratic Dividends.”

indicates a growing effect of corporations on employment patterns in the city. But second, and much more importantly, public officials were no longer an impor tant category of stockholders. Although the public officials who owned stock were quite wealthy, they were no longer the wealthiest category of stockholders. This likely reflected the fact that as political institutions became better developed, professional politicians—men like Martin Van Buren—began to become impor tant officeholders. It may also indicate that as corporations became more accessible, the value of becoming

Early American Corporations and the State

a politician-shareholder was diminished. And with fewer politicianshareholders, the legislature would have been less supportive of the interests of incumbent corporations. Even more importantly, among existing corporations in 1826, those created more recently—and therefore under governments elected through more democratic institutions—were owned and managed by individuals who were considerably less wealthy than those of older corporations, and were also at least somewhat more likely to be owned by artisans and people living in less affluent neighborhoods. Table 1.4 presents these data in detail. Relative to firms incorporated in 1810 or before, the corporations incorporated in 1823 or later were operated by directors who were only about 30 percent as wealthy, were owned by stockholders who were less than half as wealthy, and were owned at far lower rates by merchants and people residing in New York’s wealthiest (first) ward. This is a clear indication that as the state government became more democratic, broader elements of society were enabled to found business corporations or invest in those that were created. Shareholders and directors remained aty pical of the population, but became less so over time as larger numbers of corporations were created.

Changes in Corporate Regulations The rapid proliferation of corporations brought about significant changes in the relationship between those institutions and the state, and in the legal instruments used to regulate corporations. Most early corporate charters specified a capital structure, and how subscriptions were to be accepted; a governance structure, and how and when director elections were to be held; the name of the corporation and the duration of its existence; and enumerated some of the privileges to which the corporation was entitled, such as the right to sue and be sued in its own name, and the limits on the liability of the shareholders. But, in addition to the structure of the business itself and its rights and privileges, early charters imposed specific regulations on the operations of corporations, which were sometimes unique to par ticu lar firms. For example, detailed schedules of rates for different classes of traffic, and detailed specifications of the route to be followed, were written into turnpike and canal company charters; interest rate ceilings were written into bank charters, along with limitations on the degree of leverage and prohibitions against conducting transactions in commodities or real estate; and the charters of firms in a broad range of industries included prohibitions against engaging

51

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Corporate Origins

in banking transactions. Corporate charters also imposed a variety of regulations on businesses intended to protect their investors or the community more generally. These included measures such as: a requirement of the publication of annual financial statements, specific rules regarding indebtedness and dividend payments, and director election rules that gave disproportionate voting power to small shareholders.41 The text of early nineteenth-century charters would seem to imply that business corporations were subject to fairly strict regulations. Yet it is doubtful that such charter provisions translated into what citizens at the time would have considered effective regulation of those enterprises. The idiosyncratic nature of the regulations created an administrative problem: how to keep track of the specific rules to which each of the thousands of corporations were supposed to adhere. As Louis Hartz noted, “not even the fi nest administrative system could have enforced” the charters’ “welter of variety and inconsistency.” He concluded that “in all too many instances the significance of statute records is confi ned to the theoretical sphere.” 42 The limited administrative capacity of early state governments, a consequence of the characteristically American reluctance to create a professional or well-paid administrative bureaucracy, compounded this problem.43 The chartering of many business corporations was itself a reflection of a lack of state capacity, as businesses were created to provide ser vices that many would have preferred to have been provided by the government.44 And that same limited capacity impeded early efforts to regulate the corporations that were created. Often, no state agency or administrative body was specifically assigned to overseeing regulations imposed on corporations. When legislative committees or executive officers did take up the responsibility of enforcing the terms of corporate charters, they would sometimes discover that required financial statements had not been submitted, or important charter provisions had been violated.45 When the State of New York imposed a new capital tax on business corporations in 1823, the comptroller’s office, charged with overseeing the collection of the tax, had to undertake a long and costly effort just to identify the operating corporations in the state. Another difficulty with this mode of regulating corporations was that opportunistic businessmen could develop innovative techniques to circumvent the restrictions written into their charters. For example, the charters of insurance companies and banks often contained provisions strictly regulating capital contributions, and mandating that some minimum amount

Early American Corporations and the State

be paid in before the firm could commence operations.46 Yet, in a number of cases, subscriptions were paid in according to the terms of the charter, but once the firm commenced operations much of those subscriptions were then loaned back to the major shareholders. Even though these regulations were difficult to monitor and could be circumvented, the state possessed a power ful instrument for compelling businesses to abide by them: the power to dissolve corporations when their charters had been violated.47 Although the severity of this penalty might seem to imply that the state government possessed a high degree of leverage over corporations, in practice the opposite was true. The consequences of the dissolution of a corporation would typically be dire for its investors and creditors, often the very individuals the state intended to protect with the regulations it sought to enforce. As a result, violations of charter terms were often ignored when they were detected. Over time, the evolution of the process by which corporate charters were granted brought about changes that simplified the enforcement of corporate regulation. From a relatively early date, charters in some industries became relatively standardized, with boilerplate language for many important provisions. Although these provisions were adopted in part to simplify the legislative process, they probably also reduced the burden of monitoring and enforcing the regulations written into charters. A more significant change began in the early nineteenth century, as some states enacted statutes that restricted or eliminated legislative discretion over the content of charters in particular industries. These so-called general regulating acts specified some or all of the terms of subsequent charters, and thus reduced the role of legislators to determining which charters would be granted, rather than also negotiating over the content of those charters.48 This prevented states from granting privileges to particular corporations that were not shared by other firms in their industry.49 Eventually, some states experimented with legislation that not only standardized the contents of charters, but also offered access to the corporate form without a special act of the legislature: general incorporation statutes. This legislation began to eliminate political discretion over access to the corporate form, and simply offered uniform terms under which anyone could incorporate a business. As with general regulating acts, the uniformity of the regulations in these statutes held the promise of simplifying the burden of monitoring and enforcing compliance with their terms. The more sophisticated general acts included enforcement provisions that made it nearly

53

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Corporate Origins

impossible for the corporations subject to their terms to undertake important activities without complying with the statute.50 Because general statutes imposed relatively stringent regulations on the businesses they incorporated, entrepreneurs continued to seek special-act charters with more favorable terms. General acts thus initially created an additional path toward incorporation, which operated alongside the path of special charters. Ultimately, the transition to incorporation through general acts was completed though the adoption of provisions in state constitutions that prohibited the issuance of corporate charters via special legislation.51

The Shift toward General Incorporation: Manufacturing The timing of the adoption of general incorporation acts, and the terms of the acts adopted, varied across states and across industries within states. But in most states, the first general incorporation acts for businesses were adopted for manufacturing companies.52 The reason this process began with manufacturing firms is that, in the early nineteenth century, they were among the least controversial corporations—in part because they served no major public purpose, and were perceived to have only localized effects. Perhaps more importantly, early manufacturing firms produced relatively homogeneous goods, such as cotton cloth, on a small scale relative to the size of the market for their products. This suggests that entry by new firms would not have a substantial impact on the prices of goods produced by incumbent firms, and it was therefore of little value for incumbent firms to attempt to restrict entry by blocking access to incorporation.53 To be sure, manufacturing corporations had political opponents, such as artisans who felt that their interests were harmed by the new large-scale competitors.54 But offering open access to the corporate form for such enterprises provoked less concentrated opposition than it would have for firms in other sectors. New York was the first state to implement a general incorporation act for manufacturing firms; this act was quite influential and stimulated the adoption of similar measures in a number of other states.

New York’s 1811 Act In the years of the Embargo and Non-Intercourse Acts, many American states adopted measures to stimulate domestic manufacturing enterprises as foreign textiles and other products became unavailable and economic

Early American Corporations and the State

nationalism spread. These measures ranged from subsidized lending or tax exemptions for manufacturers to exemptions of the employees of those fi rms from militia ser vice. Several states also altered their corporation laws with respect to manufacturing fi rms. In 1809, Massachusetts enacted a general regulating act for manufacturing enterprises.55 In 1811, New York took the more significant step of enacting a general incorporation statute. The original New York bill contained provisions adapted from the state’s 1784 general incorporation act for religious congregations, and was entitled “A Bill to Encourage the Manufacture of Woolen Cloth, also Cotton, Hemp, and Flax. . . .”56 Like a general regulating act, it dictated the terms under which future incorporations would occur. But it also created a procedure by which anyone could simply file a certificate with the secretary of state indicating that they had created a business that complied with the terms of the statute, and they would be automatically incorporated: there was no longer any discretion over which manufacturing businesses would be able to incorporate, and which would not. The act that was ultimately passed restricted the capital of the firms to a maximum of $100,000, and specified many provisions of their internal governance, from the size of their boards of directors to the voting rights of their stockholders. It also restricted incorporations to fi rms producing textiles, glass, iron, steel, or lead. Perhaps in recognition of the fact that the measure was regarded as a response to extraordinary circumstances, its duration was limited to five years.57 Later, the act was renewed and the set of industries covered by its terms was gradually expanded to include producers of earthenware and beer. Although it was briefly permitted to lapse in 1817, the Act was revived in 1818 for another five years, and was later made permanent through inclusion in the state’s 1821 constitution.58 Figure 1.2 illustrates the effects of the act. In the top panel, which displays the total number of manufacturing incorporations by year, the unprecedented levels of manufacturing charters granted in 1809 and 1810 are clearly evident—for all years prior to 1809, New York had chartered a total of only three manufacturing companies. The Act of 1811 can therefore be seen as motivated at least in part to accommodate a surge in demand for incorporation among manufacturing entrepreneurs, which apparently faced relatively little opposition in the legislature. In the years surrounding the War of 1812, the act was used quite heavily: between 1811 and 1815, 110 firms were incorporated under its provisions.

55

56

Corporate Origins Total Incorporations, Manufacturing 50 40 30 20 10 0 1805

1810

1815

1820

1825

Average Capital, Manufacturing Corporations 400,000 300,000 200,000 100,000 0 1805

1810 Special Act Charters

1815

1820

1825

General Act Incorporations

Figure 1.2. Manufacturing Incorporations in New York, 1805–1825 Charters collected from Laws of New York; for firms incorporated through the 1811 general incorporation act, the data is from Ledger, Certificates of Incorporation (A1859), New York State Archives, Albany, NY.

As is also clear in the figure, in 1811 and in many years subsequently, the legislature continued to grant special-act charters to manufacturing firms. Some part of the motive for obtaining these charters can be seen in the lower panel, which presents average capitalizations for manufacturing corporations by year. The companies granted special-act charters typically had capitals far in excess of the $100,000 limit specified in the statute, and the firms incorporated through the statute had average capitals far lower than the $100,000 ceiling imposed in the law. Thus, the statute effectively created a dual path to incorporation for manufacturing firms: open-access for smaller firms operating in a particular set of industries with particular governance institutions, and legislative control over access to charters for larger firms or firms that did not wish to conform to other provisions of the statute.59

Early American Corporations and the State

Why was New York willing to take the important step of implementing a general incorporation act at such an early date? Most likely the state’s legislators were motivated less by concerns regarding the corrupting influence of special-act charters, and more by the desire to stimulate the creation and expansion of manufacturing enterprises. New York had reason to feel that its policies toward promoting manufacturing had not been successful. Data from the returns of the 1810 census of manufactures indicate that in that year New York had only twenty-six cotton textile manufacturing establishments within its borders, compared to sixty-four in Pennsylvania, fift y-eight in Massachusetts, and twenty-eight in tiny Rhode Island.60 Powerful interests in the state, who might have other wise opposed granting relatively open access to incorporation and limited liability, were likely persuaded that New York was losing ground to its neighbor states, and needed to enact new measures to stimulate the creation of manufacturing enterprises, particularly in textiles. Th is does not imply that jurisdictional competition in the modern sense was an impor tant motive; at the time, it would not have been realistic to hope that capital from neighboring states would flow into New York in response to favorable changes in corporation law.61 Instead, New York’s legislators probably wanted to stimulate manufacturing within their borders by lowering the costs of forming a corporation faced by the state’s residents. New York’s law was revised and expanded in 1848. By that time, 362 businesses had been incorporated by the state’s general statute.62 The revisions included a number of new provisions, developed in response to experience, which made the law much more detailed and prescriptive.63 But the 1811 statute had marked a permanent transition toward incorporating firms through general laws, and the elimination of legislative discretion over corporate charters and their terms.

General Acts for Manufacturing Firms in Other States New York’s 1811 act received significant attention outside the state, and proposals based on the New York statute were introduced in many state legislatures. Ultimately, only Ohio (1812), New Jersey (1816), and Illinois (1824) actually passed general acts prior to the 1830s.64 All were based on New York’s statute, with various changes. Little is known about the extent to which these other early general incorporation acts were utilized.65 However, all three were ultimately repealed.

57

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Corporate Origins

1850

1860

Figure 1.3. Eastern States Adopting General Incorporation Acts for Manufacturing Firms The shaded states are those that had adopted a general incorporation act for manufacturing enterprises prior to the indicated date. Not shown are California and the Kansas Territory, which adopted general acts in 1850 and 1859, respectively. Source: Eric Hilt, “Corporation Law and the Shift toward Open Access in the Antebellum United States,” in John Wallis and Naomi Lamoreaux, eds., Organizations, Civil Society, and the Roots of Development (Chicago: University of Chicago Press, forthcoming).

In the 1840s, though, general incorporation statutes began to proliferate rapidly. In part this reflected the growing influence of Jacksonian political forces, whose hostility toward the corrupting influence of legislative discretion over corporate charters led them to support the adoption of general laws. But it also likely reflected increasing familiarity with the use of the corporate form, as greater numbers of special-act charters were granted to manufacturing enterprises over time. By 1850, eleven states, whose populations collectively accounted for 54  percent of the total population of the United States, had adopted general incorporation acts for manufacturing enterprises. And by 1860, twenty-four states and territories, which accounted for nearly 92 percent of the national population, had such acts in force.66 The proliferation of these acts within the eastern United States is illustrated in Figure 1.3. The strong regional effects in the adoption of the acts are evident in the figure; the New England and Southern states were gener-

Early American Corporations and the State

ally slower to adopt them. By 1860, the only eastern states without a general act for manufacturing firms were Maine, New Hampshire, Rhode Island, Delaware, and South Carolina. With the exception of South Carolina, whose conservative governments granted relatively few corporate charters, these were small states that had granted unusually large numbers of charters to business corporations relative to the size of their populations.67 In those states, access to the corporate form via special act was granted quite liberally, making the adoption of a general incorporation statute a less significant reform. In effect, the legislature retained discretion over access to the corporate form in exchange for a promise to exclude potential incorporators only in exceptional circumstances. The legislatures of some of those states may have felt pressure to offer liberal access to charters, given that so many of their surrounding states had general incorporation acts. The terms of different states’ general acts for manufacturing enterprises varied somewhat, particularly with regard to the regulations imposed on the corporations created. Different approaches to safeguarding the interests of creditors and the community against fraud were adopted. For example, New York’s 1811 statute, as well as the statutes of Maryland, Missouri, and Pennsylvania, strictly regulated the size of corporations’ capital stock, the voting rights of their shareholders, and the size of the corporations’ boards of directors.68 In contrast, the general acts of Iowa, Georgia, and Louisiana imposed no regulations on any of these characteristics. Those latter states’ acts, in turn, contained unusually strict provisions with respect to capital contributions, stockholder and director liability, and / or the right of the state government to examine the corporations’ books and inspect their operations.69 But, irrespective of the form of the regulations imposed, each of these acts created a process by which entrepreneurs could gain access to incorporation by simply filing a certificate indicating that the terms of the statute had been followed. Political discretion over the formation of manufacturing corporations was, for the most part, ended.70

Regulation, Corruption, and Reform: Banking Corporations Whereas manufacturing corporations generated relatively little political controversy, banking corporations were their polar opposite. Banks were the most contentious class of corporations, and banking policy—from the regulations imposed on existing banks to legislation facilitating access to bank charters—often provoked pitched legislative battles.

59

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Corporate Origins

It is not difficult to understand why. Unlike manufacturing firms, whose operations were seen as having relatively few effects beyond local labor markets, banks provided ser vices that were vitally important to economic life: they facilitated payments, provided access to credit, and fi nanced their lending partly through the emission of banknotes, which circulated handto-hand as money. Society therefore depended on banks not just to borrow, but also to facilitate transactions. And it was widely understood that reckless banking could trigger bubbles and macroeconomic instability, making regulations or other measures that inhibited excessive risk-taking in banking critically important.71 Any general incorporation act for banks— legislation that permitted what became known as “ free banking”—therefore needed to include provisions to ensure that the institutions created would operate prudently. But banking was an industry that saw a great deal of innovation in its financing techniques and business practices, which made regulations extremely difficult to design and enforce. Moreover, regulations introduced in the name of ensuring the safety of new banks might effectively place those banks at a disadvantage relative to incumbent chartered banks that were not subject to such regulations. In addition, in America’s rapidly growing economy, banking was extremely profitable, or at least it could be if entry were sufficiently restricted. Many states therefore enacted so-called restraining statutes that prohibited entry into banking without a corporate charter, and then carefully rationed charters to politically connected groups. Limiting entry benefitted incumbent banks, and it may also have promoted financial stability by raising the franchise values of existing banks.72 On the other hand, limiting entry also drove would-be bankers to fi nd extra-legal routes into the industry, sometimes by operating institutions best characterized as pseudo-banks or shadow banks— often under the authority of an insurance company charter— which may have had their own consequences for financial stability. The political economy of bank chartering during the first half of the nineteenth century in many states distilled down to a contest between three distinct groups, and their political allies.73 First, there were the incumbent banks, which, out of self-interest, opposed liberal grants of bank charters or general incorporation acts for banks. Second, there were entrepreneurs, who wanted to form new banks or needed access to credit for their enterprises in other sectors, and therefore supported more liberal grants of banking charters or general incorporation acts for banks. And finally, there were elements of society—sometimes agrarian, sometimes urban and working-class—who

Early American Corporations and the State

opposed banking altogether, and were often associated with the “Locofoco” faction of the Democratic Party.74 The evolution of banking policy across states was determined in part by the relative influence of these groups, and the sometimes shift ing alliances among them. For example, at times the Locofocos allied with incumbent banks in blocking new bank charters, while at other times they may have allied with entrepreneurs in supporting general incorporation acts for banks, which at least eroded the privileges of existing banks. In some contexts, agrarian or Locofoco factions held decisive influence, and managed to enact bans on incorporated banks.75 Banking crises, which disrupted economic life, often reshaped these alliances, as the public lost faith in banking institutions and the political factions controlling the regulation of the banking industry. Impor tant changes in the legal regime governing states’ banking systems were often made in the years following these crises. In the early nineteenth century, the incumbent banks of New York City, which included a number of the largest commercial banks in the United States, were a powerful force in their state’s politics. Many became part of a political coalition that tightly restricted access to banking, and, through its allocation of the resulting rents, effectively dominated the state’s government until the financial crisis of the late 1830s. All of the problems associated with bank chartering, both political and economic, are clearly illustrated in the experience of that state, as are the causes and consequences of the transition to free banking.

New York: Bank Chartering and the 1838 Free Banking Act The first bank incorporated in New York was the Bank of New York, founded in 1784. At the time of its founding, a political stalemate prevented it from obtaining a charter from the legislature, and it operated as an unincorporated bank until it was finally chartered in 1791.76 At the time of its incorporation, the stockholders of the Bank of New York included a number of prominent Federalist politicians, and interests associated with the bank were able to successfully block several petitions within the Federalist-controlled legislature for charters for additional banks in New York City.77 With the exception of the New York branch of the Bank of the United States, also strongly associated with the Federalists, the Bank of New York operated without competition from other commercial banks in New York City for fifteen years. The bank’s

61

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Corporate Origins

opponents charged that it interfered in the state’s elections, favoring Federalist candidates and their supporters. Thus began a long era in New York in which incumbent banks used their political influence to restrict access to charters, and thereby limit competition. Ultimately, the monopoly of the Bank of New York was broken by the creation of the Bank of the Manhattan Company by the Republican Aaron Burr in 1799.78 In reaction, in 1803 Alexander Hamilton, a founder of both the Bank of New York and the Bank of the United States, helped found a  third state-chartered bank in the city, the Merchants’ Bank. However, by that time the Republicans controlled the legislature and the Merchants’ Bank was denied a charter. The Merchants’ Bank began operating without a corporate charter, and in response, in 1804, the state passed a “restraining act” prohibiting an unincorporated institution from accepting deposits or issuing banknotes.79 After a protracted battle in the state legislature, with bribes paid both by the Merchants’ Bank’s opponents and supporters, a charter was finally granted to the institution in 1805.80 Over time the number of banks in the state did increase, but the incumbent banks and their allies in the legislature tightly controlled access to banking charters. The broadening of democratic participation in the state’s politics likely contributed to the incorporation of some new banks, but these were all located outside of New York City, where the incumbent banks were able to block all petitions for charters. It was not until 1810 that a fourth bank was permitted to open in New York City, and it was one with the solidly Republican name of “Mechanics Bank.” In 1812, following the expiration of the charter of the Bank of the United States, the legislature received petitions for new banks whose total capital would have more than doubled that of the existing banks in the state. One proposal called for a charter to be given to the former New York branch of the Bank of the United States, which would be known as the Bank of America, with an authorized capital of $6 million— three times the size of the next largest bank then in operation. The mostly Federalist petitioners for that institution hired well-connected Republican lobbyists and apparently distributed extensive bribes to win over majorities of both houses.81 The governor opposed the measure, and prorogued the legislature in an attempt to prevent the passage of the charter, but ultimately the Bank of America was incorporated with a reduced, but still enormous, capital of $2 million. Several of the lobbyists hired by the petitioners were indicted for bribery, but none were successfully prosecuted.82 In the years that followed, Martin Van Buren rose to prominence in the state’s Democratic-Republican Party, and gradually orga nized it into the

Early American Corporations and the State

fi rst modern political party or “party machine.” Van Buren’s leadership entrenched the power of the party through voting discipline, a partisan patronage system, and control over candidate nominations through the party’s caucuses. But Van Buren’s most power ful tool for distributing economic rents to his allies and withholding them from his opponents was control over the process of allocating bank charters. Known as the “Albany Regency,” Van Buren’s Democratic-Republicans relied on the restraining statute and party discipline to dominate banking policy in the 1820s and early 1830s. The Regency’s control over access to banking charters stimulated efforts to circumvent it, which often had significant economic and financial consequences. For example, would-be bankers who were not politically connected enough to get a charter for their enterprises sometimes circumvented the restraining act by forming private unincorporated banks. Most of these were successfully crushed, although this often took lengthy and complex legal proceedings.83 Much more impor tant were the efforts of insurance companies to circumvent the restraining acts by engaging in banking. This strategy originated with the Utica Insurance Company, incorporated in 1816. As with most insurance companies, Utica’s charter authorized the firm to invest and make loans with the firm’s funds, although mortgages were the only form of loans specifically mentioned.84 When the firm’s capital was paid in, the directors commenced banking operations, issuing paper money identical to banknotes to finance its lending.85 This triggered a significant effort to enforce the regulations included in a corporate charter, which was ultimately intended to protect the interests of incumbent banking corporations. In November 1816 members of the Albany Regency in the New York Senate ordered the attorney general to commence legal proceedings against the company, and in 1818 the supreme court ruled that the firm was “unauthorized by law” to engage in banking.86 Utica Insurance ceased its banking operations in response.87 That judicial decision resolved any uncertainty over whether Utica Insurance had the authority to act as a bank, but the question of whether other insurance companies could do so remained at least somewhat open, given the variation in the terms of many insurance charters. And indeed, in 1818 a charter was granted to the Mercantile Insurance Corporation of New York City, which authorized it to “make loans of its capital stock or funds on bonds and mortgages or personal security.”88 When the firm commenced operations it immediately began engaging in banking, although it financed its lending by issuing liabilities it called “bonds,” which

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were technically post notes, rather than the usual banknotes issued by banks.89 In 1824 and 1825, following some unpopular political initiatives, the Albany Regency lost control of the New York legislature, and a Republican faction hostile to the Regency gained power.90 This faction, known as the “People’s Party,” seized the opportunities created by the weakening of the Regency to grant several charters to banks, numerous insurance charters, and also chartered “Lombard” or loan companies that, like the insurance companies, engaged in banking by issuing post notes. The incumbent financial interests in the state were appalled that men they regarded as “cunning rogues” were thus enabled to enter the banking industry.91 A number of the new insurance companies, whose charters contained language that could be interpreted to authorize lending, emulated the strategy of Mercantile Insurance, and began to act as banks and issue post notes. Also during those years, at least two New Jersey banks opened offices of discount in New York City, and circulated their own banknotes as well, in violation of the restraining statute. The result of the increase in the number of financial corporations in 1824–1825 was a rapid expansion of credit, particularly in New York City, financed by a similar increase in circulating banknotes and banknote-like instruments. In 1825, the New York Senate appointed a committee to investigate the extent to which the state’s insurance and Lombard companies, and New Jersey’s banks, were violating the terms of their charters or other laws. The committee identified many “dangerous and illegal” practices, but ultimately declined to make any recommendations to prosecute the offenders, no doubt out of fear of hurting the creditors of these institutions if their charters were revoked or if they were forced to suddenly repay their liabilities.92 In 1826, in a financial panic, runs on many of these institutions resulted in a spectacular series of bankruptcies. The public was outraged, and in the ensuing elections the Regency was restored to power. During the years in which the Regency was out of power, some legislators also attempted to permanently break the Regency’s control over bank chartering by proposing to repeal the restraining act, and to amend the state’s 1822 act authorizing the formation of limited partnerships to permit those firms to engage in banking. In speeches in the senate, advocates for this measure invoked Republican notions of fairness: What right have you to select your favorites in the community, and give them the means of acquiring wealth, and refuse the same privi-

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leges to other citizens, of equal characters, and in all respects equally entitled to public confidence? . . . Repeal the restraining laws, make the act relative to partnerships applicable to banking . . . and there will no longer be a pretense for those endless solicitations for bank charters for which we are subjected.93 Others in the Senate proposed adopting a general incorporation act for banks, which would have granted open access to banking through free incorporation.94 Neither of these proposals ultimately received enough support to pass; even though the Regency did not hold control, allies of the incumbent banks held sufficient influence in the legislature to block the measure. The failure of so many companies in 1826, and the financial disruptions that resulted, provoked urgent calls for reform. The political corruption produced by the process of allocating charters was made more embarrassing by the financial disruption it produced. Calls again came for a general incorporation act for banks, as a measure to both end the corruption of the legislature, and to produce a more robust banking system.95 Ultimately, the legislature retained its control over the allocation of charters. In the aftermath of the scandals, no banks or insurance companies were chartered in 1827 or 1828. In those years, debates raged about the appropriate course of action with regard to banking and insurance companies. Rather than opening access to banking, stricter controls on companies with financial powers were imposed in 1828. These controls included provisions that made directors personally liable in cases of fraudulent bankruptcy. In 1829, the state created its co-insurance scheme for banks, known as the Safety Fund Act. The Safety Fund Act imposed an annual tax of 0.5 percent on the capital of all banks to create a fund that would redeem the notes of banks if they became insolvent. Importantly, the state also created an administrative agency to oversee the operations of the safety fund and enforce banking regulations in connection with the Safety Fund Act. Figure 1.4 presents the history of charters of banks and insurance companies in New York. A brief surge is evident in 1824 and 1825, when the Regency lost power, and this period is followed by a sharp downturn in 1826– 1828 following the scandals of 1826. In the years following the passage of the Safety Fund Act, several new bank charters were granted, and the expiring charters of many New York banks were replaced with new ones subject to the law (these ‘recharterings’ are included in Figure 1.3). Throughout the 1830s, the Albany Regency continued to control access to bank charters, using the safety fund as its assurance that the banking

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Corporate Origins 110 100 90 80 70 60 50 40 30 20 10 0 1780

1790

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1810

Insurance Companies

1820

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Banks

Figure 1.4. Bank and Insurance Incorporations in New York Sources: For insurance companies, and for banks through 1837, charters from Laws of New York. For free banks (1838–), Memoranda Book (B1447–96), New York State Archives, Albany, NY.

system over which it presided would be sound. For these years, petitions for bank charters were reported in Albany newspapers, and of the 535 petitions for bank charters between 1830 and 1837, only 53, or 10  percent, became law.96 Nonetheless, in 1836, the year in which the charter of the Second Bank of the United States expired, thirteen banks were chartered, the most ever in a single year. Then the Panic of 1837 began, with traumatic consequences for the banking system. Note-issuing banks suspended convertibility, collectively refusing to redeem their notes in specie. Ultimately, the safety fund proved inadequate to protect the note holders of failing banks. Again there were calls for reform, and the Regency lost control of the state government to the Whigs. The Whigs revived the debates over the two proposals to open access to the banking industry—the limited partnership measure and the general incorporation act for banks. In 1838, a general incorporation act was passed.97 Advocates for the measure called it a “great and admirable improvement on the corrupting political monopoly it superseded.”98 The law permitted banks with a minimum capital of $100,000 free access to incorporation and entry into the industry. But crucially, it also included a sophisticated new regula-

Early American Corporations and the State

tion that became the basis of all subsequent free banking acts, including the National Banking Acts of 1863–1864—the requirement that the notes issued by the banks be fully collateralized with bonds.99 This provision ultimately created a reliable paper currency. The operation of the free banking law in its initial years illustrates the extent to which the Regency suppressed bank charters during the period in which it controlled the legislature. In Figure 1.3, there is a dramatic and discrete increase in bank incorporations in 1838 and 1839, as the pent-up demand for banks was finally satisfied.100 Ultimately, New York’s free banking system was a success.101

The Transition to Free Banking in Other States New York’s experience in the early decades of the nineteenth century was fairly typical, in that many states tightly rationed the allocation of bank charters. But the range of approaches taken in shaping and regulating banking created substantial differences in the structure and evolution of state banking systems. A few states directed their banking systems to allocate credit to par ticu lar sectors or enterprises, forming, for example, “canal banks,” “railroad banks,” or “plantation banks,” and helped finance their lending through the issuance of state bonds.102 Some even opted to charter large “state banks”—which were sometimes very close to official arms of the state government, and quite political.103 These latter institutions often played an important role in public finance; Alabama and Georgia eliminated their state property taxes for many years using revenue generated from their stateowned banks.104 The states of Indiana, Illinois, and Missouri went a step further and established monopoly state banks with numerous branches, which during their existence constituted the entire banking system in those states. Each of these states’ constitutions was influenced by antibank sentiment, and prohibited most incorporated banks, with the single exception that they provided for the creation of a state bank. The record of these monopoly state banks is quite mixed: Indiana’s was operated quite conservatively and successfully, whereas the State Bank of Illinois, chartered in 1835, was used to finance internal improvements, and failed in 1842.105 Other states went still further and chose to ban banking corporations altogether. These prohibitions of course did not completely suppress the

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provision of banking ser vices or the emission of paper money-like instruments; they simply ensured that unincorporated entities within the state, or banks from outside the state, performed those functions. The experience of Iowa’s ban (1846–1857) is instructive. Cities, counties, individual merchants, and other entities within the state issued money-like liabilities.106 And would-be bankers in the state went to the neighboring Nebraska Territory and incorporated financial institutions there. Echoing the early experience of New York, the most prominent of these was actually an insurance corporation, the Western Fire and Marine Insurance Company, which accounted for the largest fraction of circulating notes in Iowa. Like the other Nebraska institutions founded solely to circulate notes in Iowa, it was poorly capitalized and failed in the Panic of 1857.107 In 1858, Iowa enacted a free banking statute, and also chartered a large state bank. Several of the states with monopoly state banks, or bans on banking, eventually enacted free banking statutes as reforms intended to open access to the banking industry. But the transition was a slow and halting one, in part because of the spectacular failure of an early attempt to implement free banking. In 1837, the State of Michigan passed as law a free banking proposal that had been introduced into the New York legislature. Michigan therefore preceded New York in actually introducing free banking by one year. The statute Michigan enacted was based on the same principles as the one ultimately implemented in New York, but its collateral requirements and other regulations were considerably weaker, and easily evaded.108 As a result, the state’s experience with free banking was quite different from New York’s, and is best characterized as a disaster. The law was exploited by unscrupulous speculators, who issued large amounts of notes using poorly capitalized banks located in remote areas—“their cash reserves were sometimes kegs of nails and broken glass with a layer of coin on top.”109 In a reflection of the state’s poor implementation and enforcement of its law, there is some uncertainty regarding the number of banks created under its terms, but it was around forty, and nearly all of them failed in the economic downturn that began in 1837.110 Michigan repealed its law in 1839, and during the ensuing nine years, no state enacted a general incorporation act for banks. Beginning around 1850, free banking acts began to become more common, although they were not nearly as prevalent as general incorporation acts for manufacturing firms. Figure 1.5 illustrates the states that had adopted these statutes by 1850, and by 1860. In 1850 only four states, ac-

Early American Corporations and the State

1850

1860

Figure 1.5. Eastern States Adopting General Incorporation Acts for Banks The shaded states are those that had adopted a general incorporation act for banks (a “ free banking act”) prior to the indicated date. Michigan repealed its 1837 act in 1839, but enacted a new one in 1857; Connecticut repealed its 1852 act in 1855; and Tennessee repealed its 1852 act in 1858.

counting for 23 percent of the population, had free banking acts in effect.111 By 1860, sixteen states, accounting for 61 percent of the population, had free banking acts. Comparisons with Figure 1.3, which illustrates the adoption of general incorporation acts for manufacturing firms, are illuminating. Similar regional patterns are evident; general acts for banks and manufacturing fi rms were adopted more slowly in the South and in New England. And by 1860, all of the states that failed to adopt general incorporation for manufacturing—Maine, New Hampshire, Rhode Island, Delaware, and South Carolina—also failed to adopt free banking. The political institutions of those states were apparently hostile to the principle of general incorporation, not just to general incorporation for manufacturing. In addition to adopting free banking more rarely, the American states adopted free banking later than general acts for manufacturing, and their free banking acts were often less successful than their general acts for manufacturing. Among the states that implemented general acts for both manufacturing firms and banks, the free banking act was adopted on average four

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years after the general act for manufacturing.112 And three states actually repealed their free banking statutes, whereas none of the general acts for manufacturing adopted after 1830 were repealed.113 These facts are consistent with proposals for free banking producing greater political opposition than general incorporation for manufacturing. This resistance generally originated with incumbent banks, but it may also have come from interest groups that benefitted from strong public intervention in the banking system. The free banking statutes of seven states—Alabama, Georgia, Florida, Iowa, Massachusetts, Tennessee, and Vermont—saw little if any use at all.114 Th is suggests that, in some states, the outcome of legislative bargaining over the content of the free banking act was a statute that contained such onerous or undesirable provisions that potential bankers preferred to seek special charters. This is also consistent with strong political resistance to free banking. The slow and incomplete transition to general incorporation for banks illustrates the difficulties posed by proposals to distance the state from oversight over entry into banking. The profitability of banking, its importance for economic development, and its potential to generate crises and instability if mismanaged created powerful interest groups seeking to shape banking policy in a particular way, which was often incompatible with opening access to the industry. In many states, banking corporations remained the subject of intense political controversy throughout the antebellum period.

Conclusion Early business corporations, especially banks but also those operating in other sectors, corrupted American politics even as they made impor tant contributions to economic growth and dynamism. The investors in the first generation of American business corporations were not merely wealthy elites, but were also the very officeholders who held discretion over access to corporate charters. And they did not hesitate to protect their interests by denying petitions for charters from potential competitors. Political discretion over corporate charters and their terms was often used not to protect the interests of the public, but to protect the interests of the elites associated with incumbent corporations. Over time, as political institutions became more democratic, the states gradually facilitated broader access to corporate charters. As they did so,

Early American Corporations and the State

broader segments of society were enabled to form corporations, and the owners of these later enterprises were less wealthy and politically connected than the owners of earlier corporations. Corporations became more numerous, not because they were regarded as innocuous, but because many of them were considered monopolistic and endowed with exclusive legal powers. To incorporate large numbers of new businesses was to undermine the privileges and powers of the incumbent corporations. Ultimately, the states moved away from exercising political discretion over access to the corporate form by adopting general incorporation acts. Legislative authority over access to corporate charters was one of the principal mechanisms by which wealthy and politically connected elites protected their interests. General incorporation acts, which made incorporation freely accessible, did not free corporations from regulation or control by the state, but rather eliminated a mechanism by which incumbents could stifle new entry. By opening access to incorporation, a powerful instrument of corruption was blunted. General statutes also imposed strict regulations on the businesses they incorporated, which helped restrain corporate power. These experiences are illustrated most vividly in the case of New York’s banking industry. Legislative control over banking charters was maintained not to optimally regulate banking, but to perpetuate and extend the power of a political party and the interest groups associated with it. Control over access to banking enabled that party to maintain control over the state government, and ultimately even helped propel its leader, Martin Van Buren, into the presidency. Efforts to broaden access to banking charters were enacted partly in the interest of improving the banking system, since the many schemes employed to circumvent the restrictions into bank entry sometimes had serious consequences for fi nancial stability. But broader access to banking also helped bring an end to bank chartering as a lever of political power. Ultimately, New York adopted a general incorporation act for banks in 1838. New York’s statute strictly regulated the banks it created, and served as a model for the statutes adopted in other states. But unlike general incorporation acts for manufacturing, which were adopted by all but a handful of the American states by 1860, these free banking acts were successfully resisted in many states, and when they were adopted, they were sometimes failures. Then, as today, banking regulations were the subject of intense political controversy, and the influence of particular interest groups sometimes produced deficient policy outcomes.

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The analysis of this essay casts doubt on some of the historical claims included in the Citizens United opinions. Justice Stevens argued that early corporations were regarded as a danger to the Republic, which is well supported by the evidence. But his claim that the creation of corporations by special legislative act was a response to this problem was mistaken.115 It was a cause of the problem: legislative discretion over access to the corporate form enabled incumbent firms and their politically powerful owners to block entry by new firms. Opening access to the corporate form through general acts was found to be the solution. Similarly, Stevens’s argument that corporations could be comprehensively regulated was also clearly correct, but his claim that such regulations were actually imposed “in the ser vice of public welfare” does not take account of the influence of incumbent firms and their politically connected owners over the design of corporate regulations. Some regulations were, in fact, imposed to restrict competition and further entrench incumbent firms. Justice Scalia’s claim that large numbers of corporate charters were granted by early governments was also correct, but the conclusion he drew from this fact, that corporations were therefore not so controversial or unpopu lar, was clearly incorrect.116 Seeking to undermine the power and corrupting influence of the earliest corporations, successive governments granted growing numbers of charters, making corporate privileges accessible to segments of the population that had previously been excluded. It was because corporations were regarded as so powerful and dangerous that enormous numbers of them were created under Republican governments. Moreover, Scalia’s claim that the dissociation of monopolistic privileges from incorporation that was achieved through general acts eliminated hostility toward the form ignores the purpose and content of those acts. General acts were implemented to undermine the privileges of incumbent firms, and more importantly, imposed strict regulations on the fi rms they created. If they made corporations less controversial, it was partly due to the impact of the regulations they contained. From the very beginning, the corporation has been an intensely controversial institution in the United States, and the evolution of corporate legislation reflects the efforts of successive generations of governments, elected under increasingly democratic institutions, to mediate among different interests—incumbent firms, entrepreneurs, and consumers, among others. It is too simplistic to argue, as Justice Stevens did, that early corporations

Early American Corporations and the State

were regulated in the public interest, and it is simply incorrect to argue, as Justice Scalia did, that the large number of corporations created implies that these institutions were not feared or considered malign bastions of monopoly. Then, as now, the political influence of corporations was regarded as a grave danger to American democracy.

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CHAPTER 2

Corporations and Organizations in the United States after 1840 JESSICA L. HENNESSEY JOHN JOSEPH WALLIS

Between the American Civil War and the First World War large business corporations appeared in the developed countries of the West for the first time in human history. Sweeping categorical generalizations are always dangerous, but there is no evidence of large hierarchically managed private organizations anywhere in the world before the second half of the nineteenth century. The only comparably large organizations historically were governments, armies, or churches, but none of them reached the level of managerial sophistication and close coordination of capital, labor, products, and markets of late nineteenth-century firms. Before 1860, large private firms were limited to transportation and utilities, while after 1865 firms arose in many lines of manufacturing, banking, and ser vices (such as communications). No history of the corporation and American democracy can avoid the fact that American democracy exercised as large an influence on the corporation as the corporation exercised on American democracy. Corporations in the United States are all creatures of the states, literally legal persons created and recognized by state governments. While corporations are not a distinctly American phenomenon, the corporation in America is distinctly the product of American history. This essay sorts out some of the connections between American economic and political development between the early nineteenth and early twentieth centuries, with par ticu lar attention to the evolution of the corporate form of organization and its relationship to democracy. By democracy, Americans usually mean more than a political system that chooses its leaders through elections. They mean a political and social system in which citizenship is available to a wide range of individuals, all citizens have the ability to participate in political and economic activities subject to a common set of rules that govern all equally, and all citizens have the ability 74

Corporations and Organizations in the United States after 1840

to form organizations within that common set of rules that will be recognized by the government as legitimate participants in economic, political, and social activities, and in competition with existing organizations. Democracy should, in principle, guarantee equality of opportunity if not equality of outcomes. Actions in the political and economic arena, however, are usually taken by organizations. While individuals may enjoy equal opportunity to form organizations, that does not imply that all organizations (or their members) have an equal opportunity to shape the world around them. Some organizations, if only through their size, exert more influence, and it has always been the case that some organizations are granted privileges that others do not enjoy. Throughout American history, even before the Revolution, citizens worried about the impact of large organized economic interests on the operation of the political system. All organizations operate in an environment of rules that determine, in part, what they can and cannot do as organizations. The Citizens United decision made a significant change in one of the rules that constrained the ability of organizations to influence political debate. The rules governing the formation and behav ior of corporations and other organizations have undergone a constant process of change since America’s founding. The title of Richard L. McCormick’s paper, “The Discovery that Business Corrupts Politics: A Reappraisal of the Origins of Progressivism,” captures the reality that each generation discovers anew that there is a deep connection between how we organize ourselves to pursue economic, social, educational, and other private and public goals, and how our democratic system of politics functions.1 While there is no doubt that many Americans fear the effect of corporations on their politics, they simultaneously believe that large corporations are engines that drive economic growth, job creation, and the material prosperity that both enriches and protects them. The tension between Americans’ desire to live in a society that makes it easier for them to organize to pursue their own goals and the effect of organized interests on their political decisions is fundamental to the dynamics of American democracy. This essay links the early history of corporations and the emergence of general incorporation laws in the early nineteenth century—documented by Eric Hilt in Chapter 1—and the development of organizational forms later in the century. The early action in states’ general incorporation laws resulted in limiting the flexibility of corporations to organize and operate. The restrictive nature of such general laws prompted corporations to seek out

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states with more liberal incorporation statutes, described as a regulatory race to the bottom by Daniel Crane in Chapter 3. We lay out a logic of institutional change that describes why Americans first decided to move to general incorporation acts in the early nineteenth century and then changed the structure of those acts in the late nineteenth century. The logic explicitly incorporates both economics and politics. Early reforms to the rules and laws governing the formation and operation of corporations were adopted largely to solve a set of political problems with the structure of American democracy. If privileged corporations could be created by state legislatures, democracy would inevitably become corrupted. The solution was to let everyone form a corporation, taking the ability to create special privileges away from state legislatures. But those reforms imposed significant economic costs. A single set of corporate rules could not possibly provide the best rules for each organization. In the later nineteenth century, states moved to expand the rules governing how corporations could structure themselves to better accommodate the needs of diverse organizations, at the same time that they kept legislatures out of the formation of specific corporations. The logic explains why the first moves by states were often simple forms of general incorporation, and why later action allowed and enabled more sophisticated organizational forms. Logic, however, is just logic. A perfectly logical explanation could be completely inconsistent with what people did and thought that they were doing. So we track changes in the rules governing the formation and operation of corporations through changes in state constitutions. Th is gives us two advantages. By tracking the pattern of change over time and states, we can document that states were in fact learning about how policies regarding corporations affected the structure of democracy. Because these changes occurred in constitutional conventions, we can go back to the convention records and retrieve what people said about what they were doing and why they were doing it. By doing so, we can demonstrate how Americans in the nineteenth century thought corporations and American democracy were connected. Using the state constitutions to track institutional changes gives us a final advantage. The late nineteenth century, when corporations became larger, more numerous, and more influential than they had ever been before, is often depicted as a race to the bottom. More powerful corporations extracted concessions and privileges from politicians willing to accommodate business interests in exchange for financial and political support. State govern-

Corporations and Organizations in the United States after 1840

ments liberalized the terms under which corporations were created, allowing much wider latitude for corporate structures and functions than they had earlier in the century. From the perspective of the corporations, however, this was a race to the top. American states implemented a series of institutional changes that enabled larger and more effective corporations to operate in national markets. Sorting out how corporations affected politics and how politics affected corporations is difficult if we only look at business corporations and politics, since we cannot separately identify whether it was states accommodating powerful corporate interests (as the story often goes) or whether it was states trying to solve more pervasive problems with the organization of economic and social life under a democracy. We can identify which way the causation ran if we place the development of the business corporation into the context of a wider ecology of organizations. States created, maintained, and regulated many types of corporate organizations: churches, schools, counties, municipalities, townships, and political parties, as well as a host of “voluntary organizations.” The ecology of organizations matters, not only because the different types of organizations interact with one another, but because the rules by which corporations and other organizations are regulated share common elements. A rule that affects all corporations as well as business corporations is likely to have its origins and support in something other than the efficiency of the corporate business form or the interests of large corporate business interests. 2 We can use the history of organizations to better understand the interaction between business corporations and politics. Our major conclusion is that Americans consciously designed the way the whole ecology of organizations was structured in order to support a viable and vibrant democracy. The design did not spring from the mind of a political theorist but evolved over time as the result of trials, errors, and learning. The history of corporations is an integral part of the history of American democracy. The next section of the essay lays out our approach to the interaction of economic and political factors in the first wave of constitutional provisions affecting corporations in the 1840s. The third section moves to the latter half of the nineteenth century and presents basic evidence from state constitutional changes that supports the timing and substance of our argument about what states were doing. We consider the rise of general rules and how rules about forming organizations fit into the larger problem of constraining corruption in democratic legislatures. The fourth section examines the appearance of home rule for municipal governments and liberal general

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incorporation for businesses in the 1880s and 1890s as a political and economic solution to the restrictive general incorporation laws. We conclude with some thoughts about corporations and American democracy.

The Move to General Legislation As we said, it is difficult to sort out the interaction between corporations and politics if we only look at business corporations and the government policies affecting them. As Eric Hilt’s essay (Chapter 1) in this volume makes clear, we can think about state policies that govern corporations as attempts to solve problems with corporations, or we can think about state policies as attempts to solve problems with state politics. As Hilt shows, American state governments initially chartered all corporations, for whatever purpose, individually. The process of “special” incorporation could result in all corporations being unique and different, or could result in many corporations that were essentially the same. The critical aspect of special incorporation was that the legislature had to give its approval to each corporation, and politicians were in a position to manipulate the granting of a charter for political purposes (for logrolling, for extracting benefits from the person or group desiring a charter, to consolidate the interlocking interests with a political coalition or political party). It was also possible to create unique special privileges in a charter. The creation of privileges was not limited to business corporations; for example, individuals could appeal for individual special laws for divorce or the adoption of children while municipal corporations could be granted certain taxing powers. The creation of special privileges was feared as potentially corrupting, since a private group was given special privileges as the result of a public action, and those privileges were not available to the general population. The creation of a corporation created benefits for the corporate group in two ways. First, it created a legal entity, which could buy and sell property, and sue and be sued, all in its own name. The identity of the corporation was independent of the identity of its members. Other features, like limited liability or internal governance rules, governed the particular relationship that stockholders and corporate officers had to the corporate entity as well as to people outside the corporation. The relationships between the members of the corporation, between the corporation and its members, and between the corporation and individuals outside of the corporation were complex and infinitely variable. For ease of exposition we will call the benefits that cor-

Corporations and Organizations in the United States after 1840

porations and their members received from the entity itself “entity benefits.” Entity benefits flow from the state’s willingness to create and enforce certain organizational forms. When corporations were created it was also possible to create special privileges granted specifically to that corporation, the second source of corporate benefits. Early corporations often were granted monopolies over certain activities, special exemptions from laws or taxes, privileged access to government resources (like capital), or the right of eminent domain. These special privileges were also complex and infinitely variable. We’ll call them “corporate privileges.” Entity benefits and corporate privileges are not clean, mutually exclusive categories. Both vary across corporations in a special incorporation regime. When all corporations have the same form, then the entity rules are the same for all corporations, and we will talk about “general entity benefits” as created by general incorporation procedures. When the rules for corporations are all the same, then no corporate privileges are created for specific corporations.3 Going back to the sixteenth century in England, unique corporations had been created by the government to perform specific functions. These corporations possessed the corporate form as well as specific entity benefits and corporate privileges. In the seventeenth and eighteenth centuries, the Whig (or Commonwealth) thinkers developed a set of ideas that articulated the fear that political manipulation of orga nized interests would ultimately corrupt the polity. The argument went like this. All groups were to be represented in Parliament which was to act for the general good of the elites that made up Parliament. If a “faction” or “party” could manage to create an economic benefit for a par ticu lar group of people, then that group would be beholden to the political faction that created the economic benefit. In this way, a political faction could manipulate the economic interests of a sufficient portion of the population (or individual legislators) to command a majority in Parliament (Lords and Commons), and establish a legislative tyranny. It can be difficult for those of us living in the early twenty-first century to understand what the eighteenth- and early nineteenth-century words meant. To us, corruption is the use of public office for private gain, an individual abuse of the public trust. Th is type of “venal” corruption may or may not be illegal in a par ticu lar time and place, but it results from human nature. There will always be some politicians who abuse their offices, which the eighteenth-century Whigs understood well enough. In contrast, the Whigs

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were also worried that a group of political actors would attempt to systematically use the executive and legislative powers of government to craft policies that created interests in the larger population. Rather than pursuing the common good, these interests would be manipulated to ensure that the political group maintained control of the political machinery. Wallis calls this type of corruption “systematic corruption” to distinguish it from “venal corruption.” 4 Systematic corruption is the political manipulation of private economic interests to form and coordinate a political coalition to dominate the political system. In venal corruption, economics corrupts politics: economic interests manipulate the political system to create economic rewards. In systematic corruption, politics corrupts economics: political interests manipulate the economic system to create political control. Both the British and Americans were worried about systematic corruption in the eighteenth and early nineteenth centuries. Bailyn argues that fear of systematic corruption is the fundamental reason that the Americans revolted (although he does not call it systematic corruption, just corruption).5 Widely read publications like Trenchard and Gordon’s Cato’s Letters articulated a clear argument that large privileged economic organizations and interests, like the Bank of England, the British East Indies Company, and owners of the national debt represented systematic attempts to manipulate the economic interests of members of Parliament and those who elected them.6 The fear was not that the Bank of England itself was venally corrupt, but rather that the existence of the Bank of England shaped the interests of its directors and shareholders in a way that could be manipulated by the political faction in control of the government. Americans on the eve of the Revolution feared that the British constitution, the best form of government the world had known, was being corrupted by such political factions. While Americans inherited fears of organized interests from their British upbringing, the lessons about systematic corruption were driven home by the deep involvement of states in infrastructure investments in the early nineteenth century. This involved investments in banks, canals, and railroads to create the beginnings of a national economy tied together by lower cost transportation and finance. Much of the early investment was either purely public or a combination of public and private funds.7 The role states played in promoting transportation and finance projects varied across the country. In the developed states of the Northeast, states did not invest funds in banks. States in the Northwest and South, however, were deeply involved in banking, often borrowing large sums and investing directly in state-

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chartered banks that were sometimes state owned and sometimes privately owned. States in the Northeast and Northwest borrowed heavily to invest in canals and the earliest railroads, while Southern states borrowed almost nothing for transportation investments. All of these investments involved the creation of corporations, very often highly privileged corporations enjoying monopoly privileges and large amounts of state funding. The boom in state investments in the 1820s and 1830s came to a crashing halt after 1839, when it became clear that some states, particularly in the West, would have trouble repaying their bonds. Michigan, Florida, Arkansas, Mississippi, and Louisiana ultimately repudiated all or parts of their debts. Indiana and Illinois negotiated a settlement with bondholders that reduced their outstanding debt by about 50 percent. Pennsylvania and Maryland essentially paid all of their debts with back interest. Voters, taxpayers, politicians, and state governments in the 1840s asked what had happened, why it had happened, and how they could prevent it from happening again. Their answers followed what they had learned about the relationship between entity benefits, corporate privileges, and state revenues in the preceding fift y years. In that time, states had discovered that both entity benefits and corporate privileges were valuable enough that corporate groups were willing to pay significant amounts to obtain corporate charters and ongoing corporate privileges. States in the Northeast were often paid by private groups to grant them bank charters. Pennsylvania received a quarter of its revenue from charter fees and dividends on state-owned stock acquired when corporations were chartered. In Massachusetts, for example, by the 1830s half of state revenues flowed from a tax levied on the capital of banks in the state.8 States had figured out a way to tie entity benefits, corporate privileges, and government revenues into a package that voters and taxpayers would approve. As states became more involved in promoting economic development through chartering, investing in, and sometimes operating transportation enterprises (initially canals, then railroads) as well as banks, opportunities to create private economic benefits from public investment increased exponentially. Several decades of state involvement in creating and, at times, funding privileged corporations culminated in the state default crisis of the 1840s. It can be difficult for us today to appreciate the political sophistication with which Americans in the early nineteenth century diagnosed the threat that such activities posed to a democracy and the elegance of their solution to the problem. Many citizens were suspicious of and opposed to these

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investments, which transferred public credit and public resources to private organizations, or sometimes to public organizations (like a state-run canal) that benefitted private interests (like landowners along the canal). There were serious objections that the democratic process was being corrupted by the ability of political interests to create economic benefits for special groups: that political machines were building infrastructure that used political manipulation of the economy to obtain and secure political control.9 As serious as those objections were, there was also an understanding that making democracy work involved the inclusion of a wider representation of society, and that voters were unlikely to resist policy proposals that promised them the canals and banks that they desired without raising their taxes to pay for them. It was the significant revenues generated from corporations, either in the fees from charters, taxes on capital, dividends on stock owned by the state, or the profits of corporations run directly by the state that was the sugar that made the mix go down democratically. Some of the propositions made by canal and bank promoters, however, turned out literally to be too good to be true. How could a democracy resist such proposals? The state default crisis of 1841 and 1842 made manifest the fears that a democratic polity was unable to resist offers that combined lower taxes and free public goods. Americans interpreted the default crisis as stemming from factions that had managed to dupe voters (and politicians) into committing the state credit to projects that subsequently proved unprofitable, leaving taxpayers on the hook for the debts. Their deeper fears were that the legislative process itself was liable to capture by a faction through the manipulation of economic privileges.10 States did not want to deny groups the entity benefits of the corporate form, but, beginning in the 1840s, they absolutely wanted to do away with corporate privileges. Privileges were not just unfair, they had proven to have a corrosive and corrupting effect on the democratic process and the republican governments the states tried to establish. However, it was still important to provide access to the corporate form; new states saw business corporations as being the means for providing internal improvements to their undeveloped territories. As Minnesota was writing its first state constitution, delegates highlighted the importance of private business corporations, pointing out that necessary public improvements “cannot be done by individuals, and it will not be our policy . . . as a State.”11 At the same time, the Minnesota convention debated whether incorporation by special act should be

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allowed. Delegates were aware of the evils of special legislation in other states as well as in their own territory, noting that legislators sought out privileges for friends or constituents. The Minnesota delegates were aware of the passage of general legislation in the states out east, and saw it as a solution to the corruptive influence of special legislation. The states saw clearly that they could extend the entity benefits of the corporate form to all groups in an absolute and impersonal way. The cost to the state was the foregone benefits, both economic and political, generated by creating special privileges, although there was hope that some of those revenues could be recouped through general taxes on businesses created under the acts. A general incorporation law made it possible for anyone to obtain a corporate charter. Because the legislature was eliminated from the processes of granting charters, the legislature could not explicitly create special privileges. This desire to prevent the politics of special privileges from influencing the legislative process, and thus the entire political system, was at the heart of the movement to general incorporation. In 1870 delegates to the constitutional convention of Illinois reflected on the 1848 constitution that eliminated special legislation for corporations. A Mr.  Scholfield noted that the public was satisfied with general laws. The individuals who had previously demanded special legislation were those who were “not satisfied to do business upon a broad and honest basis” and who sought out “chances to plunder the public treasury or their fellow men,” lining the pockets of the legislators who made it possible in the process.12 A charter provision available to all corporations would still be valuable to individuals in search of corporate recognition, but not capable of political manipulation since any corporation could possess it. States had also learned a more subtle lesson about democracy: the perils of competition. In a truly competitive electoral republic, parties would not hold power forever. If ruling factions within a state, such as the Albany Regency in New York or the Federalists in Massachusetts, manipulated economic privileges to secure their coalition, when they lost power the tables would be turned and their opponents would move against them. More intense political competition increased the incentives for political factions to manipulate corporate charters and other privileges to secure their coalition. At the same time, competition could lead to potentially large losses for political losers. General incorporation impaired the legislature’s ability to create returns for themselves at the same time that it dramatically reduced

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the cost to the losing faction of being out of power. Losing an election no longer meant that you were unable to get you or your supporters a bank charter. Richard Hofstadter called this the “baseball analogy” in his great book The Idea of a Party System. Americans gradually learned that democratic politics, like baseball, involved a long season. When you won, you did not eliminate your opponents, for they would be back to play you again many times. General incorporation reduced the stakes of losing and the gains from winning by guaranteeing all interested parties the ability to form a business.13 These pressures were neither inexorable nor irresistible, but ultimately most states came to see the logic of general incorporation. Table 2.1 gives the first date at which different states amended their constitutions to require that the legislature pass a general incorporation law or explicitly prohibit special legislation. By 1900, only four states did not mandate such action in their constitutions, and even these states had general incorporation laws (just not constitutional provisions requiring them). Of course, mandating general incorporation did not preclude the possibility of special incorporation in those states, although that became quite rare by the end of the century. General incorporation broke the link between special corporate privileges and state legislatures by creating corporations through an administrative procedure that did not involve the legislature and the political process. A general incorporation law made a fi xed set of entity benefits available to all citizens and corporations meeting minimum requirements. The corporate organizational forms available under different general incorporation acts varied across states. Different states also offered more or less flexible options for the form a corporation could take as well. That is, the menu of entity benefits that a corporation could choose from varied in breadth as well as specifics across states. We return to the scope of entity benefits offered by states later, as the next major change in state policy with respect to business corporations in the 1880s was to widen the scope of entity benefits. Recall the argument that Hilt makes in his essay about the adoption of general incorporation acts. The existing historical and legal literature views special charters as a means by which states could regulate the behav ior of corporations and force them to act in the public interest. Hilt emphasizes that, in fact, states possessed very limited ability to effectively regulate most activities in the early nineteenth century, regardless of what the law or charter said. What states could do was determine which groups in the population had the state’s permission to act in a coordinated manner under a

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corporate charter. Should disputes arise, the courts would apply corporation law. Rather than an active regulatory policy that sought to discipline organizations that violated the rules, states adopted a passive regulatory policy in which rules were enforced through private actions brought in the courts. Since charters were valuable, the granting of charters or withholding of grants enabled politicians to manipulate the economy for political ends. General incorporation laws were not designed to tie the hands of the corporations; they were designed to tie the hands of the legislators. Mr. Dorsey, a delegate to the 1850 constitutional convention of Ohio, noted the gain from general legislation, stating that “all which we have been gaining . . . could be secured under ‘general law’; and that very much of evil in special acts, would be provided against by a general law.”14 By placing the power of granting or withholding charters in an impersonal administrative procedure, legislators were able to still provide for access to the corporate form while eliminating the dangers that the systematic manipulation of chartering corporations and the granting of other economic privileges posed to the operation of a democracy.

The Universality of General Legislation Voters and politicians quickly came to understand that changes made in the institutions governing the creation of business corporations could have similar salutary benefits in other areas of state policy. The ability to create special privileges through laws that treated different people differently could be used to systematically manipulate economic interests and, through them, the political process. Systematic corruption could operate in any area of state policy in which the legislature could create a “rent” for a specific individual or group. Systematic corruption was not limited to the creation of business corporations or even to corporations in general. States began changing their constitutions to mandate general laws for lots of things that states did. Legislatures were required, where possible, to create general laws that applied equally to everyone. Beginning with Wisconsin in 1848, states required that general laws govern the formation and operation of counties and municipal governments. Local governments in the United States are creatures of the states. The structure of a local government polity, including how it taxes, spends, and borrows, is in principle completely within the control of the state government. Granting of local exemptions and privileges could be politically manipulated by state legislators for political ends.

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Mr. Taylor, a delegate to the 1908 constitutional convention of Michigan, highlighted the similarities between municipal corporations and private corporations: “It seems to me that the successful operation of a municipal corporation is not vastly different from the successful operation of an industrial corporation.”15 General incorporation laws for counties and other local governments tied the hands of state legislatures in the same way that general incorporation acts for businesses corporations did. Any law held the potential for creating special privileges, however. Beginning with Indiana in 1851, states began mandating that laws for a wide variety of purposes be “general” laws that applied equally to everyone, and often prohibited special laws for those purposes. We will call these “general law provisions.”16 An easy example to grasp is divorce law. Individuals in early nineteenth-century America were able to approach state legislatures to have a divorce granted; the most famous case was Andrew Jackson’s wife Rachel, who wanted to divorce her first husband, Lewis Robards, and eventually was granted the divorce by the Tennessee legislature, but not before she and Jackson were married.17 Having a divorce granted by the legislature was an inherently political act. In 1851, Indiana prohibited “legislative” divorce and required the legislature to create a general law governing “judicial” divorce. After 1851, the divorce law in Indiana was the same for every married couple, even though there were undoubtedly cases where the courts discriminated in their enforcement of the law based on the social standing of the individuals involved. In practice as well as in theory, the law of divorce became an impersonal law that applied equally to everyone. The political logic of “general laws” applied to divorce in the same way that it applied to corporations.18 If the legislature did not have discretion to treat people differently, then it would be impossible for a faction to manipulate the interests of individuals or groups through the creation of those private privileges. Taking account of the whole environment in which rules and policies govern business corporations pays off when we compare the adoption of general rules for business incorporation, municipal incorporation, and general law provisions. The idea that general incorporation acts were adopted by states as a way to deal with systematic corruption is just that: an idea. We can test the idea by examining why people said they acted as they did. Another, and—depending on your preferences for evidence—perhaps stronger, test is to see if they took similar actions in other areas of society. If general incorporation was seen as a solution to the problem of systematic corruption, then it should have been applied to other organizations. It was.

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Table 2.1 gives the dates at which states changed their constitutions to require general incorporation acts (for business). Table  2.2 gives the dates when states changed their constitutions to mandate general laws for the incorporation of municipalities, and Table 2.3 gives the dates when they mandated general laws for a wide variety of purposes: “general law provisions.” The tables are a bit hard to digest and compare at a glance. Figure 2.1 graphs the first year a state adopted a constitutional provision mandating general incorporation on the horizontal axis, and the fi rst year a state mandated general law provisions on the vertical axis. Figure 2.2 does the same, only the vertical axis represents the first year that a state mandated general laws for municipal governments. Although there is a strong diagonal in the graphs, this results from the fact that new states that entered after 1850 tended to adopt provisions that mandated general laws for incorporation, general laws for municipal governments, and general law provisions. For example, the large group of states that entered the union in 1889 included all three provisions in their constitutions. Th is can be tracked in the tables. There was not a strong relationship between when a state adopted a general incorporation provision and the other two provisions between 1840 and 1870. Most of the entries in Figures 2.1 and 2.2 lay above the 45-degree line, indicating that the state adopted a general incorporation provision before it adopted a general municipal provision or a general law provision. Depending on whether new states that adopted all three measures in the first constitution are included or not, the average difference between the date of the first general incorporation provision and the first general law provision is ten years (seven years including the new states), and the difference between incorporation provisions and municipal provisions is fourteen years (nine including new states). Figure 2.3, however, plots the dates of adoption of general law provisions and of municipal provisions, and shows the striking relationship between the two. Here, the adoption dates fall largely on the 45-degree line (the three exceptions being: Michigan, 1850 general law provisions and 1909 municipal provisions; Alabama, 1861 for general laws and 1901 for municipalities; and Wisconsin, the very first state with provisions for municipalities in its first constitution in 1848, and a general law provision in 1871). The figures show that states were learning. It became increasingly common for states to adopt a package of general law provisions—and not just for corporations, but for municipalities, and for laws in general. The records of the constitutional convention debates reveal how often states were using

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other states’ experiences to help guide their new constitutions. Mr. Sibley of Minnesota not only looked at other states’ constitutions, but also spoke directly with other legislators from Iowa, reporting that he “heard no one complain that all the objects of such corporations could not be attained under such [general] laws,” and specifically noted that the Michigan provision had been shown to work particularly well.19 The experience of states continued to accumulate. Mr.  McDermott, speaking in favor of a general law provision at the 1890 constitutional convention in Kentucky, noted the experience of other states explicitly. When he talked of excluding or restricting the classes, he referred to the types of functions for which general acts must be passed and special laws were restricted or prohibited, pulling from the experiences of other states and describing what states had done previously and where they had gotten the ideas from.20 As the nineteenth century unfolded, states progressively tied the hands of state legislatures by requiring them to pass legislation that applied equally to everyone, particularly with respect to the formation of organizations, be they business corporations or cities. Tables 2.1, 2.2, and 2.3 give considerable support to the idea that states were adopting a common institutional form, the general law, and applying it to many distinct and disparate areas of state policy. Adoption of general laws on such a widespread basis was likely not driven only by the interests of businesses. The scholars who studied the adoption of general laws note remarkably similar justifications for the adoption of corporate, municipal, and general law provisions. Binney and Ireland give detailed reports of how the supporters of these provisions argued for their adoption.21 People were usually very concerned about corruption. According to a delegate to the Alabama constitutional convention of 1901, corruption across state legislatures “can all be traced to the effort to secure the passage of local or private bills, conferring some special or valuable privilege, franchise or pecuniary advantage.”22 And Binney similarly, although he was writing about current legal events and not history: What may be called the science of legislation—the careful adaptation of laws both to the needs of the State and the various classes of people composing it, and to the body of law already existing, the determination of the proper scope of general laws, and of the circumstances which call for legislation of a local or special character—was too little

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regarded, and as time went on not only was the volume of special and local legislation needlessly increased, such acts being frequently passed as to matters that could have been provided for under a general system, but private schemes were often pushed through the legislatures by unscrupulous men, to the sacrifice of public interests, each separate locality was liable to unwise interference in its affairs, and distracting changes of its governmental system, and the law, as to many matters, was thrown into confusion. The natural consequence of all this was the growth of a very general feeling of hostility to all local and special legislation. One State after another sought, by changes in its Constitution, to check the excesses into which its legislature had fallen in this respect, and the influence of the example so set is seen in the Constitutions of all the more recently organized States. That some effectual restrictions upon special legislation were needed has been repeatedly testified to by the courts of various States when called upon to enforce these restrictions. Thus, in Indiana, the earliest State to adopt them, their object was stated as  being “to restore the State from being a coterie of small independencies, with a body of local laws like so many counties palatine, to what she should be, and was intended to be, a unity, governed throughout her borders on all subjects of common interest by the same laws, general and uniform in their operation.”23 Historically, general laws for business corporations were the leading edge of the movement toward general law provisions across a range of government policies. During the 1847 constitutional convention of Illinois, the focus on the “evils of special legislation” was directed at business corporations. Mr. Bosbyshell was one of many delegates to comment on the use of special acts for corporations, opposing it because special incorporation could be “granted to the few, and wholly denied to the many,” and was thus against it no matter the form or the intent.24 The 1870 constitutional convention of Illinois highlighted the move for delegates to focus on the evils of special legislation with respect to municipalities. Mr. Washburn spoke to the evils of special legislation and the greater difficulty in passing general legislation for municipalities. He noted delegates to the convention had been complaining about and denouncing special legislation; however, when confronted with addressing the one-third of special laws that had been used to incorporate cities and towns, they had started

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backing down. As Mr. Washburn noted, when it came to conflict with their own local interest, some were opposed to it, which was a hurdle that had to be overcome to pass general legislation.25 General laws required that governments support organizations by providing rules and legal identities (entity benefits) that applied equally to all groups and all citizens, a constraint on legislatures that spread to many areas of legislative competence in the second half of the nineteenth century. The close association shown in Figure 2.3 was, in fact, a close association and not a statistical artifact. People at the time thought that general laws that applied equally to everyone and limited the ability of politicians and legislatures to create special privileges were a way to improve how democracy worked. But general laws came with a catch.

Liberal General Laws for Organizations We have argued that states adopted general incorporation laws because they were trying to solve the problem of legislatures manipulating the creation of special economic and other privileges, and using those privileges to corrupt both the political process and the economy. The problem was solved in the states by extending the same privileges to everyone, and thereby eliminating the ability of the legislature, and the political system more generally, to manipulate the distribution of privileges. We have not focused on specific details of the general incorporation laws, such as the form of liability they allowed or the voting schemes to be used by corporations to elect directors. It is not that we think these issues were not important, they were, but the driving force behind institutional changes in the forms that organizations took was to solve problems with the legislative and political process, rather than solving specific problems in the governance or structure of organizations. The historical evidence strongly suggests that American citizens used the general laws to create an enormous number of corporations, both public and private. The period between 1860 and 1915 witnessed an explosion of corporations. Current estimates by Les Hannah suggest that the number of corporations rose tenfold, from 30,000 in 1860 to 300,000 in 1915.26 There are no comparable accounts of the number of local governments, but the historical evidence clearly points to the late nineteenth century as a period when the number of “special” local governments—park, water, sewage, and irrigation districts are examples—began to increase rapidly.27

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The political system had solved the big problem of systematic corruption, but it now faced a second problem: it was reducing the ability to tailor legislation toward certain needs by creating and enforcing one-size-fits-all rules for new organizations. As Ohio was debating general legislation provisions of its new constitution at the 1850 convention, delegates were concerned for the rigidity of general legislation for business corporations as well as cities and towns.28 Minnesota also discussed general law provisions at its 1857 constitutional convention, with Mr. Flandreau of Minnesota accepting that tying the hands of the legislature by use of general laws was the safest way to create corporations but worried it may impede the ability of corporations to be formed to take advantage of unknown resources.29 Exactly how broad or narrow the options for organizations were under the general laws written by legislatures between 1840 and 1880 remains to be shown by more careful examination of the historical record. Legislatures appear, however, to have erred on the side of narrow options. At least we can infer that from the fact that, in the 1880s and 1890s, states began addressing the problem of narrow options by widening the choice of organizational forms available to businesses and municipalities, but doing so in a way that kept the solution to the corruption problem intact. This is a nuanced problem, and no one that we are aware of has mastered the history of the general incorporation laws.30 Eric Hilt’s essay is an important move in this direction. Legislators were no longer at liberty to shape the entity benefits that a corporation or municipality received in its charter, even if the unique features of the charter were not being created for political purposes but to meet the legitimate needs of the corporation or city. In the realm of business corporation law the solution to restrictive general laws was called “liberal general incorporation,” and in the realm of municipal law it was called “home rule.” In both cases, general laws were broadened in a way that allowed the corporations created under the law—be they business or municipal corporations—a much wider degree of latitude in structuring their internal and external relationships. Of the two movements, home rule has a more celebrated history than liberal general incorporation.31 The home rule movement is portrayed as a bit of a crusade, and an anti-corruption crusade at that. The history of home rule is often written as if states moved directly to home rule from a special incorporation regime, where state legislatures were able to exploit individual cities by crafting city-specific forms of governance.32 But states often moved to general incorporation acts for municipal governments first (see Table 2.2),

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and then moved to home rule. Eighteen states had adopted some form of municipal general incorporation provision by 1879 when the first home rule legislation passed in Missouri. The problem was that general legislation failed to meet the needs of specific municipalities. Either general legislation prescribed a uniform solution that had to be applied to municipalities of all sizes, resulting in ill-fitting orga nizational structures across the board, or legislators manipulated general legislation to serve the same purpose as special legislation through the use of general laws by municipal class. Many states created classification schemes that separated municipalities by population, allowing cities of different sizes to be treated differently. When a state classified by population, the largest city in the state was often in a category by itself. To the extent that through classification or directly by passing special laws that applied only to the biggest city, the state legislature could become, in effect, the city council. So, for example, if St. Louis was the only city in Missouri with a population over 100,000, and the state legislature passed a general municipal law that applied differently to cities over 100,000, the general law was effectively a special law. Binney describes how a legislature could target and put one city in a class by itself and establish general laws for the class that could ultimately serve to target that one city and “create and abolish particular offices, direct how the clerks in any special city department shall be appointed, and in many ways regulate the affairs of a single city just as if no prohibition of special legislation existed.”33 The rapidly urbanizing character of America—driven by falling transportation costs, improving productivity in agriculture (requiring fewer farmers as a share of employment), and growing manufacturing productivity (providing new goods and higher incomes)—made better governance of cities a high-priority issue. There was little or no desire to give state legislatures the power to run cities and, likewise, little desire to let cities completely govern themselves. Mr.  Hemans, a delegate to the 1908 Michigan constitutional convention, noted the issues surrounding the classification of cities and identified home rule as the better alternative that states like California and Minnesota were pursuing.34 Home rule allowed for broader ranges of options for municipal government than had been adopted in the first general laws for municipalities while still giving the legislature the power to define boundaries for municipalities as a whole. The one-size-fits-all uniform structure of general legislation motivated, in part, the move to home rule for municipalities. The restrictive nature of general legislation also provided an incentive to move away from strict gen-

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eral legislation for business corporations. The move toward liberal general incorporation for business corporations was spearheaded by New Jersey, then followed by Delaware and other states. Christopher Grandy has written an insightful history of why New Jersey expanded the boundaries of its corporate entity provisions, and details how New Jersey solved a fiscal problem by enticing corporations to domicile themselves in New Jersey while operating in many other states.35 New Jersey taxed the authorized capital of all business corporations incorporated by the state. By liberalizing their general incorporation laws and allowing corporations more flexibility, they attracted corporations from other states to locate their corporate charter in New Jersey. The most important aspect of corporation law that New Jersey liberalized, therefore, was allowing corporations to operate across state lines without the explicit permission of the state. They also allowed corporations to merge with other corporations and to determine their capital, lines of business, and internal governance structure all without the explicit permission of the state. New Jersey’s charter-mongering was a deliberate attempt to raise revenue by making incorporation in New Jersey more attractive. Of course, New Jersey wasn’t the only state that could play this game. As Grandy points out, Delaware was the most successful competitor, but West Virginia, Maryland, Maine, and New York also attempted to seize the opportunity to attract more corporations. Liberal general incorporation is often regarded as more sinister than home rule, and not just because New Jersey and her competitor states appear to have been motivated by fiscal incentives. What followed on the New Jersey rules was the first great merger movement in which scores of industries witnessed substantial consolidations where a dominant firm (or a combination of dominant firms) bought up their competitors and attempted to create large monopolies.36 As Grandy shows in table 1 of his paper, all seven of the “greater industrial trusts,” 50 percent of the “lesser industrial trusts,” and 92  percent of the “important industrial trusts” were chartered in New Jersey, with a significant number of the remainder chartered in New York and Delaware, which had followed New Jersey’s lead toward liberal general incorporation.37 It could seem that New Jersey and her competitors were engaged in a “race to the bottom.” This is one reason it is important to maintain a historical perspective. As we have tried to show conceptually and historically, concentrated influence can flow from economic organizations into the polity, but concentrated interest can also flow from the political system into the economy. The world

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we live in offers stark examples of what happens when the political system manipulates the economy for political ends. Putin’s regime in Russia systematically manipulates economic privileges to maintain an oligarchy that controls the polity. The Chinese Communist party does the same with economic privileges in China which, despite claims attributing economic growth to the advent of capitalism in China, remains a society in which the ability to form an organization for most purposes is closely controlled by the government. The dominant form of interaction between political and economic interests and organizations in history, and in the contemporary world, is illustrated by Russia and China, not by the United States. As North, Wallis, and Weingast argue, the apparently natural form that societies have taken over the last 10,000 years is a society in which the political system limits access to organizations, particularly economic organizations, in order to create rents that are used to coordinate political coalitions.38 The handful of developed countries, including the United States, that have managed to become open access societies where it is possible for any citizen to form an organ ization and compete in the political, economic, or social world are the anomalies, not the rule. The forces that led to home rule and liberal general incorporation were not limited to the interests of large cities and large corporations, although that is how the (hi)story is often told. The dynamic trajectory was to make access to organizational tools more uniform and open to everyone. Increasing the flexibility of those tools meant that small cities and small firms were able to access and adopt organizational tools that were better suited to them.39 The term “home rule” is often read to imply that cities were free to structure their constitutions however they saw fit, but home rule legislation always operates within a set of constitutional and legal restraints on what municipal corporations are and are not allowed to do. The same holds true for liberal general incorporation law. The race to the bottom in corporate regulation is often blamed on liberal general incorporation. The pursuit of government revenues by states such as New Jersey and Delaware led them to allow corporations wide latitude in structuring their internal and external relationships. An opportunity to more closely regulate corporate behavior through the chartering process was missed. This criticism, however, implicitly assumes that entry was not affected by regulation and was always open. Such an approach can miss the important effects that open entry had on the politics of state legislatures, and it is not a benefit that we want to lose sight of.

Corporations and Organizations in the United States after 1840

Allowing legislatures to create special rules for different organizations and individuals inevitably means that legislatures will manipulate those rules for political advantage. Although liberal general incorporation laws seem to have allowed bigger corporations to come into being, the counterfactual proposition is not clear. Big firms emerged quickly in New Jersey, taking advantage of the liberal incorporation provisions to operate across state lines. The counterfactual is also likely, however. Firms would have continued to grow larger as the economy grew, and grew more integrated, at the end of the nineteenth and beginning of the twentieth centuries—even within the confines of existing corporate charters and laws. Some of those firms would have requested special provisions that allowed them to operate across state lines, to own stock in corporations domiciled in other states, and to create more sophisticated financial and governance networks. Some of those requests surely would have been granted. The Pennsylvania Railroad early on, for example, was granted those types of special charter provisions to enable the railroad to manage its operations from Pennsylvania to Chicago. Granting these privileges to just some corporations would have raised troubling questions about entry, privileges, and corruption. New Jersey’s reforms made those privileges entity benefits that extended to all corporations, whether they wanted to exercise the privileges or not. If corporations had truly been limited to operate only within one state, the growth of the national economy would have been hampered. But had the growth of interstate corporations not occurred under a set of general provisions like the laws in New Jersey or Delaware provided, then the political system would surely have attempted to manipulate the granting of those privileges for political gains. Whether the United States would have been better off without the liberal general incorporation laws, therefore, is not an easy question to answer. There is a good case to be made, however, that when all of the costs and benefits are taken into account, the balance may lie on the side of liberal general laws for all types of organizations.

Corporations and American Democracy Over the years from 1840 to 1915, state governments persistently chose to broaden the scope of corporations in a variety of areas of American society and deliberately moved to mandate and adopt general rules across most areas of legislation. By and large, states chose to adopt rules that facilitated entry by lowering the cost of forming new organizations. The underlying

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reason for favoring entry was not an economic model suggesting that open entry would maximize social welfare or rates of economic growth, nor was it an overriding ideological commitment to equality of opportunity, although those reasons mattered. States chose to open entry to the corporate form because they understood the dynamic relationship between organized interests in the larger society and factions within the political sector. They worried in the nineteenth century, as we do today, about the interaction of interests in the larger world and the legislature. Their primary concern was the ability of political groups to use the government process to create privileges for specific organizations, and then use those privileged interests to maintain political power. Their solution was to open entry into economic and other organizations and thereby limit the political dangers: it was an economic solution to a political problem, not a political solution to an economic problem. A significant feature of American society from the time of de Tocqueville to the present is the rich, dense, and varied nature of its organizations. It bears repeating that societies rich in organizations are not the historical norm, nor do we understand very well how to create such strong civil societies. Political systems capable of producing governments that foster private and public organizations on a wide scale are very rare. Most political systems manipulate organizations, limiting their number and allocating special privileges among them to coordinate and enrich ruling political coalitions. Most proposals and debate over the best way for American society to create and regulate corporations take the nature of American democracy as given. The discussions implicitly assume that the nature of the government process will not be affected by the rules for forming organizations. American history suggests that the implicit assumption is unwarranted. Americans explicitly worried that the shape of organizations in the economy and wider society would exert direct and dramatic effects on the political system, and they worried that political actors would manipulate those effects for political ends. Their solution was to tie the hands of the political actors. The effective ties that bind political actors came not in the form of prohibitions on specific legislation, but through the requirement that laws be general, that they apply equally to everyone. General laws reflect the American concern with equality and a level playing field and are often interpreted as a response to those ideological commitments. Undoubtedly, the ideology of fairness and equality played a role in the adoption of general laws and plays a role in their maintenance.

Corporations and Organizations in the United States after 1840

But ideology is not all that separates developed and developing societies. As the founding generations understood, the organization of economic activity has profound effects on the dynamics and organization of politics. Open entry for economic, municipal, religious, educational, and voluntary organizations has been a fundamental support for American democracy.

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Year

1845 1846 1846 1848 1848 1849 1850 1851 1851 1851 1857 1857 1859 1863 1864 1865 1865 1866 1867 1868 1868 1868 1870 1874

State

Louisiana New York Iowa Wisconsin Illinois California Michigan Maryland Ohio Indiana Oregon Minnesota Kansas West Virginia Nevada Georgia Missouri Nebraska Alabama Arkansas North Carolina South Carolina Tennessee Pennsylvania

X X X X X X

1840s

X X X X X X X

1850s

X X X X X X X X X

1860s

X X

1870s

1880s

Table 2.1. First Year of Corporation Provision, Sorted by Year of Corporation Provision 1890s

1900s

1910s

1920s+

1875 1876 1876 1889 1889 1889 1889 1889 1889 1890 1891 1892 1896 1897 1911 1912 1968 none none none none

X X X X X X X X X X X X X X

Note: Row order is by fi rst year of a corporation provision, column order is by fi rst year of corporation provision. Source: Text of state constitutions, obtained from NBER / Maryland State Constitutions Project.

New Jersey Colorado Texas Montana North Dakota Washington South Dakota Idaho Wyoming Mississippi Kentucky Rhode Island Utah Delaware New Mexico Arizona Florida Connecticut Oklahoma Massachusetts New Hampshire X X X

Wisconsin Indiana Ohio Iowa Kansas Florida Nevada Maryland Missouri Nebraska Arkansas Texas Illinois West Virginia New York Pennsylvania New Jersey Colorado California Minnesota Montana Idaho South Dakota

State

1848 1816 1803 1846 1861 1845 1864 1788 1821 1867 1836 1845 1818 1863 1788 1787 1787 1876 1850 1858 1889 1890 1889

Statehood 1848 1851 1851 1857 1859 1861 1864 1864 1865 1866 1868 1869 1870 1872 1874 1874 1875 1876 1879 1881 1889 1889 1889

First Municipal X

1840s X X X X

1850s

X X X X X X X

1860s

X X X X X X X

1870s

Table 2.2. First Year of Municipal Provision, Sorted by Year of Municipal Provision

X X X X

1880s

1890s

1900s

1910s

1920s+

1889 1889 1890 1817 1792 1896 1788 1819 1907 1837 1912 1912 1789 1790 1788 1788 1812 1796 1788 1787 1788 1859

1889 1889 1889 1890 1891 1896 1896 1901 1907 1909 1911 1912 1916 1951 1965 1966 1974

X X X

Note: Row order is by fi rst year of a municipal provision, column order is by fi rst year of municipal provision. Source: Text of state constitutions, obtained from NBER / Maryland State Constitutions Project.

North Dakota Washington Wyoming Mississippi Kentucky Utah South Carolina Alabama Oklahoma Michigan New Mexico Arizona North Carolina Rhode Island Connecticut New Hampshire Louisiana Tennessee Massachusetts Delaware Georgia Oregon X X X X X X X X X X X X X X

Michigan Indiana Iowa Oregon Kansas Alabama Maryland Nevada Georgia Missouri Florida Texas Tennessee Illinois Wisconsin West Virginia Arkansas Pennsylvania New York Nebraska New Jersey Colorado Louisiana

State

1837 1816 1846 1859 1861 1819 1788 1864 1788 1821 1845 1845 1796 1818 1848 1863 1836 1787 1788 1867 1787 1876 1812

Statehood 1850 1851 1857 1857 1859 1861 1864 1864 1865 1865 1868 1869 1870 1870 1871 1872 1874 1874 1874 1875 1875 1876 1879

General Laws 1840s X X X X X

1850s

X X X X X X X

1860s

X X X X X X X X X X X

1870s

1880s

1890s

Table 2.3. First Year of General or Special Law Provision, Sorted by Year of General or Special Law Provision 1900s

1910s

1920s+

1850 1858 1889 1890 1890 1889 1889 1889 1817 1792 1788 1896 1907 1912 1912 1789 1788 1788 1803 1787 1790 1788

1879 1881 1889 1889 1889 1889 1889 1889 1890 1891 1896 1896 1907 1911 1912 1916

X X X X X X X X X X X X X X X X

Note: Row order is by fi rst year of a general or special law provision, column order is by fi rst year of general or special law provision. A special law prohibits special laws for specific actions and a general law mandates a general law for specific actions. Source: Text of state constitutions, obtained from NBER / Maryland State Constitutions Project.

California Minnesota South Dakota Wyoming Idaho Washington North Dakota Montana Mississippi Kentucky South Carolina Utah Oklahoma New Mexico Arizona North Carolina New Hampshire Massachusetts Ohio Delaware Rhode Island Connecticut

First Year of General Law Provision

Corporate Origins 1920 1910 1900 1890 1880 1870 1860 1850 1840 1840

1850

1860

1870

1880

1890

1900

1910

1920

First Year of Corporation Provision Original Colonies and Cessions

Old Southwest

Old Northwest

West

Central

Northern Territory

Southwest

Figure 2.1. First Year of Corporation Provision by First Year of General Law Provision Source: Text of state constitutions, obtained from NBER / Maryland State Constitutions Project.

1920 First Year of Municipal Provision

104

1910 1900 1890 1880 1870 1860 1850 1840 1840

1850

1860

1870

1880

1890

1900

1910

1920

First Year of Corporation Provision Original Colonies and Cessions

Old Southwest

Old Northwest

West

Central

Northern Territory

Southwest

Figure 2.2. First Year of Corporation Provision by First Year of Municipal Provision Source: Text of state constitutions, obtained from NBER / Maryland State Constitutions Project.

Corporations and Organizations in the United States after 1840

First Year of General Provision

1920 1910 1900 1890 1880 1870 1860 1850 1840 1840

1850

1860

1870

1880

1890

1900

1910

1920

First Year of Municipal Provision Original Colonies and Cessions

Old Southwest

Old Northwest

West

Central

Northern Territory

Southwest

Figure 2.3. First Year of Municipal Provision by First Year of General Provision Source: Text of state constitutions, obtained from NBER / Maryland State Constitutions Project.

105

PA R T I I

The Turn to Regulation

CHAPTER 3

The Dissociation of Incorporation and Regulation in the Progressive Era and the New Deal DANIEL A. CRANE

One of the central controversies in American history over the corporation and democratic values concerns the relationship between the incorporation of business enterprises and regulatory control. Early in the corporate reform movement that began in the late nineteenth century and lasted until the New Deal, advocates of corporate control invoked limitations on corporate power placed in corporate charters granted by state legislatures. As interstate competition for corporate chartering—the so-called “race to the bottom”— eroded the relevant charter limitations, Progressive corporate reform advocates began to clamor for a different regulatory response—federal chartering or licensing. The Progressives believed that federal chartering of large interstate corporations would create a framework for comprehensive federal regulation of large business enterprises that were thus far subject to only piecemeal regulation under state and federal law. They also believed that federal chartering would strengthen the federal government’s hand against constitutional challenges to its regulatory authority, on the theory that the greater power to grant or deny incorporation includes the lesser power to regulate the federal government’s corporate creatures. These proposals for associating incorporation and regulation through the device of federal chartering or licensing never came to fruition. At two key moments— one during the Progressive Era and one during the New Deal—the possibility of association obtained political traction, only to be overtaken by other regulatory solutions that left incorporation as the province of the states (except in sectors like banking where the states and federal government shared authority to incorporate, or securities where issuers had to register with the Securities and Exchange Commission). The Progressives and New Dealers largely achieved their regulatory objectives through other means. Rather than taking an omnibus approach to regulating corporations, 109

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The Turn to Regulation

Congress passed a succession of reform statutes targeting specific corporate evils—antitrust, banking, securities, labor practices, etc. In many fields in which the Progressives demanded reform, reform occurred on a far-reaching federal scale through the creation of broad statutory regimes and administrative agencies. And the constitutional impediments that frustrated earlier reform efforts receded after 1937. As of the World War II era, proposals for federal chartering or registration largely died off for lack of apparent necessity. Nonetheless, the failure of the Progressive and New Deal proposals for federal chartering or licensing were not without consequence for the development of corporate regulation. For one, during the rise of the regulatory state in the twentieth century, the federal government has largely found itself in the position of regulating conduct by “corporate persons” rather than creating, structuring, and regulating corporations themselves. Regulation is fragmented by administrative topic and institution rather than being comprehensive and seamless as contemplated by the Progressives. Further, although the constitutional battles of the Progressive and New Deal eras were resolved in favor of regulation before the beginning of World War II, new constitutional challenges to federal regulation would emerge later in the twentieth century and into the twenty-first. Consider, for example, the Supreme Court’s controversial decision in Citizens United,1 discussed in detail in Adam Winkler’s essay in this volume (Chapter 10), invalidating governmental restrictions on independent political expenditures by corporations, associations, and labor unions. The complexion of corporate speech rights might have been different if the Progressives had prevailed in achieving comprehensive federal chartering with federal regulatory powers conceptually tied to the granting of the corporate charter. This chapter examines two focal points in the multi-century narrative of American dissociation between incorporation and regulation. Both concern proposed federal statutes—the Hepburn Bill of 1908 and the BorahO’Mahoney Bill of 1937—that directly raised the possibility of association. Both bills were defeated partly for reasons idiosyncratic to those particular moments, and partly due to political and ideological impulses that have intermittently found expression since the founding of the Republic. The Hepburn Bill of 1908, the most serious of these efforts, would have initiated a system of much tighter federal regulatory authority over interstate trusts. The bill came under criticism as a step toward socialism and inconsistency with the constitutional design which largely left incorporation to the states.

The Dissociation of Incorporation and Regulation in the Progressive Era and the New Deal

The Hepburn regulatory approach lost steam by the end of the Roosevelt administration, went nowhere during the Taft administration, and was mooted by the adoption of the Federal Trade Commission and Clayton Acts in 1914, during the Wilson administration. Proposals for a comprehensive federal chartering or registration system resurfaced during the New Deal, largely in response to the Supreme Court’s perceived reactionary conservatism and frustration that large interstate corporations continued to escape federal control. These proposals took shape around the Borah-O’Mahoney Bill of 1937, which eventually ran out of steam following the “switch in time” of 1937 and the New Deal’s shift from its early regulatory, technocratic, and administrative bent toward a more traditional law enforcement model. The failure of these two bills, and other similar legislation, did not impose an immediate obstacle to the corporate reforms sought by the Progressives and New Dealers. They largely achieved their objectives in other ways. In the long run, however, the dissociation between incorporation and regulation has had important implications for the culture of corporate regulation in the United States and for its constitutional position.

Setting the Stage: Corporate Reform Efforts in the Late Nineteenth Century The story of the relationship between chartering and regulation goes back to at least the founding era when Federalists and Anti-Federalists contested bitterly over a possible federal power to grant charters of incorporation, which the Anti-Federalists feared would lead to cronyism and commercial monopoly.2 The story runs through the debates over the chartering of the Bank of the United States in the first Congress, the litigation over the bank’s constitutionality resolved in the landmark McCulloch3 decision, and Andrew Jackson’s veto of the bank’s third charter in 1836. The more immediate run-up to the Progressive Era proposals for federal chartering begins with the sweeping liberalization of corporate law in the mid-nineteenth century. After killing off the bank, the Jacksonians turned to a broader project of corporate liberalization aimed at democratizing the chartering process. The Jacksonians supported state general incorporation statutes on the ground that they were a necessary antidote to the corrupting influence of the special charter system that favored established and politically powerful commercial incumbents at the expense of newcomers.4 The

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policy of Jacksonianism became one to “reduce the privilege of incorporation, not by taking it from the few, but by opening it to the many.”5 One of the important attributes of the emerging mid-nineteenth-century classicism was an emphasis on equality of access to incorporation privileges granted by the state. In the antebellum and Reconstruction eras, the general corporate charter would become the dominant means of doing business on a medium or large scale. This expansion of the availability of the corporate form coincided with the advent of the second industrial revolution in the 1860s. The mechanized processes, infrastructure investments, and enormous fi xed costs that characterized the railroads, factories, mills, refineries, and pipelines of the late nineteenth century required unprecedented aggregations of capital, to which the newly accessible corporate form lent a ready hand.6 Thus, even as the corporate form became increasingly democratized and widely available, it became increasingly employed to aggregate economic power in the hands of a few powerful managers. The explosive growth in corporate scale in the late nineteenth century led to political demand for corporate regulation. The earliest regulatory responses came from state attorneys general who began to use state corporation law as a form of crude antitrust law to resist the capital-intensifying trends accompanying postbellum economic expansion.7 State enforcers employed the quo warranto writ to challenge as ultra vires the corporate charter of various activities, such as doing business outside the state, conducting business outside the scope of the charter, and owning the shares of other corporations.8 At the time of the Civil War, although the corporate charter was widely available, its terms remained restrictive. For example, as Eric Hilt shows in Chapter 1 of this volume, “Early American Corporations and the State,” most business corporations still were limited by their corporate charter to a single line of business.9 The states could seek to regulate their chartered corporations through litigation designed to limit capitalization, ownership of other corporations, vertical integration, conglomeration, and other aggrandizing practices. Bolstered by state corporate regulation, the attorneys general met with success against the trusts in some early cases.10 In Ohio, for example, the attorney general succeeded in nullifying various trust arrangements involving cottonseed oil, whisky, sugar, and petroleum as contrary to the conditions imposed by the corporate charter and the common law.11 Such actions had several advantages over later federal antitrust suits. Because they involved

The Dissociation of Incorporation and Regulation in the Progressive Era and the New Deal

enforcement by states against state-chartered entities, these suits faced none of the complexities of federal enforcement against the backdrop of limited federal power over interstate commerce.12 Also, the state attorneys general could draw on specific prohibitions and restrictions in corporate law, such as prohibitions on holding companies, rather than having to make broader and more complicated cases concerning the abuse of economic power that would characterize later antitrust challenges. But despite some early successes in controlling corporate power, the quo warranto enforcement of state corporate law proved to be a failure in the long run, for at least two reasons. First, clever corporate lawyers frustrated state regulators by inventing sophisticated common law trusts that replicated the structure of multistate, conglomerate or vertically integrated corporations through contract rather than direct corporate structuring.13 In Texas, for example, oil companies easily avoided state corporate restrictions by forming partnerships rather than corporations.14 Second, the competitive interstate pressures created incentives for state legislatures to “cheat” on their neighbors and liberalize the very corporate rules that their attorneys general sought to rely on to control the power of large corporations. Following the Civil War, states began to liberalize their incorporation statutes, with an eye toward attracting firms to incorporate in their state. Thus began the “race to the bottom” in state corporation law. States competing to become incorporation havens eventually permitted corporations to own stock of other companies; granted favorable tax treatment for out-of-state earnings; allowed corporate charters “for any lawful business purpose whatsoever”; dispensed with requirements that directors be state residents and that corporate meetings be held within the state; allowed unlimited capitalization; eliminated shareholder liability for corporate debts; and stopped requiring public disclosure of annual reports.15 The incentives on state legislatures to liberalize their own corporate statutes were extraordinarily powerful. New Jersey became known as the “traitor state” for its Holding Company Act of 1891, which facilitated the Standard Oil and Northern Securities trusts, among others.16 But even rival state legislatures found it hard to fault New Jersey when they considered the extent to which the state benefitted from its new incorporation regime. From 1896 to 1901, corporate filing fees and franchise taxes swelled from $800,000 to $2,189,000, accounting for 60  percent of the state’s revenues.17 By 1901, 95  percent of the nation’s large corporations were incorporated in New Jersey.18 By 1902, New Jersey had earned so much from corporate fi ling fees

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The Turn to Regulation

and franchise taxes that it had paid off the state debt and abolished property taxes. By 1905, it had a surplus of nearly $3 million in the treasury, mostly attributable to its corporate liberalization initiative.19 It was little wonder that, despite grumbling about the “traitor state,” most other states soon followed suit.20 Even as state incorporation law began to move along an inexorable path toward liberalization, an array of voices across the political spectrum began to complain about these laws’ capital-concentrating effects. As early as 1874, the conservative judge and future Interstate Commerce Commission (ICC) member Thomas Cooley warned that “the most enormous and threatening powers in our country have been created; some of the great and wealthy corporations [have] greater influence in the country at large and upon the legislation of the country than the States to which they owe their corporate existence.”21 Such warnings became ever more dire as the race to the bottom and the formation of the great industrial trusts of the Gilded Age accelerated. In 1895 the German economist Ernst Von Halle noted the irony of the simultaneous liberalization of corporate law and adoption of antitrust law: “We now have the strange spectacle of the enactment of the most severe laws against trusts and combinations on the one hand, and on the other of a transformation of the corporation law which facilitated the remodeling of the trusts, and their continued transaction of business in the state.”22 In 1900 the treatise-writer Christopher Tiedeman would blame the entire trust problem on state corporate law and propose a return to incorporation by special legislation only.23 Some scholars object to the phrase “race to the bottom” to describe the corporate liberalization of the late nineteenth century on the ground that this phrase suggests, pejoratively, that corporate liberalization was socially harmful rather than socially beneficial. In Chapter 2 of this volume, “Corporations and Organizations in the United States after 1840,” Jessica Hennessey and John Wallis show that state liberalization might actually be understood as a “race to the top” insofar as the institutional changes permitted by liberalization enabled more efficient deployment of capital on a national scale. But whether corporate liberalization was a “race to the top” or “race to the bottom” in terms of its net social effects, it clearly diluted the effective power of states to use their corporate laws as means of controlling large aggregations of capital. Corporate liberalization was thus a “race to the bottom” in at least the limited sense that it gutted the states’ ability to use corporate charter restrictions as antitrust regulatory devices.

The Dissociation of Incorporation and Regulation in the Progressive Era and the New Deal

Toward the end of the nineteenth century, calls for a federal response to the “trust” problem intensified.24 Congress responded with two corporate reform statutes—the Interstate Commerce Act of 1887 and the Sherman Act of 1890—but those statutes would only temporarily alleviate the political demands for comprehensive federal control over interstate corporations. The arc of the mid- to late nineteenth century—commoditization of the corporate form, growth in corporate scale due to industrialization, race to the bottom in corporate chartering, and failure of quo warranto to produce the desired limitations on corporate power—set the stage for a renewed conversation over federal incorporation in the early decades of the twentieth century.

Federal Incorporation Proposals during the Progressive Era Arguments in Favor of a Federal Incorporation Regime The two federal corporate control statutes of the late nineteenth century—the Interstate Commerce and Sherman Acts—were largely viewed as inadequate to counter the rise of the industrial trusts during the Gilded Age. Indeed, many Progressives came to understand the Sherman Act, in particular, as a capitalist Trojan Horse. During its first decade, the Sherman Act was little used and, when it was, its axe most often fell on labor rather than capital. Of the first thirteen successful antitrust cases, only one involved a combination of capitalists. In the other twelve, the courts found antitrust violations by labor combinations.25 And, far from turning the tide of industrial concentration, the Sherman Act arguably contributed to the great merger wave of 1895 to 1904.26 The first decade of the twentieth century saw the promulgation of a few important but industry-specific regulatory statutes. The Elkins and Hepburn Acts of 1903 and 1906 authorized the extension of the ICC’s jurisdiction and allowed it to engage in rate regulation and to impose heavy penalties on railroads that engaged in discriminatory practices. The Pure Food and Drug Act and Meat Inspection Act of 1906 allowed for an enhanced federal regulatory role with respect to food and drugs, as did the Mann-Elkins Act of 1910 with respect to telecommunications. But many Progressives argued that a piecemeal approach to corporate regulation was inadequate. What was needed, they argued, was a federal regulatory scheme that would bring the trusts to heel across the range of regulatory challenges they posed.

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The Turn to Regulation

The demand for a comprehensive regulatory solution fed into a demand for federal incorporation. Around the turn of the century, the possibility of a federal incorporation statute became a popu lar topic among academics and prominent members of the bar.27 The debate over federal incorporation within the bar and academy was concentrated in the years 1903–1905, with a number of speeches and articles on the topic given by prominent lawyers and academics. Three principal species of argument dominated federal incorporation proposals. First, incorporation proponents saw federal incorporation as a means of achieving uniformity and efficacy in corporate regulation. Progressives believed that competition between states for corporate chartering—the “race to the bottom” in corporate law—of the late nineteenth century had eviscerated the ability of state corporate law to serve as a sufficient regulatory device. For example, James Rudolph Garfield, in his first annual report to Congress as Commissioner of the Bureau of Corporations, argued that competition between incorporating jurisdictions had led to “an inevitable tendency of State legislation toward the lowest level of lax regulation and of extreme favor toward this special class of incorporators, regardless of the interests of the other classes properly concerned.”28 University of Michigan law professor H. L. Wilgus asserted that though states were the incorporating sovereigns, they had lost their practical and indeed constitutional power to regulate trusts operating in interstate power.29 Even James Dill, the author of New Jersey’s much-maligned Holding Company Act, which was widely accused of unleashing a trust-building race to the bottom, argued that “[t]he country demands uniform corporate legislation, formulated upon the good of the country as a whole, and not sectional legislation, state by state.”30 Dill and other proponents of federal incorporation argued that the trust problem was created by the diversity of state incorporation law and the absence of a national regulatory force that could supervise the activities of the gigantic interstate trusts and prevent them from exercising monopolistic power. Th is argument for federal incorporation sought to revive corporate law—in the sense of the law governing the formation and powers of corporations—as the basis for regulating a broad set of social ills occasioned by corporate participation in commercial life. It recalled that the earliest form of corporate regulation was invocation of restrictions placed in the corporate charter by the incorporating sovereign—the quo warranto actions that had enjoyed some success before the race to the bottom. Federal in-

The Dissociation of Incorporation and Regulation in the Progressive Era and the New Deal

corporation proponents saw federal chartering as a means of reinserting restrictions on corporate behav ior through a uniform corporate chartering system. Second, federal incorporation proponents saw incorporation as a device to withstand the rising constitutional challenges to federal regulation of corporations.31 The constitutional challenges to corporate regulation were of two va rieties. First, there was an open question of Congress’s power to regulate corporations pursuant to its commerce clause powers. In 1895 the Supreme Court had held that manufacturing was not interstate commerce reachable by the federal commerce power. 32 Second, because the Supreme Court had held that corporations had Fift h Amendment rights, 33 corporate regulation had to withstand the substantive due process challenges of the Lochner era. The earliest successful substantive due process challenge to state regulation in the U.S. Supreme Court involved a corporate party.34 Federal incorporation proponents assumed that federal incorporation would provide a buffer against both species of attack on the theory that an incorporating sovereign could regulate its own creation. Voicing a characteristic form of argument, William Curtis, a prominent New York lawyer with the law firm Sullivan & Cromwell, asserted that “[t]he power to create being conceded, the power to regulate must necessarily follow.”35 Third, federal incorporation proponents believed that successful corporate regulation required regulators to track, monitor, and supervise corporations proactively, not just when problems arose. Federal incorporation was seen as a device to bring large interstate corporations into the federal regulatory system and thus to allow regular reporting and monitoring from Washington. Federal incorporation would initiate an ongoing relationship between federal regulators and corporations that would create corporate accountability. Progressives differed on whether federal incorporation was strictly necessary to this project. A system of federal registration or licensing might serve the purpose equally well.

Arguments against Federal Incorporation Opponents of federal incorporation raised essentially two objections, first that federal incorporation was either unconstitutional or at least inconsistent with a historical political settlement on the division of state and federal power, and second, that federal incorporation was simply a stepping stone toward corporate nationalization and socialism.

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First, opponents worried that federal incorporation would upset the balance of power between the state and federal governments that had been forged as a compromise in the original Constitution and the Reconstruction amendments.36 On this argument, they faced an initial difficulty, since it had long been settled as a matter of constitutional law that Congress had the power to grant charters of incorporation, as the Supreme Court had held in McCulloch v. Maryland.37 Congress had done so on a number of occasions with Supreme Court approval.38 However, some federal incorporation critics charged that invoking the commerce clause to require federal incorporation by all trusts or corporations involved in interstate commerce, and then using incorporation as a hook to regulate in ways that Congress could not have regulated directly under the commerce clause, would be an unconstitutional infringement on traditional state regulatory prerogatives.39 For example, John E. Parsons, a prominent New York lawyer and former president of the New York City Bar Association, argued that allowing federal incorporation or registration as a hook to achieve comprehensive federal regulation would invade the state’s prerogatives to regulate activities such as manufacturing and mining that had long been considered within the states’ regulatory province.40 These critics argued that an iterative historical settlement had emerged over the first century of the Republic in which incorporation was to remain primarily a state prerogative.41 Important elements of this narrative included the initial decision by the Constitutional Convention of 1787 not to grant Congress an enumerated incorporation power, Andrew Jackson’s veto of the charter of the third Bank of the United States, and the state law reforms of the mid-nineteenth century that took incorporation from special act of the legislature to a generally available vehicle of business organization.42 Federal incorporation opponents understood this history as establishing a political precedent in which the federal government would only incorporate through special acts and for special purposes, leaving general incorporation of business entities to the states. For example, Thomas Thacher, a lecturer in law at Yale, founder of the Simpson Thacher law firm, and one of the leading figures in corporate law during the late nineteenth and early twentieth centuries, worried that ceding incorporation power to the government would be to “bid farewell to the fundamental theory of the Federal Constitution and to call the wisdom of the [Founding] Fathers folly when applied to the conditions of to-day.” 43 E. Parmalee Prentice, the son-in-law to John D. Rockefeller, argued that federal chartering was “a power which was not granted by

The Dissociation of Incorporation and Regulation in the Progressive Era and the New Deal

the Constitution, which Congress had never claimed, and which fi nds no support in constitutional history.” 44 Second, opponents argued that federal incorporation would serve as the beginning point in federal nationalization of industry. These opponents believed that federal incorporation would initially be used as a vehicle for pervasive regulation of the trusts and that, over time, regulatory control would morph into a regime of comprehensive federal bureaucratic management and possibly even ownership. Responding to Attorney General Philander Knox’s argument that an incorporation power was necessary to prevent fraud, Thacher noted that corporate fraud such as overcapitalization “affects only those who become participants in corporate enterprises,” not the general public.45 Since Thacher did not believe that the federal incorporation and corporate disclosure model would make the trusts more competitive, he worried that proponents of the plan had an ulterior motive. Thacher warned that the incorporation proposal was “a long step toward Federal socialism.” 46 Such claims by prominent members of the bar contributed to charges that Teddy Roosevelt was pursuing a socialist agenda in seeking greater federal control over corporations.

The Failure of Federal Incorporation or Registration Legislative Proposals Federal incorporation or registration was a popu lar mainstream political topic from the late nineteenth century until early in the administration of Woodrow Wilson. For instance, an 1899 Chicago Conference on Trusts sponsored by the Chicago Civic Federation led a number of prominent public figures to call for direct federal control of the trusts.47 William Jennings Bryan led the charge, advocating mandatory federal licensing for corporations doing business outside their home state, and accompanying stringent requirements regarding capitalization and business policies.48 Congressional movement toward federal incorporation began at the turn of the century with the introduction of legislation to place corporate control at the center of federal antitrust policy.49 The first bill, introduced in 1900 by Congressman Edwin R. Ridgely of Kansas, would have established a federal licensing scheme for corporations operating in interstate commerce.50 There followed a series of bills that would have required firms operating in interstate commerce to be federally licensed and comply with regulatory requirements. But by 1907, six such bills had died in committee.51

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The success of such bills, of course, depended on the support of the White House. To an important degree, the story of the failure of federal incorporation or registration proposals during the Progressive Era is the story of the ideological contests and transformations that took place in the executive branch from the Roosevelt to the Wilson administrations. It is also a story about the parallel battles over the political and legal management of the rising labor movement and its relationship to control over the trusts. Despite personal misgivings about the value of antitrust law and conservative opposition from within his own party, Teddy Roosevelt made corporate control legislation the keynote of his first annual message to Congress. Even before assuming the presidency following McKinley’s assassination, Roosevelt had come to believe that “[m]ore and more it is evident that the State, and if necessary the nation, has got to possess the right of supervision and control as regards the great corporations which are its creatures.”52 Roosevelt explicitly tied the power to incorporate to the power to regulate. In his 1901 message, he identified the trusts problem as one of corporate law: “It is not limitation upon property rights or freedom of contract to require that when men receive from government the privilege of doing business under corporate form . . . they shall do so upon absolutely truthful representations. . . . Great corporations exist only because they are safeguarded by our institutions; and it is therefore our right and duty to see that they work in harmony with these institutions.”53 Roosevelt achieved a modest step toward direct federal superintendence of large corporations operating in interstate commerce in a 1903 act of Congress that created a Bureau of Corporations as an agency of the newly formed Department of Commerce.54 The new Bureau was charged with investigating and reporting on interstate corporations. Between 1906 and 1913, the Bureau investigated and issued reports on the petroleum, tobacco, steel, and farm implement industries.55 However, the Bureau lacked enforcement or regulatory authority and insisted that its only authority was investigatory, with an eye toward proposing new legislation.56 Roosevelt continued to press for legislation giving the federal government direct supervisory authority over interstate corporations. Even after his administration scored a major victory over the House of Morgan in the Northern Securities case,57 Roosevelt fumed that antitrust litigation was too slow and cumbersome a means of regulatory control and that “no judicial tribunal has the knowledge or experience to determine in the first place whether a given combination is advisable or necessary in the interest of the

The Dissociation of Incorporation and Regulation in the Progressive Era and the New Deal

public.”58 Roosevelt argued that the crime-tort model of the Sherman Act, committed as it was to the care of the federal courts, needed to be replaced with a regulatory model where complex decisions about the propriety of “trusts” could be made by specialized bureaucrats. Between 1906 and 1908, Roosevelt’s annual message repeatedly urged Congress to “grant [] supervisory power to the government over these big concerns engaged in interstate business.”59 Roosevelt came closest to getting a corporate control bill when, on March 23, 1908, Congressman William Hepburn of the Committee on Interstate Commerce introduced what became known as the Hepburn Bill.60 The bill was the product of intensive negotiations under the auspices of the Civic Federation resulting in a coalition of corporate capitalists, professionals, intellectuals, congressional Democrats and Republicans (including both Bryan Democrats and insurgent Republicans), trade unionists, and farm leaders.61 At a high level of generality, there were two competing options on the table—a commission model (in line with the Federal Trade Commission model ultimately adopted in 1914) and a federal incorporation or corporate registration and licensing model.62 The Roosevelt administration steered the proposal away from a commission model and toward corporate registration and licensing. Roosevelt himself eventually took over negotiations and pushed for a tough version of the bill that would grant the executive branch significant control over corporations operating in interstate commerce.63 The bill that ultimately emerged provided that corporations could, at their option, register with the Commissioner of Corporations. To register, the corporation would have to make full disclosure of its finances and business methods. Registered companies could fi le any potentially anticompetitive agreements with the Commissioner. Within thirty days, the Commissioner could declare the contract an unreasonable restraint of trade and void, but if he did not do so the contract would become immune from attack by the government. The bill also cut back on private rights of action by de-trebling damages as to any registered contract and prohibiting any private or public suits as to contracts predating 1908.64 Although the entire system was optional—corporations could choose to stay out and take their chances in the courts—an important feature of the bill was that it left intact the Sherman Act’s flat prohibition on restraints of trade which, in some early judicial interpretations, had taken on an absolutist flavor. Thus, the Hepburn Bill provided a degree of coercion to corporations to enter into the bill’s executive

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administrative regime and hence escape severe sanctions in the courts under the existing text of the Sherman Act. Sklar summarizes the effect of the bill as follows: The basic objectives may be summarized as follows: (1) to legalize reasonable restraints of trade, that is, to legalize the large-corporate organization of the economy; (2) to subject this legalized economic order to stringent federal regulation, direction, and control; (3) to provide for the exercise of this governmental authority by powers of constant administrative supervision lodged in an executive agency, which might engage in close consultation and cooperation with compliant corporate managers, who would become in increasing measure wellpaid public servants rather than old-style capitalists; and (4) to replace judicial process with legislation and executive administration as far as it was constitutionally possible, in determining the structure and operation of the market.65 The Hepburn Bill drew immediate criticism from across the country, particularly from manufacturer and agricultural associations and the American Bar Association, which sounded alarms over the bill’s statism and demotion of the judiciary.66 The bill’s politics became increasingly complicated on February 3, 1908, when, in Loewe v. Lawlor (the Danbury Hatters case),67 the Supreme Court upheld the application of the Sherman Act to secondary labor boycotts. The Hepburn Bill contained a labor exemption, but it was uncertain how it might apply to secondary labor boycotts. The manufacturing and lawyer classes feared that it might be applied to undo the result in Loewe, and hence began to amount fierce opposition to the bill.68 Even small manufacturers, which might other wise have been interested in the bill’s implications for restricting the power over larger firms, worried about its labor implications. As the bill languished in committee, big business began to push for revisions that would have reduced the power of the Commissioner of Corporations and closed the labor exemption, and labor and Roosevelt reacted by worrying that the bill was becoming diluted. Eventually, both labor and business turned against the bill.69 When Roosevelt left office in 1909, the bill was dead. On assuming the Oval Office, Taft continued to promote the need for a federal incorporation or registration bill, except that his proposal would have made federal incorporation and regulatory superintendence mandatory for businesses operating in interstate commerce.70 But Taft’s legislative

The Dissociation of Incorporation and Regulation in the Progressive Era and the New Deal

proposals for federal incorporation were forgotten in the furor surrounding the Supreme Court’s Standard Oil decision in 1911.71 Although the Court ordered Rockefeller’s trust disbanded, Justice White’s opinion squarely affirmed that the Sherman Act prohibited not all restraints of trade, but only unreasonable ones. Many Progressives thought Standard Oil gutted the Sherman Act and opened the door to large combinations of capital.72 For example, the 1912 Democratic Party platform lamented that the opinion has deprived the Sherman Act “of much of its efficacy” and proposed legislation to “restore to the statute the strength of which it has been deprived by such interpretation.”73 While the Standard Oil decision reinvigorated calls for a federal incorporation or registration scheme, it had the opposite effect on Taft. Over the course of his administration, Taft underwent a transformation from a supporter of the federal regulation model to a defender of the judiciary and common law style of antitrust decision making. Thus, by the 1912 election, Taft had become a staunch defender of the judiciary and conventional executive law enforcement on antitrust and corporate regulation matters. Taft pointed to his administration’s antitrust cases against U.S. Steel, American Sugar, General Electric, the meat packers, and the transcontinental railways as proof that the existing system was working.74 As against critics of the Supreme Court, the former judge and future chief justice lauded the federal courts: “I love judges and I love courts. . . . They are my ideals on earth that typify what we shall meet in heaven under a just God.”75 Taft thus set himself against Roosevelt’s executive-regulatory statism. The 1912 election ushered in Woodrow Wilson, paved the way for the major antitrust legislation of 1914, and defeated both the reinvented Roosevelt and Roosevelt’s plan for direct federal regulation of corporations. Louis Brandeis, who served as Wilson’s chief antitrust brain trust, argued that Roosevelt proposed to “regulate monopoly,” whereas Wilson proposed to “regulate competition.”76 In Wilson’s view, the Rooseveltian model of direct federal creation and regulation of corporations was a recipe for governmentcreated monopoly. Wilson feared that direct federal regulatory power over corporations would lead to industrial monopolies as the corporations captured their regulators and turned regulation to their advantage.77 Unlike Brandeis, however, Wilson did not share the Progressive Era infatuation with government by experts. Reacting to a proposed antitrust commission in 1912, he caustically remarked: “I don’t want a smug lot of experts to sit down behind closed doors in Washington and play providence to me.”78 Further,

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Wilson distinguished between prohibitory regulation—for example, a law against anticompetitive behavior by trusts—which he found to be proper, and “direct administrative regulation”—for example, structuring corporations to facilitate competition—which, like Thacher, he equated with socialism.79 Thus, when Senator Cummins issued a report proposing various powers for the soon to be created Federal Trade Commission (FTC), Wilson objected to only one of them: the power to structure interstate corporations directly through regulation.80 Although Cummins argued that such prophylactic “quasi-judicial” power would allow the Commission to make competition policy “vastly more effectually” than could the courts, Wilson saw this as nothing other than Roosevelt’s model of an unholy partnership between the government and the trusts. Wilson declared that although “the opinion of the country” supported a commission, “it would not wish to see it empowered to make terms with monopoly or in any sort to assume control of business, as if the government made itself responsible.”81 The Commission’s powers would have to be prohibitory, not structural. The Wilson administration shepherded the adoption of three federal statutes responding in part to the anticorporate pressures that had been brewing since at least the turn of the century. The Federal Reserve Act of 1913 responded to concerns over the hegemonic control of the “Money Trust” and provided for a system of federal incorporation and regulation of banks— thus vindicating proponents of federal incorporation on a small scale. The year 1914 saw the adoption of two significant pieces of antitrust legislation: the Clayton Act, which strengthened and expanded the substantive reach of the Sherman Act, and the Federal Trade Commission Act which, consistent with earlier Civic Association proposals, replaced the Bureau of Corporations with an independent and powerful antitrust enforcement agency. While these acts nominally strengthened antitrust enforcement and prophylactic federal supervision of interstate trusts, they brought to a close an era of proposals for comprehensive federal supervision of interstate trusts through incorporation, registration, or licensing. Calls for such a scheme would not resurface until the New Deal.

The Borah-O’Mahoney Bill Wilson’s rejection of a federal incorporation statute and the passage of the Clayton and FTC Acts ended any serious possibility of a federal scheme tying incorporation to regulation in the Progressive Era. With a few sectoral

The Dissociation of Incorporation and Regulation in the Progressive Era and the New Deal

exceptions like banking and telecommunications, federal regulation of business was conducted through a model in which a federal statute, enforced by a federal agency, the Justice Department, or private parties, prohibited enumerated types of conduct. Thus, for example, antitrust remained a search for illegal behav ior that could be prosecuted, penalized, and enjoined rather than an administrative-regulatory system in which large interstate trusts fi led their contracts for approval with the Bureau of Corporations. More broadly, the rejection of a corporate law model of antitrust enforcement coincided with the movement in the twentieth century away from corporate law as a general field concerning the role of the corporation in society to one much more narrowly focused on the respective rights and obligations of managers and shareholders. The rising field of administrative law began to replace corporate law as the regulatory matrix addressing social ills, whether corporate or other wise. Despite these trends, the possibility of federal incorporation resurfaced during the New Deal in connection with post-Depression calls for securities regulation. The connection between securities regulation and antitrust dates back to the late nineteenth century. In 1898, Congress created an Industrial Commission to investigate combinations in restraint of trade.82 When the Commission published its report in 1902, its recommendations made the trust problem sound primarily like one of investor deception rather than harm to consumers. The Commission stated that its primary objective was “to prevent the organizers of corporations or industrial combinations from deceiving investors and the public, either through suppression of material facts or by making misleading statements.”83 It recommended that “the larger corporations—the so-called trusts—should be required to publish annually a properly audited report, showing in reasonable detail their assets and liabilities, with profit and loss; such a report and audit under oath to be subject to government regulation.”84 The idea of a financial disclosure model gained some traction during the founding era of antitrust when the Bureau of Corporations requested the power “to directly inspect corporate accounts to protect the public interest.”85 The Bureau’s proposal, however, was linked to more specifically antitrustoriented proposals to require federal incorporation and licensing of the trusts, and shared the fate of those proposals during the Progressive Era. The stock market crash of 1929 and the Great Depression that followed reinvigorated the idea of federal incorporation and licensing of large corporations. Already during the brief era of the National Industrial Recovery Act,

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a group within the Department of Justice began to investigate the possibility of a federal incorporation statute as a way of solving a variety of social ills attendant to large aggregations of capital, including anticompetitive conduct, fraud on shareholders, and labor and employment abuses. 86 The passage of the Securities Acts of 1933 and 1934, which created a regime of registration and disclosure for nationally traded securities and created a new agency to oversee corporate financial disclosure obligations,87 encouraged various New Deal factions to believe that a more comprehensive federal incorporation scheme was possible. A significant piece of the Progressive agenda for direct federal regulation of corporations, dating back to the Industrial Commission’s 1902 report, had been realized. Just as Congress had found state blue-sky laws inadequate to protect investors, so too Congress might now find state incorporation law combined with the crime-tort-modeled Sherman Act insufficient to protect consumers and small businessmen from the overwhelming power of large corporations. With the demise of the National Industrial Recovery Act’s associationalist regime in 1935,88 a Brandeisian wing took control of the antitrust division of the Justice Department and gained strength within the Roosevelt administration.89 This new faction was troubled by the ineffectiveness of state incorporation laws and believed that “this ‘competition in laxity’ had produced giant ‘tramp’ corporations, great sprawling empires with more power than the states that created them.”90 Eventually, they found a sympathetic ear in Congress. In 1937, Senators William Borah and Joseph C. O’Mahoney introduced a joint bill that would have required corporations engaged in interstate commerce to be licensed with the FTC and imposed a variety of restrictions on licensed corporations, including child labor and anti–gender discrimination provisions, prohibitions on antiunion activities, a requirement that they maintain their principal place of business in the state where they were organized, and a requirement that they observe all antitrust law, eliminate all nonvoting stock, and refrain from practices that were designed to inflate their capital structure or deceive their shareholders.91 Failure to abide by these conditions would lead to the revocation of the corporate charter. The Borah-O’Mahoney approach found a sympathetic reception in various quarters of the New Deal coalition. Organized labor, fresh off its victory in securing the National Labor Relations Act in 1935, viewed the proposal positively as a means of securing additional protections for the working class.92 Advocates of central planning like the economist Rex Tugwell supported the measure as the first step toward a planned economy.93 Just a few

The Dissociation of Incorporation and Regulation in the Progressive Era and the New Deal

years earlier, Tugwell had written that organizing a centrally planned economy would require that “incorporation of business enterprises . . . be transferred from the States to the nation, though some subterfuge might need to be employed.”94 Tugwell acknowledged that transitioning from market-based production and distribution to a planned economy might require a constitutional amendment (at least given the then-prevailing Supreme Court), but thought of federal incorporation as an “existing institution” or “familiar instrument” that might be employed to attain the same results without the cost and uncertainty of a constitutional amendment.95 Other New Dealers were uncertain as to whether, given the prevailing Supreme Court view on the meaning of interstate commerce, the federal chartering system would go far enough.96 The idea of a federal corporate chartering statute worked its way through the New Deal coalition at a time when Hammer v. Dagenhart,97 Schechter Poultry,98 and Carter Coal99 defined the reach of the commerce power. Some advocates of enhanced federal regulation argued that the federal chartering system would have to be enhanced with an interstate compact designed to catch the corporate ills that befell intra-state commerce, as defined by the Supreme Court.100 Despite some initial momentum, the Borah-O’Mahoney Bill never received profound support in Congress.101 Several factors contributed to its failure. To the extent that support for federal chartering was motivated by the Supreme Court’s restrictive view of the federal commerce power, the facts on the ground changed dramatically at the very time the bill was under consideration. After Jones & Laughlin Steel,102 Darby,103 Wickard v. Fillburn,104 and a number of other cases in the late 1930s and early 1940s enunciating a virtually unlimited view of the federal commerce power, and cases like West Coast Hotel Co. v. Parrish105 cutting back on economic substantive due process, the need for a constitutional hook to justify regulation—Tugwell’s “subterfuge”—faded. Additionally, in the late 1930s the New Dealers were already enjoying the fruits of the dramatic regulatory overhauls of Roosevelt’s first two terms. The passage of the Securities Acts of 1933 and 1934 had created a form of direct federal superintendence of large, interstate corporations. Any significant appetite for further intrusions on traditional state prerogatives may have been lacking. The National Labor Relations Act of 1935 created a new administrative structure governing management-labor relations. The RobinsonPatman Act of 1936 responded to the New Deal’s political need for some form of new antitrust legislation to protect small business interests. Robert

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Jackson and Thurman Arnold’s reinvigoration of antitrust enforcement as successive heads of the Justice Department’s antitrust division showed that the current laws could work to curb competitive abuses.106 Arnold’s influential book The Bottlenecks of Business argued that the existing antitrust laws could be effectively used to promote competition, thus arguably undermining any claim that a more radical displacement of traditional state prerogatives was needed with respect to corporations.107 Finally, with the advent of World War II, the anticorporatism that motivated the Borah-O’Mahoney approach faded within the New Deal. The large corporate organizations that dominated steel, rubber, oil, and transportation became indispensable to the war effort. Cooperation with Big Business rather than antagonism was needed. Roosevelt removed Thurman Arnold from the antitrust division and put most antitrust enforcement on hold. Further corporate reforms would have to wait. The system of state-run incorporation survived both the Progressive Era and the New Deal. Whatever the defects of the state incorporation system, it remained untouched by Congress, except to the extent that investor protection had become a regulatory function of the newly minted Securities and Exchange Commission (SEC). The corporate regulatory model had found a home in federal law, but only to the extent of investor protection.108 The Borah-O’Mahoney Bill was the last serious congressional attempt at a federal incorporation scheme that would associate incorporation and regulation. Since then, the voices advocating federal chartering or registration as a comprehensive regulatory device have largely been relegated to the margins of American political discourse.109 In the 1970s a discussion emerged about the possibility of federal incorporation, or at least minimum federal standards for state incorporation law, but it was relatively narrow in focus— directed almost entirely on problems of shareholder protection and corporate governance.110 In 1976 the Senate Committee on Commerce held six days of hearings on “why we should continue the present arrangements of state chartering of corporations or arguments for alternatives,” but proposals for a federal chartering scheme gained no traction.111 Outside of banking, federal chartering remains a rarity.

The Consequences of Dissociation With the notable exception of the banking sector and a few specialized nonprofit and quasi-public corporations like Freddie Mac and Fannie Mae, in-

The Dissociation of Incorporation and Regulation in the Progressive Era and the New Deal

corporating business corporations is the province of states, not the federal government. The consequences of having a state rather than federal incorporation system have been studied primarily in the context of corporate governance and shareholder protection, where there is an active and ongoing debate about whether interstate competition to attract corporations produces a “race to the bottom” or a “race to the top.”112 But the repeated failure of political efforts to associate federal chartering or registration with comprehensive regulatory schemes (as opposed to limited purposes regulatory schemes like those arising under the Securities laws) has had long-run consequences beyond corporate law and shareholder protection. The Progressives and New Dealers ultimately achieved much of their regulatory agenda without federal incorporation or licensing. But they did so through piecemeal statutory schemes creating regulatory institutions operating in separate silos rather than through the sort of comprehensive bureaucratic management of large corporations envisioned in the federal incorporation or licensing bills. Further, although the immediate constitutional impediments to the Progressive regulatory agenda largely faded after 1937, battles over corporate regulation would be fought on new constitutional terrains in the decades to follow. One can ponder whether federal chartering or licensing would have changed the complexion of these new constitutional battles.

Dissociation and the Fragmented Culture of Regulation Progressive advocates viewed federal incorporation or licensing as the beginning of a comprehensive regulatory relationship between the federal government and large interstate corporations. Once they were brought into federal superintendence through chartering or registration, corporations would become accountable to the oversight and formal or informal intervention of federal bureaucrats. Federal corporations would be subject to a number of regular reporting and disclosure requirements. They would also be required to receive bureaucratic clearance before engaging in certain types of transactions—such as potentially anticompetitive contracts. Finally, federal corporations might be subject to special norms of good behav ior, such as anti–gender discrimination or child labor prohibitions, shareholder protections, heightened antitrust norms, and regulation of labor practices. Bureaucrats with supervisory responsibility for the entire conduct of the corporation would be on hand to monitor compliance.

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With the shift in power from the states to the federal government and the rise of the federal regulatory state in the post–World War II era, it may seem that the Progressive vision has been realized without federal incorporation or registration. Federal statutory and administrative schemes now cover the waterfront of social ills identified by the Progressives and New Dealers. Broad aspects of the national economy are subject to federal corporate registration and reporting requirements and work under the jurisdiction of administrative agencies inspired by Progressive ideals of technocratic, expert governance. For example, issuers of publicly traded securities must register with the Securities and Exchange Commission and regularly report financial information. Media companies within the jurisdiction of the Federal Communications Commission (FCC) are subject to sweeping regulatory oversight and agency rule-making and enforcement authority. Pharmaceutical companies work under the shadow of the Food and Drug Administration (FDA). Few large business organizations escape the superintendence of federal agencies. Still, large swaths of corporate activity remain within the regulatory control of the federal government only insofar as federal agencies or Justice Department lawyers enforce prohibitory legal norms against them on the same terms as they are enforced against non-corporate actors. Instead of falling within the seamless oversight of the federal government, as Progressives advocated, large interstate corporations experience the federal government as a series of agencies or departments with jurisdictionally limited powers over particular species of conduct or practice. The dissociation of incorporation and regulation has meant that regulation is institutionally and substantively fragmented. Fragmentation has meant not merely jurisdictional gaps but widely varying regulatory cultures across the set of regulated activities. To illustrate this phenomenon, it may be useful to contrast the federal regulatory schemes with respect to securities offerings and antitrust enforcement. During the Progressive and New Deal eras, advocates of enhanced federal corporate oversight drew few distinctions between corporations’ abuses of shareholders, competitors, and consumers. They were part of a comprehensive “trust” problem that, along with a plethora of other social ills from adulterated foods to unfair labor practices, required comprehensive federal corporate oversight. With the failure of federal incorporation or registration proposals, the battleground shifted to more tailored federal regulatory interventions. Antitrust reforms came with the Clayton and FTC Acts of 1914, the Robinson-Patman Act of 1936, and the Celler-Kefauver Act of

The Dissociation of Incorporation and Regulation in the Progressive Era and the New Deal

1950. Securities reforms came with the 1933 and 1934 acts respecting securities issuance and trading. Although federal law addresses both shareholder protection and consumer protection through its securities and antitrust laws, respectively, the regulatory cultures of shareholder and consumer protection are very different. A large amount of securities regulation is bureaucratic and prospective. Securities issuers must file detailed registration statements before publicly issuing shares and, thereafter, annual, quarterly, and event-based financial reports with the Commission. The SEC issues complex rules about securities offering, reporting, and trading, and closely oversees the work of selfregulatory securities organizations (today, the Financial Industry Regulatory Authority). By contrast, corporations have no reporting or regulatory relationship with the federal antitrust authorities—the Federal Trade Commission and Justice Department’s antitrust division—unless they go through a merger covered by the Hart-Scott-Rodino Act (in which case the regulatory oversight is a one-off event), or are investigated or sued for violating the antitrust laws. Most of antitrust law still works on a crime-tort model in which the federal agency must fi le a lawsuit and prove that the defendant violated the relevant legal rule. Even the FTC, which was designed to fulfill some of the corporate oversight, monitoring, and rule-making functions sought by Progressives, has become little more than a law enforcement agency, suing to vindicate the public interest when it detects a violation of antitrust law.113 Further, a doctrine of contemporary antitrust law holds that the antitrust laws do not reach evils that lie within the regulatory ambit of (non-antitrust) federal regulators such as the FCC or SEC,114 which means that antitrust law is limited to the interstices between federal regulatory zones, whether or not the regulators within those zones address the relevant issue. The path of federal regulation over the course of the twentieth century would likely have looked quite different if interstate corporations had been required to obtain a federal charter or register with the federal government and thereby enter into a comprehensive federal regulatory scheme. Reporting, monitoring, and rulemaking would not have been limited to specific activities such as financial reporting to investors, but likely would have spanned the range of scrutinized activities and potential harms. Initially, these covered activities might have reflected the political priorities of the day—shareholder and consumer protection and labor practices. Over time, as other issues such as civil rights, environmental protection, and product

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safety came into focus, the existing framework of federal corporate superintendence could have been utilized to incorporate the new political priorities. It would be speculative to trace the path of the counterfactual over the course of the twentieth century, but fair to say that the path would have looked quite different if the contests of 1900–1907 or 1937 over federal incorporation or registration had come out differently. The proponents of incorporation or registration had a vision for a universal supervisory relationship of the federal government over large corporations. Although individual pieces of that vision have been realized through statutory schemes addressing specific regulatory objectives, the overall vision faded after 1937 and has not reemerged since.

Dissociation and the Constitutional Status of Corporations Much has been written about the development of corporate constitutional rights during the late nineteenth and early twentieth centuries,115 including the essays in this volume by Margaret Blair and Elizabeth Pollman (Chapter 7) and by Ruth Bloch and Naomi Lamoreaux (Chapter 8). Professors Blair and Pollman show that the Supreme Court’s late nineteenth-century jurisprudence treated corporate constitutional rights as shorthand for the rights of the individuals standing behind the corporation rather than as rights abstractly inhering in the corporation itself. Professors Bloch and Lamoreaux show that the Supreme Court’s early jurisprudence as to corporate rights drew careful distinctions between different types of constitutional rights, such as property and liberty, applying only some of them to corporations. Both of these essays thus suggest some degree of historical narrowing of the degree of constitutional protection enjoyed by corporations compared to contemporary assumptions that the constitutional rights enjoyed by corporations are coextensive with those of natural persons. During the Progressive and New Deal eras, proponents of more aggressive corporate regulation considered an additional potential limitation on a corporation’s constitutional rights: If the sovereign entity creating the corporation through chartering or licensing included restrictions on corporate power in the terms of the charter or license, those restrictions might be impermeable to constitutional attack on the ground that the greater power to create included the lesser power to regulate. Engagements over federal chartering or registration during the early twentieth century played out against background assumptions that the federal government’s constitu-

The Dissociation of Incorporation and Regulation in the Progressive Era and the New Deal

tional power to regulate corporations would increase if the federal government were the incorporating or licensing sovereign. Proponents and opponents of a wider federal regulatory power disagreed over the extent to which the federal government already had regulatory powers over corporations without federal chartering or registration, but they shared a common assumption that federal chartering or registration would enhance the federal government’s powers to regulate. Both proponents and opponents broadly assumed that the greater power to incorporate included the lesser power to regulate and, hence, that a federal incorporation scheme would enhance the federal government’s constitutional powers over corporations. Consider the following characteristic argument advanced by Thomas Thacher, introduced in the previous section as a prominent opponent of federal incorporation: The Nation has no peculiar relation to corporations created by the States. It can deal with them only as it can deal with unincorporated associations, partnerships and individuals. Incorporation gives a privilege. The power which gives it may reserve the right to regulate its enjoyment, that is, the conduct of the association so privileged. In the nature of things, such right can be reserved only in the grant of the privilege and only by the grantor. The fact that an association of men is incorporated by one State cannot be made the basis of regulation by any other power. Incorporation under the laws of one or more States of the Union, gives no basis for control or regulation by the United States. The basis for Federal action must be found outside of the fact of such incorporation, in something which, regardless of incorporation, brings the association within the field of Federal jurisdiction, under the provisions of the Constitution.116 Thacher was writing in 1909, after the demise of the federal incorporation proposals of 1900–1907. His argument resonated with the arguments of federal incorporation proponents from a few years earlier to the effect that federal incorporation was necessary in order to secure the constitutional legitimacy of federal regulation of corporations. In essence, Thacher was asserting that, since proponents of federal incorporation or registration had failed to achieve their goal in Congress, they must now accept that the federal regulatory powers over corporations were limited. Although the assumption relating Congress’s regulatory powers to its  possible status as an incorporating sovereign was widely held, other

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contemporaneous strains of constitutional and political theory placed less emphasis on the relationship between a particular sovereign as the incorporator and that sovereign’s regulatory powers than on the more general distinction between natural persons as pre-political and corporations as creatures of the state. Consistent with natural law theory, the political mainstream during the early twentieth century held that fundamental rights were pre-political—that they were recognized, not created, by the state since the person is recognized but not created by the state. In oft-quoted words from Pierce v. Society of Sisters, the Supreme Court held that “[t]he child is not the mere creature of the state; those who nurture him and direct his destiny have the right, coupled with the high duty, to recognize and prepare him for additional obligations.”117 This “creature of the state” rhetoric as a device for justifying a pre-political or natural law conception of constitutional rights of natural persons invited the drawing of an obvious line when it came to corporations. Corporations are, quite obviously, creatures of the state and hence might not enjoy the same pre-political rights as natural persons. Thus, when the Supreme Court upheld the Roosevelt administration’s antitrust suit against one of J. P. Morgan’s railroad mergers, Justice Brewer noted in his concurrence that a “corporation . . . is not endowed with the inalienable rights of a natural person. It is an artificial person, created and existing only for the convenient transaction of business.”118 Even Justice White, in dissent, acknowledged that “the corporation is created by the state, and holds rights subject to the conditions attached to the grant, or to such regulations as the creator, the state, may lawfully impose upon its creature, the corporation.”119 The formulation in Justice White’s Northern Securities dissent points to a conceptual problem not easily answered by drawing distinctions between natural persons and corporations. If the corporation only held those “rights subject to the conditions attached to the grant,” what happened when the regulating sovereign was not the incorporating sovereign who could attach “conditions to the grant”? The Supreme Court gave one answer the year before Northern Securities in Hale v. Henkel, a decision holding that corporations have no Fift h Amendment right to refuse to turn over incriminating books and papers.120 The Court found “a clear distinction . . . between an individual and a corporation. . . . The individual may stand upon his constitutional rights as a citizen.” The natural person’s rights were pre-political— they “existed by the law of the land long antecedent to the organization of the state.” But:

The Dissociation of Incorporation and Regulation in the Progressive Era and the New Deal

upon the other hand, the corporation is a creature of the state. It is presumed to be incorporated for the benefit of the public. It receives certain special privileges and franchises, and holds them subject to the laws of the state and the limitations of its charter. Its powers are limited by law. It can make no contract not authorized by its charter. Its rights to act as a corporation are only preserved to it so long as it obeys the laws of its creation. There is a reserved right in the legislature to investigate its contracts and find out whether it has exceeded its powers. It would be a strange anomaly to hold that a state, having chartered a corporation to make use of certain franchises, could not, in the exercise of its sovereignty, inquire how these franchises had been employed, and whether they had been abused, and demand the production of the corporate books and papers for that purpose. The Court then had to iron out a wrinkle of federalism. The corporation at issue was chartered under the laws of New Jersey, whereas the regulating sovereign—the one demanding the production of books and records—was the federal government. The Court avoided this problem by observing that corporations operating in interstate commerce must be subordinated to the federal power, hence the federal government’s regulatory powers subsumed all of those powers of the charter-granting state. “The powers of the general government in this particular in the vindication of its own laws are the same as if the corporation had been created by an act of Congress.”121 The Court’s solution in Hale was facilitated by the fact that state corporate law required corporations to keep their books and records open for inspection. In subpoenaing corporate records, the federal government was piggybacking on conditions that incorporating states themselves included in corporate charters. But what if the federal government sought to assert regulatory controls that had disappeared from state corporate law because of the “race to the bottom” in the late nineteenth century or had never existed at all? In that case, the distinction between two related strands of argument—(1) that corporate rights were inherently limited because corporations were creatures of the state, and (2) that corporate rights were a function of the chartering rules of the incorporating sovereign—would come into play. Further, the reasoning of Hale extended only to the assertion of negative rights against the government. It had nothing to do with the question of Congress’s affirmative powers to regulate. From roughly the late nineteenth century until the New Deal “switch in time” of 1937, a significant obstacle to

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federal corporate regulatory efforts was the limited view of the federal commerce power that prevented Congress from regulating large swaths of commercial and economic life. A limited view of the federal commerce power contributed to a long line of cases in the early twentieth century in which the Supreme Court sided with corporations in invalidating federal statutes regulating such activities as the protection of railroad employees,122 child labor,123 fair competition,124 employee retirement plans,125 and coal production.126 In the counterfactual world in which corporations participating in interstate commerce were federally chartered and comprehensively federally regulated, the complexion of these cases might well have been different. Recall the arguments of federal incorporation proponents that if Congress had granted charters of incorporation, it could regulate its corporate creatures all the way down to activities that other wise might be considered local and outside the federal commerce power. The constitutional revolution that began in 1937 mooted many of the questions about the relationship between incorporation and regulation that played out during the Progressive Era and early New Deal. With the demise of substantive due process and the dramatic expansion of the federal commerce power, there were few constitutional obstacles to comprehensive federal regulation of corporations even without federal incorporation or registration. With the arrival decades later of new constitutional weapons protecting corporations from regulation—particularly the corporate speech doctrine that brought about the Citizens United decision127—the thread of the debate over incorporation and regulation had been largely lost from political and legal discourse. Questions about the constitutional status of federally chartered corporations largely are about whether the corporation is part of the federal government for state action purposes,128 not whether federal incorporation allows the federal government greater regulatory powers over its creatures. Any sense of a potential relationship between a sovereign’s status as incorporator and regulator has largely disappeared from constitutional discourse. To be clear, a wide association between incorporating and regulatory powers would not likely have meant carte blanche regulatory authority for the federal government. In modern constitutional parlance, the assertion of regulatory authority even by a creator-sovereign would raise the problem of unconstitutional conditions.129 The greater power (to create) does not always include the lesser (to condition the exercise of privileges granted). For in-

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stance, the power of Congress to grant or deny Medicaid funding does not mean that Congress has carte blanche authority to penalize recipient states that refuse to participate in expanded Medicaid coverage.130 Or, to give a more salient example from the speech context, if the federal government had sole authority to grant corporate charters for businesses operating in interstate commerce, it still could not engage in viewpoint discrimination by prohibiting federal corporations from contributing money to Republicans while allowing them to donate to Democrats (or vice versa). Still, the unconstitutional conditions paradigm would be more advantageous a position for the state in limiting constitutional questions involving corporate control than the prevailing paradigm in which the state is typically forced to justify regulatory control on the same grounds as it justifies control over natural persons. The dissociation between incorporation and regulation is not the surrender of a trump card for the state, but it does represent a potential weakening of the state’s constitutional position when it comes to regulatory authority over corporations as compared to a circumstance where the government used chartering or registration more aggressively to impose ex ante conditions on corporate behav ior. Whether or not there has been a “race to the bottom” in corporate law insofar as the quality of corporate law has diminished because of interstate competition to attract corporate chartering, the failure of federal chartering to emerge as a broad phenomenon and the corresponding evaporation of state incorporation laws as devices of regulatory control have arguably limited the power of both the states and the federal government to control corporate behav ior—at least compared to the expectations of the advocates of federal incorporation or registration. To make the constitutional question concrete, consider the congressional practice with respect to granting charters of incorporation in the twentieth and twenty-first centuries. According to a 2013 Congressional Research Service Report, over half of the charters of the approximately one hundred Title 36 corporations—fraternal and patriotic organizations like Daughters of the American Revolution and the Boy Scouts of America—contain restrictions on political activities by the corporation or its directors.131 For instance, the charter of the United States Submarine Veterans of World War II provides: “Political Activities: The corporation or a director or officer as such may not contribute to, support, or otherwise participate in any political activity or in any manner attempt to influence legislation.”132 The American National Theater and Academy “shall be nonpolitical and nonsectarian, and

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may not promote the candidacy of an individual seeking public office.”133 The Agricultural Hall of Fame and any “governor, officer, employee, or member as such may not contribute to, support, or assist a political party or candidate for public office,”134 a restriction substantially shared by the American Society of International Law.135 (In light of earlier parts of this chapter, it is interest ing to ponder why the charter of the Teddy Roosevelt Association, of all Title 36 corporations, contains no similar restriction.)136 Apart from a few complaints and occasional efforts at modification,137 the practice of congressional restrictions on Title 36 corporation political contributions and activities seems to have gone unchallenged. Still, it is not clear whether, under current constitutional principles, the form of the restriction matters. If Congress cannot pass a general statute restricting certain kinds of speech by corporations, may Congress embed those same restrictions in a chartering document? For those contesting federal chartering or licensing during the Progressive Era, the answer seemed obvious—Congress’s power to incorporate included significant regulatory powers that Congress could not wield through direct regulation. It is difficult, of course, to say whether the “power to incorporate includes the power to regulate” principle assumed by federal incorporation or licensing advocates would, in fact, have been accepted by the Supreme Court of the 1910s, 1920s, or 1930s if squarely presented against the backdrop of contestation over the scope of the federal commerce power, the non-delegation doctrine, substantive due process, and other constitutional frictions. And it is impossible to say whether, if such a doctrine had been adopted in the Progressive or New Deal eras, it would have survived the evolution of constitutional doctrine in the second half of the twentieth century. Still, the thread has not been entirely lost from American political discourse. In the aftermath of Citizens United, there have been calls for states to place restrictions on corporate political speech into corporate charters. Regulation and incorporation have been dissociated. Whether their association would give the state a stronger regulatory hand remains to be tested.

CHAPTER 4

The Public Utility Idea and the Origins of Modern Business Regulation WILLIAM J. NOVAK

This essay concerns one of the more remarkable innovations in the history of democratic attempts to control the American corporation. In the late nineteenth and early twentieth centuries—after the series of impor tant changes in corporation law described in previous essays in this collection1— lawyers, economists, legislators, and democratic reformers pieced together a new regime of modern business regulation. At the center of that project was the idea of the “public utility” or “public ser vice” corporation. While most legal-historical accounts of government-business relations in this period trumpet the overriding significance of antitrust or antimonopoly policy,2 the legal invention of the public ser vice corporation and the public utility was to some extent even more significant for the future democratic control of the American corporation. For, in many ways, the modern American administrative and regulatory state was built directly on the legal foundation laid by the expanding conception of the essentially public ser vices provided by corporations in the dominant sectors of the American economy: transportation, communications, energy supply, water supply, and the shipping and storage of agricultural product. In law, the original architects of the administrative state, the authors of the very first casebooks, and the teachers of the first classes on administrative and regulatory law—people like Bruce Wyman, Felix Frankfurter, and, ultimately, James Landis—basically cut their teeth on the legal, political, and economic problems posed by public ser vice corporations and public utilities. The public utility, the public corporation, and the modern American administrative and regulatory state, in other words, all grew up together.3 Indeed, in the end, the public utility or public ser vice corporation became the central regulatory vehicles through which Progressive and New Deal policy makers pioneered a more capacious notion of “public interest” in politics and economics, and a more comprehensive conception of the “social 139

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control of American capitalism.” 4 Much like original notions of “utility” fueled a nineteenth-century era of governmental reform in England, fresh concepts of “public utility” and “public service” propelled new American conceptions of economic justice and social reform into the twentieth century.5 Awareness of the close linkage between the public utility idea and this more expansive agenda of economic regulation and reform was expressed frequently at the time in some of the most important manifestos of the era. Henry Carter Adams turned first to Granger laws in challenging the laissez-faire presumptions of Herbert Spencer’s Social Statics. John Commons began his influential Legal Foundations of Capitalism with a prolonged analysis of Munn v. Illinois and business “affected with a public interest.” Louis Brandeis’s solution to the era’s banking problems in Other People’s Money was the idea of “Banks as Public-Service Corporations.” 6 Richard  T. Ely’s famous “Statement” to the opening meeting of the American Economic Association mentioned both western water supply and midwestern rate discrimination as exemplary places to begin thinking in essentially public rather than private terms: “We hold that there are certain spheres of activity which do not belong to the individual, certain functions which the great co-operative society, called the state—must perform.”7 This centrality of the public utility idea to the modern project of economic regulation more generally even caught the attention of the period’s best legal historian. As Willard Hurst once summarized its significance and lasting legal influence: “One major development, starting in the last quarter of the nineteenth century but coming to fullest definition in our time, has increasingly expressed discontent with the legitimacy of the market on grounds of utility—that is, that the market simply did not prove sufficiently ser viceable to allow it the central place as a resource allocator which public policy was prepared to give it between 1750 and 1890. Our prime symbol of this changed judgment was the growth of the law of public utilities.”8 But the public utility idea was not just a legal doctrine or an intellectual program or a reform ambition. Rather, the power and historical significance of public utility came from the way in which it burrowed its way to the very core of the American legal and political-economic system. Quite simply, public utility took over turn-of-the-century statute books, commission reports, and court records. It dominated the period’s legal output: legislative and administrative, as well as judicial. It was the cutting edge and the avant-garde, moving conceptions of regulation beyond the constraints of the common law and state police power toward things like

The Public Utility Idea and the Origins of Modern Business Regulation

comprehensive price and rate controls, ongoing administrative and bureaucratic supervision, municipal ownership, and, ultimately, public works. It culminated in unprecedented interventions like World War I’s Food Administration (initially justified by the idea that in times of war all businesses were “affected with a public interest”), World War II’s Office of Price Administration and the Tennessee Valley Authority. To this day it  continues to hold sway in some impor tant sectors of the economy governed by a distinctive law of “regulated” or “networked” or “utility” industries.9 The concept itself constantly expanded beyond early initiatives in special areas like transportation, communications, energy, and water supply to the regulation of things like hotels, warehouses, stockyards, ice plants, insurance, milk . . . you name it. Railroad, commission, and public utility reports— consisting of complaints, investigations, rules, cases, holdings, findings, and deliberations—proliferated, taking over huge swaths of law library space and dwarfing other legislative and judicial materials. From the Civil War to the New Deal, the very best economists, lawyers, and policy makers were consumed by the problem of public utilities. In railroading—the original and paradigm case—state railroad commissioners had organized themselves into the National Association of Railroad Commissioners by 1889. And by 1929, the Interstate Commerce Commission had its own practitioners’ bar association with almost 2,000 members and a formal registry of practitioners totaling over 8,000. Kenneth Culp Davis has estimated that the extraordinary number of activities and personnel involved in railroad administration alone in this period exceeded the personnel and output of the entire federal court system.10 A shorthand but more concrete sense of the massive scale and scope of the “public ser vice corporation” project is suggested by Bruce Wyman’s twovolume, 1,500-page, 5,000-case treatise, The Special Law Governing Public Ser vice Corporations, published in 1911—at the height of Progressive activism concerning the relationship of business and American democracy. Building on the earlier texts of Harvard Law School colleague Joseph Henry Beale, and anticipating Felix Frank furter’s very influential work on public utilities and interstate commerce, Wyman consolidated and summarized two generations of legal-economic regulation in response to the emergence of the large-scale business corporation in the late nineteenth century. Th rough the “public ser vice” concept, he brought together three important and overlapping areas of legal-economic development in this period: (a) the early law

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of public callings and public carriers; (b) the emerging law of public utilities; and (c) new developments in the law of public works, public employment, and public contracting. “Twenty-five years ago,” Wyman noted, “the public ser vices which were recognized were still few and the law as to them imperfectly realized.” But his massive treatise was now a testament to a “present state of the public ser vice law” in which there was “almost general assent to State control of the public ser vice companies.”11 And how extensive were such public utilities and public ser vice companies by 1911? In the first three substantive chapters, Wyman covered the following types of businesses: Ferries, Bridges, Bonded warehouses, Log driving, Tramways, Railways, Pipe lines, Transmission lines, Elevated conveyors, Lumber flumes, Mining tunnels, Gristmills, Sawmills, Drainage, Sewerage, Cemeteries, Hospitals, Booms, Sluices, Turnpikes, Street Railways, Subways, Wire conduits, Pole lines, Waterworks, Irrigation systems, Natural gas, Water powers, Grain elevators, Cotton presses, Stock yards, Freight sheds, Docks, Basins, Dry Docks, Innkeepers, Hackmen, Messenger services, Call boxes, Gas works, Fuel gas, Electric plants, Electric power, Steam heat, Refrigeration, Canals, Channels, Railroads, Railway terminals, Railway bridges, Car ferries, Railway tunnels, Union railways, Belt lines, Signal services, Telegraph lines, Wireless telegraph, Submarine cables, Telephone systems, Ticker ser vice, Associated press, Public stores, Grain storage, Tobacco warehouses, Cold storage, Safe deposit vaults, Market places, Stock exchanges, Port lighters, Floating elevators, Tugboats, Switching engines, Parlor cars, Sleeping cars, Refrigerator cars, and Tank cars.12 So, now we come to a historical conundrum. For here we have this big, powerful, proliferating thing at the very center of American law and political economy between the Civil War and the New Deal—what Felix Frank furter dubbed “perhaps the most significant political tendency at the turn of the century.”13 And for all intents and purposes, today it has almost disappeared from sight. What was once at the forefront of law, economics, and public policy discussion has been relegated to the backbench—the dustbin—of American history. The words “public utility” no longer rouse; they are more likely a soporific. From the cutting edge of political economy, the law of public utilities has become something of a backwater concerning fewer and fewer things—electricity, gas, water—of perhaps ever receding significance. What happened? While keeping in mind the very real possibility that reports of the death of public utility have been greatly exaggerated,14 two answers to this question

The Public Utility Idea and the Origins of Modern Business Regulation

require at least preliminary mention. The first answer involves something of a success story. For the most part, the lawyers, economists, and reformers pushing the public utility idea essentially won. The overarching goal of the public utility idea was an enlarged police power—an expansive conception of state (and, ultimately, federal) regulatory power over corporations, business, and the American economy more generally. And by the time of the U.S. Supreme Court’s landmark decision in Nebbia v. New York in 1934 (concerning the state price regulation of milk during the Great Depression), the conception of state police power was so thoroughly expanded through the infusion of the public utility concept, that the Court no longer found it necessary to designate a specific kind of business “affected with a public interest” to justify almost any kind of economic regulatory regime seen as in the “public interest” more generally.15 The public utility idea had done its main work. Through a volatile era, its unique conception of public interests in distinctly public ser vices fended off attempts to constitutionally limit or cabin state police power and, in fact, greatly reinvigorated and expanded the range and reach of the original police power idea. Frank Goodnow was well aware of the important work done in this regard by 1916 when he summed up this transformation: “The first change in ideas . . . was made in the class of activities which are often spoken of generically as ‘public utilities.’ On the theory that the public interest was peculiarly concerned in those cases . . . the conception of regulation in the public interest came finally to be held.”16 But a failure story must be noted here as well. If the legal and constitutional story by the time of Nebbia was something of a victory for the proponents of an expanded notion of public interest, soon thereafter in political economy, the public utility idea beat a slow and steady retreat. Indeed, the last half century or so has witnessed a sustained effort on the part of social scientists to undermine and undo the public utility idea. Perhaps aware of the intimate connection between public utilities and the rise of the regulatory state, two generations of critics of regulation (from the left and center as well as the right)17 have taken direct aim at almost every aspect of the Progressive public utility paradigm. Most significantly, the law and economics movement has systematically dismantled central pillars of the public utility argument in a series of fullthroated and field-defining critiques like Ronald Coase’s “The Federal Communications Commission” (1959), George Stigler’s “What Can Regulators Regulate?” (1962), Harold Demsetz’s “Why Regulate Utilities?” (1968), Sam Peltzman’s “Pricing in Public and Private Enterprise” (1971), and Richard

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Posner’s “Taxation by Regulation” (1971).18 Consequently, most now perceive public utilities in economics (when they are noticed at all) as a peripheral area of policymaking concerning marginal things—primarily the provision of municipal ser vices. Indeed, the “public utility” moniker is currently something of a pejorative in the academy—viewed with a mixture of scholarly derision and contempt. Because of this peculiarly mixed record of success and failure, a full reckoning with the public utility idea first requires an exercise in historical recovery. Thus, this essay attempts to exhume something of a world we have lost—the lost world of public utility law—a world in which conceptions of public interest, public ser vice, public goods, and public utilities were anything but marginal or maligned. Holding some common wisdom at arm’s length, the rest of this chapter attempts to recapture the genesis of the public ser vice corporation at the turn of the twentieth century. In contrast to the anemic vision of “public utilities” in contemporary discourse, it explores the initial emergence of a legal idea of public ser vice and public utility that was innovative, capacious, and extraordinarily efficacious. And, in contrast to an exclusive focus on antimonopoly and trustbusting—Roosevelt vs. Wilson; New Nationalism vs. New Freedom—as the dominant Progressive policy concerning corporations, this essay reinforces Willard Hurst’s intuition that the law of public utilities was the “prime symbol” of changing conceptions of the market and regulation in this period. The “public ser vice corporation” was one of the major Progressive responses to the emerging power of the corporation in the twentieth century, and it yielded a new understanding of the relationship of the corporation and democracy in modern America with resonances for regulation, administration, legislation, and adjudication to this very day.

A World We Have Lost?: Nineteenth-Century Antecedents A clear picture of the emergence of the law of public utilities first requires an examination of its historical antecedents. For the public ser vice corporation and public utilities regulation emerged at the nexus of important developments in three separate areas of law: (a) an age-old area of English common law pertaining to “public callings”; (b) the rise of the state legislative police power; and (c) the early nineteenth-century American regime of corporation regulation through the state legislative charter. The way these areas of law converged and diverged through the nineteenth century established some-

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thing of a promising channel for the emergence of a modern and synthetic understanding of public ser vice corporations and public utilities.

The Common Law of Public Callings Long before the advent of the regulation of business through statutes and corporate charters, the common law developed ample provisions for the public control of certain kinds of economic trades, callings, occupations, and enterprises. Judges in the earliest English law reports fairly consistently singled out a set of essentially “public” or “common” callings and trades for differential legal treatment. The common surgeon, tailor, blacksmith, victualer, baker, miller, innkeeper, and, perhaps most importantly, the common carrier, were held to different public legal standards in the performance of their tasks than more ordinary private interactions.19 And they were subject to a special class of common law restrictions and duties, such as a duty to provide a ser vice once undertaken and a duty to serve all comers. The spirit of the early common law understanding is suggested by Blackstone’s summary in his Commentaries: There is also in law always an implied contract with a common innkeeper, to secure his guest’s goods in his inn; with a common carrier or bargemaster, to be answerable for the goods he carries; with a common farrier, that he shoes a horse well, without laming him; with a common taylor, or other workman, that he performs his business in a workmanlike manner: in which if they fail, an action on the case lies to recover damages for such breach of their general undertaking. But if I employ a person to transact any of these concerns, whose common profession and business it is not, the law implies no such general undertaking; but in order to charge him with damages, a special agreement is required. Also if an inn-keeper, or other victualer, hangs out a sign and opens his house for travellers, it is an implied engagement to entertain all persons who travel that way.20 Other English jurists often talked more specifically about public callings in terms evoking larger legal ideas of “public trust,” “public rights,” “public good,” and “public employment.” Once one removed economic activity from the local and private world of mere household and neighborly interaction and held one’s self out generally to doing business with “the public,” certain legal and official “public” obligations inevitably followed. As Lord Chief

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Justice John Holt put it in 1701: “Wherever any subject takes upon himself a public trust for the benefit of the rest of his fellow-subjects, he is eo ipso bound to serve the subject in all things that are within the reach and comprehension of such an office.”21 But, more significant for the development of modern public utility law was Matthew Hale’s commentary on the calling of wharfinger in his treatise De Portibus Maris—what Bruce Wyman called “the most famous paragraph in the whole law relating to public ser vice.”22 As legal historians Harry Scheiber and Molly Selvin have demonstrated, Hale exerted great influence over the development of the American law of public ways: highways, waterways, rivers, ports, bridges, and roads.23 And he most clearly articulated the notion of juris publici—rights belonging to the public at large—in certain kinds of public spaces, throughways, and even activities. With respect to the wharfinger, Hale first elaborated the notion of certain economic activities “affected with a public interest,” which would become so significant after the U.S. Supreme Court’s opinion in Munn v. Illinois: If the king or subject have a public wharf, unto which all persons that come to that port must come and unlade or lade their goods . . . because they are the wharfs only licensed by the queen . . . or because there is no other wharf in that port, . . . in that case there cannot be taken arbitrary and excessive duties for cranage, wharfage, pesage, etc., neither can they be inhanced to an immoderate rate, but the duties must be reasonable and moderate, though settled by the king’s license or charter. For now the wharf and crane and other conveniences are affected with a publick interest, and they cease to be juris privati only; as if a man set out a street in new building on his own land, it is now no longer private interest, but is affected with a publick interest.24 The American reception of some of these English common law doctrines concerning public spaces and public callings was swift and certain. Securing public rights in highways, rivers, ports, and public squares through the use of such precedents was a major preoccupation of antebellum American jurists.25 And from the earliest days of the Republic, certain occupations and businesses continued to be governed by special common law rules owing to their status as common or public callings. Indeed, large bodies of case law rapidly grew up around two of the most important public callings in early American law: the law of innkeepers and the law of common carriers. The significance of this jurisprudence is attested to by the leading figures drawn

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to its systematization. Joseph Angell and Isaac Redfield both contributed elaborate treatises on the law of common carriers.26 And none other than Joseph Henry Beale added a 638-page tome on The Law of Innkeepers and Hotels: Including Other Public Houses, Theatres, Sleeping Cars. For Beale, this exploration of the law of public callings was a direct complement to his work on public carriers, public utilities, and, ultimately, railroad rate regulation more generally. As he acknowledged, “The law of innkeepers was the earliest developed and is the simplest and clearest of those topics of law which are concerned with the various public-service callings.”27 The path from the ancient legal notion of common callings to the most modern forms of public utility rate regulation was quickly being established. In short, a fairly elaborate system of common law regulation grew up in the nineteenth century around certain public economic activities that highlighted a series of special duties and public rights. From the law of bailments to an expanding law regarding common carriers and innkeepers, wharfingers, and warehouses, a burgeoning case law outlined some of the special public obligations of certain public callings—from a duty to serve all to the provision of adequate ser vice to standards of reasonable compensation. Even before the rise of the state regulation of business through statute and charter, the common law provided surprisingly supple remedies for protecting public rights against private forms of encroachment.

State Police Power and the Corporate Charter But the regulation of economic activity seen as having great public effect did not remain within the exclusive purview of the common law for very long. Two very different kinds of legislation simultaneously entered the regulatory mix: (a) general state police power regulations, and (b) the more specialized state statutes known as charters of incorporation. The shifting interrelationship between these two very different types of legislation is central to the most important developments in nineteenth-century business and corporate regulation. Indeed, the intersection of the laws of police power and corporation marks the birthplace of the law of public utilities. The development of nineteenth-century legislative police power regulation of economic activities formerly controlled by the judicial administration of the common law is a topic both enormous and complex. For the purposes of this essay, some shorthand must suffice. In area after area of the economy—from ports to wharves to inns to common carriers to warehouses

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to urban marketplaces and beyond—early American states and localities began rapidly drafting ordinances and regulatory statutes that built on the economic lines and reasoning of common law precedent but pushed toward a much more comprehensive, rational, and codified system of economic regulation.28 The overarching legal and political justification for this expansion of police power remained an awareness of the public rights and public interests implicated in certain kinds of economic activity as anticipated in the common law of public callings. But the protection of public rights and public interests in a blossoming market, commercial, and even industrial economy demanded new measures. Nowhere was this shift to statute more carefully analyzed and, ultimately, rationalized than in the classic police power opinion of Massachusetts chief justice Lemuel Shaw in Commonwealth v. Alger (1851). Upholding the legislature’s right to establish a wharf line in Boston harbor beyond which no private structures should encroach, Shaw’s reasoned defense of the public interest moved deft ly from common law to codification; from nuisance to police power; from public calling to public utility; and from the ancient wharfinger to modern land-use regulation. He first defended the authority of the legislature to pass regulatory statutes with broad implications for the entire economy: “Wherever there is a general right on the part of the public, and a general duty on the part of a land-owner or any other person to respect such right, we think it is competent for the legislature, by a specific enactment, to prescribe a precise, practical rule for declaring, establishing, and securing such right, and enforcing respect for it.” He then went on to offer one of the most eloquent defenses of police power and public rights to be found in nineteenth-century case law: All property in this commonwealth . . . is derived directly or indirectly from the government, and held subject to those general regulations, which are necessary to the common good and general welfare. . . . The power we allude to is rather the police power; the power vested in the legislature by the constitution to make, ordain, and establish all manner of wholesome and reasonable laws, statutes, and ordinances, either with penalties or without, not repugnant to the constitution, as they shall judge to be for the good and welfare of the Commonwealth.29 Similar (though less grandiose) legislative and judicial reasoning attended the slew of ordinances and statutes that greeted an expanding nineteenthcentury American economy: regulations of lotteries, hawkers and peddlers,

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rents and leases, mines, ferries, apprentices and servants, attorneys and solicitors, the exportation of flaxseed and other goods, the inspection of lumber, staves and heading, public auctions, fisheries, flour and meal, the practice of physic and surgery, beef and pork, soal leather, inns and taverns, shipping, common carriers, etc. 30 Rather than leave the regulation of a growing economy to the common law practices of judges and juries (let alone the imaginary world of laissez-faire theorists), states and localities codified the rights and responsibilities of key economic actors and activities.31 One of the persistent features of this legislative intervention from the beginning was explicit, and sometimes quite detailed, price administration or rate setting: from the regulation of the ancient assize of bread to the early mill acts to the precise setting of prices for ferriage and cartage to the even more explicit rate-setting practiced during the canal and early railroad eras.32 As Chancellor Went worth of New York defended the ubiquitous practice of price-setting in Beekman v. Saratoga and Schenectady Railroad Co. (1831): “The legislature may also from time to time, regulate the use of the franchise, and limit the amount of toll which it shall be lawful to take, in the same manner as it may regulate the amount of tolls to be taken at a ferry, or for the grinding at a mill.”33 Though the initial blueprint of the common law of public callings and common carriers was still decipherable in such statutes, a new and far more capacious regulatory state was methodically supplanting older legal and economic frameworks. In Standards of American Legislation, Ernst Freund captured the basic thrust of this legal-to-legislative, commonlaw-to-police-power revolution. Freund outlined the vast “shortcomings of the common law as a system of public policy” and described the increasingly affirmative use of legislative police power, finding in such “modern regulative statutes a general endeavor to define vague restraints or prohibitions, to strike at antisocial conditions, . . . and to give effect to altered concepts of right and wrong and of the public good.”34 The second important element in the construction of modern American business regulation was the development and proliferation of a distinctive kind of legislative statute—the special state charter of incorporation. The American practice of economic promotion and regulation through state corporate chartering did not develop spontaneously in a legal vacuum. Beyond the specific legislative details of any individual corporate charter, the common law of nuisance and public callings still operated and a whole series of state and local police power regulations continued to govern various kinds of economic activities. Indeed, it is only by keeping in mind all three modes of

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nineteenth-century economic regulation—the common law, state police power, and corporate chartering—that one can get a full picture of the relationship of the corporation to the larger American democracy in this era. As Eric Hilt, Jessica Hennessey, and John Wallis describe in their essays in this volume, before general incorporation statutes achieved predominance in the United States, most corporations came into being through a special charter secured directly from the state legislature.35 After 1800, chartering (not only business corporations but municipal corporations, charitable associations, churches, academies, etc.) became a preoccupation of state legislative sessions that almost matched their appetite for general police power statutes. Between 1789 and 1865, for example, Connecticut passed something like 3,000 special acts incorporating every conceivable kind of social and economic organization from “Academies” to “Work Houses.”36 As Hilt, Hennessey, and Wallis suggest, two characteristics of this early special charter regime had impor tant implications for an emerging law of public utilities. First, the special charter was a legal tool through which the legislature extracted what Ernst Freund dubbed an enhanced or “enlarged police power.”37 In exchange for a host of special corporate privileges—such as monopoly power, eminent domain power, tax exemption, property grant, public financing, rights to collect tolls, etc.—legislatures carved out expanded public powers of oversight and regulation. Second, this enlarged police power prompted the frequent conclusion of early histories that these early specially chartered corporations were essentially seen as public callings or public franchises. That was exactly Willard Hurst’s conclusion when he argued that “from the 1780s well into the mid-nineteenth century the most frequent and conspicuous use of the business corporation—especially under special charters—was for one par ticu lar type of enterprise, that which we later call public utility and put under particular regulation because of its special impact in the community.”38 A growing case law only reinforced this original public interest / public ser vice / public utility interpretation. In the first place, courts uniformly rejected an overly strict contract theory of the charter that some corporations argued exempted or immunized themselves from further regulatory or legislative control. The definitive discussion of this issue unsurprisingly arose in an early railroad regulation case—Thorpe v. Rutland and Burlington Railroad Company (1855). There, Vermont chief justice Isaac Redfield (a leading legal authority on common carriers) rejected a railroad corporation’s argument that its original 1843 charter immunized it from costly subsequent po-

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lice power regulations requiring all such railroads to fence their lines and maintain cattle guards at crossings. Citing Roger Taney in Charles River Bridge as well as John Marshall in Dartmouth College, Redfield insisted that corporate charters be strictly construed “in favor of the public” so as not to interfere with general legislative police power to regulate persons and property in the public interest.39 Redfield contended that “there would be no end of illustrations upon this subject,” listing just some of the “thousand things” that the legislature regulated on all railroads, including “the supervision of the track, tending switches, running upon the time of other trains, running a road with a single track, using improper rails, not using proper precaution by way of safety beams in case of the breaking of axle-trees, the number of brakemen on a train with reference to the number of cars, employing intemperate or incompetent engineers and servants, running beyond a given rate of speed.” And he justified its imposition on corporations of all sorts: “Slaughter-houses, powder-mills, or houses for keeping powder, unhealthy manufactories . . . have always been regarded as under the control of the legislature. It seems incredible how any doubt should have arisen upon the point now before the court.” 40 Just as Chief Justice Redfield was defending the reach of the conventional understanding of police power to corporations in Vermont, Chief Justice Shaw in Massachusetts was carving out a specially “enlarged” or enhanced police power in the case of corporations seen as having especially important duties to the public. Drawing on his extensive experience with legislation, adjudication, and regulation involving Massachusetts’s extensive network of mills and public infrastructure, Shaw argued in Lumbard v. Stearns (1849) that the Massachusetts “Act to Incorporate the Springfield Aqueduct Company” created a public ser vice company subject to the higher obligations and regulations of a public utility.41 The corporate charter was replete with special legislative provisos, including eminent domain power, an obligation to provide water to fight fires, special penalties for corrupting water, and, perhaps most significantly, a vesting of “superintending powers” in the board of health and the county commissioners. Joseph Henry Beale and Leonard Levy located the historical origins of the law of public ser vice corporations and the state regulation of “businesses affected with a public interest” precisely in Shaw’s jurisprudence upholding the regulation of “turnpike, bridge, canal, mill, and railroad companies.” As Levy put it, “although privately financed and operated for private gain, these enterprises were all characterized by Shaw as ‘public works’ because they were established by

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public authority on consideration that the public would benefit from them.” With these cases, the much-discussed “Road to Munn” was thus already very much established.42 However, the “Road from Munn”—a much longer road that stretches through Progressivism to the early onset of the New Deal—remains very much a matter of modern legal and historical debate. It marks the real explosion and proliferation of modern public utility regulation and the onset of what might be labeled “the public utility era.”

Origins of the Public Utility Era As the preceding discussion demonstrates, there was no single, defi nitive point of historical departure from which to date the exact birth of the public utility idea. From ancient English common law precedents on common carriers through the more comprehensive treatises of law writers like Matthew Hale to some of the first private companies and first public regulations established in the Americas, the older historical roots of public utilities were as variegated as they were ubiquitous. Even the more particular mechanism of administrative regulation through various kinds of boards, commissions, and agencies had broad and diverse legal-historical roots. As Jerry Mashaw and Nicholas Parrillo have now definitively established, administrative law, administrative regulation, and administrative governance long antedated the establishment of the Interstate Commerce Commission and even the development of state railroad commissions.43 As Mashaw put it, “From the earliest days of the Republic, Congress delegated broad authority to administrators, armed them with extrajudicial coercive powers, created systems of administrative adjudication, and specifically authorized administrative rulemaking.” At the local and state level too, boards of health, county commissioners, and various other administrative entities had long exercised the power to supervise, administer, and regulate callings, associations, businesses, and corporations deemed important to the people’s welfare. As early as 1832, Connecticut was in the habit of establishing a special “board of commissioners” in the charter of each and every railroad it incorporated.44 And the reports, activities, and rulings of other various local and state turnpike commissioners, street and highway commissioners, canal commissioners, bank commissioners, water commissioners, and the like pervaded the antebellum legal and political landscape. But though one particular point of historical origin is elusive, it is possible to detect within this complex mesh of historical laws and institutions

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certain historical trajectories or developmental trends that are central to explaining the explosive emergence of modern public utilities law at the turn of the twentieth century. In the developments outlined above, one can detect a general trend from highly particularized (and retrospective) common law adjudication on public callings to more generalized (and prospective) legislative police power statutes (frequently coupled with ad hoc administrative delegations of supervisory authority) to the regulation of particular franchises through special provisions included in state charters. Of course, this developmental tendency was anything but clear or linear. Even after the rise of regulation through state charters (and municipal franchises), state police power enactments and municipal ordinances continued to control many aspects of corporate behav ior respecting public ser vices. And, of course, individuals continued to litigate in courts seeking judicial enforcement of both legislative and common law remedies concerning the special rights, duties, and obligations of public franchises. So, by the middle of the nineteenth century, there was not so much a determinate (let alone rational or systematic) law of public utilities as a wide proliferation of regulatory devices and measures—from sporadic court judgments enforcing common law understandings to various state and local police power statutes and ordinances to the host of highly differentiated and individualized provisions of special franchise charters. The limitations of such a regulatory regime— built on such a sprawling disarray of litigation, ordinances, statutes, franchises, and charters that varied across local, state, and federal jurisdictions—would soon become obvious to politicians, reformers, regulators, jurists, commentators, and the public at large. Two things in particular transformed this old regime. First, with respect to business corporations in particular (as discussed in several other chapters in this volume),45 the regulatory control afforded through the state charter regime quickly began to unravel through the combination of the forces of (a) general incorporation; (b) the so-called race-to-the-bottom that animated late nineteenth-century state policymaking vis-à-vis corporations; and (c) the increased nationalization and internationalization of commerce and business that quickly outran or preempted many state and local regulatory initiatives. The ad hoc, special, local, and state-by-state initiatives that characterized antebellum public policymaking vis-à-vis public utilities quickly gave way to an increasing rationalization, systematization, and thorough-going nationalization of administrative regulation. Localism and federalism proved no match for the centralization of corporation and public

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utility policy that ultimately culminated in national initiatives like the Interstate Commerce Commission (ICC), the Sherman Antitrust Act, and the Federal Trade Commission. Such institutional transformations set the stage for the rise of modern public utilities and the public utility era. As Felix Frank furter captured this confluence of events, “The modern system of state utility regulation thus coincid[ed] with the efforts . . . to arm the federal government with powers adequate to assure interstate public ser vices.” 46 Here, administrative regulation in a recognizably national and modern form proliferated, creating conditions for the rapid emergence of an administrative regulatory state and a modern economy in the United States. Second, one particularly important and highly visible form of common carrier and public ser vice corporation—the railroad—burst onto the American scene with an economic ferocity and a social and political chaos perhaps unmatched by any other historical force other than war. As Alfred Chandler contended, railroads remade the American economy. They were “the nation’s first big business,” marking the beginnings of modern corporate finance, modern corporate management, modern labor relations, and thus, not surprisingly, the “modern governmental regulation of business.” 47 Just as the scale and scope of railroads transformed the American economy, the scale and scope of railroad administration changed the face of American regulation. As Frank furter noted, “Railroad regulation was the precursor of the far-flung system of utility control today.” 48 Railroads were not the first transportation companies in the United States, and railroad commissions were certainly not the first administrative agencies. But something about the size and extent of this infrastructural and regulatory intervention forever altered the relationship of the modern economy and the administrative and regulatory state. The railroads ushered in modern public utility regulation on a scale and with a national impact that was unprecedented. The railroad problem gave birth to the modern public utility idea.

The Public Utility Idea The modern concept of public utility drew on some impor tant legalintellectual precedents: the common law of public callings, the antebellum police power, and legislative and public ser vice corporate chartering. Out of these early roots and traditions, however, there emerged a distinctively more modern and expansive rendering of regulation in the “public interest” at the turn of the century. Three new elements were especially salient in the trans-

The Public Utility Idea and the Origins of Modern Business Regulation

formation of public law that made public utility the entering wedge of modern administrative regulation. First, the public utility idea drew directly on a new positive conception of statecraft and the public duties of a modern polity—particularly as it concerned the provision of “public ser vices.” The most penetrating analysis came from Léon Duguit who argued in Law in the Modern State that “public ser vice” was rapidly “replacing the old theory of sovereignty as the basis of public law.” 49 Drawing on recent trends in sociological jurisprudence and an increasingly functionalist and pragmatic conception of law, Duguit rooted his modern theory of the state not in its right to command, but in its social functions and public duties, wherein “public ser vice” became “the only adequate foundation for a modern system of politics.” Ernst Freund noted a similar dominant tendency in modern governance to move beyond traditional functions like defense and order to the provision of public welfare through an array of distinctly public ser vices.50 Public utility, then, was very much at the core of a new, pragmatic understanding of the public ser vice functions of the state—of what John Dewey talked about in terms of “the public and its problems.” Moving beyond older conceptions of the state rooted in political theories of social contract or sovereignty and fiscal-military-ordering imperatives, Dewey outlined a more modern and pragmatic quest for a “democratic state” dedicated to “the utilization of government as the genuine instrumentality of an inclusive and fraternally associated public.” And for Dewey, the growing awareness that more and more businesses were “affected with a public interest” was a classic step forward in the development of that functionalist, democratic, and service-oriented state.51 As Felix Frank furter captured this trend in his defining essay “Public Ser vices and the Public,” the new needs to be met in this new era were “as truly public ser vices as the traditional governmental functions of police and justice.” And in fact, he viewed no task as more profound for modern government than its role “in securing for society those essential ser vices which are furnished by public utilities.” Elementary examples of this trend toward public ser vices included the evolution of education and charity from private to public affairs, as well as the development of “the postal and telegraph system” into “public ser vice[s] of primary importance.”52 To these basic examples of the public ser vice idea, Duguit noted the modern repletion of innumerable further instances: “The time has passed when each man was his own public carrier. . . . This makes plain every day the greater necessity of organizing transportation into a public ser vice. In the great towns we

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need tramways and a public motor ser vice; throughout the country we need railway ser vice. . . . Not only public lighting but also private have been similarly transformed. . . . The time is not far distant when every house will demand electric light. So soon as this becomes a primary need it will create a new subject of public ser vice.” Duguit concluded in perfect sync with the architects of public utility law in America: “Any activity that has to be governmentally regulated and controlled because it is indispensable to the realisation and development of social solidarity is a public service so long as it is of such a nature that it cannot be assured save by governmental intervention.”53 Second, the modern public utility regime was characterized by the coming of age of the police power and administrative regulation. Though police power regulations and administrative rulemaking and adjudication had been features of American governance since the founding of the Republic, they now took on a new, enlarged, and purposive form. A new selfconsciousness and inventiveness propelled discussions of police power and administrative law as the first systematic treatises and analyses of scholars like Freund, Wyman, and Frank J. Goodnow synthesized, reorganized, and, in the end, transformed the fields of inquiry.54 It was no accident that the idea of “police power” came of age in the “public utility” era. The formative treatises and articles of Ernst Freund and other commentators were testament to the convergence and simultaneous growth of police power, public utility, and an expanded conception of public interest. For Freund, the Granger cases, the law of public ser vice corporations, public use, and public utility were the harbingers of the growth and maturity of modern police power. The increased power to regulate businesses, the corporation, and the economy through public utility was an essential part of the long process through which the police power moved beyond older common law and constitutional limitations—beyond traditional concerns of safety, order, and morals—to embrace the more ambitious and prospective mission of securing the “public welfare” generally and making “internal public policy.” Noting the almost limitless expansion of public utility in the early twentieth century (beyond natural monopolies, railroads, common carriers, inns, grain elevators, banking, insurance, etc.), Freund concluded: “If a business is affected with a public interest its charges are subject to reasonable regulation . . . , it may be required to render ser vices without discrimination, and the amount and manner of ser vice may be regulated in the interest of public convenience—an interest which does not ordinarily call the police power into action. A great expansion of

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the police power may be expected by further development and application of this doctrine.”55 In precisely this confluence of legal-regulatory events and concepts, Rexford Tugwell located a new “public interest” in the economy— “the right of the government to interfere in business affairs. Under its aegis public utilities arise and the police powers are brought to bear in the field of industry.”56 This fundamental enlargement of the police power is one of the signal accomplishments of the public utility era. Administration and administrative law had a similar experience in their interaction with public utility. As Felix Frank furter noted, gesturing to the long pre-history of administration and administrative law in America, “Administrative law has not come like a thief in the night. It [wa]s not an innovation.” But he acknowledged that the “general recognition” and “self-conscious direction” of administrative law was a product of recent times and largely a consequence of the public utility revolution. Public utility put the “public” in American “public administration.”57 The Law of Railroad Rate Regulation was the pioneering treatise in this field authored by Beale and Wyman—a complement to their work, Cases on Public Service Corporations, and Wyman’s breakthrough text on Administrative Law.58 And Frankfurter began his own important work in administrative law with his much-discussed Harvard Law School course concerning Cases under the Interstate Commerce Act.59 Within the law of public utility, the modern idea of administrative regulation reached a clarity and coherence that eluded earlier commentators. From these broader conceptions of public ser vice, police power, and administration there emerged the final, culminating piece of the public utility idea, i.e., a more generalized and autonomous conception of the public interest itself as the basis for increased state and governmental regulation in that public interest. Of course, powerful concepts of general public welfare had long been a part of the ethical and philosophical history of the “utility” idea in the abstract. David Hume’s devastating critique of the formalism of social contract theory formed a backdrop to the original emergence of “utility” as a more grounded, general, and consequentialist imperative behind the associative happiness of others and all.60 Jeremy Bentham’s similarly devastating critique of Blackstone credited Hume with establishing that “the foundations of all virtue are laid in utility” rather than in natural law or other legal formalisms.61 The impact of Benthamite utilitarianism on the writings of the Mills, the nineteenth-century revolution in English government, and, ultimately, John Dewey’s “new liberalism,” suggest something of the deep historical roots and power of the general utility idea.62

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The modern transformation of the legal idea of public utility drew on these deep sources of inspiration, as the idea of utility helped launch another governmental revolution. The linchpin was the all-important idea of generality—moving older ideas of salus populi, people’s welfare, and res publica beyond the particular confines of customary, common law, and ancient constitutional categories toward a broader and more modern conception of general regulation in the public interest. In The Economic Basis of Public Interest (1922), Rexford Tugwell summed up the general arc of development: “The definition of police power in all the recent cases brings it into the broad field of public interest, so that the regulation of business in its economic aspects, its prices and its standards of ser vice, flows from the general interest of the public just as does the right of regulation of business to secure the health, morals and safety of the community.” Here, Tugwell correctly identified the basic transformation in law, thought, and action that would ultimately undergird a much larger reform agenda for the social control of the economy: “When the market is viewed as a social mechanism rather than as a private one, and the reasons why it must be social and cannot be private are clearly envisaged, the problems of price and ser vice control attain a new importance.” 63 For Tugwell, the law of public utility was the all-important vehicle for moving public and legal ideas of the common good and the public interest in the economy beyond early nineteenth-century conceptions and toward the twentieth-century ideal. And indeed, the most important aspect to recognize about this new general construct of economic regulation in the public interest was the degree to which it was not confined to monopolies, natural or unnatural. Though many commentators, then, as well as now, acknowledged monopoly as a problem for which public utility provided a response, monopoly was just one of many other important factors driving the public utility idea.64 As already suggested, Ernst Freund made clear the degree to which the public utility idea pushed the established police power beyond bounds of order, safety, health, and morals toward more general concerns of public welfare, public policy, and even public convenience. So too, it pushed well beyond the context of economic or social understandings of monopoly and trust. Bruce Wyman and other legal reformers were articulating the general and fundamental principles of a “unified body” of “law governing the public ser vices,” beyond the charter question, beyond the corporation question, and beyond the monopoly question—and distinctly toward the Progressive conception of the regulation of business generally in the public interest. Such principles multiplied beyond the concerns or theories of classical or neo-classical eco-

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nomics and resonated much more with the goals of social and political policymaking. “Monopoly is significant as one among many social and economic situations that may be considered by the legislature in adopting its policy,” argued John Cheadle.65 Rexford Tugwell began his own analysis with the monopoly question, but quickly moved on to a set of much broader public justifications, including consumer’s disadvantage and general public necessity. In the public interest / public utility model, imposition, oppression, unreasonable charges, harmful prices, or harmful standards of ser vice were all justifiable regulatory concerns.66 In this way, the public utility idea evolved beyond so-called natu ral monopolies like railroads, telegraph, and utility lines, and embraced an almost endless number of economic activities where the law imposed a duty to be reasonable in dealing with the public. As legal scholar Nicholas Bagley has argued about Wyman’s concept of “virtual” or “practical” monopolies, “A business need not be monopolistic in a strict sense. An extraordinary range of market features—the costs of shopping around, bargaining inequalities, informational disadvantage, rampant fraud, collusive pricing, emergency conditions, and more—could all frustrate competition and . . . warrant state intervention” via the enlarged law of public callings and public utilities.67 Conditions like necessity, exorbitant charges, arbitrary control, and consumer harm in turn triggered new affirmative legal obligations that themselves greatly expanded extant notions of public interest. Wyman’s list was just a start: “All must be served, adequate facilities must be provided, reasonable rates must be charged, and no discriminations must be made.” 68 Access, sufficient ser vice and supply, cost reasonableness, and nondiscrimination worked together in the law of public utility to generate a new, broad, general notion of government’s obligation to regulate for the public welfare. Felix Frank furter was aware of the direct consequences: “Suffice it to say that through its regulation of those tremendous human and financial interests which we call public utilities, the government may in large measure determine the whole socio-economic direction of the future.” 69 How right he was. As early as 1916, that other pioneer of modern American administrative law Frank Goodnow articulated the clear route from public utilities to more general public interest theories of regulation and administration. “A change is noticeable in our attitude towards these matters,” he began: The first change in ideas which is noticeable was made in the class of activities which are often spoken of generically as “public utilities.” On

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the theory that the public interest was peculiarly concerned in those cases because the enterprises in question were based on public privileges, the conception of regulation in the public interest came finally to be held. Not only is no constitutional question any more raised as to the power of the competent organ of our government to take the necessary regulatory measures but public opinion justifies regulation of so drastic a character that it would hardly have been deemed possible even a quarter century ago. . . . The regulation which in the case of public utilities was justified on the theory that the enterprise was based upon a privilege has since been extended to enterprises which in no sense owe their existence to the possession of such privileges. The justification for the regulation is found in the mere fact that the public interest is involved. Instances of such action are to be found in the antitrust legislation which has become so common and in the well-nigh universal legislation passed to improve labor conditions. Workingmen’s compensation acts, employer’s liability and minimum wage laws, compulsory conciliation acts, increase of school opportunities for both the young and the old, paid for out of the proceeds of taxation, all testify to the fact that the private rights philosophy of a century ago no longer makes the appeal it once did.70 This was the modern concept of public utility—public utility as the entering wedge of the general idea of economic and corporate regulation in the public interest. But while the intellectual and jurisprudential development of the idea of public utility was necessary to this democratic revolution in governance concerning the corporation, it was not sufficient. Indeed, the public utility era would not have occurred without more direct social, political, and legal action on the ground and in the streets. The locus classicus for this more direct form of mobilization was the long and arduous late nineteenth-century struggle for democratic control of railroad corporations. With the extraordinary advent of the railroad and the railroad commission, powerful new forces in politics, law, regulation, administration, and statecraft came together to remake the relationship of citizen and corporation well into the future.

The Rail Road to Munn One of the simple historical facts of the matter is that the law of public utilities and the law of administrative regulation together exploded onto the

The Public Utility Idea and the Origins of Modern Business Regulation

American scene after 1877—the date of the Supreme Court’s influential ruling in Munn v. Illinois. And the case of railroad regulation clearly led the way. As Frank furter put it succinctly, “Railroad regulation was the precursor of the far-flung system of utility control today.”71 Though the first railroads and various kinds of common law, statutory, and franchise regulations grew up together before the Civil War, a new intensity and comprehensiveness attended public policymaking vis-à-vis railroads in the postwar period. The end result was a revolution in modern regulatory and administrative governance—the emergence of modern business regulation. Something of the magnitude of what was then ubiquitously referred to as “the railroad problem” was broadcast to the nation in 1869 when Charles Francis Adams opened his history of the Erie Railway in the North American Review with a comparison to the Barbary pirates and then closed it with an allusion to the fall of Rome. Adams talked about the railroad problem not in terms of market failure or imperfect competition but as nothing less than a national “emergency.” Allusions to war and plunder and banditry infused Adams’s narrative of endemic economic and political corruption: “The freebooters have only transferred their operations to the land, and the commerce of the world is now more severely . . . taxed through the machinery of rings and tariffs, selfish money combinations at business centres, and the unprincipled corporate control of great lines of railway, than it ever was by depredations outside of the law.”72 From E. L. Godkin, B. O. Flower, and Frank Norris to William Jennings Bryan, Robert La Follette, and Theodore Roosevelt, a steady drumbeat of rhetorical and political criticism followed Adams’s original anti-railroad expose, providing a consistent prod to governmental action well into the twentieth century. But, even more significant for the subsequent history of corporate regulation than the muckraking enthusiasm that greeted the Gilded Age was a rising chorus of organized and popu lar political discontent with railroad policymaking. Across the nation, but especially in agrarian and midwestern states such as Illinois, Iowa, Wisconsin, and Minnesota, voluminous complaints about extortionate and discriminatory railroad pricing (between long hauls and short hauls and between competitive and monopolistic routes) produced intense political pressure for more aggressive forms of state action. The end result was a proliferation of new comprehensive state regulations of railroads, warehouses, and grain elevators. Given the increasing complexity and scope of both this new economic problem and new flurry of regulations, states turned to a much more powerful mechanism of regulatory oversight and enforcement—the state administrative and regulatory

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commission. The commission movement built on Adams’s 1871 conclusion in “The Government and the Railroad Corporations” that “neither competition nor legislation have proved themselves effective agents for the regulation of the railroad system.” And it provided the direct answer to his searching institutional and constitutional question: “What other and more effective [instrument] is there within the reach of the American people?” 73 With the rapid development of state railroad and warehouse commissions after the Civil War, the American regulatory state and the law of public utilities began to assume new and modern forms. Now, of course, there was nothing especially novel about the turn to the commission form per se in the creation of this new regulatory enforcement regime. Various county commissioners, officers, and ad hoc boards were present and used seemingly at every moment in American governmental history. Even in terms of more formal utility commissions, Massachusetts utilized state commissions for banking as early as 1838 and for insurance in 1854. Thanks primarily to the creative labors and influence of Charles Francis Adams, Massachusetts led the way as well for railroads in devising the more comprehensive and permanent statewide Board of Railroad Commissioners that assumed general supervision of its railroads in 1869.74 And though such early commissions are still too frequently dismissed as “weak” or “voluntaristic” or merely “advisory,” it would be a major mistake to underestimate the original powers delegated to such bodies to investigate, publicize, and persuade; to hear complaints and petitions; to inspect railroad activities; and to make recommendations to the legislature—all powers still central to modern administrative regulation. The early advisory commissions formed an invaluable administrative complement to the ongoing work of courts, prosecutors, and legislative police powers. The successes of Adams and the Massachusetts Board of Railroad Commissioners were legendary in this regard—inducing railroad reforms by continuously bargaining in the shadow of the possibility of future legislation and regulation up to and including the threat of state ownership. And future legislation and regulation was forever coming. When the Massachusetts legislature formed the commission in 1869, it was hardly getting out of the business of direct legislative regulation as it passed almost a hundred other special and general railroad measures in that session alone. But the creation of the Board allowed for the establishment of a supplemental administrative and regulatory authority. The legislature granted the commissioners “gen-

The Public Utility Idea and the Origins of Modern Business Regulation

eral supervision of all railroads in the Commonwealth,” with a special charge to ensure “compliance of the several railroad corporations with the provisions of their charters and the laws of the Commonwealth.” This, of course, was an enormous delegation of supervisory authority, setting up an extraordinarily ambitious administrative task. The Board essentially received plenary authority to look into and make recommendations to all railroads in the state as to repairs, stock, stations, rates of fares for passengers and freight, and, for that matter, any other “change in the mode of operating its road or conducting its business.” And they were further charged with hearing complaints and petitions, making inspections and investigations, and gathering and reporting on information covering nearly all aspects of railroading in Massachusetts including accidents and returns. The Annual Reports of the Board of Railroad Commissioners were comprehensive and state-of-the-art compendia of information and recommendations on railroading and governance that prefigure the modern bureaucratic ethos. Beyond common law adjudication, police power legislation, and special charter provisions, the Board allowed for a consistent, ongoing, and systematic supervision of the railroad enterprise throughout the state.75 Th is concentration of oversight authority in a single agency was a vast improvement over the somewhat haphazard and sporadic coordination possible through the earlier welter of statutory provisions, charter stipulations, and common law adjudications. And indeed, the Board was so successful that the Massachusetts legislature did not feel the need to alter its basic structure and mission until 1913 when the Board was replaced by the Massachusetts Public Ser vice Commission. Nor did the Massachusetts Supreme Judicial Court see fit to challenge its existence or its basic regulatory authority.76 But while the label “weak” or “advisory” is something of a misnomer given the extensive regulatory powers exercised by entities like the Massachusetts Board of Railroad Commissioners, the Board did lack one direct power that would loom large in the future direction of public utility regulation. And that was the power to set and enforce actual rates and prices. The Board was authorized to recommend rates and hear complaints about unfair or discriminatory fares, but it had no direct coercive or enforcement powers to force railroads to comply beyond the threat of proposing legislation to that effect.77 Nonetheless, the Board consistently claimed success in its efforts to control rates in Massachusetts. As Adams testified ten years into the experiment: “The Commissioners have no power except to recommend

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and report. Their only appeal is to publicity. The Board is at once prosecuting officer, judge, and jury, but with no sheriff to enforce its process. This method of railroad supervision is peculiar to Massachusetts, but I do not hesitate to say that I believe it is the best and most effective method that has ever been devised.”78 By the time of the formation of the national Interstate Commerce Commission, fi fteen states had set up railroad commissions based on the Massachusetts model.79 But this formal limitation regarding direct administrative rate-making and law enforcement power did underscore the historical significance of the change inaugurated in 1871 when—after years of debate culminating in the railroad reforms of the state constitutional convention of 1869– 1870—the Illinois legislature passed “An Act to Establish a Board of Railroad and Warehouse Commissioners.”80 The statute was the immediate byproduct of new and explicit state constitutional directives that: (a) “Railways . . . are hereby declared public highways, and shall be free to all persons for the transportation of their persons and their property”; (b) “The General Assembly shall . . . pass laws establishing reasonable maximum rates of charges for the transportation of passengers and freight on the different railroads in this state”; (c) “The General Assembly shall pass laws to correct abuses and prevent unjust discrimination and extortion in the rates of freight and passenger tariffs on the different roads in the State”; and (d) “The General Assembly shall pass laws for the inspection of grain, for the protection of producers, shippers, and receivers of grain and produce.”81 The original Illinois Railroad and Warehouse Commission Act was thus no ordinary piece of legislation. In addition to responding to explicit state constitutional mandates, the commission legislation was but one piece of a whole packet of incredibly detailed statutes on warehouses and railroads passed mostly in March and April, including: a revision of Illinois’s general railroad incorporation act, an act concerning railroad injuries, an act prohibiting unjust rate discriminations and extortions, an act regulating the transportation of grain by railroad corporations, an act setting maximum rates for charges on passengers, and an act for the construction of railroad stations and depots.82 In short, from its constitutional convention forward, Illinois (like many other midwestern states) was undertaking a detailed and thoroughgoing account and regulation of railroad corporations and warehouse companies and establishing a new permanent commission to oversee and enforce this heightened regulatory regime (to investigate,

The Public Utility Idea and the Origins of Modern Business Regulation

to prosecute, and, in some cases—for example, concerning warehouse licenses—to directly penalize violations of Illinois law). In 1873 the Illinois legislature added a fi nal piece of modern administrative machinery in authorizing the commission itself to develop a schedule of maximum rates for the transportation of passengers and freight on all railroad corporations that would be deemed prima facie “reasonable” in Illinois courts.83 In pioneering the development of a state board that could also establish maximum rates and take direct enforcement action, Illinois established something novel and produced a direct precedent for the regulation of the national railway system. Iowa, Wisconsin, Minnesota, Georgia, and California soon followed Illinois’s lead. And by the time of the founding of the ICC, ten states had implemented the Illinois model.84 Though rooted in older common law traditions regarding common carriers and public callings (as well as state and local commission experience), this was a new kind of regulatory regime. Arguably for the first time,85 regulatory policy displayed almost all of the characteristics that continue to define modern administrative regulation: fact-finding, data-gathering, reporting, publication, inspection, investigation, prosecution, delegation, price-setting, adjudication, rulemaking, and regulatory enforcement. Much as antebellum police power regulations attempted to improve on the ad hoc and ex post system of common law rules, here legislatures pushed further— deploying a new kind of comprehensive regulatory apparatus to more efficiently and effectively enforce formidable new state regulations of railroads, warehouses, and grain elevators. The first reports of the Illinois commission reflected this more complete regulatory and law enforcement objective. “The act to prevent unjust discrimination and extortion in the rates for the transportation of freight, is systematically violated,” the commission noted, “many complaints have been received on that head.”86 The strong midwestern state regulatory commission was a direct result of the effort to move beyond the limitations of common law and statutory modes of regulation—to self-consciously create a more modern and comprehensive regulatory administration. Almost immediately, the Illinois commission (like those of other states) began aggressively exercising its new legislatively derived powers of investigation, regulation, administration, and even prosecution. In its first year of existence, on receiving satisfactory evidence of “unjust discrimination and extortion” of the rates on the Chicago and Alton Railroad, it instructed J. H. Rowell—the state’s attorney for McLean County—to file an information in

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the nature of a quo warranto to “declare the charter of that company forfeited” as being in violation of the new Illinois railroad regulation. It added that “the prosecution will be pressed with vigor.”87 With respect to warehouses and grain elevators, they noted similar failures to comply with new legislation requiring official licensing and the fi xing of new maximum charges for storage. Given such open violations of plain laws, the Board again instructed the state’s attorney—this time for Cook County—“to institute proceedings against said delinquent owner or manager of warehouses.” After a delay forced by the Great Chicago Fire, these latter proceedings ultimately formed the grounds for the litigation that would culminate in the U.S. Supreme Court’s pioneering decision in Munn v. Illinois.88 Following the legislature’s directive in 1873 further prohibiting extortion and unjust discrimination, the commission prepared a schedule of maximum rates which were held to be prima facie evidence of reasonableness in Illinois courts. The details of this extraordinary exercise of authority in many ways exemplified a new form of modern regulatory and administrative power that would perhaps reach something of a peak of development in the operations of the Food Administration in World War I, the National Recovery Administration in the New Deal, and the Office of Price Administration in World War II. The commission began with a formal classification of every conceivable kind of freight. The list in Table 4.1 reproduces only classified freight beginning with the letters “Ca” (the comprehensive list, of course, runs from A to Z).89 Here, the numbers 1 through 4 stood for First through Fourth Class; 1½ for once and a half First Class, and D1 for double First Class. The Commission then reproduced seventeen separate schedules for these Classes—First through Fourth and A through D, with additional schedules for Flour and Meal; Salt, Cement, Plaster and Stucco; All Grain and Mill Stuffs (except Wheat); Wheat; Lumber; Horses and Mules; Cattle and Hogs; and Sheep. The schedules listed the commission’s rates by both miles and per 100 pounds, and listed the existing comparative rates of each and every major railroad in the state. Table  4.2 shows a sampling from Schedule No. 1—Merchandise—First Class—in cents, per 100 pounds.90 Welcome to the world of modern administrative regulation. Th is kind of detailed exercise in direct rate-making and price-setting was the cornerstone of public utility regulation, and it would remain the paradigm example of the modern administrative state in action for the next hundred years (eclipsed only recently perhaps by the equally complex administrative pro-

The Public Utility Idea and the Origins of Modern Business Regulation Table 4.1. Freight Classification Cabbage, in small lots, crates or hhds Cabbage, car loads, same as potatoes Cabinet ware Cabinet organs Caissons Cable chain Camphene, in wood Candles Candles, 2,000 lbs. or more Canvass Canvass, roofing Canes Cane mills Cannon Cannon, on wheels, or if flat car required Candy Canned goods Canned goods, 100 boxes or over Caps, in boxes, strapped Caps, in boxes, not strapped Caps, in trunks Capstans Carboys and contents Carboys, empty Carboys, empty, car loads Cards Card board Carpets and Carpeting Carpet, hemp Carpet lining Carpenters’ tools Carriages and sleighs, not boxed Carriages, well boxed Carriage springs, boxes and axles Car springs, rubber Car springs, volute, boxed Car wheels and axles

2 See furniture 1 2 4 1½ 2 4 1 2 1 2 2 Class A 1 2 3 1 1½ 1½ 2 D1 1 Class A 1 2 1 1 1 1 1½ D1 2 2 4 4

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The Turn to Regulation Table 4.1. (continued) Car wheels and axles, car loads Carts in pieces Casks, large, empty Cassia Cast-iron grain mills Castor oil, in glass Castor oil, in wood Cauldron kettles

Class D 1 1½ 1 2 1 3 2

cess of standard-setting). Into the early twentieth century, this par ticu lar activity—rate-making—would wholly consume the attention of literally countless regulators, businessmen, practitioners, judges, economists, social scientists, legal scholars, and popular commentators. Millions of pages and barrels of ink would be spent debating such extraordinarily complex things as the best means of calculating a rate of return, the nature of a “reasonable” versus an “unreasonable” rate, and the comparative interests of corporations, shareholders, and the public at large. From the very beginning, there was an acute awareness of the enormity of the economic regulatory task at hand— calculating things such as investment, cost, return, and rates in railroading.91 More than a century later, Stephen G. Breyer still began his own inquiry into the difficulties and problems inhering in modern regulation with detailed examinations of cost-of-service rate-making and historically based price regulation.92 Systematic administrative and regulatory rate-making of the kind launched by the Illinois Railroad and Warehouse Commission was a new thing under the sun. And so it should come as no surprise that now the level of judicial and constitutional scrutiny of administrative action would increase as well. The strong state commissions seemed to almost expect as much, as their early reports self-consciously developed a legal-political framework with which to justify their new administrative forays. From the beginning, the strong state commissions proactively defended and extended their new powers with extraordinarily detailed (and largely accurate) legal histories of the both the law of common carriers as well as state legislative police power.93 The briefs they developed along with state’s attorneys were some of the most comprehensive and well-informed statements concerning the law of regulation in America—anticipating nearly every piece of future state and U.S. Supreme Court doctrine. And they supple-

The Public Utility Idea and the Origins of Modern Business Regulation Table 4.2. Routes and Rates

Miles 1 5 10 15 20 25 30 35 40 45 50 60 70 80 90 100 125 150 175 200 225

Commissioners’ Rates

Rockford, Rock Island, St. Louis

13.20 15.40 17.60 19.80 22.00 23.65 25.30 26.40 27.50 28.60 29.70 31.90 34.10 36.30 38.50 40.70 46.20 51.15 55.27 59.40 63.52

13.20 15.40 17.60 19.80 22.00 23.65 25.30 26.40 27.50 28.60 29.70 31.90 34.10 36.30 38.50 40.50 46.00 51.00 55.25 57.30 60.60

Peoria, Pekin, and Jacksonville 13.00 15.00 16.00 18.50 19.50 21.00 23.00 25.00 27.00 29.00 32.00 34.00 38.00

mented legal precedents concerning state regulatory power with bold political-philosophical arguments about public ser vice and the public good: In regard to the first objection of an ‘innovation and intermeddling on the part of the state,’ we consider that nothing can justly be called an ‘innovation,’ in its offensive sense, that the public good requires. Railroads themselves are an innovation upon the modes of travel and transportation of fift y years ago, and it would be strange if the duty of the state was limited to granting them privileges without inquiring whether those privileges were abused. We conceive it to be the duty of the state to do for its citizens all that is necessary for the public good, and which it in the nature of things can do better than the private individual, as expressed by John Stuart Mill: ‘The ends of government are

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as comprehensive as the social system, and consist of all the good and all the immunity from evil which the existence of government can be made directly or indirectly to bestow.’94 Given the broad expansion of state and regulatory power inherent in the administrative rate-making process, it was perhaps inevitable that this new wave of midwestern state railroad regulations would soon yield a classic constitutional controversy and an epic set of Supreme Court decisions. It is hard to overstate the historical and economic significance of the series of cases decided together by the U.S. Supreme Court in 1877 that are still commonly (and somewhat misleadingly) referred to as the “Granger Cases.”95 Munn v. Illinois and the six companion cases regarding railroad rate regulation in Iowa, Minnesota, and Wisconsin—with six separate majority opinions all authored by Chief Justice Morrison R. Waite, and reported together in seventy-four pages of volume 94 of the U.S. Supreme Court Reports— provided an early, remarkably consistent, and authoritative discussion of the fundamentals of police power and public utility regulation.96 Hereafter, Munn and its progeny would become the new starting point for most legal and economic discussion of public utilities and the administrative regulatory state.97 Indeed, it is not too much of a stretch to suggest that Munn launched the public utility era. Chief Justice Waite’s opinion in Munn v. Illinois is famous for a reason. Like Hale in De Portibus Maris or Shaw in Commonwealth v. Alger or Redfield in Thorpe v. Rutland, Waite synthesized a mass of previous material and precedents and adapted it for a new age. Waite reached back into a rich tradition of established doctrines regarding highways, public callings, legislative power, state police power, regulation of corporations, and special obligations of public ser vices and boldly advanced them past claims that the due process clause of the Fourteenth Amendment rendered such regulation constitutionally problematic. Despite the force of the still quite new constitutional amendments, Waite was able to easily sustain the broad legislative and regulatory powers at the heart of the so-called Granger laws in their entirety. In doing so, he provided a fresh and firm constitutional foundation for the new and rapidly developing law of public utilities. The Supreme Court decisions in Munn and its companion railroad cases provided a sweeping, unapologetic, and foundational defense of the new powers of a rapidly emerging administrative regulatory state. The extensive activities of the state railroad commissions—particularly their striking new

The Public Utility Idea and the Origins of Modern Business Regulation

departures in rate-making and law enforcement—changed the face of regulation in America. And despite new arguments from dissenters about the Fourteenth Amendment, due process rights, and the special sanctity of corporate charters, the U.S. Supreme Court had little difficulty sustaining the new regulatory regime in its entirety—across four key states, from legislature to commission, from warehouses to railroads. Surveying some 300 years in the history of common law and state regulation of economic activity, Waite—with more than a little assistance from ambitious commission counsel—penned a veritable field guide to the common law of public rights and common carriers, the state police power, and an emerging law of public ser vice corporations. The work of the Illinois Railroad and Warehouse Commission, Munn, and Chief Justice Waite thus nicely set the stage for the explosive emergence of what might be called the public utility movement. As Bruce Wyman concluded, “Any discussion of the foundations of our industrial relations must begin with that decision. . . . Upon the right understanding of this accommodation of private rights to public duties depends the true conception of our general theory of the function of state regulation.”98

Conclusion Given the long and strong consensus that has existed about Munn’s status as a canonical case concerning governmental regulation of the economy (and given the extraordinary amount of academic commentary originally focused on this particular set of decisions), it is worrisome that the prevailing legalhistorical wisdom on Munn remains somewhat problematic. The heart of the problem is a continued interpretive tendency to see Munn as a constitutional endpoint rather than a new beginning. While the road to Munn is reasonably well understood, and for the most part agreed on, the road from Munn is comparatively neglected—or at least lost in the miasma of obsessive concern with the mythical resurgence of laissez-faire constitutionalism. There is a tendency to see Munn as something like the climax of an essentially early nineteenth-century story—a story still under the influence of characters like Lord Hale, Lemuel Shaw, and Roger Taney, and archaic-sounding concerns like common carriers, juris privati, sic utere tuo, and ferries and wharfingers. That is a mistake. For though Waite and the state railroad commissioners were well aware of the importance of precedent and the long history of Anglo-American economic regulation, they are better understood as

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paving the way for characters like Felix Frank furter and James Landis, and more modern-sounding concerns like public utility, administrative rulemaking, and even securities regulation. Munn and the Illinois Railroad and Warehouse Commission were not the backward-looking last gasps of the wellregulated society, they were the forward-looking harbingers of the modern administrative and regulatory state. Particularly problematic is the common understanding of Munn wherein Waite’s designation of businesses “affected with a public interest” is read myopically as yet another example of the development of constitutional limitations in a Gilded Age. In depicting the ultimate triumph of laissez-faire in law, Max Lerner held that Munn v. Illinois, along with the Slaughter-House Cases (1873), stood out “in melancholy solitude as part of the ‘road not taken’ when two paths diverged for the Supreme Court in the constitutional wood.”99 Charles Fairman too noted that it was “familiar” that the key “phrase whose currency sprang from that memorable opinion”—namely, business “affected with a public interest”—“came presently to denote a rigid category that closed against various newer measures of public control.” “It took the Great Depression,” Nebbia, and the New Deal, Fairman continued the familiar line of argument, to finally get the Supreme Court back on track.100 Even Harry Scheiber, who has done as much as anyone to illuminate the public regulatory power of the legal doctrines underlying Waite’s opinion in Munn, in the end concluded that the public interest doctrine proved to be as much a restraint on the power of the state as an enabling doctrine: “The Munn doctrine was fated to become, in the hands of an increasingly conservative Supreme Court, an equally effective shield against public regulation for business the Court deemed strictly private.”101 This narrow reading of Munn, together with a relative neglect of the subsequent development of public utility law, skews our reading of the legal history of corporate regulation in America. Far from being a “road not taken,” Munn was the very superhighway down which reformers drove a truckload of far-reaching experiments in state regulation of new economic and business activity. And the ramifications went well beyond economic matters alone. The very next time the phrase “affected with a public interest” was used in the Supreme Court, it was uttered by Justice John Marshall Harlan in an attempt (for the time being unsuccessful) to widen the constitutional arena for civil rights regulation in the Civil Rights Cases (1883): The doctrines of Munn v. Illinois have never been modified by this court, and I am justified, upon the authority of that case, in saying that

The Public Utility Idea and the Origins of Modern Business Regulation

places of public amusement, conducted under the authority of the law, are clothed with a public interest, because used in a manner to make them of public consequence and to affect the community at large. The law may therefore regulate, to some extent, the mode in which they shall be conducted, and, consequently, the public have rights in respect of such places, which may be vindicated by the law. It is consequently not a matter purely of private concern.102 Over the next fift y years, the Supreme Court with few exceptions used the phrase “affected with a public interest” to uphold a wide variety of extensive economic regulations. In Western Turf Association v. Greenberg (1907), the Court used the language to sustain a California statute regulating admission policies at “any opera house, theatre, melodeon, museum, circus, caravan, race-course, fair, or other place of public amusement or entertainment.”103 State appellate courts used Munn to even greater regulatory effect.104 Moreover, the Court made perfectly clear that the fact that a business or industry was not found to be legally “affected with a public interest” did not insulate that activity from ordinary police power regulations. In Schmidinger v. Chicago (1913) and Holden v. Hardy (1898), the Court upheld a detailed regulation of the sale of bread in Chicago and an eight-hour day for Utah workers in mines and smelters without ever taking up counsel’s contention that those police power regulations required a special finding of business “affected with a public interest.”105 Contrary to some well-established interpretations regarding the relationship of law and economic regulation in the late nineteenth and early twentieth centuries, Munn v. Illinois did not mark the beginnings of an era of constitutional limitations or classical legal thought or a weak American state capitulating to business and corporations. On the contrary, Munn inaugurated an extraordinary era of innovation in the social control of business, industry, and the market. It set in motion a panoply of new ideas like public utilities, rate regulation, price discrimination, fair rate of return, valuation, just price, and economic planning that dominated legal and economic policymaking to the present. It propelled an agenda of economic regulation and controls that culminated in some of the more far-reaching experiments in public and government ownership of economic enterprises in United States history.106 Felix Frank furter, from his perspective as one of the central legal advocates for the increased social control of business in the early twentieth century, understood exactly the implications of Munn and early public utilities law for the economic state-building project of Progressivism. In an

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extraordinary essay on “Rate Regulation” that he wrote with Henry Hart for the original Encyclopaedia of the Social Sciences, Frank furter summed up the accomplishment: The resultant contemporary separation of industry into businesses that are ‘public’ and hence susceptible to manifold forms of control, of which price supervision is one aspect, and all other businesses, which are private, is thus a break with history. But it has built itself into the structure of American thought and law; and while the line of division is a shifting one and incapable of withstanding the stress of economic dislocation, its existence in the last half century has made possible, within a selected field, a degree of experimentation in governmental direction of economic activity of vast import and beyond any historical parallel.107 The public interest doctrine of Munn did not insulate private corporations from regulation. Rather, it created a new legal field of important economic activity that could be subjected to unprecedented state control from direct price regulation to outright public ownership. In The Economic Basis of Public Interest, Rexford Tugwell provided a short list of the economic activities that he could envision as essentially public services by 1922—a list in which it is still possible to see the influence of Bruce Wyman’s far more extensive categorization (with which we started this essay.108 Tugwell listed fourteen public classifications that covered a vast portion of American economic life: 1. Railways and other common carriers including express ser vices, oil and gas pipe lines and cab and jitney lines. 2. Municipal Utilities, so called, such as water, gas, electric light and power companies and street railways. 3. Turnpikes, irrigation ditches, canals, waterways and booms. 4. Hotels. 5. Telephone, telegraph and wireless lines. 6. Bridges, wharves, docks and ferries. 7. Stockyards, abattoirs and grain elevators. 8. Market places and stock exchanges. 9. Creameries. 10. Ser vices for the distribution of news. 11. Fire businesses. 12. The business of renting houses.

The Public Utility Idea and the Origins of Modern Business Regulation

13. Banking. 14. Businesses of preparing for market and dealing in food, clothing, and fuel. Tugwell’s list of public interest ser vices suggests that Progressives viewed the law of public utilities as a vibrant and expansive arena for experimenting with unprecedented governmental control over business, industry, and the market. While today most would restrict the idea of public utility to a couple of closely circumscribed industries (for example, water, electricity, gas), in the early twentieth century the utility idea encompassed urban transportation, railroads, motor bus and truck, telecommunications, radio, pipelines, warehouses, stockyards, ice plants, banking, insurance, milk, fuel, and packing.109 As Bruce Wyman commented on the future elasticity of the public utility idea, “What branches of industry will eventually be of such public importance as to be included in the category . . . it would be rash to predict.”110 For Progressive legal and economic reformers, this capacious and open-ended legal concept of public utility was capable of justifying state economic controls ranging from statutory police regulation to administrative rate setting to outright public ownership of the means of production. Moreover, after Munn it was possible to consider a whole range of reforms appended to the basic idea of the public ser vice corporation—from Mary Barron’s notion of the “State Regulation of the Securities of Railroads and Public Ser vice Companies” to Florence Kelley’s advocacy of “The Public Regulation of Wages, Hours, and Conditions of Labor of the Employes of Public Ser vice Corporations.”111 Indeed, the public utility idea was so capable of further growth as to ultimately produce one of the most ambitious administrative and regional planning initiatives of the New Deal—the Tennessee Valley Authority. One of the main reasons for the conventional misreading of the impact of Munn is the tendency to focus almost exclusively on high court opinions and to overemphasize the judicial review of administrative action. Such a traditional constitutional approach overstates the negative naysaying function of the judiciary and radically underplays the myriad of positive, everyday political and governmental actions that steadily constituted the public utility era—actions catalogued in literally thousands of volumes of public utility reports that dominated the period. So, while there is no question that important judicial pronouncements like Wabash, St. Louis & Pacific Railway Company v. Illinois (1886), or Chicago, Milwaukee & St.  Paul Railway Company v. Minnesota (1890), or Smyth v. Ames (1898) greatly affected and sometimes

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redirected the public utility movement, they did not fundamentally inhibit it.112 Instead, the main storyline of legal-political development is precisely the one outlined so well by Frank furter and Tugwell—the story of the creation of a public utility policy and jurisprudence that would grow to dominate economic policymaking and business regulation into the New Deal and beyond. The public utility idea was one of the most impor tant Progressive innovations in the democratic control of the American corporation.

CHAPTER 5

Corporate Taxation and the Regulation of Early Twentieth-Century American Business STEVEN A. BANK AJAY K. MEHROTRA

The previous essays in this volume have identified and analyzed a pervasive ambivalence in American policies and attitudes toward the business corporation. This same ambivalence has been strikingly acute in the history of corporate taxation. On the one hand, there has been a long-standing antimonopoly tradition that has attempted to use tax laws and policies to restrain the growth and power of business corporations. Yet, on the other hand, during particular historical moments, economic experts and government officials have also designed tax laws and policies to encourage the development of business corporations as effective engines of economic growth and prosperity. This tension between a desire to protect democratic values against the rising power of corporate capitalism and efforts to reap the material benefits of big business has come to defi ne the early twentieth-century history of U.S. corporate tax law and policy. Business corporations, to be sure, have long been a part of American law, economy, and society. But during the first half of the twentieth century, the tension between using national tax policy to either control corporate power or facilitate its growth became increasingly pronounced. This period witnessed the accelerating rise of large-scale industrial business corporations that threatened to undermine democratic values. The tremendous size and power of the new industrial titans presaged the emergence of a new corporate plutocracy—one that could limit the ability of individual citizens to participate fully in a democratic polity. A world dominated by large business corporations left little room, or so it was believed, for participatory democracy. As a countermeasure, some lawmakers during this formative period attempted to use corporate taxation as a means of social control and restraint. Yet, the legal response was not always consistent or coherent. Some 177

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policy makers viewed the corporate tax, and particularly its collection and possible publicity of tax information, as one way to limit corporate growth, while others believed that the administrative aspects of the levy could be used to harness and manage the power of large-scale corporations. A complex set of mixed motives, in other words, shaped the early historical development of corporate tax laws and policies. In this chapter, we seek to disentangle the aims and intentions of fiscal reformers during critical junctures in the development of early twentiethcentury U.S. corporate taxation. Our central aim is to explain how changing historical conditions have shaped corporate tax laws and policies over time. More specifically, this essay investigates why activists at certain times turned to taxation as a mode of corporate control, and why at other times they used tax policy to promote corporate growth. By focusing on the pivotal ideas and actions of key political economists, social commentators, and lawmakers, this essay attempts to explain how and why reformers saw taxation as a viable form of public control over corporate power. We argue that the corporate tax emerged and developed as a result of competing factions and changing social, political, and economic conditions. During the height of corporate consolidations, some reformers believed taxation could be used to control, or even reverse, the growth of corporate size and power. In the wake of corporate scandals, the government’s collection and possible publicity of corporate information was seen as one specific way to regulate and discipline large-scale industrial corporations. By contrast, others saw the corporate tax as a means to encourage and foster the kind of behavior that would generate much needed economic activity and growth, especially during periods of financial crisis and economic recovery. Still others, mediating between these two extremes, sought to use the corporate tax in a supervisory capacity, while ensuring that it did not “kill the goose that lays the golden eggs.”1 Thus, the corporate tax that developed throughout the first half of the twentieth century reflected changing visions of corporate regulation—visions that fluctuated among demands for penalty, subsidy, and neutrality. This chapter begins with the 1909 corporate excise tax, a federal levy on the privilege of conducting business in the corporate form. Although there were earlier precedents for national corporate taxes, particularly during the Civil War and the Spanish-American War, the 1909 law became the foundation for the modern income tax. From the start, the tax was driven by a complex combination of rationales that went beyond the wartime need for

Corporate Taxation and the Regulation of Early Twentieth-Century American Business

revenue. The origins of the 1909 tax, in this sense, were rooted in the differing logics that would come to define twentieth-century U.S. corporate tax law and policy. The 1909 act also contained the constitutional resolution that would ultimately lead to the Sixteenth Amendment, empowering Congress to levy an income tax without apportionment. This concession to populist social groups and Progressive lawmakers initially had little chance of being adopted, but it helped ensure the cooperation of those who were generally opposed to increasing the federal government’s taxing powers. The beginning of U.S. corporate taxation was thus a result of a political compromise that attempted to strike a delicate balance between competing interests. After exploring the varying motivations for the 1909 corporate tax and the post–Sixteenth Amendment development of corporate income taxation, this chapter turns to the World War I tax regime. While the first corporate income tax was relatively moderate, by the time the United States entered the war in 1917, it had established a tax base that would soon become the source of a robust corporate income tax and innovative business taxes such as the excess profits tax. Like the levies before them, those enacted as part of the Great War represented the tension in American law and political economy over the desire to promote corporate capitalism without undermining traditional liberal democratic values. The next section examines the 1920s to illustrate how changing political currents and a moderate post–World War I recession led to the early retrenchment of certain parts of the war time fiscal regime. Although pro-business advocates secured the repeal of the excess profits tax and a broadening of favorable tax treatment for mergers and acquisitions, many advocates saw these as hollow victories. Congress’s adoption of Treasury Secretary Andrew Mellon’s plan for the pullback of the income tax, in lieu of competing proposals to replace it with a national sales tax, solidified the place of the corporate income tax in the revenue scheme. This set the stage for the New Deal, which is discussed in the section that follows. When Franklin D. Roosevelt became president, the tone and substance of corporate tax laws and policies changed dramatically. The businessfriendly policies of the 1920s came to an end. And the perception that corporate growth and concentration of economic power contributed to the Crash and ensuing Great Depression led to the embrace of corporate taxation as a device for managing and controlling corporate power. Social democratic concerns about participatory democracy seemed to trump the affinity

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for using business corporations to revive the economy. Rather than representing a permanent shift in the use of the corporate tax, though, New Deal policies were a reflection of the shift ing motives that typified much of corporate taxation during the early twentieth century. Ultimately, changing historical conditions profoundly affected the early development of U.S. corporate tax law and policy. During periods of anxiety about corporate power and abuse, the corporate tax has been used to impose a penalty or to provide oversight, while during periods of concern about stimulating the economy, the corporate tax has been used to subsidize and incentivize corporate growth and productivity. Throughout, however, reformers have viewed the corporate tax as a means of influencing business, rather than just as a method of collecting revenue. Even when moderate reformers and lawmakers have called for the tax system to remain ostensibly neutral in the affairs of big business, the corporate tax has had a significant impact in shaping corporate decision making.

The 1909 Levy and the Early Development of Corporate Taxation Even before lawmakers began considering a corporate tax in 1909, there were several broader forces and seminal events that brought tax reform and corporate regulation to the forefront of national policymaking. First among these was the accelerating growth of corporate capitalism. Indeed, between 1895 and 1904, during what scholars have dubbed “the great merger movement,” U.S. manufacturing firms consolidated at a remarkable, breakneck pace due to a confluence of factors. During that brief period, nearly two thousand companies combined with former rivals to create some of the nation’s largest industrial corporations—many of which continue to exist today.2 Unlike previous periods of corporate growth, the turn-of-the-century merger movement hastened the institutional convergence of industrial manufacturing and finance capital. Consequently, the ownership of large business corporations gradually became more dispersed among the American elite, and a spirit of financial speculation and an ideology of “shareholder democracy” began to take shape.3 As these large-scale industrial corporations came to dominate the American economic and political landscape, tax reformers and lawmakers took notice. Taxation, along with the rise of public utility law, became an alternative means toward restraining and managing the growth of these new corporations.4 As other more comprehensive forms of corporate control, such

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as the federal incorporation movement, began to wane, taxation came to the fore.5 The growing concentration of corporations in the Northeast industrial sector provided populist tax reformers, particularly those from the agrarian South and West, with an easy target. They pointed to the wealthy shareholders and managers of the new, large-scale industrial firms as the type of individual taxpayers who had the ability and obligation to bear a growing share of the costs of underwriting a modern administrative and regulatory, social-welfare state. For other Progressive reformers, the colossal corporations themselves were seen as sources of tax revenue and as citizens in their own right— citizens that had a social duty under the principles of fiscal citizenship to contribute to the commonwealth. For more pragmatic state-builders, the development of a “corporate-administered” phase of American capitalism provided new “tax handles” with which to assess and collect personal and business incomes.6 As income and economic power became concentrated in large, integrated business corporations, it became easier for government authorities to identify and access sources of tax revenue. Thus, corporate and individual income became more visible and “legible” for taxing authorities.7 It was not only large-scale industrial firms that caught the attention of government regulators and taxing authorities. The increasing size and power of banks and insurance companies also heightened anxieties that concentrated economic power could undermine democratic ideals. A series of scandals in the insurance industry, exposed by muckraking journalists and a special 1905 commission appointed by the New York legislature, illustrated just how far certain executives were willing to go to evade existing investment regulations and to corrupt the political process. Evidence of direct payoffs of government officials and other nefarious dealings convinced many ordinary Americans that large financial interests were perverting the democratic process. For many contemporaries, these companies were afflicted with what Louis Brandeis referred to as “the curse of bigness.” With their unbridled concentration of wealth and power, they were “the greatest economic menace of today.”8 In addition to the growing public concern over corporations, the resurgence of the protective tariff and the increasing attention to economic inequality also made corporate tax reform a pressing issue. As tariff revenue increased steadily during the first decades of the twentieth century, protectionism was once again associated with an increasing cost of living. Although the annual rate of inflation in the early 1900s was rather moderate

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(averaging about 2 percent annually), the perception among many ordinary Americans was that the widening scale and scope of import duties was raising the prices of the “necessaries of life,” and unduly protecting domestic monopolies.9 Because the tariff affected the price of many everyday consumption items, including food and clothing, these levies imposed a greater financial burden on the poor than the rich, taking more from those who had less. The regressive incidence of customs duties also fueled concerns that the growing power of business corporations and the existing tax regime were exacerbating disparities in economic wealth and power. These distributional concerns would only multiply as corporations became more powerful and as the tariff continued to be seen as a shield protecting American monopoly power.10 If broader structural forces provided the critical background for the origins of the 1909 corporate tax, the triggering event came with the panic of 1907 and the ensuing economic recession. The panic began with the San Francisco earthquake of 1906, which devastated the city and its inhabitants, while setting in motion a series of events that dramatically undermined confidence in northeastern financial institutions. As a result, hundreds of small banks throughout the country failed. Commodity prices plummeted. Imports declined precipitously. And unemployment skyrocketed. Like earlier recessions, the downturn that followed the panic compelled reformers and lawmakers to reconsider the role of the state in the economy.11 In the wake of the panic and subsequent recession, tax reform soon became a pressing issue. With tariff revenues declining due to the downturn, and greater attention focused on growing inequalities, lawmakers began to consider a new income tax that would make up revenue shortfalls and address the distributional impact of the existing tariff regime. Although the movement for a national income tax had been growing throughout the late nineteenth century, it was initially defeated in 1895 by the U.S. Supreme Court, which struck down the 1894 income tax as a violation of the direct tax clause.12 Since that time, the Court had approved other types of national levies, namely an estate tax and a corporate excise tax used to finance the Spanish-American War, which ultimately encouraged some lawmakers to consider a new income tax that might pass constitutional muster.13 Even though the concept of taxing individual income was not new, the idea and process of taxing corporations remained a vexing issue throughout the late nineteenth and early twentieth centuries. Economic experts, social commentators, and lawmakers all debated the differing methods of taxing

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corporate wealth. “Governments are everywhere confronted by the question of how to reach the taxable capacity of the holders of [corporate] securities or of the associations themselves,” explained Edwin R. A. Seligman, one of the leading tax experts of the time. “Whom shall we tax and how shall we tax them in order to attain a substantial justice? Perhaps no question in the whole domain of financial science has been answered in a more unsatisfactory way.”14 An equally puzzling concern for economic experts and lawmakers was who ultimately bore the burden of a corporate tax. For decades, scholars had been arguing that the incidence of a corporate levy was contingent on numerous factors and assumptions. Most agreed that differing market conditions and contexts meant that a tax on business corporations could be shifted onto several different groups, including shareholders or workers or creditors or even consumers.15 Still, despite the claims that the incidence of a corporate tax was ambiguous, lawmakers contended that shareholders would be the ultimate payers of the tax in the form of lowered dividends or diminished share prices.16 Based on this reasoning, some lawmakers believed that corporations could be used as collection and remittance devices to get at the wealth held by the owners of large business corporations. From this perspective, corporations were simply an aggregation of individual wills—artificial legal entities created to pursue individual economic interests. And thus the corporate levy was merely a way to exploit the corporate form to get at the true targets of the tax: the wealthy individual shareholders of business corporations. In the spring of 1909, Senators Joseph W. Bailey (D-TX) and Albert B. Cummins (R-IA) proposed a new comprehensive income tax that included a levy on corporate income—a levy that was premised on the notion of using the corporate tax to target shareholder wealth. The Bailey-Cummins bill called for a 3  percent tax on all individual and corporate income above a $5,000 exemption level. To relieve low-income taxpayers from the corporate levy, the bill permitted shareholders who had income below the $5,000 threshold to apply for a refund of their portion of corporate taxes paid by the business.17 For Cummins, the main objective of the bill was to tax corporate owners. “The corporation is simply the instrumentality for the enrichment of its stockholders,” he informed fellow lawmakers, “and if the instrumentality results in conferring upon its stockholders an income above the minimum fi xed by the amendment, then it should be taxed; but if that income is below the minimum, there is no more reason for imposing a tax

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upon it than there would be if it were derived as a salary or as profit in a real estate transaction or as the profits of a farm.”18 From this perspective, the corporate levy was not intended to be a tax on corporations qua corporations. Rather, the goal was to use corporations as seemingly neutral, administrative machines—as remittance vehicles to collect income from wealthy shareholders.19 Although the Bailey-Cummins bill was ultimately tabled, it was not long before the movement for a renewed income tax gained momentum. In a June  1909 message to Congress, President William Howard Taft helped propel the income tax campaign by proposing a corporate excise tax along with a constitutional amendment permitting an income tax without apportionment. On the campaign trail, Taft had claimed that an income tax might be constitutional, but once he became president he recognized that a direct challenge to the Court could tarnish the integrity of an institution that he revered—and would later in his career join.20 In his congressional message, Taft provided a variety of justifications for a new revenue bill. Citing a “rapidly increasing deficit,” the president called for tariff revision and the adoption of “new kinds of taxation” to help “secure an adequate income” for the growing federal government. This part of his message suggested that Taft was concerned with using the new levy mainly as a source of revenue.21 Yet, even in this context, Taft appeared to believe that both shareholders and corporations—as separate legal entities—could be sources of tax revenue. The tax, Taft explained, imposed “a burden at the source of income at a time when the corporation is well able to pay and when collection is easy.”22 As scholars have noted, Taft’s words implied two different meanings. On the one hand, the focus on sources of income and collection ease suggested that Taft believed the levy could be an effective indirect means to tax shareholder wealth.23 At the same time, the president’s reference to the corporation’s “ability to pay” suggests that he also may have believed that the corporation ought to be treated as a separate legal entity, as a natural person, with its own taxpaying duties and obligations.24 Other parts of Taft’s message were more explicit about the use of taxation as a means of corporate supervision and control. At the outset, Taft explained that the levy “is an excise tax upon the privilege of doing business as an artificial entity,” and hence “not a direct tax on property.” He did this, no doubt, to ensure that the excise tax would not be challenged as a violation of the Constitution’s direct tax clause. Taft maintained that “another merit of this tax is the federal supervision which must be exercised to make the law

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effective over the annual accounts and business transactions of all corporations.” He was referring to how an effective corporate tax could collect and make public vital information about the operations of large-scale business entities. Taft acknowledged that the corporate form “has been of the utmost utility in the business world,” but he also reminded Congress that “substantially all of the abuses and all of the evils which have aroused the public to the necessity of reform were made possible by the use of this very faculty.”25 With the American economy and society still reeling from a financial panic linked to abuses in the banking industry and an earlier series of insurance company scandals,26 Taft’s address bolstered the Progressive view of taxation as a device to curb the abuses of corporate capitalism. Indeed, the president spelled out how the tax, in a “perfectly legitimate and effective” way, could help the government, stockholders, and the general public gain “knowledge of the real business transactions and the gains and profits of every corporation in the country.” By making the inner dealings of big businesses more transparent, the corporate tax, Taft insisted, would be a “long step toward that supervisory control of corporations which may prevent a further abuse of power.”27 Taft’s many references to the public disclosure aspects of the law demonstrated that he believed the tax could be much more than merely a means of collecting and remitting taxes from wealthy shareholders.28 In its final form, the Tariff Act of 1909 contained a tax on the legal privilege of doing business in corporate form. In par ticu lar, the law required “every corporation, joint stock company or association, organized for profit and having a capital stock represented by shares” to pay a “special excise tax with respect to the carry ing on of doing business.”29 The tax was set at an annual flat rate of 1  percent on net income above $5,000, and even applied to all foreign corporations engaged in business in the United States.30 The law also contained the controversial public disclosure feature that Taft had recommended. This provision directed that all corporate tax returns “shall be filed in the office of the Commissioner of Internal Revenue and shall constitute public records and be open to inspection as such.”31 For some Progressive lawmakers such as Albert Cummins, this provision did not go far enough in encouraging corporate transparency. For others, like Senator Elihu Root (R-NY), the publicity provision was “exceedingly drastic and injurious.” To a certain extent, then, the law reflected a political compromise between competing factions. Neither side seemed particularly pleased, but both could point to relative achievements. The low rates placated

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conservative opponents of taxation and the publicity requirement, for the most part, satisfied many Progressives. Eventually, however, business criticism of the publicity provision led lawmakers to limit its scope and reach. And within two years, public access to corporate returns was officially eliminated.32 While the publicity provision of the 1909 law was an innovative, albeit short-lived, feature of corporate taxation, the idea of taxing business corporations was hardly new or unique to the United States. Indeed, throughout the nineteenth century, American states and localities regularly taxed property held by corporations. Several subnational jurisdictions also taxed corporate shares as personal property. Over time, however, as financial assets such as stocks and bonds became more prevalent and dispersed, it became more difficult for states and municipalities to enforce the property tax on such intangible, personal property. As a result, fiscal reformers turned to the national government and other levies to tax the wealth held in financial assets.33 Similarly, other industrialized democracies also attempted to tax corporations, but in a variety of ways. Other common law countries like England, for example, had long traditions of taxing corporations. Yet, whereas U.S.  corporate tax policy was riddled with contradictions, British laws and policies during this period were more consistent. For the English, the corporation was simply an artificial entity, and hence it was taxed much like partnerships. The British mainly used their “company” income tax as an indirect collection device aimed at shareholders. The stark contrast between U.S. and Anglo corporate taxation did not escape the notice of comparative tax experts. As the British tax scholar Harrison B. Spaulding observed, the U.S. political theory of laissez-faire capitalism was in tension with an actually existing tax system that seemed to punish capitalists. “While in the United States Socialism as a political creed has little following,” wrote Spaulding, “yet in few countries have there been tax laws so pleasing to Socialists as those of the United States.”34 Even in the United States, well before 1909, the federal government did attempt to tax business corporations to finance wars. During the Civil War and the Spanish-American War, national lawmakers experimented with several temporary corporate levies. Yet none of these early measures seemed specifically designed to capture the taxpaying ability of corporations qua corporations. The Civil War income tax, for example, applied to business profits, but mainly as an indirect means to tax individual shareholders. The

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1898 excise tax on sugar- and oil-producing industries, by contrast, was a tax on the privilege of doing business, and hence was a model for the 1909 law.35 Yet, even the 1898 excise tax was enacted for conflicting reasons. On the one hand, the statute’s legislative history and its general application to all sugar and oil refinery businesses, not just corporations, suggest that lawmakers were not singling out corporations as regulatory targets, but rather that they were using the excise levy as a proxy to tax the owners of sugar and oil companies, and hence generate the revenue necessary to prosecute a war.36 On the other hand, if the ultimate targets of the tax were specifically Standard Oil and American Sugar, two of the largest and most powerful industrial corporations in America at the time,37 then perhaps the 1898 excise tax was a forerunner of the legislative attempt to control the increasing wealth and power of corporate capital. Furthermore, since the 1898 law did not contain disclosure requirements, lawmakers seemed less interested in transparency as a form of public supervision, and more focused on using the levy to curb the growing profits of specific business corporations.38 Unlike the earlier corporate taxes, which were temporary measures in response to wartime emergencies, the 1909 levy paved the way for a more permanent corporate tax. In fact, after the Sixteenth Amendment was ratified in 1913 and a comprehensive income tax was enacted in that same year, the corporate excise tax was replaced with a direct tax on corporate incomes. This new corporate income tax acted as a complement to the individual income tax. The new law provided a “normal” tax of 1 percent on all individual and corporate income above certain exemption levels. It also enacted a graduated set of “surtaxes” on individual income that ranged from 1 to 6 percent on income above $20,000. Because shareholders were exempt from paying the normal tax rate on dividends, the normal rate on their corporate income was merely applied at the corporate rather than the individual level. With this system in place, only truly wealthy shareholders paid a graduated surtax on corporate dividends.39 The adoption of progressive rates, however, complicated the taxation of corporate income. With higher individual surtax rates, there was an incentive for corporations to retain earnings rather than distribute them as dividends to individual shareholders. The corporate form, in other words, could be used to avoid graduated individual income taxes. To combat this, lawmakers enacted a highly subjective penalty provision, known as an undistributed profits tax. According to this feature, shareholders of a corporation

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that retained earnings for the purpose of avoiding the shareholder-level surtax on dividends would be subject to surtaxes on their pro rata share of the earnings as if they had been distributed. In effect, this provision provided partnership-like, pass-through tax treatment for those corporations that were deemed to be tax avoidance vehicles. Because this provision provided a disincentive for corporate managers to aggregate profits at the corporate level, the penalty also limited the economic power of large-scale corporations. Thus the 1913 Act, with its progressive rate structure, was arguably the beginning of the modern American corporate tax.40 With the enactment of the 1913 income tax, Congress began to acknowledge the differences between corporations and their owners. In many ways, it is no surprise that during this time the corporation was targeted as a separate legal entity, with its own taxpaying capacity. Since the turn of the century, American legal theorists had been incorporating the ideas of continental scholars to argue that corporations had separate legal identities.41 Building on the work of German jurists, American legal scholars like Ernst Freund had been advancing for many years the juridical conception of the corporation as a real or natural, and not merely artificial, entity. This argument, in many ways, flowed naturally from American constitutional law. As early as 1886, the U.S. Supreme Court in the famous Santa Clara case had ruled that corporations were legal persons with property rights that could not be denied without equal protection.42 If corporations were entitled to the property rights of legal personhood, tax reformers argued, they surely also had the attendant responsibilities and obligations that came with legal personhood—including the duty to pay taxes. American policy makers not only absorbed the ideas of legal theorists, they went further in showing how corporations embodied the ideal of taxing a legal person according to their earning capacity or ability to pay. In 1909 the U.S. Bureau of Corporations explained how corporations provided “a place where the theoretically perfect test—ability to earn—can be applied in practice as a means of ascertaining the proper amount of taxes to be paid.” Business corporations were uniquely situated to measure future earning power. “The market value of the stock depends not wholly upon past earnings, but also, and chiefly upon supposed ability to earn in the future,” wrote the Bureau. Consequently, corporations faced a tax burden “which is theoretically correct,” and which “may well be taken into account when one discusses whether it is to the public interest to encourage the formation of corporations.” 43

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Just as government officials were discussing why corporations were ideal entities for taxation, economic experts and social commentators were also linking the growing inequality created by modern industrialism to the rise of large-scale corporations. “The greatest force in the last three decades making for income concentration has been the successful organization of monster corporations,” wrote statistician and political economist Willford I. King in 1915. “The promoters and manipulators of these concerns have received, as their share of the spoils, permanent income claims, in the shape of securities, large enough to make Croesus appear like a pauper.” 44 The goal for King and many other Progressive reformers was to use the corporate tax to attack these concentrations of wealth. From its origins in the 1909 excise tax to its development as part of a more comprehensive income tax, the corporate tax was marked by dueling, perhaps even contradictory, rationales. For those who feared that “monster corporations” were separate legal persons that could threaten American democracy, certain elements of the new corporate tax were intended to limit the growing size and influence of these economic and legal entities. Meanwhile, for those who viewed the corporation as simply an aggregation of individuals, the corporate tax was merely an effective administrative device, a tool for collecting and remitting taxes on wealthy shareholders. Although they disagreed on why a corporate tax was necessary, both sides seemed to agree that the time had come for some form of levy on large business organizations. Thus, the multiple goals of corporate tax policy were not necessarily mutually exclusive or antithetical to each other. Just as bootleggers and Baptists could come together to support Prohibition, anticorporate regulators and administrative revenue reformers could agree, at least in principle, on the need for a corporate tax, even if their motivations differed.

World War I and the Rise of a Robust Corporate Tax Regime If the 1913 income tax initiated the development of modern corporate taxation, the World War I tax regime, with its dramatically higher tax rates and innovative business levies, clearly accelerated the process. Yet, like its earlier versions, the wartime corporate taxes were riddled by a variety of complex justifications. As the costs of conducting a global war increased, the need for new and sustained revenues pushed Congress to enact steeply progressive income tax rates. At the same time, the robust demand for wartime goods and materiel provided an opportunity for some industrial corporations to

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benefit enormously from the war effort. To prevent excessive war profiteering, lawmakers enacted several novel profits taxes. Although these levies were intended to act as constraints on “unreasonable” corporate profits, they frequently had unanticipated consequences. In fact, by the end of the war the steeply progressive rates and the new profits taxes led some experts to wonder whether the new tax regime was unnecessarily hindering the development of corporate capital. Even before the United States officially entered the war in April 1917, the need for war preparedness led lawmakers to transform the federal tax system. The Revenue Act of 1916, in fact, initiated a series of war time tax measures that significantly shifted the national tax system away from its traditional reliance on indirect and regressive consumption taxes to the modern system of direct and progressive taxation. The 1916 law contained higher individual and corporate rates, a modest federal estate tax, and a net receipts tax on munitions makers. The revenue acts that followed also ushered in a revolution in administrative capacity, as the power and personnel of the U.S. Treasury Department increased dramatically. By focusing the new national tax powers on the wealthiest Americans, and rejecting a broadbased mass income or sales tax, the Woodrow Wilson administration and its congressional allies set a clear tone: the World War I tax regime would be focused on “soaking the rich.” 45 There was, to be sure, some resistance to the new “soak-the-rich” wartime tax regime. Most business interests, however, limited their opposition to private correspondence with policy makers. Many were profiting enormously from the war, and they feared that any public protests would be interpreted as anti-patriotic. Still, politically conservative interests preferred to finance the war with a mix of consumption taxes and bonds rather than steeply progressive income or munitions levies. Populist lawmakers, by contrast, initially used the threat of highly progressive taxation to try to blunt the war effort. On the eve of the war, Claude Kitchin (D-NC), the House majority leader and powerful chair of the House Ways and Means Committee, did not hide his sectional bias. When wealthy New York citizens, he wrote, “are thoroughly convinced that the income tax will have to pay for the increase in the army and navy, they will not be one-half so frightened over the future invasion of Germany and preparedness will not be so popular with them as it now is.” 46 Only later did populists like Kitchin see the war as an opportunity to use tax policy as a type of antimonopoly tool. One of the Wilson administration’s greatest achievements during the war was its building of a fragile political coalition of Populist Democrats and

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Progressive Republicans in support of the new, robust tax regime. Led by Treasury Secretary William G. McAdoo, who was also Wilson’s son-in-law, the administration together with its congressional allies was able to dramatically raise individual tax rates and lower exemption levels. Although the WWI revenue laws did not usher in a mass-based tax, they did increase the scope and scale of taxes on America’s wealthiest citizens. During the war, the top marginal individual income tax rate soared to 77  percent, and in fiscal year 1919 nearly 17  percent of the labor force fi led individual income tax returns. As a result, the effective tax rate of the nation’s wealthiest 1 percent of households climbed from roughly 3 percent in 1916 to 15 percent within two years. Although the corporate income tax rate also increased, it did so at a more modest pace. Consequently, the spread between individual and corporate rates widened significantly, providing further incentives for wealthy shareholders to use corporations as tax avoidance vehicles.47 Originally, there was some thought to subjecting corporate income to the high marginal rates applied to individuals. During its deliberations over the Revenue Act of 1917, the Senate Finance Committee considered treating corporations like partnerships, where income earned by the entity was taxed to the owners individually at their marginal rates regardless of whether the income was actually distributed.48 This idea, and another proposal to extend the 1913 Act’s undistributed profits tax to cover all retained earnings—not just those unreasonably retained to avoid the shareholder-level taxes—was rejected, however, in large part because corporations insisted that it would harm their ability to accumulate the funds necessary to meet the needs of the wartime economy.49 Corporations claimed that retained earnings were particularly impor tant in a period when businesses were limited in their ability to raise money from the capital markets because of the large flotation of government bonds to finance the war.50 Corporate managers contended that they needed to lock in capital so that they could “meet the great demands now laid upon the industries of the country . . . both normal and due to the war at home and abroad.”51 In effect, the separate corporate income tax was justified at this time as a way to shield corporate income from the high wartime rates on individuals. To make sure those retained earnings were still adequately taxed at the corporate level, Congress enacted one of the most complex and controversial provisions of the war: the excess profits tax. Whereas the 1916 munitions tax levied a flat 12.5  percent tax on the profits of all armament producers, the newly created excess profits tax applied to profits “over a reasonable return on invested capital.” Moreover, the law affected all businesses, not

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just those in the munitions industry. The initial goal was to use this new levy to attack the large industrial corporations that were benefiting enormously from the war effort.52 A tax on excess profits reflected the belief that the broader public, operating through the powers of the state, had a legitimate stake in collecting excess private gains generated by war profiteering. Although other nations were already using excess profits taxes as a funding source for the war, the unprecedented turn to this levy by the United States signaled the Wilson administration’s desire to alter the concept and meaning of business profits— at least during the war. The term “excess” profits itself implied that there was some reasonable level of earnings that a business was entitled to, but that any surplus amount above that level was “unreasonable” or “abnormal.” Such wartime surpluses were deemed to be windfall gains that exceeded a legitimate amount of financial profit. At a time when ordinary Americans were sacrificing life and limb, the enactment of an excess profits tax expressed a growing social indignation with war profiteering and a demand for shared sacrifice that was at the heart of the Wilson administration’s sense of fiscal citizenship.53 Indeed, social concerns over excessive and unscrupulous war profiteering drove the demands for an excess profits tax. As early as 1917, calls for the “conscription of wealth” to match the conscription of men began to fi ll the editorial pages of the country’s leading publications.54 Soon after the United States entered the war, the popu lar journal The Outlook documented “the extraordinary increase in profits” among the leading industrial firms. Comparing the profits of over one hundred companies from 1914 to 1916, the editors calculated that the aggregate profits of these corporations “exceed the profits of the year in which the war began by over a billion dollars.” From this statistical evidence, The Outlook joined other leading popu lar periodicals in supporting an excess profits tax to make “the war-brides pay up.”55 From the start, though, many economic and legal experts questioned the efficiency, administrability, and even constitutionality of a tax on all “excess” profits beyond a “normal level.” The main point of contention was the use of “invested capital” as a baseline from which excess profits could be determined. The term “invested capital” was used elsewhere at this time, including in determining regulatory rates for public utility companies, but it was a notoriously difficult concept to apply in practice.56 Economist Edwin Seligman summarized the hostility toward the use of “invested capital” in

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determining excess profits when he wrote that “what constitutes capital is so elusive as to be virtually impossible of precise calculation.”57 Members of the business and legal communities echoed Seligman’s concerns. The Commercial and Financial Chronicle—that bastion of orthodox business thinking—attacked the “Excessive Taxation of ‘Excess’ Profits” as “governmental confiscation of wealth.”58 Though most business leaders were cautious about publicly complaining about the excess profits tax, privately they seethed. Jacob Schiff, a senior partner in the investment banking firm of Kuhn, Loeb & Co., complained directly to Treasury Secretary McAdoo in 1917 that the high wartime rates would “curb the push and ambition which is at the bottom of all material progress and development.” Similarly, the automobile manufacturer Cleveland Dodge wrote to McAdoo privately warning that the excess profits tax schemes “would kill the goose which lays the golden egg.”59 As many experts predicted, the excess profits tax did not always operate as intended. Treasury Department economist Thomas S. Adams conducted a study of the excess profits tax in the summer of 1918 that documented how the levy was having perverse implications. The existing law, with its use of “invested capital” as the baseline for determining “excess profits,” was adversely affecting small businesses more than the large corporations it was designed to attack. Larger corporations, Adams concluded, were able to manipulate the law to reduce their tax liability. By increasing their invested capital, either by issuing more equity or by increasing their investments in intangible assets or through other accounting maneuvers, they could inflate the base from which their rates of return and profits were calculated, thereby placing their net profits in a lower tax bracket. By contrast, smaller enterprises, especially those that relied less on heavy industry, did not have high levels of capital to begin with, nor did they have the slack or flexibility to adjust their capital levels or annual investments. Thus, they were hardest hit by the excess profits tax.60 Despite the uncertain effects of the excess profits tax, there were some lawmakers and experts who believed a revised profits levy could be used as a permanent measure to combat monopoly power. Congressman Claude Kitchin became a leading advocate for maintaining the excess profits tax in its original form, in spite of its defects, mainly because he hoped it would become a permanent part of the postwar fiscal order—not as a source of significant revenue, but rather as a cudgel that could be used to tame powerful corporate interests. Nearly all tax experts were critical of the administrative

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burdens of the levy, but a few were optimistic that it could seize “some of the promised advantages of socialized industry without incurring the risks and disadvantages of socialism.” 61 Eventually, however, the Treasury Department was able to convince lawmakers that a hybrid excess profits and war profits tax ought to be used to fund the remaining war effort. By hinging the calculation of “war profits” to a prewar level of acceptable profits, the new hybrid levy was reframed as a temporary measure, one that could be—and was—easily dismantled after the war. Indeed, when the war officially ended in the summer of 1919, the excess profits tax was one of the first targets of the fiscal conservatives who swept into office. Although excess profits taxation was quickly eliminated, the overall thrust of the new income tax regime did not wither away after the conflict. The ultimate success of the income and profits tax regime demonstrated the federal government’s ability to underwrite a global war with a strong tax system. This success convinced reformers, lawmakers, and tax administrators that a direct and progressive tax system—especially one with a strong corporate income and profits tax component—could be used both to collect badly needed revenue and to discipline corporate war profiteering.

The Mellon Plan and a Pro-business Shift in Tax Policy The aftershocks of World War I continued to reverberate at the outset of the 1920s. The dislocation occasioned by the war’s end and a sharp drop in prices ushered in a recession between 1920 and 1922.62 Furthermore, the heavy wartime taxes remained after armistice as the country strained to cover the war bill. The top combined individual normal and surtax rate, which had been 7  percent in 1913, had more than doubled to 15  percent in 1916, and rose to a whopping 77 percent at war’s end, with commentators calling it “the greatest burden that had ever been laid upon the American people.” 63 In this postwar recessionary environment, a new vision of corporate taxation was beginning to emerge. The voices of those who had sought to use corporate tax policy to discipline big business during the war were drowned out by those seeking to use corporate tax reform as a means to subsidize or facilitate business activity and economic growth. In his 1920 Annual Report, Treasury Secretary David Houston’s prescriptions for tax reform reflected this gradual shift in attitude: “While it is vitally important that saving and reinvestment effected through the medium of the corporation should not be

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dealt with more leniently than similar savings made by the partnership or individual, it is equally impor tant that the methods of taxation employed should in all cases penalize saving and investment as little as possible.” 64 Even at this early stage, government officials were aware that it was exceedingly difficult for corporate tax policy to remain completely neutral. By 1921, a consensus was forming about the need for business tax relief, which extended beyond corporate taxation to the high progressive rates on partners, sole proprietors, and individual investors. In his inaugural address that year, President Warren G. Harding remarked that the “business world reflects the disturbance of war’s reaction.” 65 Other lawmakers agreed that steeply progressive taxes were undermining the postwar recovery. A U.S. House Ways and Means Committee Report observed that “the exacting of the present excessive sums of taxes from the country contributes in no small degree to the depressing influences under which business and industry in general are staggering as an aftermath of the World War. . . . The reduction of the tax burden is essential to business recovery.” 66 One particular target of business tax reformers was the excess profits tax. As they had during the war, critics noted the levy’s contradictory implications. The National Association of Manufacturers contended that the public equated “excess” with “illegal” profits, and the tax incentivized corporations to undertake inefficient projects on deductible expenses, thereby artificially depressing investor returns.67 Not only was the tax viewed as problematic in concept, it was also considered complex in operation, requiring significant audits, frequent appeals, and lengthy processes before liability could be established. Indeed, the uncertainty the tax generated was itself considered a threat to business. Treasury economist T. S. Adams wrote that “[t]housands of business concerns, particularly corporations, must some day be confronted with large additional tax bills for the war period. These ‘heavy but indefinite future obligations’ . . . hang like a suspended avalanche over American business.” 68 Some favored simply replacing the excess profits tax with an undistributed profits tax to get at a corporation’s retained earnings, but the economic downturn helped quash this idea. Partly, this was because the issue of retained earnings was less important when corporate earnings were already reduced. Senator Reed Smoot (R-UT) noted that “[d]uring war times . . . there may have been some reason for taxing undistributed earnings, but just as surely as we stand here to-day there is not much danger of undistributed earnings for the year 1921, and, I think, for a number of years to come.” 69

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With little fear that corporations were being used as tax avoidance vehicles, lawmakers began to see retained earnings in a more positive light. More importantly, many observers believed that it was impor tant to shield corporations and corporate savings from the high individual rates enacted during the war. Whereas retained earnings had been viewed as a tax avoidance maneuver prior to the war, they came to be seen as an important engine for economic recovery through corporate reinvestment after the war. T. S. Adams, who had advocated for undistributed profits taxation in 1918, changed his tune by 1923: The proposal [to tax undistributed profits] has been rejected because Congress and the people will not face the prospect of applying fift y per cent surtaxes to the great volume of savings effected every year by the corporations of this country. . . . We want corporations to save, to reinvest, to plow back their profits into the business. We admit that it would be undesirable to apply the high surtaxes to the savings made by corporations. Saving, reinvesting is beneficent; it is a renewal of the lifeblood of business; and that part of the business income of the country [that is retained] cannot stand surtaxes rising to fift y per cent.”70 Secretary of State Charles Evans Hughes sounded a similar theme in a May 1924 speech before the National Institute of Social Sciences: “We must have a surplus and it must be used to develop enterprise. How fatuous to dry up this essential source of prosperity by plans of taxation which discourage enterprise and yet are stridently proclaimed as being in the interest of the people!”71 The pro-business shift in corporate taxation also was evident in the move to further liberalize the tax treatment of mergers, consolidations, and other corporate reorganizations. In 1918, Congress adopted a provision to permit the nonrecognition, or tax deferral, of gains and losses on exchanges of stock or securities in such transactions, but it was considered too vague and restrictive to permit much activity. This had proven problematic as businesses made the transition from wartime to peacetime production. Because of the high progressive rates imposed on individuals during the war, stockholders simply would not risk engaging in transactions that might lead to taxable income. The slowdown in merger activity during the 1920–1922 recession was blamed at least in part on the defects of the 1918 law.72 T. S. Adams testified before the Senate Finance Committee that “where any heavy tax is in-

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volved the reorganization is held up. They do not do it. All kinds of business readjustments have been stopped . . . the principal defect of the present law is in blocking desirable business readjustments.”73 In the 1921 Act, Congress expanded and clarified the reorga ni zation provision to remove it as an obstacle. As the Senate Finance Committee report on the Act emphasized, the amendments “will, by removing a source of grave uncertainty . . . permit business to go forward with the readjustments required by existing conditions.”74 Supporters of the 1921 Act tried to promote it as a pro-business measure. “The present Federal tax law is distinctly more favorable to business than any since the war,” declared New York City tax lawyer and former Treasury official Arthur Ballantine in the winter of 1922. “An individual or partnership may incorporate the business without tax liability by reason of the transfer to the corporation. The exchanges of securities in the course of corporate reorganizations may be effected without tax liability.”75 Notwithstanding the positive reviews of the 1921 Act, many pro-business Republicans were dissatisfied. Postmaster William  H. Hays, the former chairman of the Republican National Committee, wrote a letter to newly appointed Treasury Secretary Andrew W. Mellon urging him to move more quickly to scale back the wartime tax regime, complaining that the 1921 Act did not go far enough in aiding business and investors.76 These critics viewed the repeal of the excess profits tax as a start, but the amendments to the income tax only served to lessen the negative impact of a tax that had outlived its usefulness with the passing exigencies of war. The problem was that the business community itself could not agree on a suitable alternative to the excess profits tax and the income tax. Treasury Secretary David Houston warned that returning to prewar levels of revenue was not an option, at least in the short term, because of the large amount of floating debt remaining from the war, including the $7 billion in Victory Bonds and other obligations that would be coming due in the next three years.77 Moreover, although reducing the size of government was urged and cost reductions were pursued in many cases, the growth in administrative expenses seemed unlikely to be reversed entirely.78 A national sales tax was the most promising alternative source of revenue, but business split on whether to support it. Many business trade groups supported a sales tax, ranging from the Business Men’s National Tax Committee to the New York Board of Trade.79 Other organizations, though, such as the National Industrial Conference Board, the National Association of Credit Men, the National

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Association of Retail Grocers, and the Committee of Manufacturers and Merchants of Chicago all opposed the various sales tax proposals. Their concern was that the tax would effectively act as a gross receipts tax and, if business could not easily shift the cost to consumers, it could be particularly damaging to businesses with higher costs and lower margins.80 The resulting compromise—the Mellon Plan—was both a rejection of a complete retreat to the prewar era of minimal income taxation and a continuation of the more business-friendly tax policies enacted in 1921. Under the Mellon Plan, a steep reduction of the top combined personal income tax rates from 77 percent at the end of the war to 25 percent by 1927 was coupled with a modest increase in the corporate rate from 10  percent to 13.5 percent over the same period. This was more pro-business than it might at first appear. The corporate rate increases were viewed as a substitute for the revenues from the excess profits tax in 1921 and the capital stock tax in 1924,81 both of which most businesses viewed to be more odious than the corporate income tax. Moreover, the drop in the top individual rates was considered necessary to spur business investment. In his 1924 book written to garner popular support for the plan, Mellon wrote, The high rates inevitably put pressure upon the taxpayer to withdraw his capital from productive business and invest it in tax-exempt securities or to find other lawful methods of avoiding the realization of taxable income. The result is that the sources of taxation are drying up; wealth is failing to carry its share of the tax burden; and capital is being diverted into channels which yield neither revenue to the Government nor profit to the people.82 Mellon particularly highlighted the example of the railroad industry, noting that “[it] is estimated that the railroads will require a billion dollars a year of new capital in order satisfactorily to provide the facilities and equipment requisite to handle the traffic presented and to reduce the cost of transportation. . . . If the railroads are to be furnished with capital, much of it must come from the sale of stock and to permit any sale surtaxes must be reduced as to attract the large investor to that type of security.”83 Throughout the 1920s, Progressives and their allies continued to beat the drum for using tax as a tool to try to control corporations, but any victories were small and short-lived. For example, they repeatedly attempted to revive the publicity requirement originally enacted in 1909 for corporate tax returns, but they now sought to apply it to all returns. After a public inspec-

Corporate Taxation and the Regulation of Early Twentieth-Century American Business

tion requirement was defeated in 1921, Congress finally adopted a provision in 1924 requiring public inspection of both the names of corporate and individual taxpayers and the amount of taxes they paid. During deliberations over this requirement, then-Secretary of Commerce Herbert Hoover had warned that public disclosure would particularly harm businesses, arguing that “it may be well recalled that publicity of tax returns which was required during the period of 1867 to 1872 contributed to the industrial and financial chaos of the time.”84 By 1926, the anti-publicity movement got the upper hand and the amount of tax paid was no longer made public.85 Similarly, as part of the deliberations over the Revenue Act of 1928, Congress considered a graduated corporate income tax that would for the first time tax the “bigness” that Louis Brandeis had decried more than a decade earlier.86 Business immediately assailed the proposal. The Wall Street Journal called it “a direct challenge to the ‘Big Business’ savoring of the old trust busting days,” complaining that it would “penalize the stockholders of the large corporations, such as the railroads” and that it was “essentially an excess profits tax” without the use of the more equitable invested capital standard.87 Although the House approved the proposal, it was later rejected in the Senate in favor of a one percentage point reduction of the single corporate rate and an increase in the exemption from $2,000 to $3,000 for corporations with incomes of $25,000 or less.88 For at least a little while longer, business concerns still trumped in the tax arena.

The 1930s and the New Deal on Corporate Taxation The stock market crash in 1929 and the onset of the Great Depression forced a reexamination of all sorts of governmental policies, including in the corporate sphere. This time, however, the prescription for the economic situation was decidedly less business-friendly than it had been in the early 1920s during the much milder post-WWI recession. Whereas in 1921, corporations were seen as part of the solution, and therefore were to be protected from or encouraged by taxation, after the Crash corporations were seen as part of the problem and tax reform was viewed as part of the solution. One of the most significant changes in the intervening decade was the continued rise of large corporations and the dominance of large corporate groups and their owners in the economy. As policy makers began to investigate the causes of the economic downturn, the growth of big business was identified as a contributing factor. Supreme Court Justice Louis Brandeis

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effectively captured the prevailing sentiment in this new era, writing that “coincident with the growth of these giant corporations, there has occurred a marked concentration of individual wealth, and . . . the resulting disparity in incomes is a major cause of the existing depression. Such is the Frankenstein monster which states have created by their corporation laws.”89 In addition to the race to the bottom in state corporate laws that Brandeis referenced, there was a growing concern that the pro-business tax policies of the 1920s had contributed to the dangerous concentration of corporate power. As Franklin Roosevelt took office, he and his allies in Congress sought not merely to reverse the pro-business tax policies of the 1920s, but also to use the corporate tax as one of the tools to achieve his vision for the federal oversight of corporations. Indeed, the effort to use the corporate tax to influence corporate behavior was not simply a reaction to the economic events in 1929. Rather, it was one of the main pillars of New Deal policy, fueled by academic research and the powerful personalities in Roosevelt’s so-called Brain Trust of close advisors. The New Deal’s antibusiness posture began on the campaign trail. In a May 1932 memorandum, Raymond Moley and other Brain Trusters outlined a national program for recovery.90 One of the key prongs was to address the problem of corporate “hoarding,” or retaining earnings to pay for expansion or to hold as a private “war chest” rather than distributing them as dividends. Adolf Berle, a Columbia law professor who was responsible for this section of the memo, wrote that “this attempt of corporations to provide for a rainy day was really the thing which itself brought on the rainy day. The expansion doubly upset the balance of production and consumption.”91 Berle had just completed his work with economist Gardiner Means on their seminal book, The Modern Corporation and Private Property, before being recruited to help develop Roosevelt’s economic platform.92 Based on the insights gleaned from that research and fellow Columbia professor Rex Tugwell’s scholarship on the misallocation of capital resources in the corporate economy,93 Berle advised that “we should carefully consider a modification of taxes on corporate income, aimed at discouraging undue accumulation of corporate reserves, and stimulating distribution of such reserves to the millions of small investors who are their rightful owners.”94 This proposal for “a tax on undistributed surplus income of corporations” was intended to serve as a check against corporate managers who had “lost sight” of the small investors and acted like corporate profits were “private funds.”95

Corporate Taxation and the Regulation of Early Twentieth-Century American Business

Soon thereafter in 1932, the U.S. Committee on Banking and Currency authorized an inquiry to investigate the causes of the stock market crash.96 The subsequent hearings, known as the Pecora Hearings after Ferdinand Pecora, the aggressive lead counsel for the Committee,97 contained substantial revelations of corporate abuses, including rampant tax avoidance through largely legal maneuvers. The Pecora Hearings only fanned the flames for those seeking to use corporate tax reform as a means of controlling corporate growth and expansion.98 In 1933, the House authorized a study of the internal revenue system to investigate some of the sensational revelations from Pecora’s investigation. The resulting House Subcommittee Report targeted a variety of corporate tax provisions. It specifically named the expansion of the tax-free corporate reorganization provisions in 1921 and 1924 as one of the culprits for business failure, proposing to repeal nonrecognition (tax deferral) treatment altogether for such transactions. “[T]he present provisions,” the Report observed, “have encouraged the injection into business structure of an unsavory stimulus, such as the organization of large holding companies and the overcapitalization of business.”99 The Report, which Senator William Borah introduced as an amendment to a Senate bill, also recommended eliminating the ability of a group of affiliated corporations to file a consolidated return, which was characterized as an attempt “to strike at the holding company system.”100 As described in Daniel Crane’s essay (Chapter 3) in this volume, Borah would go on in 1937 to co-sponsor the Borah-O’Mahoney Bill requiring federal licensing and oversight of corporations by the Federal Trade Commission. Borah’s participation in both reforms—the elimination of consolidated returns and the call for federal licensing—suggested that reformers viewed tax and antitrust law as two means of accomplishing the same ends in the quest to manage and supervise corporations from the federal stage rather than relying on state corporate law. In the Revenue Act of 1934, the recommendations to reform the reorganization provisions and abolish consolidated returns were scaled back, but nevertheless were adopted in a way that suggested a momentum shift in corporate taxation. Rather than proposing to repeal the reorganization provisions, which Treasury Secretary Henry Morgenthau pointed out would actually cost revenue because it would permit stockholders to claim their post-Crash losses,101 the eligibility for reorganization treatment was “restricted . . . [t]o conform more closely to the general requirements of corporation law.”102 The  U.S. Chamber of Commerce tried to invoke 1920s-style arguments,

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warning that the new provision “will discourage mergers which, in the view of recent economic conditions should be made in the interests of good business policies,”103 but this argument failed to dislodge the proposal the way it might have a decade earlier. Some amendments were made, but contemporary commentators still complained that the enacted provision “sharply modified” the availability of the tax-free reorga nization.104 Presumably, though, this was intended to make mergers and acquisitions, and the resulting concentration of wealth and power, more costly and therefore more difficult. The foundation for the proposal to repeal the consolidated return was laid even before Roosevelt assumed office and the subcommittee issued its report. It was based on the growing concern about holding companies, which first appeared at the turn of the century as states relaxed their restrictions on corporations holding stock in other corporations, and in particular about the use of pyramidal structures that enabled investors at the top of the pyramid to leverage a relatively small investment in one corporation into control over a vast empire.105 The consolidated return appeared to “penalize[] David and assist Goliath.”106 The fear was that consolidated returns had enabled these corporate groups to drive out competition through predatory pricing while at the same time avoiding taxation on monopoly profits, all by using the losses from one subsidiary to offset the gains from another. As Missouri Democrat Charles Cannon explained, An electric company or telephone branch or transportation company pays little attention to the cost of installing new ser vices. A railroad company can run a bus line at a loss, a streetcar company can operate a line of taxicabs, or a power company can preempt a new community at a loss. Th rough the benevolent provisions of this law they charge these losses against their profits elsewhere and reduce their taxes while destroying competition and monopolizing the market.107 Congress rejected Cannon’s proposal to repeal the consolidated return in the Revenue Act of 1932, but it did subject corporate groups to a penalty tax that rose to as much as 1 percent for the privilege of filing a consolidated return.108 House Speaker John Nance Garner described how the adoption of a penalty tax rather than full repeal served as a compromise between those seeking to use taxation to battle corporate abuse and those worried that the tax reform would kill the golden goose: “If it is advantageous to them to file such re-

Corporate Taxation and the Regulation of Early Twentieth-Century American Business

turns they will pay the penalty. If there is no advantage in consolidated and affiliated returns, they will submit separate returns.”109 As a result of the Subcommittee Report in 1933, corporate tax reformers reintroduced the proposal to repeal the consolidated return. In the Revenue Act of 1934, they were ultimately successful in securing repeal, but not without railroads obtaining an exemption after Ben Dey, general counsel of the Southern Pacific Railroad, testified that “it is impossible to put the railroads under this proposal without committing a terrific public crime. They simply cannot stand it.”110 Railroads still had to pay the penalty tax in existence prior to 1934, but the ability to continue filing consolidated returns robbed the repeal of much of its influence over railways.111 By 1935, the New Deal’s retreat from a pro-business approach was largely complete. In his tax message to Congress in June of 1935, Roosevelt openly embraced regulatory taxation as a means to limit corporate abuses. He justified measures such as a graduated corporate tax rate and an intercorporate dividends tax much in the way President Taft had justified a corporate tax in 1909—as the price for the privileges afforded to the corporate form by the government—but the focus was more on the abuses of those privileges than on the price for them. Roosevelt proclaimed that “we should seek through taxation the simplification of our corporate structures through the elimination of unnecessary holding companies in all lines of business.”112 In effect, Roosevelt’s goal was to tax out of existence what were perceived to be abusive holding company structures—or at least to tax them at a rate high enough to make them justify their necessity in securing higher returns. These measures against “bigness,” which were both adopted in the Revenue Act of 1935, hardly imposed the kind of rates or penalties one would need to truly reshape the corporate landscape by force.113 Roosevelt’s original proposal for graduated corporate rates suggested replacing a flat rate of 13.75 percent with a scheme rising from 10.75 percent to 16.75 percent.114 The final Act imposed a 12.5  percent rate on income below $2,000 up to a 15 percent rate on income above $40,000.115 Neither was likely to make bigness unprofitable. Similarly, the intercorporate dividends tax was actually just a reduction of the 100  percent exemption for dividends received by a corporate shareholder to a 90 percent exemption, amounting to an effective tax of 1.5 percent on intercorporate dividends.116 Even Progressive sources were dubious about the impact of these provisions. The New Republic claimed that “it will scarcely break up the big industrial units, nor will it restore enough competition to make any visible

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difference.”117 This has led modern observers to deride the 1935 Act and, indeed, the entire New Deal corporate tax program as a “symbolic showpiece . . . full of sound and fury,” but signifying “almost nothing.”118 Historian Paul Conkin observed that the provisions enacted in 1935 “neither soaked the rich, penalized bigness, nor significantly helped balance the budget.”119 Such pronouncements, however, ignore the extent to which the New Deal corporate tax program was largely about establishing the principle of differentiation between large and small corporations, so that corporations could be taxed based on size.120 For New Deal opponents, this distinction was called “the camel’s head inside the tent.”121 Indeed, the intensity of business reaction reflected this concern. Edward  G. Seubert, the president of Standard Oil Company of Indiana, wrote in a letter to stockholders, “The danger in present proposals is not so much in their immediate effect as in adoption of the principle of discriminating against a corporation merely because it is big and successful.”122 A representative of the Armstrong Cork company testified that the reduction in the top rates in the House bill did not give much comfort: “Experience teaches that once the opening wedge is driven, the field covered by a new tax tends to expand steadily.”123 Moreover, when viewed in the context of the Public Utility Holding Company Act also enacted in 1935, which ordered the breakup of pyramidal holding company structures among public utility companies, business concern about the regulatory aims of New Deal corporate tax measures was well justified.124 New Deal corporate tax policy seemed focused on attacking large-scale business corporations. In his second term, Roosevelt’s corporate tax policy only served to confirm business fears about his expanding ambitions to control the size and growth of corporate wealth. In 1936, Roosevelt proposed perhaps the most disturbing of all corporate tax reforms from the perspective of business— an undistributed profits tax. Although his advisers had urged such a policy as a tool against corporate surplus as far back as the 1932 Berle memorandum, Roosevelt had resisted because of the fear that business opposition would derail his other New Deal policies.125 His electoral landslide in 1936, coupled with a budgetary crisis, prompted him to move forward. In a supplemental budget message delivered on March  3, Roosevelt proposed replacing the corporate tax and the exemption of dividends from the individual tax with a penalty tax on excessive retained earnings. Roosevelt and his supporters expected that business would oppose the penalty tax and the attempt to affect dividend policy,126 but they may have

Corporate Taxation and the Regulation of Early Twentieth-Century American Business

underestimated the degree of opposition. Economist Alfred G. Buehler reported that “[t]he business world . . . was aghast at the proposal and shuddered at the consequences if it was adopted.”127 The New York Times argued that the penalty tax would substitute “the blanket judgment of Congress and the Treasury Department, based on a general theory” for the “individual judgment of business managers, based on their direct knowledge of the needs of their particular company.”128 One of the biggest concerns was that it would drive a wedge between corporate managers and stockholders. The U.S. Chamber of Commerce predicted that the tax “would engender such uncertainties concerning the sound course to pursue as to subject management to grave difficulties with shareholders and creditors.”129 When Roosevelt managed to stave off efforts to quash his proposal, business leaders pushed to neutralize its distributive force. They favored retaining the tax on dividends so that the penalty for a distribution to shareholders would cancel out the penalty for retaining earnings.130 The goal was to realign managers and shareholders on the question of dividend policy, at the price of effectively introducing double taxation of corporate income.131 As enacted in the Revenue Act of 1936, the top rate of 27 percent on undistributed profits was identical to the lowest surtax rate for incomes in excess of $44,000.132 The demise of the undistributed profits tax, and indeed the New Deal’s anti–big business stance in corporate taxation generally, began in the summer of 1937 as a recession dashed any hope of an early recovery from the Great Depression.133 Much like in the early 1920s, when reformers cited the postwar recession as a justification for business-friendly corporate tax policy, the swift economic slowdown created a window of opportunity for business groups.134 Critics blamed the undistributed profits tax for a myriad of economic problems, ranging from rising unemployment and growing stock market volatility to “strikes by capital” and declining business confidence.135 In 1939, congressional leaders and Treasury and administration officials jointly negotiated a business tax aid program that (1) eliminated the undistributed profits tax, (2) liberalized the capital stock tax,136 (3) eliminated the limit on capital loss deductions for corporations, and (4) permitted corporations to carry forward losses for two or three years.137 By 1942, the ban on consolidated returns enacted in 1934 was also lifted.138 As the United States entered World War II, renewed concerns over excessive war profiteering once again led to higher rates on individual and corporate

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income. Unlike the previous global conflict, however, this time there was a decidedly business-friendly feel to Congress’s approach to taxing corporations. For instance, excess profits taxation was a primary feature, but corporations were permitted to choose between a war profits approach that set the base equal to the average of the previous three prewar years, and a high profits approach that set the base equal to a normal percentage return on invested capital.139 This flexibility permitted companies with large prewar profits to keep making those profits during the war by choosing the average return base, while companies that had profited only modestly during the war could choose the invested capital base and thereby preserve the ability to increase their profits during the war. In one example, a company was reportedly not subject to any excess profits tax despite having war-related orders of $70 million and profits that were 3,000 percent larger than its previous year’s profits.140 Taxation was also used to subsidize or incentivize corporations, such as through depreciation allowances. Under the Second Revenue Act of 1940, Congress adopted a special provision that permitted accelerated depreciation deductions for buildings deemed necessary for national defense. The recovery period for such buildings was set at five years or the conclusion of the war, whichever came first.141 In effect, the brief recovery period allowed corporations to write off their capital purchases faster, making these expenditures more cost effective. As former Treasury official Randolph Paul explained, this accelerated recovery period was necessary “to tempt private capital into war plants.”142 Toward the end of World War II, it was clear that the shift away from a more punitive approach to corporate taxation, at least for the moment, was complete. J. Keith Butters and John Lintner of the Harvard Business School had published a number of influential and well-publicized studies in the spring of 1944 documenting the extent to which the postwar recovery could be harmed by the corporate tax burden.143 Th is prompted a flurry of corporate tax reform proposals. During the summer, three highprofi le corporate tax reform proposals designed to aid business in the transition to the postwar economy were released within weeks of each other.144 Many groups soon followed with their own plans, leading to almost sixty proposals being in circulation at one point.145 Although budgetary concerns deferred radical reform, a “five-point program” which was “designed to improve the cash position of business” was signed into law in 1945.146

Corporate Taxation and the Regulation of Early Twentieth-Century American Business

Conclusion Throughout the first half of the twentieth century, U.S. corporate tax laws and policies were shaped by competing groups struggling to cope with changing historical conditions. From the start, the corporate tax was riddled by conflicting aims and rationales. The 1909 excise tax, enacted as a political comprise brokered by President Taft, became a dual-edged sword. It was wielded by both Progressive reformers and moderate state-builders. The former believed the law could be used to restrain the growth and power of the new large-scale, industrial corporations. Other more moderate lawmakers and reformers viewed the corporate tax as a means toward effectively reaching the income flowing to affluent individual shareholders. Although the early rationales for the corporate tax were not identical, they reflected a growing social concern that increasing concentrations of wealth—whether it was held by corporate managers or individual owners—could undermine the precepts of modern American democracy. The corporate tax’s dual ability both to raise revenue and discipline big business became even more robust during World War I. The dramatic increase in individual and corporate tax rates and the adoption of novel business levies to combat war profiteering not only ushered in a new era of “soak-the-rich” taxation, they also helped advance the notion that wealthy individuals and corporations had a social responsibility to contribute to the war effort. Meanwhile, the need for corporate capital to keep up with the demands for war time supplies and materiel provided a new rationale for business managers, who defeated calls for an undistributed profits tax by arguing that corporate tax policy could help lock in necessary capital. The end of the Great War brought with it a significant shift in corporate tax laws and policies. Although the modern fiscal state did not wither away after the conflict, the retrenchment of the 1920s created a more businessfriendly environment. Consequently, the excess profits tax was repealed, tax rules on corporate mergers and acquisitions were relaxed, and top marginal rates were slashed, though they did not return to their prewar levels. Business corporations were even encouraged to retain earnings and develop surpluses that could be used for further capital investments and economic growth. The material benefits generated by corporate capitalism were hailed as supporting rather than undermining American democracy. This sanguine view of the relationship between big business and a democratic polity came to a crashing halt, however, with the arrival of the Great

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Depression. In fact, during the early New Deal, corporate tax policies were decidedly anti–big business. Corporate managers and owners were singled out as causes of the Depression and as sources of political corruption. Although the enacted tax laws and policies of the early 1930s did little to change the business landscape, President Roosevelt’s rhetoric and proposals to use tax policy to discipline and control corporations created a conservative backlash. The quick end to the fragile economic recovery in 1937 only accelerated the backlash, leading to the repeal of the short-lived undistributed profits tax and the enactment of other pro-business reforms. When the United States entered World War II, corporate taxation continued to exhibit the mixed motives that had marked its early adoption and development. On the one hand, the dramatic increase in rates and the enactment of a modified excess profits tax indicated that the federal government was well aware of how the risks of excessive wartime profiteering could undermine faith in the legitimacy of American democracy. On the other hand, the government was not above using tax policies to shape the wartime economy, and to induce corporations to make particular kinds of tax-favored investments. Indeed, the war witnessed the increasing use of tax benefits like accelerated depreciation to shape corporate behav ior and decision making. Although corporate tax revenues as a percentage of national GDP peaked at the end of the war and remained relatively high during the 1950s, soon thereafter this source of federal revenue gradually began to decline. Well after the war, the fluctuating rationales and reasoning behind corporate tax policy persisted, moving in tandem with changing historical conditions. During some economic downturns, tax laws were designed to subsidize businesses. At other times, when corporate scandals were particularly salient, tax laws and policies were used to crack down on perceived corporate abuses and malfeasance. And the law continued to evolve to allow Congress to more precisely pull these strings as necessary. Indeed, one of the most significant post-WWII developments in corporate taxation— the move in the 1950s to separate out the treatment of large and small corporations by enabling the latter to elect partnership tax treatment under the Subchapter S rules—recalls the move to graduated corporate income tax rates in the 1930s as a way to target “bigness,” while still nurturing small businesses. As the next part of this edited volume illustrates, many aspects of the modern corporation took on greater importance during the post-WWII era. From the development of the non-profit sector, to the vertical integration of

Corporate Taxation and the Regulation of Early Twentieth-Century American Business

corporate consolidation, to the regulation of corporate speech, the democratic treatment of the modern business corporation has continued to change with changing historical conditions. A striking ambivalence toward business corporations thus has been, and remains, a central part of American law and democracy.

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The Changing Corporate Form

CHAPTER 6

From Fiscal Triangle to Passing Through Rise of the Nonprofit Corporation JONATHAN LEVY

In twentieth-century American public discussion, “the corporation” became synonymous with just one kind of corporation—the for-profit business corporation, most often engaged in industrial production. Take General Motors, the archetypical corporate subject of management guru Peter Drucker’s canonical text Concept of the Corporation (1946).1 The problem of the corporation restricted to the problem of the firm, restricting subsequent scholarship on the relationship between corporations and American democracy. For many other institutions, whether unions, universities, chambers of commerce, or political advocacy groups, were all corporations too— “nonprofit” corporations. The development of different corporate forms and the dynamics among them—with the for-profit / nonprofit binary most critical—is a relatively unexplored aspect of American corporate history, and is the focus of this chapter, which centers on the rise of the nonprofit corporation across the twentieth century. The time to begin is the decades after World War II. The nonprofit corporation was born in the nineteenth century, but it was the postwar decades that witnessed the first invocation of the “nonprofit sector” of American civil society.2 After the war, to limit the New Deal state, and to distinguish the United States from European totalitarian regimes, many American thinkers, liberals and conservatives alike, championed Amer ica’s vibrant civil society.3 This was not the first time that civil society—the arena of voluntary association, contrastive to the state—was invoked after an abrupt expansion of state power.4 But the appeal in the decades after World War II to a “nonprofit sector,” “voluntary sector,” “independent sector,” or “third sector” was new. Tellingly, Alexis de Tocqueville’s Democracy in America (1835– 1840), ignored for decades, now flew off the shelves, becoming the canonical interpretation of Amer ica’s enduring political culture of voluntary association.5 213

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The invoking of nonprofit was critical to a more general postwar ideological expression of U.S. political economy and culture. The image was of three sectors. First, there was the federal government, the dominant state structure. Second was the national economy. Th ird was civil society— voluntary, plural, and expressive. Sharpening this image in the postwar decades was a strong membership surge in national, federated, nonprofit corporations—like the Elks Club, the American Legion, or the National Parent-Teacher Association (PTA).6 After surveying the United States, the United Kingdom, Germany, Mexico, and Italy in the late 1950s, political scientists Gabriel Almond and Sidney Verba reported in The Civic Culture (1963) that American respondents claimed higher rates of participation in “civic-political associations.” Because of its flourishing voluntary associational life, Americans were said to benefit from high “civic competence.”7 Invocations of civil society and voluntary association are one thing. Actual institutions are another. The postwar image of a voluntaristic nonprofit sector obscured something fundamental. That sector, and American civil society with it, was (and still is) organized by a specific institutional form: a state-charted corporation granted income tax exemption by the federal government. When viewed from the perspective of the nonprofit corporation, rather than from the perspective of a nonprofit sector marked off sharply from the economy and the state, another picture comes into view. That is, not three sectors, but a fiscal triangle—the institutional structure charged with the production, distribution, and redistribution of income in twentieth-century America. Its three corners were the federal government, the for-profit corporation, and the nonprofit corporation. In power and authority, at the apex was the federal government, conducting warfare, dispensing welfare. But it was industrial capital that was the source of the fiscal triangle’s income flows. That is, from their investments in fi xed capital—the factories—postwar industrial corporations like General Motors yielded pecuniary incomes. Following the 1913 constitutionalization of the income tax and its subsequent expansion during the wars (see Bank and Mehrotra’s essay in this volume, Chapter  5), the federal government appropriated corporate incomes as revenues. This was in the form of corporate income taxes, capital gains taxes, or personal income taxes (withheld from employee paychecks beginning in 1943). Revenue from corporate income taxation exceeded personal income taxation until WWII, but in 1945 the corporate income tax still accounted for $16 billion of federal revenue, compared to $19 billion from the personal income tax.8 And so, for-profit corporations gen-

From Fiscal Triangle to Passing Through

erated fiscal revenue. Meanwhile, either corporations or individuals might donate their remaining incomes to nonprofit corporations—whether it was the Ford Foundation, the University of Chicago, or the United Way. Their pecuniary revenues, from such donations or from financial investments on their endowments, were not taxed because they carried out public “purposes,” codified in Section 501(c) of the Internal Revenue Code of 1954. This, at least, was the interconnecting institutional design of the fiscal triangle in its ideal postwar form, no less ideal than the postwar ideological construction of three sharply separated sectors of state, economy, and civil society. Indeed, in practice, in the postwar decades there were struggles to ensure that the institutions on each corner of the fiscal triangle carried out their proscribed tasks, while the flows of income that connected them moved in the appropriate fashion among corporate forms. The boundaries, if not always so hard, were at least constantly policed. Ideological invocations of a distinct “nonprofit sector” served this function. So did the struggle of the IRS to ban nonprofits from “industrial pursuits.” The New Deal state attempted to separate public welfare from private charity. In 1954, Congress prohibited nonprofits from political campaigning. Ultimately, however, the geometry did not hold. And it is here that one can speak of the rise of the nonprofit corporation, and for three interrelated reasons. Significant changes in the nonprofit corporation, from the late 1960s onward, both expressed and contributed to the undoing of the fiscal triangle. First, over time there was simply a proliferation of nonprofit corporations. Continuing a theme developed earlier in this volume with respect to jointstock business corporations (see Chapter 1 by Eric Hilt and Chapter 2 by Jessica  L. Hennessey and John Joseph Wallis), Americans finally gained “open access” to nonprofit incorporation. While states passed general incorporation laws for nonprofit corporations in the late nineteenth century, in many states judges retained discretion in granting nonprofit corporate charters.9 With civil rights advocates equating access to nonprofit incorporation with “freedom of association,” by the 1970s open access was achieved. That furthered the striking increase in the sheer number of nonprofit corporations. The number of tax-exempt organizations (an inexact proxy for nonprofit corporations) climbed from 12,500 in 1940 to 50,000 in 1950, and then rose to 309,000 in 1977 and to 1 million in 1989. United States forprofit business corporations over the same time span increased from 473,000 to 3 million.10 The nonprofit corporation became America’s fastestgrowing corporate form.

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Second, the nonprofit corporation changed its character. Namely, both states and for-profits began to ask nonprofits to do more work on their behalves. The more they did, it seems, the more the sanctity of the nonprofit boundary had to be invoked. Nonetheless, beginning with LBJ’s Great Society, the federal government increasingly delivered welfare through nonprofit corporations. In 1964, 53  percent of nonprofit corporate revenues came from private philanthropic donations (individual and corporate). By 1993, only 24  percent did.11 At first, revenues came from governments. But then, after the Reagan administration, nonprofit corporations more and more came to rely on their own earned incomes, whether from commerce or financial investment—in other words, their own tax-exempt profits. This was emblematic. For, U.S. business corporations were themselves then turning to finance, while finding various ways to contribute less to U.S. tax revenues, including legally reincorporating as “pass through” corporations, in which entity-level corporate income (the kind of profit representative postwar industrial corporations like General Motors yielded) does not exist, and therefore is not taxed. Or, in fields like health care, for-profits and nonprofits began to compete with one another. Or, all three, states, for-profits, and nonprofits, in fields like housing, began to collaborate. Meanwhile, the state even turned to for-profits to deliver public goods (incarceration, military violence). In sum, with the anchor of industrial capital crumbling, and income flows shifting if not reversing their direction, barriers that had separated the state, for-profits, and nonprofits disintegrated. Third, nonprofit corporations, born institutions for carry ing out public tasks, newly became important legal vehicles for claiming private individual rights. Here, the fate of the fiscal triangle mattered too. For, critical to the postwar fiscal triangle was the twentieth-century constitutional and administrative articulation of two corporate personalities, which were fiscal—forprofit, and nonprofit. What granted corporations their legal personalities was their entity-level production of profit / taxable income (or not). As the fiscal triangle of industrial society dissolved, the U.S. Supreme Court, increasingly ignoring the tax-exempt purpose of the nonprofit corporation at hand, in a series of nonprofit cases—from Roberts v. Jaycees (1983) to Citizens United v. Federal Election Commission (2010)—began to ignore the forprofit / nonprofit identity, while constitutionalizing the expressive rights of individuals by way of corporate litigants. Thus, in the legal context as well, the barrier between nonprofit and for-profit weakened. The nonprofit origins of current controversies over corporate personality must be attended to, if

From Fiscal Triangle to Passing Through

only because, in this new environment, what happens first to nonprofits can easily happen next to for-profits. Burwell v. Hobby Lobby (2014) proves the point. This chapter begins with the origins of the for-profit / nonprofit corporate distinction at the state level in the nineteenth century, proceeds by demonstrating how and why the federal government fiscalized both corporate forms during the middle of the twentieth century, erecting the fiscal triangle on the foundation of industrial capital, and concludes by demonstrating that, in more recent decades, the fiscal triangle has begun to disintegrate and that a new chapter in American corporate history has begun. Rather than fiscal structures, corporations are becoming entities through which the wealth, power, and rights of individuals merely “pass through.”

From Purpose to Profit The binary classification of for-profit / nonprofit was not present at the founding of the American republic. In the flurry of special incorporations that followed the Revolution, there were, of course, joint-stock companies— banks, insurance companies, turnpikes—that made profits on their share capital. There were corporations without share capital that did not pay dividends to shareholders—like universities, or charities—that enjoyed tax exemption because of their mission. But “profit” was not the most fundamental category of corporate identity or classification. Instead, corporations were first defined with respect to sovereignty. Legally, early U.S. corporations were mixed public-private entities. Their charters were “concessions” of popu lar sovereignty. Corporate privileges were granted on a discretionary basis by republican legislatures to private property holders to fulfi ll a “public purpose” enumerated in a charter.12 The public purpose might be to construct a turnpike, erect a university, issue money, or bestow charity. Only in the latter half of the nineteenth century did anything like a private for-profit / nonprofit binary take shape in state corporation law. In the states, corporations increasingly became defi ned with respect to profit—a purely private category. But contested notions of public purpose remained (see the essay by Novak in this volume, Chapter 4), and this was especially the case with respect to the nonprofit form. The original nineteenth-century tension manifested in the twentieth century, when the federal government appropriated the states’ for-profit / nonprofit distinction into the new federal income tax code.

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Nineteenth-century state incorporation law is a large and unwieldy subject.13 Still, some general trends are visible with respect to the emerging category of nonprofit. In one trend, states began to enlarge the number of public “purposes” for which corporations without share capital might incorporate. The earliest state incorporation acts were passed for rather specific corporate purposes. New York, for instance, passed its first general incorporation act in 1784 for “religious societies.” In 1848 there was a general incorporation act for all “benevolent, charitable, scientific, and missionary societies.”14 In this spirit, the Massachusetts Charities Act of 1874 offered general incorporation (and property tax exemption) to: any educational, charitable, benevolent or religious purpose . . . any antiquarian or musical purpose . . . missionary enterprise: with either foreign or domestic objects . . . organizations encouraging athletic exercises and yachting . . . libraries and reading rooms. . . . Societies of Freemasons, Odd Fellows, Knights of Pythias and other charitable or social bodies of a like character and purpose.15 The qualifier “like character and purpose” was ambiguous. But the law still reserved access to the corporate form for specific “purposes.” Legally, the legislation-mandated public purpose helped establish an entity-level corporate personality independent of the individual incorporators. This was one reason English trust principles—empowering the individual “hand of the donor,” rather than the purpose of the corporation—struggled to establish themselves in U.S. courts.16 Yet, in the same year, 1874, Pennsylvania passed a very different type of general incorporation law than Massachusetts. It too listed possible corporate purposes. But the act also divided all corporations in the state into three categories. Religious corporations were in a category by themselves and enjoyed property tax exemption. Then there were taxable “for-profit” corporations. Finally, there were tax-exempt “not for profit” corporations. Over time, in addition to the putatively “public” purpose at hand, and in addition to the possession of share capital (or not), what determined whether a corporation was “not for profit” was also the private motive of the individual incorporators.17 This was a new classification of corporate identity. Now, joint-stock corporations (the largest corporation in Pennsylvania was then the Pennsylvania Railroad, by many measures the largest in the United States, and indeed the world) did not exist to carry out a public purpose— building a railroad, issuing money—but only to make private profits.18 For

From Fiscal Triangle to Passing Through

incorporators and corporations without such intentions, a new category remained—“not for profit.” If not specifying “profit,” during the 1870s many state general incorporation acts began to restrict joint-stock corporate activity only to the minimal threshold of “lawful purpose.”19 For joint-stock corporations, freed from their public purposes, lawful purpose came to mean private profit.20 What this meant on the for-profit side is well illustrated across this volume. Access to incorporation opened. Courts began to foreground the property rights of dividend-earning individual shareholders. “Concession” theories of corporate personality declined. There emerged distinctively American “contract” or “partnership” theories, which conceived of corporations as associations of individuals in the first instance (see the essay by Blair and Pollman in this volume, Chapter 7).21 By this theory, the U.S. Supreme Court’s decision in Santa Clara County v. Southern Pacific Railroad Company (1886) created the precedent that granted Fourteenth Amendment protections for the property rights of corporate shareholders (see the essay by Bloch and Lamoreaux in this volume, Chapter 8). Notions of public purpose remained, and would be revived, at the turn of the twentieth century, by the “public utility” ideal (see the essay by Novak in this volume). But by then it had to contend with the notion of a purely private, for-profit joint-stock business corporation. What about developments on the emergent nonprofit side? There were parallels. One trend was to underscore the private motivations of incorporators— the absence of a shareholder’s “profit motive,” or the positive presence of incorporators’ “altruistic” motives.22 Meanwhile, a new generation of philanthropists, men like Andrew Carnegie and John  D. Rockefeller  Sr., created nonprofit corporate forms whose purposes were increasingly open-ended, culminating with the creation of the “general purpose foundation.”23 Thus, the minimal limit on for-profit corporate activity set by “lawful purpose” was mirrored on the nonprofit side by “general purpose.” The Rockefeller Foundation’s 1913 charter restricted the corporation to promoting “the wellbeing of mankind throughout the world.” At the state level, the trends were to open access to the corporate form, to eliminate chartered restrictions on corporate activity while relaxing restrictions according to purpose, and to emphasize the private motivations and rights of incorporators and owners. Nonetheless, access remained far more open on the for-profit side. In 1895 the state of New York passed a Membership Corporation Law, which consolidated a century of general incorporation acts. It created a specific classification for corporations “not organized for pecuniary profit.” Still, state

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judges had to approve articles of incorporation, and often turned down charter requests for reasons of “public policy.” Despite the appeal to profit, on the nonprofit side the notion that a corporation was a concession of sovereignty—that it only existed to carry out a public purpose—still lingered. Access to nonprofit incorporation was not yet fully open.24 The state-level tension between purpose and profit was carried into the twentieth-century federal income tax code. The Wilson-Garman Tariff Act of 1894, which mandated a 2 percent tax on corporate incomes, legislated a tax-exemption that appealed to purpose, exempting “corporations, companies, or associations organized and conducted solely for charitable, religious, or educational purposes.” The provision was included without legislative debate. The 1909 Corporate Excise Tax—passed to circumvent the U.S. Supreme Court’s 1895 ruling that a federal income tax was unconstitutional—included tax exemption after a debate in the Senate. Here, the law itself taxed “corporations organized for profit.” Many senators thought that was enough to exempt corporations “not organized for profit.” Others believed Congress should specify purposes. The result was a muddle. The final law exempted “any corporation or association organized and operated exclusively for religious, charitable, or educational purposes, no part of the net income of which inures to the benefit of any private stockholder or individual.” That meant tax-exempt organizations (they did not have to be corporations) were restricted to specified purposes. They could also, apparently, earn income themselves so long as it did not “inure” to any shareholder or individual. The shareholder restriction was clear. But what did that mean, for income not to inure to an individual? The question was left open.25 The Revenue Act of 1913, permanently establishing a federal income tax, incorporated the exemption language from the 1909 Excise Tax. Nonprofit corporate identities were to continue to be defined with respect to some mixture of purpose and profit, public and private.

The Fiscal Triangle The twentieth-century U.S. state fiscalized corporations, for-profit and nonprofit. On the for-profit side, it appropriated corporate profit as taxable income and therefore a critical source of fiscal revenue. Meanwhile, the federal government granted income tax exemptions for nonprofit corporations to carry out “public purposes” mandated in section 501(c) of the federal income tax code—enshrined in the code’s 1954 revision. Flows of personal and

From Fiscal Triangle to Passing Through

corporate income thus connected the three corners of the fiscal triangle. Of the three institutions residing at its corners, across the middle decades of the twentieth century the nonprofit corporation was the relatively ancillary actor. For, the economic anchor of the fiscal triangle was industrial capital, and the IRS warned nonprofits off from “industrial activity.” And, while Congress mandated that nonprofits carry out public tasks, nonprofits were nonetheless hemmed in by the expanding public provisions of the New Deal state. Congress also restricted nonprofits from engaging in political activity. After the constitutionalization of the federal income tax in 1913, when taxing corporate profits federal administrators faced two vexing questions. First was whether to tax corporations at the entity level, independent of a tax on individual shareholder financial dividends (see Bank and Mehrotra this volume). Second was the related question of how to defi ne corporate profit / taxable income in the first place? That was a technical but nonetheless momentous question—given that for-profit corporations were not only to be taxed, but that profit / income now very much defi ned both for-profit and nonprofit corporations’ identities to begin with. An administrative decision was made to tax corporate incomes in relationship to the volume of industrial capital they used up when making profits. This anchored the fiscal triangle in fi xed, industrial capital. Arthur Ballantine was a corporate lawyer, a Republican, and a consultant to the Treasury Department. His 1920 Yale Law Journal article, “Some Constitutional Aspects of the Excess Profits Tax,” announced critical administrative solutions. Wars legitimated high corporate income tax rates. Tellingly, Ballantine was interpreting the federal government’s Excess Profits Tax Act of 1917, passed in the wake of American entry into World War I. Ballantine explained that neither the income tax law of 1913 nor of 1916 had defined corporate income with reference to “invested capital.” Taxable corporate income, like personal income, was determined “without regard to its relation to capital.” Namely, it was defined with reference to net incomes minus operating costs, without regard for the original capital invested, and used up, in pursuit of profits. However, both the corporate excise profit tax of 1909 and the excess profits tax of 1917 had accounted for capital. Both granted an exemption from the tax “based upon the invested capital of the enterprise.” That made it more difficult “to compute and administer.” It was not government officials, certainly not corporate shareholders, but corporate managers and their accountants—in charge of the corporate entity—who invested the capital to begin with and had the competency to “compute” profit in this

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way. That meant, in effect, a choice to tax the corporate entity, independent of its shareholders. Ballantine thus explained why the federal government must incorporate “invested capital” into the measurement of the corporate income tax. For, it was necessary to prevent corporate managers from paying high taxes on high incomes that were but a “low return upon the investment.” Unlike personal incomes, Ballantine concluded, corporate incomes could not be “justly” taxed according to their “amount,” but only “according to their relation to some measure of capital.”26 Ballantine and the Treasury Department thus transplanted into the federal tax code the logic of a relatively new corporate metric of industrial profit—rate of return on capital invested, other wise known as ROI. Late nineteenth-century for-profit corporations had in most instances not calculated profits with respect to capital invested in long-lived fi xed and physical industrial capital outlays, but only with respect to operating costs.27 In the early twentieth century—only decades after profit first defined corporate identity—the very meaning of profit changed. ROI became the chosen metric of corporate profit. It was a managerial, bureaucratic metric, produced by corporate accountants. ROI was first known as the “Du Pont formula.”28 A Du Pont accountant explained its logic in a 1911 internal memo: a commodity requiring an inexpensive plant might, when sold only ten percent above its cost, show a higher rate of return on the investment than another commodity sold at double its cost, but manufactured in an expensive plant. . . . The trust test of whether the profit is too great or too small is the rate of return on the money invested in the business and not into the percent of profit on the cost.29 This was an industrial profit metric that recognized income extracted from long-lived expenditures in fi xed and physical capital. It rose to prominence in the wake of the Great Merger Movement of 1895–1904, which left corporate managers in the saddle of corporate governance.30 In the end, the twentieth-century fiscal state appropriated the logic of ROI, if not the exact calculation, for its own use. Entity-level ROI had further consequences outside the fiscal basis of the state—namely, understandings of corporate personality. In 1922 the corporate accountant William Paton published the seminal accounting text, Accounting Theory, with Special Reference to the Corporate Enterprise, championing what he called “entity” corporate accounting, against “pro-

From Fiscal Triangle to Passing Through

prietary” accounting, which computed profits with respect to shareholder equity. Paton declared the industrial corporation a “living organism,” an entity apart from its individual shareholders. The point of corporate accounting, the point of the corporation, was to “integrate” the corporation’s external transactions and internal operations into a single metric of profit—for corporations to make, and for states to tax.31 Paton’s nod to a “living organism” was no accident. The corporate accountant echoed “organic” and “natural” legal theories of corporate personality imported from Germany, and to a lesser extent Great Britain, at the turn of the twentieth century, and which competed with prior “contract” or “partnership” theories.32 Natural and organic theories held that corporations possessed a pre-legal existence apart from the individuals that combined to create them—an existence which the state did not need to first “concede,” and which states therefore merely needed to recognize. Paton’s 1922 invocation notwithstanding, after the United States declared war on Germany in 1917, not coincidentally, the natural theory of corporate personality declined in the United States. And that was not just because of anti-German sentiment. Organic theories drew from “pluralist” political philosophies before the war that had posed the question of what distinguished a corporation from a state as a form of association.33 With the war, the answer seemed clear. States had armies and fought wars, exercising coercive force that corporations could not muster. The federal government now sat firmly at the apex of the American fiscal triangle. What replaced natural theories of corporate personality in the United States was a more pragmatic, less philosophical and abstract notion of corporate personhood. If not metaphysically “organic,” a corporation was at least pragmatically “real.” Pragmatist philosopher John Dewey’s 1926 Yale Law Journal article on corporate personality was a turning point.34 Max Radin, a Berkeley law professor, echoed Dewey in a 1932 law review article on the “The Endless Problem of Corporate Personality.” It was foolish to attempt to metaphysically isolate a corporate “will.” But a corporation did exercise practical “capacities.” If not a “concession” of sovereignty, if not “natural,” the corporation, Radin concluded, was nevertheless real, something more than a “fiction,” or the mere aggregation of individual associates. For, if nothing more, “it is fiscal.” The fiscal production of wealth alone granted the corporate entity a real existence apart from its individual shareholders.35 Coming after the rather metaphysical pre-WWI discussions of corporate personality, which has drawn much attention from subsequent scholars, the

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mid-twentieth-century, pragmatic understanding of corporate personality has received much less attention. In part, this is because the discussion, legally, moved from a constitutional law register to a more mundane, administrative one concerning tax disputes. This is an arena where students of corporate personality have not much looked. But it was a tax dispute, in New Colonial Ice Co. Inc. v. Helvering, Commissioner of Internal Revenue (1934), which led the U.S. Supreme Court to bluntly declare: “As a general rule a corporation and its stockholders are deemed separate entities.”36 Earlier, Supreme Court Justice Oliver Wendell Holmes  Jr. wrote in 1916 to Harold Laski—a British pluralist political theorist who advocated natural theories of corporate personhood in the United States—and pleaded with him to abandon his “doubtful conclusions” concerning the “personality business.”37 Nevertheless, in Donnell v. Herring-Hall Marvin Safe Co. (1908), while Holmes had granted that, “Philosophy may have gained by the attempts in recent years to look through the fiction to the fact and to generalize corporations, partnerships, and other groups into a single conception,” for-profit corporations in practice were distinguishable. There was a “nonconductor” in a corporation, separating the entity from its shareholders, making, if nothing more, entity-level taxation possible and constitutional.38 Holmes affirmed his position—there was “no doubt that a State may tax a corporation and also tax the holders of its stock” since the “owners are different”—in Klein v. Board of Tax Supervisors of Jefferson County (1930).39 As corporate income tax rates soared during World War II, the U.S. Supreme Court ruled once and for all in Moline Properties v. Commissioner of Internal Revenue (1943): “The doctrine of corporate entity fills a useful purpose in business life.” At minimum, the corporation had a “tax identity distinct from its stockholders.”40 Outside the arena of corporate tax, the distinction between corporate tax identity and stockholders—between management and ownership—was sacrosanct among a generation of New Deal liberals. Depending on the context, theories of corporate personality might either ground corporate rights claims (see Bloch and Lamoreaux in this volume) or legitimize government regulations. Mid-twentieth-century liberals believed in entity-level corporate personality. For, if the corporate entity existed then the state could both tax it and regulate the activities of those in charge of it—white-collar corporate managers. Here, the classic text was Adolf Berle and Gardiner Means’s The Modern Corporation and Private Property (1932), preoccupied throughout with the scope of managerial power.41 The discussion then ran

From Fiscal Triangle to Passing Through

through a number of important postwar works, including Drucker’s study of General Motors in Concept of the Corporation (1949), with its theory of corporate “triple personality”—economic, social, and political.42 In perhaps the most representative postwar text, the collected volume The Corporation in Modern Society (1959), editor Edward Mason declared that when “the onehundred-and-thirty-odd largest manufacturing corporations account for half of manufacturing output in the United States,” the industrial corporation inevitably posed the “problem of power.”43 In the postwar decades, the problem of power appeared to concern the discretion of managers, in charge of defining and achieving ROI for the entity. Shareholder power was of less concern, and even, according to Berle and Means in The Modern Corporation and Private Property, required government defense. From a business perspective, “hard driving” factories into the ground to produce short-term profits for shareholders (a common nineteenthcentury practice) was not in this particular corporate entity’s long-term interest. General Motors, for instance, declared that it sought a 20 percent ROI, operating its plant only at 80  percent of capacity.44 Thus, as Talcott Parsons explained in a 1942 article on “The Motivation of Economic Activities,” profit had become “an institutionally defined goal” rather “than a motive.”45 In this respect, the long time span of ROI calculations afforded managers, in the short term, the wealth they needed to accommodate a variety of goals—what organizational theorists came to call “organizational slack.”46 The paradox of this new corporate “profit motive,” Fortune magazine declared in 1959, was that “precisely because it is in the business to make money years on end,” for-profit corporations could not “concentrate exclusively on making money here and now.”47 The postwar industrial corporation did not behave, according to leading observers at the time, like a “profit maximizer.”48 As the Keynesian economist Carl Kaysen put it in a 1957 article in The American Economic Review, “No longer the agent of proprietorship seeking to maximize return on investments, management sees itself as responsible to stockholders, employees, customers, the general public, and perhaps most important the firm itself as an institution.” That might include directing wealth toward “factory architecture and landscaping,” as well as support for “higher education” and “pure science.” For-profit corporations, Kaysen even speculated, had become “soulful.”49 Should they choose (or be forced to), they might collectively bargain with organized labor. They might provide welfare—in tax-deductible pensions, health care, or human resource programs—themselves. The economist Oliver Williamson in 1963 thus

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referred to the evident presence of for-profit corporations’ “nonprofit” goals.50 It was from this matrix that the postwar notion of “corporate social responsibility” was born.51 In sum, investing in industrial capital, postwar for-profit corporate managers created the organizational form, physical infrastructure, and social structure of mass industrial society.52 It also generated taxable income for the U.S. welfare and warfare state. Finally, managers might redistribute wealth to nonprofit corporations themselves. In 1953 the New Jersey Supreme Court, in A. P. Smith Manufacturing Company v. Barlow, upheld the legality of a New Jersey statute (by 1956, three-quarters of all states had passed similar laws) that allowed corporate philanthropic donations to nonprofit corporations. In this case it was a donation to Princeton University.53 In 1934 the federal government had granted for-profit corporations tax credits for donations of up to 5  percent of their taxable incomes to tax-exempt nonprofit corporations. Nonprofit corporations, with treasuries decimated by the Depression, had lobbied for the measure. On average, for-profits would never donate more than 2 percent of their incomes to nonprofit corporations.54 Still, in the fiscal triangle, forprofit corporate philanthropy became a not insignificant pathway of wealth. The phenomenon pivots the focus to the corner where nonprofits resided. There was a nonprofit equivalent of the fiscalized for-profit corporation. It too was a creature of administrative law. At the entity level it was defined by its tax-exempt “purpose,” according to section 501(c) of the Internal Revenue Code of 1954. Congress, the IRS, and the courts worked hard to limit nonprofit corporations to their “primary purposes.” In the postwar decades, tax-exempt nonprofits were excluded from industrial profit making (from making ROI), from delivering public welfare, and from political campaigning, as the nonprofit corporation struggled to find its place in postwar industrial society. The fiscal state had faced the challenge of how to define “income” for purposes of the corporate income tax. The IRS faced the same problem with nonprofit corporate income tax exemption. The language of the exemption continued to read, “no part of the net income of which inures to the benefit of any private stockholder or individual.” What kind of profits could nonprofits not make, and for what purposes? In 1921 the IRS first attempted to formulate a working rule: An organization which would other wise be exempt from taxation but which operates in a nonexempt manner is not entitled to exemption. . . .

From Fiscal Triangle to Passing Through

And furthermore an organization which is ordinarily exempt but which owns property in excess of its needs and carries on industrial pursuits distinct from its exempt activities is not exempt from taxation. 55 The qualifier “industrial pursuits” was critical. Nonprofits, even if the income ultimately supported its tax-exempt “purpose,” could not make industrial profits—income extracted from industrial capital. The IRS would hold, for example, that if a nonprofit corporation “manufactures” articles “for profit” it was ipso facto not operated for tax-exempt “purposes.” It was not exempt, even if those profits did not “inure” to the “benefit of individuals.”56 This became the “primary purpose” test.57 Nonprofit corporations challenged the IRS. The  U.S. Supreme Court decided the case of Trinidad v. Sagrada Orden de Predicadores in 1924.58 Here, the IRS had stripped the corporation, a religious order, of tax exemption because it was not “operated exclusively” for its religious purpose. The corporation admitted to producing and selling wine and chocolate, although only to provide wealth for its “religious” and “educational” purposes. The Court found against the IRS, declaring that since “fi nancial gain” was not the purpose of the nonprofit corporation’s profit making, it should be exempt. Nevertheless, after Trinidad, the IRS refused to rewrite its administrative rules. Only in 1934 did it issue a new guideline: A corporation other wise exempt . . . does not lose its status as an exempt corporation by receiving income such as rent, dividend and interest from the investments, provided such income is devoted exclusively to one or more of the purposes specified. . . . 59 The restriction “exclusively” was strong. Regardless, in an age of industrial capitalism, nonprofit corporations could not make industrial profits. However, universities (501(c)(3) tax-exempt organizations) could earn rental income from leasing properties to support their educational purpose. Generalpurpose foundations could invest their endowments in financial markets, in pursuit of financial profits, to redistribute wealth to nonprofit corporations. Unions (501(c)(6) tax-exempt organizations) could not engage in workerowned industrial enterprises and keep their tax exemption, but they could earn income from the investments of their pension funds.60 For-profit corporations engaged in industry would suffer no competition from nonprofits. But other profit-minded corporations might, and protested.

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In 1947 the Treasury conducted a study, and the House held hearings, on the commercial activities of nonprofits.61 The result, the passage of an Unrelated Business Income Tax (UBIT) in the Revenue Act of 1950, further barred taxexempt nonprofit profit making. Nonprofit earned income not exclusively channeled to the “primary purpose” of the corporation would be taxed. Further, corporations set up as independent subsidiaries, to earn profits that were then funneled to nonprofits, would no longer earn tax exemption. The most infamous example was the macaroni-making Mueller Pasta Company, donated to New York University in 1947, but which the University, in the end, had to sell off. The federal government demanded that nonprofit corporations “integrate” their activities into a single corporate identity. With the passage of the UBIT, the final prohibition on nonprofit profit making was in place. In the two decades after WWII, the majority of nonprofit revenues came from philanthropic donations, as per capita personal donations— despite high marginal rates of taxation—peaked. In 1952, Congress further elevated personal income tax deductions from 15 to 20 percent of income.62 High rates of taxation and high rates of philanthropic giving correlated.63 Philanthropic wealth buoyed postwar nonprofits. A lesser percentage of nonprofit revenues came from either earned income or government sponsorship. Before the fiscal triangle formed, nonprofit corporations—led by the great general-purpose foundations—had carried out welfare tasks other industrial societies normally reserved for states.64 In the midst of the Depression, President Franklin Delano Roosevelt took office intent on providing more federal welfare, but also intent on keeping private charity and public welfare separate. Further, many in his administration hoped to replace private charity with public welfare. A 1933 federal executive order mandated that federal welfare must be delivered by state agencies. It could not be channeled through private nonprofit corporations.65 In the end, state welfare did not subsume private charity. The effort shattered, as Elisabeth Clemens has put it, “on both the complex inequalities of American society and the political as well as fiscal reserves of the Roosevelt administration.” As early as 1935, FDR backtracked, imploring nonprofit corporations to complement public welfare. That made for an impor tant precedent for the postwar decades, when—inspired by the same wartime nationalism that legitimated high rates of personal and corporate taxation—both a “nationalization of charitable sensibilities” and a “highly generalized reciprocity among citizens,” according to Clemens, led to the golden age of mass philanthropy.66 National nonprofits, whether mass charities like the United Way, or mem-

From Fiscal Triangle to Passing Through

bership organizations like the PTA, flourished after WWII like never before or since.67 Postwar American public intellectuals had them in mind when they invoked America’s flourishing civil society and “nonprofit sector.” Public-spirited charity was one thing. Politics was another. Congress first indicated in 1935 that tax-exempt nonprofit corporations should not engage in tax-subsidized political influence. Almost two decades later, Congressman Lyndon  B. Johnson attached an amendment to the Revenue Act of 1954 banning tax-exempt organizations from the ability to “participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of any candidate for public office.”68 In response, the IRS created what would become the allowance in the 501(c)(4) classification— created in the 1954 code technically for “social welfare organizations”—for corporations to “educate” the public on political issues and legislation, just not advocate for particular electoral candidates. The IRS held in a 1955 ruling that such 501(c)(4) organizations would enjoy tax exemption, but that contributions to them would not themselves be tax deductible.69 Thus, the postwar nonprofit was hemmed in. Congress placed limits on nonprofit revenue generation and political activity. The New Deal welfare state displaced much private charity. For-profit corporations newly exercised “social responsibility.” Tellingly, the nonprofit form did not grow very quickly. For-profits outnumbered nonprofits by a factor of two to one at the turn of the twentieth century. By the middle decades, it was three to one.70 What exactly did postwar nonprofit corporations do? In 1949, Harper’s Magazine wrote of philanthropy’s “timid billions,” and in 1956 public intellectual Dwight Macdonald wrote a scathing account of the Ford Foundation’s relative inactivity.71 In 1947, following the death of Edsel Ford, the Ford Foundation had received $321 million in Ford Motor Company stock—to help the Ford family maintain control over the Ford Motor Company while avoiding the inheritance tax (by 1960, the Ford Foundation had an endowment two-thirds the size of all American university endowments combined). Above all, postwar foundations channeled philanthropic wealth to nonprofit cultural and arts institutions, as well as to universities. The university was perhaps the greatest postwar nonprofit corporation, producing the very knowledge with which Americans attempted to understand corporations themselves—not to mention the graduates that entered the corporate ranks, both for-profit and nonprofit.72 Amherst College political scientist Earl Latham declared in The Corporation and Modern

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Society, alluding to early twentieth-century discussions of corporate personality, that “theories of the corporation . . . whether metaphysical or juristic,” yielded “less understanding than do more empirical approaches.”73 The postwar study of corporations had in fact taken an empirical turn. And it was nonprofit corporations, universities—their economists, sociologists, historians, industrial psychologists, business school professors, and law school professors, with their salaries paid by tax-exempt contributions and tax-exempt endowment investment incomes—that produced such an empirical social science. Replacing abstract pre-WWI philosophical discussions of “corporate personality” were disciplinary discussions, which did not always overlap, of “firms,” “interest groups,” “entities,” and “associations.” Berle and Means wrote The Modern Corporation and Private Property under a grant from the Laura Spellman Rockefeller Foundation, at Columbia University. The Corporation and Modern Society was financed by a grant from the Fund for the Republic, at Princeton. The Ford Foundation commissioned university economists Robert Gordon and James Howell to write Higher Education for Business (1959), a classic text in postwar managerial culture and “corporate social responsibility.”74 All of this was emblematic of how, despite the many boundaries separating them, flows of income, knowledge, and people still moved around the fiscal triangle. The nonprofit university was a critical hub.75 In sum, the postwar fiscal triangle took the following shape. The federal government, a warfare and welfare state, had fiscalized the for-profit corporation, a real corporate entity, appropriating the logic of ROI, a managerial metric of profit, as taxable income. It granted income tax exemptions to nonprofit corporations to carry out “public purposes.” Barred from industrial profit making and overt political advocacy, marginalized by the public provisions of the New Deal state, no one might have guessed the bright future nonprofit corporations had in store.

The Nonprofit Transformed The fiscal triangle counted many successes. It mobilized the wealth necessary to fight mass industrial warfare, winning two world wars and projecting U.S. imperial power abroad. At home, it fostered industrial capital accumulation by for-profit corporations—the dominant domestic economic and social institution—giving mass society its mass. It helped achieve remarkably high rates of national industrial economic growth. With high rates

From Fiscal Triangle to Passing Through

of income taxation, it redistributed wealth and narrowed the stark economic inequalities that had attended nineteenth-century industrialization. Tax-exempt nonprofit corporations, whether foundations or universities, funded and produced the very knowledge and categories—whether statistical measurements of national income and growth, or the normative theories of “distributive justice” premised on those metrics—with which to define, achieve, and represent such success.76 The fiscal triangle, in short, was nothing less than the institutional engine of New Deal liberalism. Still, there was much the fiscal triangle failed to do. During the 1960s, with Civil Rights movements and Vietnam War protests, one par ticu lar nonprofit corporation, the university, famously suffered from political unrest. And yet, the entire postwar universe of corporations, for-profit and nonprofit, reflected the sharp inequalities in postwar American life that could not be captured, let alone alleviated, by statistical measurements of economic growth and income equality.77 Having distributive dimensions, these inequalities were more relational in kind—predominately but not exclusively of race, gender, and sex.78 In the nonprofit domain, postwar membership organizations, like the Elks Club or the United States Junior Chamber (Jaycees), were highly segregated along these axes of discrimination and stigma. As social movements formed to advocate for new rights and to redress old forms of inequality that the fiscal triangle did not touch, the nonprofit corporation was transformed. First, barriers to nonprofit incorporation tumbled. Completing the movement for open access to incorporation that began in Jacksonian Democracy, by the end of the 1960s, in all states nonprofit incorporation was no longer a privilege, granted in return for the performance of a “public purpose.” It became a right.79 Before the late 1960s, state judges had disentangled “freedom of association” from the privileges of nonprofit incorporation. That was one reason why national, federated nonprofit corporations dominated the landscape for so long. It was safer to federate with an established nonprofit than to seek another charter—which state judges might disallow for reasons of “public policy.” A proposed corporation might duplicate the efforts of an already existing entity, be a potential cover for communist agitation, or simply be un-American.80 In 1946, for instance, a New York justice turned down an application for nonprofit incorporation from the Boy Explorers of America, for the citizens of New York might confuse it with the Boy Scouts of America.81

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Besides the Boy Scouts, there was another nonprofit corporation chartered under New York’s 1895 Membership Corporation Law (for corporations “not organized for profit”). That was the National Association for the Advancement of Colored People (NAACP), which carried a 1909 charter. In 1956 the Alabama attorney general sought to prohibit the corporation from operating in his state. While the case moved up to the U.S. Supreme Court, in 1957 the Yale Law Journal published a scathing student comment, “State Control over Political Organizations: First Amendment Checks on Powers of Regulation.” The argument was simple. In a polity dominated by “interest groups,” not individuals (corporations chief among them), all individuals had First Amendment free speech rights, as well as Fourteenth Amendment equal protection rights, to prohibit “state-imposed curtailments upon the rights of associations to communicate.” That included the very right of nonprofit incorporation.82 In NAACP v. Alabama ex rel. Patterson (1958), the Court found in favor of the NAACP, and first began to articulate a constitutional right of association (see Bloch and Lamoreaux in this volume).83 A rising generation of civil rights lawyers continued the onslaught.84 The New York Supreme Court relented in 1961, admitting that if “expression” was “lawful,” then those engaging in it were “entitled to a vehicle for such expression.” That vehicle was the nonprofit corporation.85 A for-profit / nonprofit divide, defined at least in part according to purpose, still held strong. The ruling was not applicable to for-profit corporations. The Civil Rights Movement transformed nonprofit corporations in other ways as well. They became not only vehicles of “expression,” which made crucial financial, legal, and expressive contributions to civil rights.86 They also became critical vehicles of the expansion of government-funded welfare ser vices. This was not exactly new. Despite FDR’s attempts to separate public welfare from private charity, the Social Security Act of 1935 had licensed the delivery of modest amounts of federal welfare through nonprofit corporations, mostly nursing homes and hospitals.87 But the New Deal had explicitly forbidden the states from contracting with nonprofits to administer and deliver federal welfare. The Great Society welfare programs of the 1960s marked a thorough transformation.88 The Social Security amendments of the 1960s, creating Medicare and Medicaid, explicitly approved state contracting with nonprofit corporations. Further, the New Deal had also forbidden states from using nonprofit wealth as the “matching funds” oftentimes necessary to receive federal grants. The Social Security Amendment of 1967 lifted that restric-

From Fiscal Triangle to Passing Through

tion. Further, the Economic Opportunity Act of 1964, the centerpiece of President Johnson’s War on Poverty, created in federal law a new nonprofit corporate form—the Community Development Corporation (CDC)—to fi nance and deliver a vast array of public goods, beginning with public housing. Robert F. Kennedy’s Bedford-Stuyvesant Restoration Corporation— funded jointly by the federal government with the Rockefeller Foundation and the Ford Foundation, among other nonprofits—was the first. None of this was a coincidence. Nonprofits and the federal government made policy together, and the Ford Foundation, for some time, was arguably the Kennedy administration in exile. John W. Gardner, for example, was the president of the Carnegie Foundation (1955–1965) before becoming LBJ’s Secretary of Health, Education, and Welfare (1965–1968), and then a Stanford University professor. (He was also on the corporate boards of, to name only a few, the Metropolitan Museum of Art, Shell Oil Company, and Stanford.)89 In the end, a radical transformation had occurred, not only in the expansion, but also in the delivery, of public welfare. By 1974, in nonprofit corporate revenues, government funding ($23.2 billion) had already come to nearly equal tax-deductible charitable contributions ($25.3 billion).90 By the end of the decade it would surpass them. And, by then, from less than 25  percent of state welfare ser vices during the 1950s, nonprofit corporations had come to deliver the majority of state-funded welfare ser vices.91 Unsurprisingly, New Deal liberalism’s antagonists turned against nonprofit corporations.92 Already in 1952, Georgia Senator Eugene Cox had formed a committee to conduct hearings into the practices of “educational and philanthropic foundations.” As the committee’s final report declared: A professional class of administrators of foundation funds has emerged. . . . It has already come to exercise a very extensive, practical control over most research in the social sciences, much of our educational process, and a good part of government administration in these and related fields. Associated with the excessive support of the empirical method, the concentration of power has tended to support the dangerous “cultural lag” theory and to promote “moral relativity,” to the detriment of our basic moral, religious, and governmental principles. To Republicans like Cox, foundations and universities—while nonprofit corporations—were creations of capitalism. But they had been hijacked by liberals hostile to “ free enterprise.”93 The Cox hearings did not result in

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legislation. Finally, in 1969, after decades of conservative scrutiny, Congress placed tighter administrative rules on general-purpose foundations.94 In 1976, in a highly symbolic act, Henry Ford II resigned as a trustee from the Ford Foundation. Before he left, he too reminded the Foundation that it was a “creature of capitalism”—a “statement that, I’m sure, would be shocking to many professional staff in the field of philanthropy,” let alone the many institutions, “particularly the universities,” which were the “beneficiaries of the foundation’s grant programs.”95 If the 1970s were a time of liberal critique of big business, they were also a time of conservative critique of the largest and most powerful nonprofit corporations. In little more than a decade, nonprofit corporations had been utterly politicized. Incorporation, increasingly associated with “freedom of association,” had transformed from a privilege to a right. At the same time, civil rights advocacy, the liberalism of the great postwar foundations and research universities, as well as the cooptation of nonprofits by LBJ’s Great Society, had prompted a conservative backlash. Nonprofits reacted by doubling down on the idea of a “nonprofit sector,” which was “independent,” “third,” and “voluntary.” In 1977, John Gardner co-founded the Independent Sector, a national organization of nonprofit organizations. John  D. Rockefeller III pledged $250,000 to fund the first university research center on nonprofits, Yale’s Program on Non-Profit Organization (1978).96 Nevertheless, by then, the nonprofit corporation—subject to both liberal and conservative critiques—had been transformed. But more change was to come, and the nonprofit corporation was to play an even more crucial role in American life. Except now the driver of change came from the opposite two ends of the fiscal triangle.

Passing Through The anchor of the fiscal triangle was industrial capital. Investment in it was the basis of postwar ROI. Corporate industrial profits were an impor tant source of the state’s tax base. The IRS cast suspicion on nonprofit profit making that involved “industrial activity.” If industrial capital ceased to anchor U.S. political economy, change of some form was bound to follow, and this was precisely what happened. During the 1970s, corporate industrial profit making, as a relative share of total U.S. profits, declined. Corporate profit making increasingly occurred in other economic domains, like FIRE (finance, insurance, and real estate).

From Fiscal Triangle to Passing Through

In 1950 manufacturing accounted for almost 50  percent of total corporate profits. FIRE (finance, insurance, and real estate) took 10 percent. FIRE corporate profits first climbed past manufacturing in 1985. By 2000, FIRE took 45 percent of corporate profits, while manufacturing took 10.97 Accordingly, there rose to prominence a more fi nancial metric of profit, rate of return on equity (ROE), which measured profits from shareholder-focused, asset market values—using “mark-to-market” accounting—rather than from managerial and bureaucratic benchmarks of fi xed investments in industrial capital (ROI).98 The turn to FIRE blurred one boundary between for-profit and nonprofit, since FIRE was a region of revenue generation where nonprofits had always been at home. Harvard University has always invested its endowment in financial markets. One wonders if New York University, handsomely invested in lower Manhattan real estate, would today wish to operate a macaroni factory. At minimum, old IRS tax-exemption rules premised on “industrial activity,” and the restriction of nonprofit profit making to “rent, dividend and interest,” no longer mattered so much anymore. Further, corporate income began to elude the state’s fiscal grip. The Korean War corporate excess profits tax raised corporate income taxes to an all-time high of a third of federal revenue. That share first dropped below 10 percent during the 1980s.99 And not only has the top marginal corporate income tax declined, but multinational corporations (engaged in manufacturing somewhere or another or not) have proven adept at shift ing income outside the U.S. state’s fiscal grip.100 In 1956, General Motors publicly reported four domestic corporate subsidiaries—three of them finance-based, the largest by far the consumer finance General Motors Acceptance Corporation. Legally, the industrial corporation itself was one corporate entity, committed to achieving a unitary ROI.101 In 2007, Google Inc. publicly reported the ownership of thirty-five separate domestic subsidiaries—whether it was Google LLC, a limited liability company orga nized in Delaware, or Applied Semantics, a California corporation. Google also owned fi ft y-two international subsidiaries.102 In the 1950s, General Motors had many international subsidiaries. But, say, a General Motors do Brasil repatriated its profits back to its U.S. parent, where they were taxed. Google Ireland Holdings, however, is a corporation that receives profits from Google sales around the world, including from the United States, which it moves to another corporate entity— Google Bermuda Unlimited—where those profits are not taxed. The physical infrastructure of Google Bermuda Unlimited is a mailbox.

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Meanwhile, there is another cause at work besides the globalization of corporate income accounting and subsidiarity. Congress first created an “S corporation” for small businesses and privately held corporations in 1958. Unlike a “C corporation,” an S corporation is a “pass through structure,” in which income is not earned, but merely “passes” or “flows” through— dissolving, as Justice Holmes had once put it, the “nonconductor” between corporate entity and shareholder. Therefore, in an S corporation only individual shareholders and owners are taxed—not the corporate person itself, which, fiscally, does not exist. By the 2000s, the IRS would note that S corporations filed more income tax returns than C corporations. It was not only S corporations. Capital mobilized a variety of new business forms, taxable at the level of the individual only. There were real estate investment trusts (REITs), dating from the 1960s, limited liability corporations from the 1970s, master limited partnerships from the 1980s, and business development companies from the 1980s.103 In 2008 all such “pass through” corporate entities accounted for 63 percent of all U.S. corporate profits.104 Thus, the relative tax burden on C corporations lifted, and the individuals that own financial claims on corporate revenues—the shareholders— were in many instances the only ones left with fiscal identities. When Republican presidential candidate Mitt Romney infamously declared in 2011, with respect to corporate tax policy, that “corporations are people, my friend,” he did not mean that corporations are people (as in they have an independent legal identity), he meant corporations are people (as in, ultimately they are all owned by individual shareholders, who should not be taxed twice).105 In all, “pass through,” literally and figuratively, might be said to be the great emblem of this brave new corporate world. As the old industrial structure crumbled, as institutions became more “porous,” so much income and activity began to pass through for-profits, nonprofits, and the state, in so many dizzying directions, that the boundaries that once separated them began to collapse, and the fiscal triangle began to lose its structure.106 What has so far resulted is extraordinary institutional collaboration and complexity, in which corporations, rather than mass social structures, often became little more than paper entities. Still, there has been at least one great continuity in the final decades of the twentieth century, and that has been the continued state cooptation of nonprofits. The Reagan administration came into office on more pseudoTocquevillian rhetoric. A 1981 “Task Force on Private Sector Initiatives,” in

From Fiscal Triangle to Passing Through

a reversal of the New Deal impulse, looked for ways to replace public welfare with private charity. That did not exactly happen. However, before the Reagan administration, when moving wealth to nonprofit corporations the federal government most often made grants directly to them. Beginning with the Reagan administration, the federal government replaced grants to corporations with consumer-side vouchers and subsidies to individual citizens.107 In 1980, 53 percent of federal contributions to nonprofit corporations came from consumer-side subsidies (mostly because of Medicare and Medicaid). By 1986, it was 70 percent, and the number only continued to climb. For example, the Child Care and Development Block Grant of 1990—extended by President Bill Clinton’s 1996 welfare reforms—granted states the right to choose between grants to nonprofits or vouchers for individual citizen consumers. States chose to funnel 80  percent of federal disbursements directly to citizens.108 Only continuing the trend was “charitable choice,” included in Clinton’s 1996 Personal Responsibility and Work Opportunity Act, which granted citizens the right to purchase welfare ser vices from religious nonprofit corporations. The new emphasis on consumer choice in government social ser vice delivery after 1980 meant that nonprofit corporations entered into new forms of competition with one another. But they also newly competed with forprofit corporations. For instance, in the wake of cuts to the post–Cold War military budget, the profits of the military contractor Lockheed Corporation declined. After the 1996 welfare reforms, the corporation entered into the welfare business, entering contracts with states for “information processing.”109 All told, between 1980 and 2000, for-profit corporations’ share of government social ser vice delivery contracts climbed from almost next to nothing to 25 percent.110 A parallel and more novel trend was the extension of tax credits to forprofits for the provision of public goods. After 1980, the Department of Housing and Urban Development saw its budgets slashed. The Tax Reform Act of 1986 created the Low-Income Housing Credit (LIHC). The LIHC created inordinately complex networks of corporate entities. Basically, private housing developers purchase tax credits through an intermediary nonprofit corporate “syndicate.” That nonprofit corporation, perhaps drawing in philanthropic wealth too, grants yet another nonprofit corporation the authority to manage public housing properties. It then allocates the tax credits, and the income earned from the development, to the private entity (corporate or not) who put up the capital. A proliferation of new nonprofit corporate forms

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blended government funds, tax credits, philanthropic wealth, and profitseeking capital. For example, the leading LIHC “syndicator” became the Local Initiative Support Corporation—created by the Ford Foundation in 1979, thereafter tapped by a federal government itself in retreat from the direct public provision of its ser vices.111 In sum, the delivery of public goods—state authority itself—fragmented, hollowed out, and devolved onto nonprofit corporate actors.112 And so, governments channeled more fiscal wealth to corporations, nonprofit and for-profit. Yet, at the same time, nonprofits as a whole came to rely much less on fiscal wealth. Despite the continued expansion of government social insurance programs like Medicare, federal discretionary spending leveled. As tax-deductible donations, in unison with marginal tax rates, declined as well—from 53 percent of nonprofit revenues in 1964 to 24 percent by 1993—nonprofit corporations became more dependent on investment income and ser vice fees for their revenues.113 The trend was most clear in the arts.114 Elsewhere, once civic-minded nonprofits, focused on membership, transformed into professionally managed commercial entities.115 Tellingly, from 1990 to 2004, federal intake from the UBIT grew by 117  percent.116 Meanwhile, the IRS relaxed its rules on nonprofit corporations setting up for-profit “feeder” corporations. In 1999 the American Association of Retired Persons (1951) created two corporate subsidiaries, the AARP Foundation, a tax-exempt charity, and AARP Services, Inc., a taxable for-profit corporation, wholly owned by its parent, which received royalty income from for-profit corporations for their use of the AARP brand to sell products—every thing from insurance policies to hotel rooms. Another nonprofit corporation, the American Farm Bureau Federation (AFBF), was founded in 1911 to represent agricultural interests in Washington, DC. In 1996 it spun off a for-profit insurance subsidiary, FBL Financial Group, with an initial public offering that valued its shares at $8.75.117 Income thus circulated throughout the fiscal triangle in new directions and in new ways. But it was more than just that. The structure itself disintegrated. Everywhere, holes appeared in the walls between governments, for-profit corporations, and nonprofit corporations. New relationships formed. And nonprofit profits became crucial to capitalist profit making. Many nonprofit corporations simply “converted” to for-profit. In 1996 the nonprofit health insurer Blue Cross of California converted to the for-profit WellPoint Health Networks. Or, nonprofits and for-profits—crossing the most ironbound of all postwar barriers—collaborated. The Sisters of Charity

From Fiscal Triangle to Passing Through

of St. Augustine was a Catholic charity that originally operated in Cleveland, Ohio (under an 1851 corporate charter). In the twentieth century, it founded a number of nonprofit hospitals in Cleveland and Canton that were dependent on public funds. When those funds dried up in the early 1990s, the Sisters entered into a joint venture with Columbia / HCA Health Care Corporation, a for-profit. An “intermediary” was created. Into it, the Sisters relinquished their hospitals’ assets, in return for a $200 million payment from Columbia / HCA (with which the Sisters created a series of new nonprofit foundations). Columbia / HCA acquired the right to manage the hospitals, and generate taxable profits, while the Sisters maintained control over half of the hospitals’ boards. The transaction was emblematic of the final decade of the twentieth century.118 One interpretation was that, in the spirit of the times, nonprofit corporations embraced “the market,” abandoning their public purposes.119 But there are reasons to pause. For-profit corporations were abandoning unprofitable industrial capital. Their movement into nonprofit domains can be interpreted as desperate and parasitic, as much as triumphant. Further, organizationally, for-profits followed in the footsteps of the networked nonprofit—first achieved in collaboration with states. Finally, with the rise of new corporate forms during the 2000s—like the “Benefit Corporation,” or the “Low Profit Corporation”—the nonprofit may well be poised to enter the once for-profit domain.120 In a postindustrial setting, the barrier between for-profit and nonprofit has crumbled. As to what will result it is too soon to tell. Perhaps the story is financialization. Perhaps it is one of ‘nonprofitization.’

The New Corporate Personality One trend, however, is clear. What structured the fiscal triangle were two entity-level corporate personalities—for-profit and nonprofit. In an era of passing through, as the distinction between the two has diminished, legal reasoning has focused on protecting the rights of the individuals who comprise corporations rather than corporations’ entity-level purposes. It seems corporations themselves are no longer weighty enough structures to block, or at least shape, such rights. The old wine of late nineteenth-century American “contract” or “partnership” theories of the corporation has been poured into new bottles. Now, rather than administrative law regulating corporate power on behalf of American democracy, constitutional law protects individual rights, freeing corporate power.

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For one, after 1980, new, transactional theories of the corporate entity began to conceive of the corporation as a “nexus of contracts” between individuals. They underscored not managerial power but the contractual “principal-agent relationship” between shareholders and managers. This was complicit, in academic economics, popular business thought, and corporate law, with a new emphasis on “shareholder value.” A more financial conception of the for-profit corporation displaced an industrial one.121 Less noted, during the 1980s academics developed a parallel new theory of the nonprofit corporation. The economist Henry Hansmann made impor tant contributions to the new shareholder-centered view of the for-profit corporation, but also wrote a landmark article in 1980 defining nonprofits not according to their public purpose, or even limitations on their profit making, but rather by their “nondistribution constraint.” What distinguished nonprofits was only the absence of share capital, or the absence of shareholders’ financial claims on the distribution of their profits.122 No longer were the interests of individual shareholders subdominant in theories of the corporation. Increasingly, they were definitional. The emphasis on individual interests was visible elsewhere, including law, where individual rights—not the purpose of the corporate entity—became the new definitional pivot. That is, rather than defi ned, at the entity level, by their federal tax-exempt “primary purpose” in section 501(c), nonprofits became conductors of individual rights. The shift was noticeable with the U.S. Supreme Court decision, Regan v. Taxation with Representation (1983). Taxation with Representation, a 501(c)(4), exempt for the purpose of “social welfare,” was incorporated to lobby against corporate income tax avoidance. But then the corporation applied for 501(c)(3) status so that it could receive tax-deductible contributions from corporations and individuals, claiming it fulfi lled the purpose of “education.” The IRS refused it 501(c)(3) status, ruling that Taxation with Representation “substantially” engaged in political lobbying. The corporation sued, claiming violation of its First Amendment free speech rights. Justice William Rehnquist wrote the majority opinion, affirming the prohibition of 501(c)(3) political speech. The federal government was not required to subsidize speech with tax deductions. But then Rehnquist—foregrounding the rights of individuals that pass through corporate forms, rather than reasoning from the standpoint of the purpose of the corporate entity—blurred the boundary between 501(c)(3) and 501(c)(4). Taxation with Representation could simultaneously be both, sharing the same physical address, staff, and board—so long as tax-exempt contributions

From Fiscal Triangle to Passing Through

to its 501(c)(3), for “education” on political issues, did not directly fund political lobbying, or “social welfare,” through its 501(c)(4). For, the same rights, and wealth (protected speech), passed through 501(c)(3) and 501(c)(4) forms.123 The Court even poked holes in the walls federal administrators had established between 501(c)s and Section  527 organizations (not corporations but tax-exempt “action organizations” to influence elections, created by the Federal Election Campaign Act of 1971).124 No different from the future organizational shape of Google, Inc., from this moment nonprofit corporations organized themselves through overlapping, cross-owned nonprofit corporate entities—which exist, basically, only on paper. There is, for instance, a National Resource Defense Council, Inc., a 501(c)(3) organization, an NRDC Action Fund, a 501(c)(4), and an NRDC Environmental Accountability Fund, a Section 527 organization. In response to Regan, the IRS and the Federal Election Commission (c. 1971) rewrote its administrative guidelines. Indeed, increasingly attentive to constitutionally protected individual rights, the courts seized the reins on the regulation, or lack thereof, of nonprofits. Political speech was but one constitutionally protected individual right that would newly flow through them. At stake in another landmark case, Roberts v. United States Jaycees (1984), was a Minnesota antidiscrimination law that compelled the Jaycees to open its membership to women. Justice William J. Brennan’s majority opinion acknowledged that the Jaycees was a “nonprofit national membership corporation,” incorporated to “pursue such educational and charitable purposes as will promote and foster the growth and development of young men’s civic organizations.” The Court upheld the Minnesota law. But it also incorporated an expressive individual “right to associate” into the First Amendment.125 Similarly, in Boy Scouts of America v. Dale (2000), now Chief Justice Rehnquist, citing Roberts v. Jaycees as precedent while reaching an opposite outcome, permitted the Boy Scouts to exclude homosexuals. The exclusion, Rehnquist reasoned, had absolutely nothing to do with the purpose of the nonprofit corporate entity. It was merely an exercise of the constitutional individual right to “expressive association.”126 On the one hand, the Supreme Court extended arguments first made by young civil rights lawyers in the 1950s and 1960s who argued that nonprofit incorporation should be a right open to all, on grounds of “freedom of association.” On the other hand, there was a key difference. Advocates of nonprofit incorporation had sought to stamp the “purpose” of the nonprofit corporation with freedom of association. In this spirit, a 1960 Howard Law

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Review article had remarked, “If we are individualists now, we are corporate individualists.”127 Forty years later, what was striking about Boy Scouts was not only Rehnquist’s invocation of the freedom to associate on behalf of exclusion rather than integration. Moreover, one would never have known that the Boy Scouts of America even was a corporation, clothed by its charter with state-granted privileges. The word “corporation” appeared not once in Rehnquist’s decision.128 The weight of the decision hinged merely on the enunciation of an individual’s right to “expressive association.” As the Court went about creating a right of “expressive association,” confusion and irony abounded. For one, Congress had not updated 501(c) classifications in decades. As of 2014, there were twenty-nine different types of 501(c) organization. The final one, 501(c)(29), a Qualified Nonprofit Health Insurance Issuer, was created by the Affordable Care Act of 2010. The previous entry, 501(c)(28), is a National Railroad Retirement Investment Trust. A third of the way down the list, 501(c)(23) was created for organizations that existed before 1880. Throwing its hands up, the American Bar Association began to recommend that nonprofit corporations, in addition to a “nondistribution constraint” to shareholders, like for-profits be restricted only to a “lawful purpose.”129 And so, while the Supreme Court created a constitutional right of “expressive association,” nothing like an “expressive” purpose ever entered into the tax code. Entity-level purpose withered as a legal classification and regulatory tool. The IRS, responding to court decisions, let 501(c)(4)—for “Civic Leagues, Social Welfare Organizations, and Local Associations of Employees”—catch “expressive” activity. Which was telling. Administrative agencies, once assertive regulatory authorities, more and more found themselves rewriting their rules in response to the constitutional decisions of federal courts. Second, despite the newfound right to “expressive association,” in the final quarter of the twentieth century nonprofit corporations became far less expressive. Theda Skocpol speaks of a transition from “membership” to “management.” Beginning in the middle of the 1970s, membership in national federated nonprofits, like the Elks Club and the PTA, absolutely plummeted, never to recover.130 Nonprofits became “memberless entities,” “bodiless heads,” used by other persons and entities according to their own interests.131 Today, through nonprofits states funnel vast government income, to carry out public tasks. From nonprofits, for-profit corporations extract tax credits and income. The redistributive channels of the fiscal triangle

From Fiscal Triangle to Passing Through

drying up, levels of income and wealth inequality reappear that were not seen since long before it locked into place.132 Wealthy individuals, across the ideological spectrum, funnel tax-exempt, and sometimes tax-deductible, income across and through nonprofits for a variety of political and partisan ends, while the courts protect their prerogatives to do so. Regulators remain on the defensive, at best. If there still is a fiscal triangle, the federal government, namely the Congress and the Executive—vested with carry ing out the public interest in American democracy—can hardly be said to still authoritatively stand at the apex. It is in all of these contexts that even more recent U.S. Supreme Court decisions must be placed. Both Citizens United v. Federal Election Commission (2010) and Burwell v. Hobby Lobby (2014) are quintessentially pass through decisions. In Citizens United, the majority opinion not only reasoned from the rights of individuals to engage in constitutionally protected speech through the nonprofit corporate form. It also invoked the rights of individuals on the opposite end— citizen rights, as it were, to consume unfettered speech from corporations.133 Reasoning thus, and issuing a ruling, seemingly, broadly applicable to all corporations, for-profit and nonprofit, the Court leveled another blow to the already feeble wall between for-profit and nonprofit corporations.134 Hobby Lobby went further. Justice Samuel Alito, writing for the majority opinion, was explicit. The Court considered not Hobby Lobby Stores, Inc. the corporation, at the entity level, but rather the rights of its individual employees, officers, and shareholders. With that premise, ignoring the purpose of the corporation, Alito reasoned, coherently enough, that for the case at hand there could be no meaningful distinction made between “nonprofit corporations” and “for-profit corporations.” The Court was thus prepared to grant to a for-profit corporation, in addition to constitutional protections of its shareholders’ property rights (see Bloch and Lamoreaux in this volume), an “expressive” liberty right of the kind first applied to nonprofits.135 In this instance, because of the Religious Freedom Restoration Act of 1993, a federally granted religious exemption for nonprofits operating under the Affordable Care Act must be made applicable to a “closely-held” for-profit corporation. Justice Ruth Bader Ginsburg wrote the lead dissent, appealing to the purpose of the organization at hand (in this case to distinguish between religious organ izations and for-profit corporations). Purpose was old reasoning, with good authority. But after Hobby Lobby, that will not so much be the case.136

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The fiscal triangle is not coming back. Perhaps it is time to think about and legally design corporations in new ways. For now, in the twenty-first century, the fiscal triangle continues to crumble, and corporations, ever more resembling one another, resemble sieves—paper entities through which the rights, actions, and wealth of individuals merely pass through.

CHAPTER 7

The Supreme Court’s View of Corporate Rights Two Centuries of Evolution and Controversy MARGARET M. BLAIR ELIZABETH POLLMAN

To the surprise of many ordinary citizens not schooled in constitutional or corporate history or law, the Supreme Court, in two recent decisions (Citizens United1 and Hobby Lobby2), seemed to announce that corporations have some of the same First Amendment rights as individuals, notably freedom of speech and freedom of religion. The sound bite version of the Court’s logic in these two cases is that corporations are recognized by the law, for many purposes, as “persons,” and that the Court therefore found that corporations have rights and protections that human persons would have in the same contexts.3 While this “logic” oversimplifies what the Court said and meant, these cases have reignited an old and serious debate among legal scholars and policy makers about arcane questions of what corporations are, what functions they serve, and what stance the law should take toward them. Corporations have been around, and have been controversial, going back well before the U.S. Constitution was written. Adam Smith was famously critical of socalled “joint stock companies,” which were early organizations with many features of corporations, in his 1776 book Wealth of Nations,4 for example, and Edward Thurlow, 1st Baron Thurlow, is reported to have observed later in the eighteenth century that corporations could be dangerous because they have “neither bodies to be punished, nor souls to be condemned.”5 The corporate form is so important to the organization of business activity, however, that it is difficult to imagine modern life without corporations—and inevitable that courts must confront complex questions about what rights and responsibilities these organizations have under the law. In this chapter, we focus on the constitutional questions and controversies involving corporations that have been brought to the Supreme Court 245

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over the last two centuries to better understand how the Court has answered questions about the nature of corporations over time to bring us to where we are today. What understanding did the Court have about the function of corporations in the economy and in society as it was deciding key early cases on the constitutional rights of corporations? As corporations changed over time, did the Court’s understanding of corporations, and the rights they should have, evolve too? To answer these questions, we examine the key cases involving the constitutional rights of corporations, set in the context of the historical, economic, and political circumstances surrounding those cases. We show that in nineteenth-century case law, the Court characterized corporations as associations of persons acting collectively through a common name. While much armchair criticism of the Court’s decisions, especially of Citizens United, has focused on the idea that the Court attributed “personhood” to corporations in extending them constitutional rights,6 we show that when the Court extended constitutional rights to corporations in the nineteenth century it instead did so on the grounds that it was necessary in order to protect the rights of the natural persons that the corporation represented. The Court’s use of the word “person” in reference to corporations throughout the nineteenth century can be understood as a shorthand expression for a legal entity which represents a group of individuals, rather than an ontological assertion about the nature of corporations. Further, we show that throughout most of the nineteenth century, this view of corporations as associations of individuals acting through a legal entity was not out of step with what the actual population of corporations in the United States looked like. By the end of the nineteenth century, and certainly by early in the twentieth century, however, this view of corporations was no longer a good description of many corporations, especially the huge, professionally managed and widely held corporations that came to dominate the U.S. economy by that time. Th roughout the twentieth century, and into the twenty-fi rst, the corporate form has been used for a wide variety of organizations. Some of these, such as certain membership organizations or nonprofit corporations dedicated to policy analysis or advocacy, can be reasonably characterized as legal entities representing associations of individuals. But many of the most prominent corporations that came into existence at the end of the nineteenth or early in the twentieth century, as well as many corporations today, were publicly traded, with thousands of shareholders, many of whom trade rapidly in and out of the stock, and some of whom may trade in derivative se-

The Supreme Court’s View of Corporate Rights

curities that can leave them with voting rights but no economic stake in the company, or even with financial interests that conflict with the health and performance of the corporation. Over the twentieth century, such corporations also have carefully cultivated branded identities intended to distinguish the corporation from any of the specific individuals involved in them,7 and hierarchical, self-perpetuating professional management structures. From this tracing of case law and history, this chapter observes that the Supreme Court’s jurisprudence on corporate rights has not evolved to reflect the transformation that has taken place in the types of corporations in existence, or to distinguish the full variety of uses of the form. Importantly, the Court has also failed to articulate a principled and consistent rationale for its expansion of corporate rights. In the fi rst section of this chapter, we examine the key cases involving the rights of corporations that the Court heard in the nineteenth century. We show that, in each case in which the Court recognized a corporation as having a right, the Court derived such right from the human persons that the corporation was seen as representing. In the second section, we review what historians have taught us about the population of corporations in the nineteenth century and look explicitly at the structure and character of the corporations involved in the early cases to show that, in impor tant ways, they were rather typical of the corporations in existence at the time. Then we explore the dramatic changes that took place at the end of the nineteenth century and early in the twentieth century in the types and character of corporations in the economy. In the third section, we consider how the Court dealt with new questions coming before it in the twentieth century about the rights and liabilities of corporations to consider whether the Court’s jurisprudence took account of these changes. We explain that the Court dealt with these questions in a somewhat ad hoc way, sometimes continuing to rely on a view of corporations as associations of individuals acting through a legal entity. Where that argument could not reasonably be sustained, the Court sometimes turned to an instrumental rationale, arguing that extending the right in question to the corporation served some public purpose. These cases have engendered continuing controversy, especially where competing interests have been at stake behind the corporate form and it has been unclear exactly whose rights are being protected. We conclude by observing that this controversy stems, at least in part, from the Court’s failure to take account of the changes in the use of the corporate form since it began addressing the treatment of corporations under the Constitution.

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Nineteenth-Century Supreme Court Cases Involving the Rights of Corporations Our inquiry into Supreme Court jurisprudence on corporate rights starts with the observation that the U.S. Constitution does not expressly refer to corporations. The task of interpreting how to treat corporations under the Constitution was left to the courts from the very beginning.

Early to Mid-Nineteenth-Century Case Law From the country’s early years through the Civil War, the key Supreme Court cases involving the constitutional rights of corporations reflect a view of corporations as artificial entities representing identifiable groups of individuals. The Court used this view in a number of limited rulings to protect the contract and property interests of those individuals. Generally, but not always, the Court looked to the shareholders as the individuals represented by a corporation. In cases where this approach posed a challenge—either because the corporation had no shareholders, or where there were other complicating factors—the Court established a simplifying presumption that maintained the logic of looking through the corporation to its shareholders or the Court considered other corporate participants such as founders, donors, and trustees. In this way, when the Court recognized a corporation as having a right, the Court considered the interests of natural persons that the corporation was seen as representing. Further, in doing so, the Court never confused the corporate entity itself with a natural person. The Court also distinguished rights that, by their nature, could only be held by natural persons, and in those cases the Court refused to extend rights to corporations. The Supreme Court began this line of jurisprudence in the 1809 case Bank of the United States v. Deveaux,8 which presented a question concerning diversity jurisdiction, a category of cases that the Framers granted federal courts jurisdiction to hear under Article III, section 2, of the Constitution. This provision, together with the Judiciary Act of 1789, authorizes federal courts to hear cases “between citizens of different states.” The corporation involved in the case, the first Bank of the United States, claimed that it was a “citizen” for the purpose of diversity jurisdiction and that its members, president, and directors were citizens of Pennsylvania.9 The corporation sued in the name of “The President, Directors and Company of the Bank of the United States,” and averred that the defendants, Deveaux and Roberts,

The Supreme Court’s View of Corporate Rights

were citizens of Georgia, making the case “between citizens of different states.”10 The underlying matter in the suit concerned a claim that two Georgia state officers had trespassed on bank property when entering and seizing money in satisfaction of a Georgia tax, which the bank had refused to pay. The Court held that corporations are not “citizens” but could be treated as such for the purpose of diversity jurisdiction because they “describe the real persons who come into court . . . under their corporate name,”11 and that courts should look to the citizenship of a corporation’s shareholders to determine whether a corporation is a citizen of “different states” from the opposing party in a suit. In reaching this holding, the Court viewed the corporation as an “artificial being . . . a corporat[e] aggregate,” representing a group of natural persons.12 A similar view was espoused by the bank, which argued that “[a] corporation is a mere collection of men having collectively certain faculties.”13 Writing for the Court, Chief Justice Marshall explained, “That [corporate] name, indeed, cannot be an alien or a citizen; but the persons whom it represents may be the one or the other; and the controversy is, in fact and in law, between those persons suing in their corporate character, by their corporate name, for a corporate right, and the individual against whom the suit may be instituted.”14 Further, where the shareholders or members of the corporation are citizens of a different state from the opposing party, they come within the intended spirit of diversity jurisdiction provided for in the Constitution.15 Early nineteenth-century case law following Deveaux refined the Court’s approach to diversity jurisdiction. At first, the Court reversed course in Louisville, Cincinnati and Charleston Railroad Company v. Letson,16 holding that a corporation is treated as a “citizen” of the state in which it is incorporated. However, the Court subsequently returned to the earlier conceptual approach from Deveaux of treating a suit by or against a corporation as a suit by or against its shareholders in Marshall v. Baltimore & Ohio Railroad.17 The Court established a conclusive presumption for the purpose of diversity jurisdiction that a corporation’s shareholders are citizens of the state of incorporation. This approach carried on the Deveaux Court’s notion of treating the corporation as a citizen because of the natu ral persons who compose it, while simplifying factual complexity that could arise about actual shareholders.18 The Court confronted the next novel constitutional question concerning corporations a decade after Deveaux, and again it looked to the interests of

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the individuals associated with the corporation to decide the case. The case, Trustees of Dartmouth College v. Woodward, presented an action of “trover,” a wrongful conversion of property, brought by the twelve trustees of Dartmouth College who had been incorporated as “The Trustees of Dartmouth College” to run a literary and religious institution with contributions made for that objective.19 The New Hampshire legislature had subsequently passed acts changing the corporate charter to give the state control, such as by increasing the number of trustees, transferring the property vested in the old trustees to the new board of trustees, and creating a board of overseers appointed by state executives. The Trustees of Dartmouth College challenged these acts as violating the contract clause of the Constitution, which prohibits states from passing any law “impairing the obligation of contracts.”20 The Court held that the corporate charter was a contract within the meaning of the contract clause and that the state legislature had indeed violated this provision by unilaterally amending the charter. To reach this conclusion, the Court considered whether the corporation in question was a public or private institution. The Court explained that if the corporation were public in nature, the state legislature would be free to take control of it in the administration of government, but if it were private in nature, the contract clause would restrain the state legislature from doing so. The answer was not obvious at the time because, as explained in the next section, many, if not all, of the corporations formed in the American colonies in the eighteenth century were formed to serve some public purpose and were regarded as at least quasi-public in nature. In determining that the corporation was private, the Court considered that the corporation involved was a charity school founded by an individual at his own expense, and although incorporation required a government grant, the college was entirely funded by private donations from individuals who wished to promote its religious and educational aims.21 Even though the donors no longer had a direct interest in the property, the Court said, “[t]he corporation is the assignee of their rights, stands in their place, and distributes their bounty, as they would themselves have distributed it, had they been immortal,” and does so through the acts of its trustees.22 Thus, as Dartmouth College was what we would today call a “nonprofit” corporation, and so did not have shareholders, the Court instead looked to the founders, donors, and trustees in identifying the human persons whose rights would be impaired. Thus, by the early nineteenth century, the Supreme Court had begun to develop its jurisprudence on diversity jurisdiction and the contract clause

The Supreme Court’s View of Corporate Rights

with a view of corporations as artificial legal entities representing groups of individuals. These cases not only recognized corporate rights, but also suggested limits to the scope of these rights. In Deveaux, the Court carefully noted that corporations are not, in fact, citizens. In his Dartmouth College concurrence, Justice Joseph Story noted that while corporations may be protected by the contract clause, they are still subject to the “general law of the land,” and the state may reserve power to itself when granting a corporate charter.23 In cases that followed Dartmouth College, the Court showed a willingness to strictly construe the terms of a corporate charter in determining whether it was impaired. 24 For example, in the 1837 case, Charles River Bridge v. Warren Bridge, the Court ruled against proprietors of an incorporated toll bridge who claimed they had an implied exclusive right to provide transportation across the Charles River that was impaired by the state legislature’s grant of a charter to another group of citizens to build a new bridge over the river. The Court expressed concern about the consequences “to the individuals who are concerned in the corporate franchises,” but explained that a corporate charter, even for a business that serves a public need, does not provide an exclusive right unless it is expressly stated.25 This rule of construction is necessary in a country that is “continually advancing,” because the state must retain its power to “promote the happiness and prosperity of the community by which it is established.”26 Furthermore, the Court made clear that corporations do not have all of the same rights as natural persons. In the 1839 case of Bank of Augusta v. Earle,27 the Supreme Court faced a new question concerning the treatment of corporations under the Constitution—whether corporations were “citizens” for purposes of Article IV’s privileges and immunities clause. The question of whether a corporation formed under the laws of one state could enter into binding contracts in another had impor tant implications regarding the rights of corporations in interstate commerce. In Bank of Augusta, an Alabama citizen had refused to honor a Georgia bank’s bill of exchange on the grounds that the bank was a foreign corporation with no right to contract outside of its chartering state. The bank claimed that it was a “citizen” under the privileges and immunities clause and thus had rights to enter another state and conduct valid business. Writing for the Court, Chief Justice Taney explained that while the Court had been willing to “look to the character of the persons composing a corporation” in determining jurisdiction, to do so here would undermine the policy of shareholder limited liability, which had in the previous decade been recognized by a growing

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number of states. The privileges and immunities clause was never intended to give citizens privileges while also exempting them from liabilities, the Court explained.28 The Court therefore held that a corporation was not a “citizen” under the privileges and immunities clause, but recognized that the principle of comity allowed states to voluntarily give effect to the contracts of foreign corporations. Through the mid-nineteenth century, the Court continued to display an understanding of corporations as artificial legal entities representing groups of individuals, and it upheld the limited scope of rights it had earlier recognized. Dodge v. Woolsey is illustrative.29 A plaintiff-shareholder sought to enjoin a bank corporation from paying, and the state from collecting, a tax assessment against the bank that allegedly violated the contract clause because the corporation was chartered under an Ohio statute ensuring a par ticu lar limit on taxes. The majority opinion reflected the influence of Dartmouth College, looking through the corporation to see an injury to the shareholders and ruling that the tax impaired the obligation created in the corporate charter. A dissenting opinion by Justice Campbell argued that the state’s power to tax was inalienable and that the majority’s decision would encourage corporations (“combinations of men”), who were already the beneficiaries of “special privileges and exemptions,” to run to the federal courts to avoid obligations or regulations at the state level.30 In the mid to late part of the 1800s, the Court moved closer towards Justice Campbell’s Dodge dissent, often upholding state police power to regulate corporations against contract clause claims,31 but conceptions of the corporation as an artificial entity representing natural persons remained.32 In addition, the Court in 1868 affirmed in Paul v. Virginia33 its earlier conclusion from Bank of Augusta that a corporation was not a citizen for purposes of the Article IV privileges and immunities clause.

Post–Civil War Case Law The period after the Civil War brought about three Reconstruction Amendments, including the Fourteenth Amendment, which is home to the privileges or immunities, equal protection, and due process clauses.34 With these new provisions of the Constitution, new questions arose regarding how to interpret them, and then how to do so with regard to corporations. The Court’s first major ruling on the Fourteenth Amendment came in the Slaughter-House Cases.35 The Court narrowly interpreted the privileges or

The Supreme Court’s View of Corporate Rights

immunities clause and upheld, as a constitutional exercise of state police power to protect public health, an act of the Louisiana legislature that confined all animal slaughtering in the New Orleans area to a specific slaughterhouse the state had incorporated and authorized to charge fees. Responding to claims from the plaintiff butchers, the Court stated the new amendments should be interpreted in light of their purpose of ensuring the freedom of the emancipated slaves. Consequently, it narrowly read the privileges or immunities clause to distinguish between the rights of state and national citizenship, finding that the butchers’ claims opposing the monopoly and the limits on the practice of their trade were not within the protections of the clause. Several justices dissented, including Justice Stephen Field, who notably criticized the majority for vitiating the privileges or immunities clause, which he believed restricted a state from interfering with a person’s right to pursue a trade.36 Other early cases raising Fourteenth Amendment claims included Munn v. Illinois and the companion Granger cases, in which the Court rejected due process claims to uphold, under state police power, legislation that set maximum railroad and grain storage rates.37 Important questions had emerged in the Slaughter-House Cases and Munn and its associated cases regarding who were the intended beneficiaries of the Fourteenth Amendment and what actions were within the constitutional scope of state police power and authority for the regulation of business.38 It was against this background of early Fourteenth Amendment claims and interpretations that the famous case Santa Clara v. Southern Pacific Railroad came before Justice Field while he was traveling to hear cases in the circuit court in California, as was customary at the time, and then rose on appeal up to the Supreme Court in the mid-1880s. Santa Clara was one of a group of similar tax cases involving railroad corporations, and was associated with a companion case brought by San Mateo County against Southern Pacific Railroad Company and two other railroads.39 These cases, also known as the Railroad Tax Cases, concerned whether a provision in the California Constitution violated the Fourteenth Amendment of the U.S. Constitution by providing that property taxes would be assessed by allowing all property holders, except for “railroads and other quasi public corporations,” to take a mortgage deduction.40 The cases thus posed whether corporations were “persons” for purposes of the Fourteenth Amendment’s equal protection clause in the context of a property and taxation issue. This question had not previously been addressed by the Supreme Court, but a number of business lawyers, including those representing railroads, saw benefits for

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business people if the Court could be persuaded to rule that corporations were persons under the Fourteenth Amendment, and attempted to use these cases for that purpose.41 Justice Field’s circuit court opinions shed light on his understanding and treatment of corporations and his views about corporations and the Fourteenth Amendment. In his Santa Clara circuit opinion, Justice Field ruled in favor of the railroads by broadly interpreting the text of the Fourteenth Amendment and characterizing corporations as associations of persons. He explained that corporations were like partnerships in that “private corporations consist of an association of individuals united for some lawful purpose, and permitted to use a common name in their business,” but different from partnerships in that they also “have succession of membership without dissolution.”42 According to Justice Field, the Fourteenth Amendment protects the property of individuals, who “do not because of such association lose their rights to protection, and equality of protection.”43 He explained that whenever a constitutional protection is accorded to corporations it is because the Court is looking through the corporate name to protect the people composing the corporation. It did not likely escape Justice Field’s attention that the issue presented was a controversial one because of public concern about the large aggregations of capital that railroad corporations represented and the power they wielded. Justice Field had sat on the Court during the Granger cases that accompanied Munn, raising issues about states’ ability to regulate railroad corporation rates. Justice Field, however, was known as a “friend of the railroads.”44 He was supported in his appointment to the high court by California railroad magnate Leland Stanford, and his reputation as a supporter of railroad interests had weakened support for his bid to be the Democratic Party’s presidential nominee in 1880.45 Perhaps with this awareness, in both his Santa Clara and San Mateo circuit court opinions, Justice Field acknowledged the vast property aggregated in manufacturing and other companies, and the large scale of railroad corporations in particular.46 Nonetheless, he went on to note the widespread use of the corporate form for a variety of purposes, ranging from commerce and railroads to charitably serving the sick and needy.47 Looking straight through that corporate form, he reasoned that “[i]t would be a most singular result, if a constitutional provision intended for the protection of every person against partial and discriminating legislation by the States, should cease to exert such protection the moment the person becomes a member of a corporation.”48 He concluded that the

The Supreme Court’s View of Corporate Rights

Fourteenth Amendment protects “the property of the corporators” and that the provision at issue discriminated against certain corporations because of the character of their ownership rather than constituting a valid classification of property based on its nature or use.49 The cases went up to the Supreme Court on appeal. Counsel for the parties focused in their briefs almost entirely on the constitutionality of the taxes.50 Before argument in Santa Clara, Chief Justice Waite stated from the bench: The Court does not wish to hear argument on the question whether the provision in the Fourteenth Amendment to the Constitution, which forbids a State to deny to any person within its jurisdiction the equal protection of the laws, applies to these corporations. We are all of the opinion that it does.51 The opinion, written by Justice John Marshall Harlan, avoided ruling on the question of whether corporations are “persons” within the meaning of the Fourteenth Amendment. Instead, the Court based its decision on a narrow finding that the board of equalization included property in its tax assessment that the board lacked jurisdiction to assess, and thus the assessment was void. In subsequent cases, Justice Field and other justices referred back to Santa Clara as if it settled the proposition that corporations are “persons” under the Fourteenth Amendment, and so it became the law.52 For example, just two years after Santa Clara, in Pembina Consolidated Silver Mining & Milling Co. v. Pennsylvania, the Court held that corporations are not “citizens” for purposes of the Fourteenth Amendment’s privileges or immunities clause, but included as an aside: “Under the designation of person [in the Fourteenth Amendment] there is no doubt that a private corporation is included. Such corporations are merely associations of individuals united for a special purpose, and permitted to do business under a particular name, and have a succession of members without dissolution.”53 A year later in Minneapolis & St. Louis Railroad Co. v. Beckwith, the Court rejected a railroad corporation’s Fourteenth Amendment due process and equal protection claims in the case at hand, but generally affirmed “that corporations can invoke the benefits of provisions of the constitution and laws which guaranty to persons the enjoyment of property, or afford to them the means for its protection, or prohibit legislation injuriously affecting it.”54 Thus, by the end of the 1880s, the Court had stated in its opinions that corporations were included in the

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Fourteenth Amendment’s reference to “persons.” The context was limited to property rights, however, and the Fourteenth Amendment had not yet been used to apply the Bill of Rights against the states.55 Although scholars have sometimes treated references to corporations as either “artificial entities” or “associations” as opposing views of the corporation,56 our reading suggests that the Court used both phrases in the nineteenth century to describe different aspects of the corporate form. The term “artificial” referred to the need for a state charter and the entity’s ability to hold property with characteristics such as perpetual succession,57 and “association” referred to the group of natural persons acting through the corporation. The Court speaks through different voices over time, each naturally having his or her own views and reasons for reaching par ticu lar conclusions. Notwithstanding this inevitable fact, we can observe that through the nineteenth century, the Court only extended corporate rights on a derivative basis to protect the rights of natural persons represented by the corporation and it did so in limited contexts pertaining to contract and property interests.58 The Court’s rulings often balanced private property rights with public welfare, and the Court refused to extend corporations rights where the constitutional provision at issue could not reasonably be applied to artificial entities, such as whether corporations could be “citizens” under the Article IV privileges and immunities clause.

U.S. Corporations in the Nineteenth Century and the Rise of Modern Corporations The Supreme Court’s rulings on corporate rights, discussed above, were made in the context of dramatic developments in the character and role of corporations in the economy and society over time. To understand what the population of corporations looked like in each of the key periods, and whether the corporations before the Court were typical, we review what historians have taught us about corporations in early America and the nineteenth century.

Corporations Prior to 1840 The corporate form of organization has roots going way back, at least to the Middle Ages in Europe, when a pope or king or lord would grant “charters” to cathedrals, monasteries, colleges, hospitals, orphanages, or other eleemo-

The Supreme Court’s View of Corporate Rights

synary institutions, by which the sovereign would recognize the organization or institution as a legal entity separate from its members or administrators, with an indefi nite life.59 In this way, the institution could accumulate property and enter into contracts in the name of the organization, so that when the bishop or abbot or senior administrator died or stepped down, the property would continue to be held by the organization, and would not revert to the king or go to any heirs of the administrator. Also, contract rights and obligations of both the institution and its counterparties would be unchanged. Charters were also granted to towns and boroughs to grant certain self-governance rights to the citizens. And groups of merchants and craft guilds sometimes received charters that granted them monopoly control of, and governance rights over, the practice of their craft or business within a designated territory.60 In the sixteenth, seventeenth, and eighteenth centuries, charters were granted to groups of merchants that gave them monopoly rights over trade or settlement in some specific geographic territory, and governance responsibility for the trade routes to and from that territory. The Levant Company, the East India Company, and the Hudson Bay Company were among the most wellknown of these.61 The chartered guilds and trading companies are generally recognized as the predecessors of modern business corporations. The colonists who settled in North America would have been familiar with the corporate form primarily in two contexts—the trading and land settlement companies mentioned above that created and governed some of the early colonies, and nonprofit organizations such as churches and colleges that had been granted charters to serve communities established in the colonies. By late in the eighteenth century, citizens of the new United States began to use the corporate form as a way to organize and finance certain quasi-public ser vices or utilities, such as bridges, canals, waterworks, banks, and insurance companies. Prior to the founding of the United States, charters for these businesses would have been granted by the king or Parliament in England, or by the governors of the colonies. For example, the charter of Dartmouth College, the protagonist in the Dartmouth College case, was granted in 1769 by King George III.62 After the passage of the Bubble Act in England in 1720, however, corporate charters were granted very sparingly by both the king and Parliament. But in the United States after 1776, the new states took over responsibility for granting corporate charters. State legislatures proved much more willing to grant corporate charters than the king or Parliament had been, but the use of this form for businesses did not

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become popular or widely accepted immediately. Joseph  S. Davis tells us that, as of 1791, only forty corporate charters had been granted in all thirteen states for business activities.63 About half of these (nineteen) were for transportation infrastructure projects, such as canals, bridges, and wharves, and the rest included eleven banks and insurance companies, five local public ser vice companies, three manufacturing firms, one mining company, and one trade company.64 After 1791, the rate at which state legislatures granted corporate charters for business purposes increased, slowly at first, and then accelerating in the nineteenth century, and the form came to be used for a wider variety of activities. Davis estimates that by 1800, 335 business corporations were in existence in the states.65 Each new corporation had to have a charter issued by a state legislature, a process that was costly and contentious and could take a number of years. Professor Eric Hilt tells us that, in these early years, the creation and regulation of business corporations were among the most contentious issues faced by the American states.66 Among the reasons for this were that, in this early period, the corporate charter typically came with some exclusive privilege or franchise, such as the right to control traffic on a specific stretch of river or road, or the right to engage in some business, such as banking, that was other wise closed to private enterprise.67 The corporate form was attractive enough, even for businesses that required no special privileges or franchises, that business people and their lawyers devised a similar form called a “joint-stock company” designed to mimic the benefits of the corporate form, without having a charter. The form combined elements of partnerships and trusts, and could be implemented by means of private contracts. Compared to corporations, the law governing joint-stock companies was less clear—courts often treated them as partnerships68—but they had a significant advantage in that they could be implemented without going to a state legislature for a charter. Because they were implemented through private contracts, however, we do not have good records documenting the prevalence of this alternative form. But it can be inferred from examples of joint-stock companies in the literature that business people found the form quite attractive.69 Once it became sufficiently easy to form corporations, which it gradually did over the first half of the nineteenth century, most business people who did not want to use the standard partnership form chose to use the incorporated form.70 From 1800 to 1839, Richard Sylla and Robert E. Wright count 9,023 more charters that state legislatures issued for business corporations. They esti-

The Supreme Court’s View of Corporate Rights

mate that only about one-third to one-half of these corporations actually raised funds, actively engaged in business, and survived to 1860.71 The corporations that did become active were generally financed by local merchants and wealthy landowners who wanted the ser vices that the corporation would provide.72 Hilt has shown that among corporations created in New York between 1791 and 1826, shareholders were predominantly wealthy, with average wealth nearly three times the average wealth of the general population.73 According to Alfred Chandler, there were still no “middle managers” in business corporations by the 1840s,74 and many businesses, especially in farming, lumbering, mining, manufacturing, and construction, continued to be small, single-unit operations, managed by the founder or his family, and organized as individual proprietorships or as partnerships.75 Those businesses that were incorporated tended to be larger in scale than unincorporated businesses in the same industry.76 Corporate charters were also much more commonly granted in some industries than in others, especially in banking and transportation infrastructure.77 In the 1830s, there was a significant expansion of chartering of banks and early short-line railroads, for example.78 Granting of charters for banks was especially contentious because the charters conveyed a franchise to engage in a potentially very profitable business, a business that could, in turn, be used to provide financial favors to supportive politicians.79 Banks were typically organized with more capital and more shareholders than other types of corporations, except corporations that built and operated transportation infrastructure projects.80 But as Joseph Sommer has observed, banking in the early nineteenth century still had the character of merchants’ “clubs,” “credit union[s],” or “cooperatives.”81 Thus, the corporate landscape in existence at the time of the Supreme Court’s decisions in Bank of the United States v. Deveaux (1809), Dartmouth College (1819), Charles River Bridge (1837), and Bank of Augusta v. Earle (1839) consisted mainly of firms in which mostly local investors pooled their investment capital and obtained charters from the state legislatures so that they could provide a fi nancial ser vice, such as banking, or transportation ser vices, such as roads, bridges, and canals, to their members or shareholders, and their communities. Other corporations were still mostly small to medium-sized, closely held firms not too different from partnerships. In Deveaux, the corporation at issue, the Bank of the United States, was not typical because it was federally chartered and extraordinarily large by the standards of the time, with $10 million in capital. While the government had

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invested $2 million in the Bank, the Supreme Court would have understood that an identifiable group of private citizens had invested $8 million in the bank hoping to earn a profit.82 In Charles River Bridge, the parties in the dispute were a group of wealthy and aristocratic political and society people and their heirs who had invested in the Charles River Bridge in 1785, and members of an opposing group of wealthy and prominent, newly rich commercial elites who invested in building the Warren Bridge, which directly competed with the Charles River Bridge.83 It is not hard to imagine that the Court understood the corporations involved in this case as representing specific groups of individuals. In the years between Deveaux and Bank of Augusta, a number of states passed laws making it clear that shareholders in corporations were protected by limited liability.84 By 1839, the Court was concerned about the implications of equating the corporation at issue, Bank of Augusta, to an aggregation of its members, as it had held previously, because if the corporation was understood as merely an aggregate of its shareholders, this might undermine the argument that shareholders should be protected by limited liability. So the Court stressed instead in its decision the separate entity status of the corporation. But it was still the case that the Court regarded the entity as representing the investors behind the corporation. In Trustees of Dartmouth College v. Woodward (1819), the corporation in question was, as noted before, a nonprofit eleemosynary institution. As such, it was serving a charitable purpose with no thought of profits for investors. The key question at issue was not so much about whether the corporation was distinct from its donors, but about the relationship between such an entity and state authority. If the corporation in question was a creature of the state, did the state have the authority to change its status or its rights to hold and administer property? Was it a “civil institution,” in effect a state college which the state could control? Or was the entity a private entity, created by means of a “contract” with the state, by which the entity could hold property without interference from the state?85 In deciding that Dartmouth College was a private entity, and its charter was a contract, the Court looked to the fact that private individuals had donated land and resources to found the school, and reasoned that the entity represented those private individuals.

Dramatic Expansion in Use of the Corporate Form, 1840–1860 By 1840, it was well established that the corporate form could be used for almost any kind of business venture in the United States, and states were

The Supreme Court’s View of Corporate Rights

taking actions to make corporate charters easier to obtain. Between that year and 1860, Sylla and Wright report that twenty-four of the thirty-eight states and territories passed some form of general incorporation law, either as a stand-alone law, or as a provision in a state constitution.86 They also show that 13,149 more corporate charters were issued by special acts of state legislatures during this period, and they estimate that as many as 4,000 more corporations were chartered without legislative action in states that had passed some form of general incorporation statute.87 During this period, especially in the 1850s, a railroad construction boom produced a three-fold increase in miles of track in existence.88 By 1860, railroad corporations accounted for $2.3 billion in capital investment, half of the total minimum authorized capital of all specially chartered corporations in the United States.89 This was distributed over 2,603 railroad firms—$883,065 per railroad fi rm, a much larger average size per fi rm than in any other industry. These railroads were still quite small by modern standards, rarely more than fi ft y miles long—they mostly connected existing commercial centers and supplemented existing water transportation.90 By 1860, little progress had been made in linking up these railroads into regional and national systems.91 Many of the railroads built in this period had been financed, at least in part, by public funds,92 and had received grants of land and rights-of-way from their local governments. Consequently, they were regarded by the public in much the same way that the corporations that had built the canals, bridges, and roads in the early part of the nineteenth century had been. Legal historian Charles McCurdy wrote of this period that so much local government money flowed into the corporate sector in 1850–1870 in an effort to boost railroad construction, and other wise boost local business, that it was hard to distinguish “purely private businesses from those which executed works in which the public had an interest.”93 Justice William Strong in Olcott v. Supervisors of Fond Du Lac County94 referred to railroads as “public highways,” even when they had been constructed and owned by private citizens. “Their ‘uses are so far public that the right of eminent domain . . . may be exerted to facilitate . . . construction’ and that had ‘been the doctrine of all the courts ever since such conveniences for passage and transportation had any existence,’ ” Justice Strong said.95 John Wallis and Barry Weingast explore the fiscal fallout of all of that public funding provided for railroad construction. Just as had been the case with public financing of canals, bridges, and turnpikes, the early railroads did not always make money,96 and, in the 1870s, numerous local government

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entities defaulted on their debts. States responded, they note, by “extending procedural restrictions and specific limitations on the issue of local government debt in the 1870s.”97 In addition to the railroad firms, Sylla and Wright count 19,816 other corporations formed by special charters through 1860. Just over 40  percent of these (8,028) were other transportation infrastructure firms (canals, bridges, harbors, roads), which tended to be structured and financed much the same way the early railroads were; and 4,551 were financial firms, with more than half of those being banks; 6,148 were industrial firms; and 1,089 were other ser vice firms.98 Of these, banks, railroads, and infrastructure firms tended to have a large number of shareholders (up to several hundred, although generally these investors were local wealthy individuals and business people), and the rest were generally very closely held, and not very different from partnerships.99

Civil War to 1895 The Civil War brought economic devastation to the southern states, but in the northern and western states, the railroads made significant strides toward linking together hundreds of small rail lines into a national system. New manufacturing corporations were also formed, and existing manufacturing corporations grew to unprecedented size by producing the uniforms, armaments, food, and supplies the armies needed for their troops. George Heberton Evans documents an upsurge in the pace of incorporations in the 1860s, “after the outbreak of hostilities,” and then “a decade of readjustment” after the war was over, when incorporations slowed down in the 1870s.100 Growth in corporate activity was also stimulated by the fact that, in state after state, especially after about 1850, legislatures passed some form of general incorporation law.101 General incorporation meant that business people could form corporations on their own, without any action by the state legislature, simply by registering their articles of incorporation with the state. Hilt tells us that “as the state government became more democratic, broader elements of society were enabled to found business corporations or invest in those that were created.”102 Nonetheless, business people used the corporate form much more frequently in some industries than in others. As previously discussed, railroads and banks were nearly always orga nized as corporations. By 1875, according to Hilt, the state of Massachusetts had more than 10,111 business fi rms. Of these, only 601 fi rms (just under

The Supreme Court’s View of Corporate Rights

6 percent) were organized as corporations.103 The rate at which firms incorporated varied significantly from one industry to another. In the chemical preparations industry, for example, six out of nine firms were corporations; in the cotton and linen parts of the textile industry, about half of all firms were incorporated; and in the silk and wool parts of the same industry, fewer than 20  percent of the firms were incorporated. In the boots, shoes, dress trimmings, and other clothing industries, only 1.4 percent of the firms were organized as corporations. In the paper industry, 32  percent of the firms were corporations, but in the printing and publishing industry, only 2  percent of the firms were corporations.104 In industries with higher capitalization requirements, firms were more likely to be organized as corporations than in industries that required less capital.105 Most manufacturing corporations were also very closely held. Hilt tells us that the median number of shareholders in manufacturing corporations as of 1875 was only eighteen.106 The mean number was higher, with forty-seven shareholders per fi rm, reflecting the fact that some corporations had gotten quite large. But the highest number of shareholders in a manufacturing corporation was still only 730, and only thirty-one of the corporations had shares trading on the Boston Stock Exchange as of 1875.107 The largest corporations were textile mills—the 107 corporations in the cotton goods industries had average capitalization of about $450,000, and an average of 100 shareholders. Hilt tells us that these corporations were quite unusual for the time, however.108 This early post–Civil War period saw the very beginnings of the development of huge, professionally managed corporations that dominated by the early twentieth century. This occurred first in the railroad sector. Railroad corporations moved to the forefront of managerial innovation because they had to solve significant logistical problems in coordinating the movement of growing numbers of people and huge amounts of equipment and goods,109 not only within the span of the individual railroads, but also in transferring them from one railroad to the next. Top managers of the hundreds of local and regional railroads thus began meeting to coordinate the establishment of physical connections between the tracks of different railroads, uniform operating procedures, and standardized technology.110 By the 1880s, these gatherings had been formalized into over a dozen different associations, representing specialized functions carried out by railroad managers and employees, and frequently holding meetings to discuss nationwide standardization of procedures and equipment.111

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The activities of these associations led to changes in the design and technology of trains, and of the organization and administration of railroad lines, that greatly improved productivity and through traffic. But the railroads had exceptionally high fi xed costs of capital and equipment relative to the total costs of providing ser vices. Over time, these high fi xed costs encouraged individual railroads to try to cut rail rates to attract traffic from competing lines.112 The resulting rate competition destroyed profits and led to attempts by competing rail lines to try to collaborate with each other to control rates.113 Such efforts at controlling competition repeatedly failed. Worse, they drew the ire of farmers’ granges and merchants’ boards of trade.114 Since they could not control rates across firms, the railroads had significant incentives to merge their operations into much larger firms. In the process, the “railroad barons” such as Charles Crocker, Edward H. Harriman, Mark Hopkins, Leland Stanford, Jay Gould, and Cornelius Vanderbilt became enormously wealthy by causing the railroads they founded or ran to buy out other railroads and merge them into huge systems that operated thousands of miles of tracks.115 Competitive pressures were also beginning to reshape other industries with high capital costs. John D. Rockefeller rapidly expanded Standard Oil in the 1870s, first by trying to collaborate with other refiners through the National Refiners Association, of which Rockefeller was the first president,116 then by controlling other refining and related firms such as pipelines, and eventually by eliminating competitors through tactics many regarded as unfair.117 Writing in the Atlantic Monthly in 1881 about the hearings held in Congress and in some state legislatures into the monopolizing tactics of “the Standard,” as he called the organization, essayist Henry Demarest Lloyd referred repeatedly to the people and firms that were part of Rockefeller’s empire as “members” of “the Standard,” although he also wrote of the organization as a unified entity, and is credited with the first use of the term “octopus” in reference to Standard Oil and other monopolists.118 In 1882, Rockefeller converted his empire from a loose coalition of individual closely held corporations and partnerships to a “trust” form, in which a trust held the shares of Standard Oil Company, and thirty-nine other refining and related companies.119 The business and activities of these firms were then coordinated and managed together by a board of nine trustees.120 In 1885, Standard Oil of New Jersey was incorporated to be the holding company for firms that had been part of the trust. Similarly, Andrew Carnegie’s iron and steel interests had grown to substantial size by 1880, but continued to be or-

The Supreme Court’s View of Corporate Rights

ganized as “closely-owned partnerships” until they converted to the corporate form in 1892.121 And E. I. du Pont de Nemours and Company, which supplied the U.S. military with more than half of the gunpowder used by the North in the Civil War, was organized as a family partnership, and participated with other closely held firms in the Gunpowder Trade Association, until 1899, when it finally combined several firms into one, and incorporated, initially with only six family members as shareholders.122 However, despite the growth in the number and size of corporations in the late nineteenth century, by 1880, Louis Galambos asserts that there were still “hardly any private businesses” that rivaled the railroads in scale, in the sophistication of internal management systems, in the extent to which they used capital raised from anonymous financial markets, or in the extent to which they had a recognizable brand or otherwise had a distinct identity that investors, employees, and customers could understand as being separate from the founders or founding families.123 Likewise, Morton Horwitz has stated that “[b]efore 1890, only railroads constituted ‘large, well-established, widely known enterprises with securities traded on organized stock exchanges, while industrials, though numerous, were small, scattered, closely owned, and commonly regarded as unstable.”124 Until at least the 1890s, therefore, the universe of corporations in the United States consisted of a small number of large and sophisticated railroad firms, hundreds of smaller railroads that had yet to be consolidated into smoothly functioning systems, other transportation and public works firms serving localized markets and generally financed locally, a few large firms in mining and manufacturing, a few large banks, and thousands of much smaller corporations, in a whole range of industries, that were still closely held and operated much like partnerships.125 As of 1890, corporations were just beginning to emerge as powerful entities, independent of their founding families or of the group of businessmen who consolidated to form them. In fact, business historian Leslie Hannah has argued that, as late as 1900, “U.S. business corporations were dominated by plutocratic family owners.”126 Notably, some corporations had begun marketing their products across large stretches of the country, making use of the new railroads to transport goods long distance, and were beginning to use brands to identify the source of their products and assure consumers of the quality of products carry ing the brand.127 The use of brands helped to build a national market for products and, not incidentally, to distinguish corporations from their shareholders and managers.128 Brands later became an impor tant element of

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identity for corporations in the twentieth century and continue to be an impor tant component of the value of corporations in the twenty-fi rst century. But that process was only just beginning by the 1890s. Thus, it was understandable that the Court continued to regard the largest corporations of the time, such as the railroads involved in the 1886 Santa Clara case, as “associations” of individuals. The Southern Pacific Railroad and Central Pacific Railroad, defendants in the cases that had been joined together in Santa Clara, were widely known to be controlled by a group of four railroad barons, called The Big Four. These were Leland Stanford, Collis Potter Huntington, Mark Hopkins, and Charles Crocker.129 Supreme Court Justice Field, who decided the case at the circuit court level and is widely believed to have supported the position of the railroads in the Supreme Court, “socialized with the railroad men,” according to Ted Nace, and “when Leland Stanford organized Stanford University he appointed Field as a trustee.”130 The Court may have continued this associational characterization into the 1890s because many of the largest firms, following the path of the railroads, had, in fact, been formed by joining together groups of smaller firms, and the combinations did not initially have well-integrated, unified, and self-perpetuating management structures. By 1895, however, the great merger movement of the turn of the century was beginning to get under way, and over the next ten years modest-sized corporations in dozens of industries would consolidate into very large corporations, with monopoly, or near-monopoly, control over their markets.131 With the widespread increase in size, liquidity, managerial hierarchy, dispersion of share ownership, and branded identity of corporations that quickly developed during this time, the landscape of corporations truly changed. But by then, the Supreme Court had already laid down some of the important principles that would guide its decisions about the property and contract protections of corporations and continue to shape the constitutional treatment of corporations into the twenty-first century.

1895 to Early 1900s: Mergers and Consolidations and the Rise of Modern Corporations The transformation that occurred in business corporations in late nineteenthcentury America was stunning in its breadth. By 1905, hundreds of very large corporations that controlled large parts of their industries had emerged out of the merger movement that peaked in 1898–1901.132 Transcontinental

The Supreme Court’s View of Corporate Rights

railroads and telegraph lines had tied the nation together into a single economy, technology had allowed ambitious entrepreneurs to build large, high-throughput factories that could provide products for the new mass market, and the federal government had begun to try to figure out whether and how to regulate the new industrial behemoths. Business historian Alfred Chandler observed that “the American businessman of 1840 would find the environment of fifteenth-century Italy more familiar than that of his own nation seventy years later.”133 The business environment of the early 1900s was the product of a merger movement that took hold in the mid-1890s. Naomi Lamoreaux attributes that movement to a dynamic that played out in dozens of industries at the same time, and that followed the general pattern of the earlier railroad mergers.134 Firms that operated only one or a few facilities built new factories that incorporated mass production technology, and expanded rapidly to serve the growing consumer market. But then they found themselves with substantial excess capacity during the depression of 1893.135 Each firm then had strong incentives to cut prices to try to keep their plants operating at high levels of throughput. The result was ruinous competition that threatened to bankrupt hundreds of medium-sized firms.136 Faced with such competitive pressures, firms tried to organize themselves into cartels to keep prices from collapsing, but the cartels were unsustainable. And, in any case, Congress had passed the Sherman Antitrust Act in 1890 that made such collaborative activities illegal.137 So, in industry after industry, the leading business people sought help from law firms to consolidate, and from 1895 to 1904, huge numbers of small to medium-sized corporations merged into very large corporations with monopolies, or near-monopolies, in their industries. Lamoreaux, in her classic book describing this period, asserts that “more than half of the consolidations absorbed over 40  percent of their industries, and nearly a third absorbed in excess of 70 percent.”138 Despite the large size of corporations that resulted from these consolidations, it was not unreasonable for the Supreme Court to continue to regard them as associations, at least in the early years after the merger movement, because they had been formed from groups of smaller, closely held firms, often owned by or closely identified with various entrepreneurs who had initially collaborated in industry associations, and then joined together to try to solve a common problem. In fact, most of the big consolidations were formed from groups of five or more smaller firms that were still identified with their founders or a founding family that held most of the stock.139

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Other changes in the population of corporations that were taking place from the 1890s on, however, challenged the idea that business corporations were just associations of people. During the late 1890s and early 1900s, state laws were changed that made it easy for firms to merge by permitting corporations to hold stock in other corporations and to enter into consolidation agreements on the basis of approval by a majority of shareholders, rather than unani mous approval of shareholders.140 Corporations were also increasingly being controlled by boards of directors, or professional managers, instead of by the founders, or by the shareholders themselves.141 As Chandler famously observed, “The visible hand of managerial direction had replaced the invisible hand of market forces in coordinating the flow of goods from the suppliers of raw and semifinished materials to the retailer and ultimate consumer.”142 And after 1890, “industrials began to be listed on the Stock Exchange and to be traded by leading brokerage houses,”143 a “number of industrial enterprises were beginning to serve the entire nation,” and by 1900, “the names of many integrated, multifunctional enterprises had become household words.”144 Indeed, with the rise of mass retailers, mail-order houses, and chain stores, came the rise of complementary businesses like advertising agencies that began to have a national scope.145 One of the functions of the new advertising business was to promote the sale of packaged products sold under branded labels, for which the manufacturer and distributor of the products were known to be corporations, not specific entrepreneurs or even family firms.146 Thus, the association-of-individuals view of corporations became difficult to sustain as large publicly traded business corporations in the twentieth century increasingly came to have branded identities, professional management, and anonymous shareholders who traded in and out of the stock. The corporate form became the dominant way to organize large-scale business of a type that had never been seen before.

Twentieth-Century Supreme Court Corporate Rights Jurisprudence and the Failure to Account for the Rise of the Huge, Modern Corporation In this final section, we examine how the Supreme Court responded to the rise of modern business corporations. As the Court continued to develop its jurisprudence on corporate rights, did it account for the transformation that had occurred in the types of corporations in existence? Or did it continue to

The Supreme Court’s View of Corporate Rights

use an associational view of corporations in the face of the changed corporate landscape? Has it found a way to treat corporations that reflects the role and function they have come to play in the contemporary era? We believe not. Instead, it adapted to the new corporate environment by introducing other rationales for granting rights to corporations, while continuing to invoke the idea that corporations are simply associations of people. These rationales were sometimes tortured, but were justified as instrumental for achieving what the Court decided was in the public interest.

The Rise and Normalization of the Modern Corporation The merger movement of the turn of the century reduced the number of corporations in existence (because many smaller corporations were joined together to become part of larger corporations), but greatly increased the number of corporations that were very large by the standards of the time. David Bunting estimates that, as of 1898, only 300 corporations in the United States had a capitalization of more than $1 million. By 1904, he says, some 3,000 corporations would have met this size test.147 As the dust settled on the great merger movement, the existence of large corporations with substantial control over the markets in which they were active had become a fact of life for large parts of the U.S. economy. By 1901, “the nation’s railroads had been combined into seven large rail systems.”148 By 1905, a list of the one hundred largest industrial corporations included many that would be recognizable to an observer of the corporate scene a century later: U.S. Steel; Standard Oil of New Jersey (Exxon); International Harvester; U.S. Rubber (renamed Uniroyal in 1961, and acquired in 1990 by Michelin); Swift & Co. (now a subsidiary of Brazilian meat processor JBS S.A.); Armour & Co. (the brand still exists, although the corporation was split in two and acquired by other food processing companies); National Biscuit (Nabisco, today a subsidiary of Mondelez International); E. I. Du Pont de Nemours Powder (DuPont); General Electric; Westinghouse Electric & Mfg. (purchased CBS broadcasting company in 1995, became CBS Corporation in 1997, and was then purchased by Viacom in 1999); National Lead (NL Industries); Kodak, Ltd. (Eastman Kodak); Newport News Shipbuilding (now a subsidiary of Northrop Grumman); and others.149 The one hundred largest industrial corporations together accounted for about 30 percent of all industrial capital in the United States in the early decades of the twentieth century.150

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These huge corporations had publicly traded shares, monopoly or oligopoly control over their industries, and professional management that was not necessarily controlled by a founding family or by the entrepreneur or industry leader responsible for assembling and bringing together the collection of smaller firms that had merged to form the giant corporation. In the early 1900s, they were viewed with fear and suspicion by the consumers of their products, as well as by other business people. Thomas W. Lawson, who identified himself as a “broker, banker, and corporation man,” observed in 1906: “During the last twenty years there has grown up in this country a set of colossal corporations in which unmeasured success and continued immunity from punishment have bred an insolent disregard of law, of common morality, and of public and private right, together with a grim determination to hold on to, at all hazards, the great possessions they have gulped or captured.”151 People were concerned about the newly created large corporations because of their potential to monopolize markets, keep prices high, and squeeze out competitors, as well as their potential for cheating investors by issuing “watered” stock, or other wise roiling financial markets. But over the next two decades, public attitudes toward corporations adapted and softened.152 Although it was still true that investors in the stock of corporations were predominantly upper class, shareholdings became much more widely held in the early decades of the twentieth century. H. T. Warshow reported that the number of individuals who owned corporate stock rose from 4.4 million in 1900 to 14.4 million in 1922.153 His analysis of income tax returns from 1916 through 1922 also showed that a growing share of individuals of relatively modest income reported income from dividends during this period. “The largest and most significant increase in dividends received has taken place in the class of incomes below $5,000 per annum [equivalent to about $72,000 in 2016 dollars154] in the group which includes the ‘wage-earning class,’ ” he noted.155 Corporations were also coming to be managed by large, entrenched bureaucracies, characterized, as Max Weber tells us, by hierarchical decision making, in which power is allocated by abstract rules.156 “Bureaucracies place emphasis on impersonal decisions made by a staff of experts filling positions which, theoretically at least, do not change when the personnel does,” Galambos observes.157 “Men fill these positions on the basis of explicit technical qualifications, and in a normal career they advance in regular steps with the organization.”158

The Supreme Court’s View of Corporate Rights

These changes likely had the effect of changing the image that most people had about what corporations were, and what they did. Galambos’s extensive study of opinions about large corporations and their role in the economy among the middle classes shows a very complex evolution of public opinion, but concludes that by 1919, middle-class Americans found new ways to talk and think about corporate enterprise. Increasingly, they bought goods from companies, not octopuses; they worked for firms, not trusts. By 1919 they viewed these businesses in a relatively impersonal light. In the previous generation many citizens had been upset not just with big business but with Gould and Vanderbilt. After 1902, they focused on J. P. Morgan, Andrew Car negie, and John  D. Rockefel ler, but they still felt that behind the office doors of the largest companies there were real, live men who were, for better or for worse, deciding what should be produced, where it should be manufactured, and how much it should be sold for. If Americans were upset with the trusts, they could locate their enemy and perhaps (via the Clayton Act) even punish him for his wrongdoing. During the First World War, however, public attention drifted away from the plutocrats and empire builders who had personalized the corporation. From the First World War on Americans increasingly looked upon the corporation as an impersonal bureaucracy beyond the control of any one man.159 By fairly early in the twentieth century, what had emerged to dominate the U.S. economy and imagination was, as Galambos tells us, “a new culture, a corporate culture, which included . . . a new public image of the giant corporation.”160 While people were generally concerned about the possibility of abuse of power, they also found that “the bureaucratized corporation shared many values with the middle-class reformers who led the progressive movement in state and national politics.”161 It is important to keep in mind, however, that the analysis above tends to treat “corporations” as synonymous with “big business.” The new entities that emerged at the end of the nineteenth century and shaped thinking about corporations through most of the twentieth century were indeed very big businesses. But while a significant number of very large business corporations have existed in the United States since the early twentieth century, an even greater number of other types of corporations have also existed.162 These other types of corporations include small, closely held business firms,

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nonprofits, cooperatives, and membership organizations, all organized using the corporate form, and many of which have been around in abundance since the eighteenth century. Discussions about the nature and function of “corporations” and concerns about the impact of corporations on public policy today are generally based on an image of corporations as big bureaucratic businesses, not as these other types of corporations. For many of these other types of corporations it may well be appropriate to regard them as associations of individuals. Just as researchers and the general public have often not been careful about distinguishing the type of corporation under discussion, we see next that the Supreme Court often failed to distinguish between large publicly traded business corporations and other types of corporations in its jurisprudence on corporations and constitutional rights.

Corporate Rights Related to Trials and Searches and Other Early Twentieth- Century Developments The new large corporations that had come to dominate the U.S. economy in the early twentieth century presented new challenges for the Supreme Court’s rationale for granting constitutional rights to corporations. For these corporations, it was no longer convincing to proceed as if they were simply legal structures representing an identifiable group of natural persons. Corporations did represent substantial economic power, however, and many people believed this power needed to be tamed, restrained, and controlled. Early in the century, these issues came up in at least two notable contexts: whether corporations, rather than just the natural persons involved in the corporations, could be held liable for criminal acts, and whether corporations could use their financial clout to influence elections. The first of these issues, corporate criminal liability and related rights, came before the Court during this early twentieth-century period and the Court struggled to find a rationale for how to regulate and restrain corporations. Without reflection, it continued to rely on the characterization of corporations as associations of individuals. The second issue would not come to the Court until decades later, but the important beginnings of a system of campaign finance regulation started to take shape, reflecting a similar effort to rein in corporate influence, and the paradigm of shareholders as the persons behind the corporation in need of protection endured. Prior to the early 1900s, common law judges had struggled with the question of whether a corporation could be held guilty of crimes. The dilemma

The Supreme Court’s View of Corporate Rights

arose out of formalist thinking about the nature of corporations and the intent required for crimes. A corporation could only act through human agents and the agents could already be directly tried and punished for their crimes. A corporation was an artificial entity, it had no body, soul, or mind to engage in wrongful conduct or suffer imprisonment. It would be acting “ultra vires,” outside of chartered authority, if it were to commit a crime. English common law, for example, traditionally held corporations liable only for crimes of nonfeasance, such as failure to repair a public convenience, and the first American decisions to hold corporations criminally liable were for nuisance caused by neglect.163 By the mid- to late nineteenth century, some courts had been willing to hold corporations criminally liable based on the tort law principle of vicarious liability of a principal for his agents, but did not go so far as to hold corporations responsible for crimes requiring intent.164 In its landmark decision, New York Central & Hudson River Railroad Company v. United States, in 1909, the Supreme Court held for the first time that a corporation could be criminally liable for acts by its agents.165 At issue was the constitutionality of the Elkins Act, which provided that a common carrier was subject to criminal liability for the acts of its officers, agents, and employees in offering illegal rebates. Counsel for the defendant railroad argued that the Elkins Act was unconstitutional because levying a fine on a corporation for the acts of its employees amounted to taking money from innocent shareholders without due process of law. Th is argument looked through the corporation to its shareholders. In establishing corporate criminal liability, the Court did not ground the development in a theory of the corporation, but rather turned to public policy, explaining that “the great majority of business transactions in modern times are conducted through these bodies,” and “to give them immunity from all punishment . . . would virtually take away the only means of effectually controlling the subject-matter and correcting the abuses aimed at.”166 Without specifically addressing the question of the nature of the fi rm, the Court recognized that many corporations, especially large business corporations, were more than, or different from, the individuals who invested in or acted for the corporations. The Court’s decision in Hale v. Henkel167 from around the same time, however, demonstrated that the Court continued to use previously developed characterizations of corporations as associations and artificial entities, despite growing difficulty in using these views consistently in the context of a

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changing population of corporations. The case involved a subpoena commanding the petitioner, Hale, to testify and give evidence to a grand jury in an action that was pending under the Sherman Antitrust Act against the American Tobacco Company and MacAndrews & Forbes Company, which at the time was the largest manufacturer of licorice paste used in a certain type of tobacco.168 The Court extended Fourth Amendment protection to corporations, following its earlier pattern of relying on the view of a corporation as “an association of individuals under an assumed name and with a distinct legal entity.”169 The Court explained that “[i]n organizing itself as a collective body it waives no constitutional immunities appropriate to such body.”170 The Court gave as examples that a corporation’s property cannot be taken without compensation and that a corporation is entitled to due process and equal protection under the Fourteenth Amendment. At the same time, the Court denied corporations the Fift h Amendment privilege against self-incrimination because that right “is purely a personal privilege of the witness.”171 The Court explained that the privilege against self-incrimination operates only where a witness is asked to incriminate himself. An agent of a corporation retains such protection as to testimony that might incriminate himself, but the agent cannot plead the privilege to protect against incriminating someone else—including the corporation for which he acts. This reasoning emphasized the separate legal identity of the corporation. Although the Court did not explicitly do so, the extension of Fourth Amendment protection and the denial of the Fifth Amendment privilege against self-incrimination could be reconciled by understanding the former as a right that could be held derivatively while the latter could not because it inheres only in a natural person in his or her individual capacity. Notably, however, the Court did not grapple with whether the understanding of corporations that it developed in the nineteenth century was still appropriate for corporate rights questions in the twentieth century. Furthermore, in extending Fourth Amendment rights, the Court moved into a new area of constitutional protection for corporations—one arguably beyond contract and property interests—and it did not stop to explain whether the associational view still fit this purpose, who was included in this characterization, or whether it appropriately described the corporations involved in the underlying matter. After Hale v. Henkel, the Court continued to extend protections related to searches and trials to corporations, on a variety of bases and mostly

The Supreme Court’s View of Corporate Rights

without explanation.172 The Court reexamined Fourteenth Amendment jurisprudence it had developed concerning economic liberty and substantive due process,173 but it did not reconsider the position it had taken in the nineteenth century on Fourteenth Amendment protection for corporations, despite dissenting voices to do so.174 The second context in which the growing power of corporations raised legal questions came up because corporations began contributing significant amounts to political candidates and parties in the 1890s. Public concern immediately arose that corporations were having a corruptive influence on politics.175 For example, at New York’s constitutional convention in 1894, noted lawyer and reformer Elihu Root pushed for a ban on corporate political contributions: The idea is to prevent . . . the great railroad companies, the great insurance companies, the great telephone companies, the great aggregations of wealth from using their corporate funds, directly or indirectly, to send members of the legislature to these halls in order to vote for their protection and the advancement of their interests as against those of the public. It strikes at a constantly growing evil which has done more to shake the confidence of the plain people of small means of this country in our political institutions than any other practice which has ever obtained since the foundation of our Government.176 Although few states succeeded in passing reforms, the movement to ban corporate contributions gained momentum when President Theodore Roosevelt was charged with accepting massive corporate contributions in his 1904 presidential election and when the New York life insurance scandal of 1905 came to light.177 A high-profile investigation revealed that executives at some of the country’s largest life insurance companies had made self-serving campaign contributions with company funds. The public outcry over this scandal and for campaign fi nance regulation expressed the harm as one to the public interest and democracy generally,178 as well as to shareholders of the corporation in particular.179 This latter concern invoked the associational view, by seeing the corporate property as that of the shareholders and not that of a distinct entity. It also recognized, however, that directors had potentially diverging interests from shareholders as the separation of ownership and control became more pervasive. In response to the public call for reform, Congress enacted the Tillman Act in 1907, banning corporate contributions in connection with federal

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elections. President Roosevelt used the formulation of equating corporate money with shareholder money in his support for the Tillman Act: “All contributions by corporations to any political committee or for any political purpose should be forbidden by law; directors should not be permitted to use stockholders’ money for such purposes.”180 The Act became an impor tant foundation on which additional restrictions on corporate political spending were eventually built.181 Although the Court was not immediately asked to opine on corporate speech rights, we will see in the next section that when it did, it magnified its failure to take account of the transformation in the types of corporations in existence and the differences among them.

The Supreme Court’s Development of the Commercial Speech Doctrine, Protections for Corporate Political Spending, and Beyond The question of whether the First Amendment protects corporations did not fully emerge until the 1970s. Before that time, governments had regulated corporate advertising, mailings, and political spending with little question of constitutionality.182 It was taken for granted that the government could regulate commercial speech as part of its power to regulate commerce.183 First Amendment protections had been extended to corporations primarily in the narrow context of media corporations and claims brought by the NAACP in the civil rights era.184 Beginning in the 1970s, two main lines of jurisprudence began to develop concerning freedom of speech for corporations under the First Amendment: the commercial speech doctrine and corporate political spending. In each line of corporate speech jurisprudence, the Court significantly expanded corporate rights. The Court did this partly by continuing to characterize a broad range of corporations as associations. But, in addition, the Court also developed a new rationale for granting rights based on the interests of people who listen to the “speech” of corporations. As in its early jurisprudence, the Court did not confuse corporations with actual living human beings but rather it extended rights to corporations asserting that doing so could protect the interests of natural persons. Yet, the Court lost sight of the limited nature of the early case law that had cabined the scope of corporate rights. And, most significantly, the Court has made broad rulings that focus on “speech” instead of “speaker,” and has elided the task of distinguishing among very different types of organizations that operate using the corporation form.

The Supreme Court’s View of Corporate Rights

The commercial speech doctrine started in 1976 in the Virginia Pharmacy case. At issue was whether the state could prohibit pharmacists from advertising drug prices.185 Consumer advocates brought the case, arguing that the First Amendment entitles consumers to receive information that pharmacists might advertise about the price of drugs. The state argued that the advertising ban benefitted consumers in a variety of ways such as by helping to avoid aggressive price competition that could put pressure on pharmacists to stop supplying professional ser vices in their dispensing of prescription drugs. Consumer advocates countered that the state’s argument was highly paternalistic and that people would be able to act in their own best interests if they were informed. The Court held that advertising, which does no more than propose a commercial transaction, is within the scope of First Amendment protection because of the consumers’ interest in the free flow of commercial information. The Court’s rationale relied on the idea that, in a “ free enterprise economy,” it is a matter of public interest that private economic decisions be well informed.186 Consumers have a right to hear the information; suppression of truthful speech about lawful activity could hurt consumers.187 In his dissent, Justice Rehnquist pointed out that no pharmacist was actually asserting a claim to communicate drug price information through advertising, there was no ideological content to the information, and the information was freely available to the consumers by phone or in person and they could even collect and publish it if they so desired.188 In contrast to the majority, Justice Rehnquist understood the First Amendment as an instrument to enlighten decision making on “political, social, and other public issues, rather than the decision of a particular individual as to whether to purchase one or another kind of shampoo.”189 A few years later, in Central Hudson Gas & Electric Corp. v. Public Services Commission of New York, the Court again ruled on commercial speech, holding that a state could not completely ban promotional advertising by an electrical utility.190 The Court set out its four-part test for considering questions of commercial speech: whether the speech concerns lawful activity and is not misleading, whether the government has a substantial interest in regulating the speech, whether the regulation directly advances that governmental interest, and whether it has a reasonable fit in serving that interest.191 While the Court clarified that commercial speech is a distinct category of expression, warranting less protection, it has not clearly defined commercial speech itself; most have generally understood it as speech promoting a

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commercial activity, product, or ser vice, such as advertising or marketing.192 As the commercial speech doctrine was crafted to protect the listener rather than the speaker, the Court has made no inquiry into whether this extension of First Amendment protection to corporate “speech” treats corporations as having interests in self-expression, and from where such autonomy interests would originate in corporations of different types. The second line of case law concerning speech and corporations also began to develop in the 1970s. It was made possible by the Court’s watershed decision in 1976, Buckley v. Valeo, which drew a distinction between campaign contributions and independent expenditures, but more importantly equated political spending with political speech.193 This interpretation viewed the First Amendment as a limit on campaign fi nance regulation and it consequently laid the foundation for potential First Amendment challenges to restrictions on corporate political spending. The test case came shortly after Buckley and around the same time that the Court was endorsing the novel basis of listeners’ rights to protect commercial speech. In First National Bank of Boston v. Bellotti, the Court held unconstitutional a Massachusetts law that prohibited banks and corporations from spending money to influence ballot initiatives.194 Writing for the Court, Justice Powell first dodged the question of whether corporations have First Amendment rights and, if they do, whether their rights are coextensive with those of natural persons.195 Justice Powell wrote that the court below had “posed the wrong question” with that framing, and instead the proper question was whether the statute “abridges expression that the First Amendment was meant to protect.”196 He could then answer the reframed question affirmatively, because political speech about a referendum issue “is at the heart of the First Amendment’s protection.”197 With this reasoning, the focus was on the speech rather than the speaker. The opinion explains why, in the majority’s view, the corporate identity of the speaker does not deprive this speech of its protection. First, the Court rejected an argument that corporations do not have a right to liberty under the Fourteenth Amendment, the means by which the First Amendment is applicable to the states.198 The Court simply cited the 1886 Santa Clara case in a footnote, and a short string citation to the media corporation cases.199 The Court did not acknowledge that the recognition of corporations as “persons” under the Fourteenth Amendment had been in the context of property interests. Second, the Court pointed out that its recent commercial speech decision in Virginia Pharmacy illustrated that the First Amendment

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“prohibit[s] government from limiting the stock of information from which members of the public may draw.”200 This argument adopted the Court’s new, instrumental rationale for extending a right to a corporation—the need to protect the interests of people outside of the corporation, in this case the listeners, rather than deriving a right from people involved in the corporation. Next, the Court labeled the statute’s identification of certain prohibited areas for corporate contributions and expenditures an impermissible subjectbased speech prohibition.201 Finally, the Court explained that the state failed to show a compelling interest to justify the prohibition.202 Because referenda are held on issues, not candidates, the Court reasoned that the risk of corruption was not present.203 Further, the Court reasoned that shareholder protection was not a compelling interest because “[u]ltimately shareholders may decide, through the procedures of corporate democracy, whether their corporation should engage in debate on public issues.”204 Bellotti represented a significant expansion of First Amendment protections for corporations, a completely different realm from that of the Court’s nineteenth-century decisions concerning contract and property rights, or even the early twentieth-century decisions concerning criminal liability and associated protections. While claiming to focus on speech rather than speaker, Bellotti nonetheless dramatically increased the protections accorded to corporations and shifted the balance in the regulation of corporate influence in the political process. The Court did this without considering on what basis a corporation would hold a First Amendment right and be considered a speaker. The Court avoided identifying the source of the First Amendment value when a corporation spends from its treasury, and whether that logic would apply to all corporations. Furthermore, its reliance on the notion of “shareholder democracy” avoids engaging with the questions of whether and how people interact and express their voices in or through different kinds of corporations. In this way, the Court failed to recognize the reality of large, modern, publicly traded business corporations, in which shareholders often own stock only indirectly through mutual funds or other institutional investors and are frequently rationally apathetic, without information or a voice in the corporation.205 In addition, the stock ownership of modern, publicly traded corporations changes minute by minute, making it nearly impossible to pinpoint a fi xed group of shareholders for whom the corporation would be speaking. Employees generally do not participate in corporate governance mechanisms such as the election of directors or choices concerning political spending. And, in any case, director elections are done for

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purposes other than expressing political beliefs or choosing political representatives. The Bellotti dissents are more consistent with the logic of earlier Supreme Court jurisprudence than is the majority opinion, and the dissents also take more account of the nature of modern business corporations. Justice White’s dissent, joined by Justices Brennan and Marshall,206 emphasized that differences among corporations merited consideration in the extension of First Amendment protections. Noting that there are some corporations, such as the NAACP, “formed for the express purpose of advancing certain ideological causes shared by all their members, or, as in the case of the press, of disseminating information and ideas,” the dissent argued that “corporations operated for the purpose of making profits” could not be viewed in the same light.207 The difference stems from the fact that “[s]hareholders in such entities do not share a common set of political or social views, and they certainly have not invested their money for the purpose of advancing political or social causes or in an enterprise engaged in the business of disseminating news and opinion.”208 Accordingly, there is no reason to believe that when a corporation makes a political contribution or expenditure, it is expressing the beliefs of its shareholders.209 Further, the campaign finance statute at issue would not infringe listeners’ First Amendment interests because corporate political spending “lack[s] connection with individual self-expression,” and it would still leave individuals composing the corporation “free to communicate their thoughts,” even by “form[ing] associations for the very purpose of promoting political or ideological causes.”210 Justice Rehnquist’s dissent in Bellotti pointed out that, although the Court had ruled in the late nineteenth century that a corporation is a “person” under the Fourteenth Amendment’s equal protection clause and due process clause, not long after the Court also clarified “that the liberty protected by that Amendment ‘is the liberty of natural, not artificial persons.’ ”211 The only exceptions had been in cases involving the liberty of the press and the NAACP, which is not a business corporation, but a nonprofit membership corporation formed to promote equality and political expression. The Court had never before considered “whether business corporations have a constitutionally protected liberty to engage in political activities,” and the majority was wrong not to give more deference to the U.S. Congress and the state legislatures and courts that had determined it was permissible and desirable to restrict the political activity of business corporations.212 Citing Dartmouth College, Justice Rehnquist stated, “[O]ur inquiry must seek to determine

The Supreme Court’s View of Corporate Rights

which constitutional protections are ‘incidental to [corporations’] very existence.’ ” Unlike “the power to acquire and utilize property,” “[i]t cannot be so readily concluded that the right of political expression is equally necessary to carry out the functions of a corporation organized for commercial purposes.”213 In fact, “those properties, so beneficial in the economic sphere, pose special dangers in the political sphere.”214 In its most recent landmark corporate political speech decision, Citizens United v. FEC,215 the Court went further down a path of corporate rights jurisprudence that does not take account of the modern spectrum of corporations. Instead of taking the opportunity to clarify and modernize its corporate political spending jurisprudence, which had become riddled with inconsistent reasoning in the years after Bellotti,216 the Court expanded corporate rights without regard to distinctions among corporations that had grown more significant over time. At issue in Citizens United was whether a federal prohibition on corporations using general treasury funds for independent electioneering communications was constitutional as applied to a documentary and advertisements by Citizens United, a nonprofit corporation involved in political advocacy.217 Striking down campaign finance precedent as well as the federal statutory provision at issue, the Court broadly extended its ruling to all corporations.218 The Court eschewed ruling on a narrower ground out of its stated concern about chilling speech,219 and its view that the campaign finance provision at issue was “an outright ban” because speech through the segregated funds of political action committees (PACs) was too burdensome and not the same as allowing a corporation to speak.220 Relying on Bellotti, the Court explained that “First Amendment protection extends to corporations,” including in the context of political speech, because of the “principle that the Government cannot restrict political speech based on the speaker’s corporate identity.”221 Notably, in rejecting arguments that a compelling government interest existed to support the statutory limitation on corporate political spending, the Court also relied on Bellotti, its assumptions about “the procedures of corporate democracy,”222 and referred to corporations in multiple instances as “association[s]” or “associations of citizens.”223 As in Bellotti and the commercial speech decisions, the Court’s statement that the corporate identity of the speaker does not matter implies an instrumental basis for the right—it is the right of the listeners, not the right of the corporation, that is being protected. Yet, the Court did not explain whether the political spending of all corporations has expressive content in which

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listeners would have an interest. The Court’s use of the “associations” rhetoric also implies that the Court additionally had in mind a derivative rationale for the right, but the Court did not actually consider whether such logic could support its broad ruling as to all corporations.224 For example, in one instance where the majority referred to corporations as “associations of citizens,” it noted that most corporations do not have large amounts of wealth.225 But it did not consider corporations that do control great wealth, and whether it is also appropriate to characterize them as “associations of citizens.” In fact, with its broad ruling as to all corporations, Citizens United unwound the Court’s earlier attempts in campaign fi nance jurisprudence to draw a line between nonprofit associations created to pursue ideological agendas, and business corporations.226 As with Bellotti, it is the Citizens United dissent rather than majority opinion that is more consistent with the logic of earlier Supreme Court jurisprudence extending protections to corporations and that takes more account of the modern business corporation. Justice Stevens, joined by Justices Ginsburg, Breyer, and Sotomayor, explained that the majority was wrong to characterize the statutory provision as a “ban” because corporations can use PACs, every shareholder and executive remains free to electioneer outside of the corporate form, and ideologically inclined individuals could use a nonprofit corporation that does not accept corporate or union money.227 The law at issue “target[ed] a class of communications that is especially likely to corrupt the political process, that is at least one degree removed from the views of individual citizens, and that may not even reflect the views of those who pay for it.”228 Moreover, the dissent argued that the majority was simply wrong to assert that the First Amendment does not allow for distinctions to be drawn, including by the speaker’s identity, because the government routinely restricts the speech of students, prisoners, and its own employees, among others.229 “Campaign finance distinctions based on corporate identity tend to be less worrisome” because corporations “are not natural persons,” and corporate political spending is “ ‘furthest from the core of political expression, since corporations’ First Amendment speech and association interests are derived largely from those of their members and of the public in receiving information.”230 As the Court recognized in the nineteenth century, corporations might receive protections in order to protect their members, but those protections are limited in scope. Justice Stevens similarly argued: “Corporations help structure and facilitate the activities of human beings, to be sure, and their ‘personhood’ often serves as a useful legal fiction. But they are not them-

The Supreme Court’s View of Corporate Rights

selves members of ‘We the People’ by whom and for whom our Constitution was established.”231 Further, he recognized that included in the term “corporations” are entities for which it is not clear “ ‘who’ is even speaking when [they] place[] an advertisement that endorses or attacks a particular candidate.”232 “Take away the ability to use general treasury funds for some of those ads, and no one’s autonomy, dignity, or political equality has been impinged upon in the least.”233 The majority had accorded rights to corporations that were in some instances unconnected to the needs and interests of the natural persons actually involved. Finally, the Court has further expanded corporate rights in the 2014 case, Burwell v. Hobby Lobby Stores, Inc.234 Against strong dissent, the Court held that a federal statutory provision requiring employer health insurance plans to cover certain forms of birth control violated the Religious Freedom Restoration Act of 1993 (RFRA) as applied to closely held corporations whose shareholders have sincerely held religious beliefs. To reach this result, the Court allowed for-profit corporations to claim rights of religious exercise under RFRA, which prohibits the government from substantially burdening a person’s exercise of religion unless that action constitutes the least restrictive means of serving a compelling government interest. The Court looked to the religious beliefs of the shareholders, the families who owned the closely held corporations’ stock, and concluded that their exercise of religion was substantially burdened by the statute’s requirement that the corporations provide contraceptive coverage in employee health benefits. The Court seemingly used a derivative rights rationale, but without explanation as to why the shareholders were the appropriate persons from whom to derive a religious exemption from an employee health benefit requirement for the corporation, despite one of the corporations involved having as many as 13,000 employees with competing interests. Justice Ginsburg wrote in dissent, “The distinction between a community made up of believers in the same religion and one embracing persons of diverse beliefs, clear as it is, constantly escapes the Court’s attention.”235 Although Hobby Lobby rests on statutory grounds rather than the free exercise clause, the case has continued the Court down a path in which it expands the scope of corporate rights without deeper examination into the complexities of our time.

Conclusion The Supreme Court has repeatedly confronted questions over the last two centuries about which, if any, constitutional rights corporations should have,

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and under what circumstances. During the nineteenth century, the Court recognized property and contract rights for corporations, with a focus on the individuals represented by the corporation and a characterization of corporations as associations of people acting through an artificial entity. At times during this period, the Court denied constitutional rights to corporations and balanced the application of corporate rights with the public interest. Our examination shows that throughout most of the nineteenth century, the Court’s understanding of corporations was not significantly out of step with what the actual population of corporations in the United States looked like. By the end of the nineteenth century, and certainly by early in the twentieth century, however, the Court’s view of corporations was no longer a good description of many corporations in existence. Huge, professionally managed and widely held corporations came to dominate the U.S. economy and could no longer be plausibly regarded as simple “associations” of individuals. Who would the Court argue they represent? Shareholders, numbering in the thousands, many of which are not human persons but investment funds and other corporations, and which sometimes rapidly trade in and out of the stock? Customers, some of whom may be deeply loyal purchasers of certain products, but others of whom have no loyalty or connection? Employees, who, of all stakeholders, probably have the most extensive ties to their employer corporations, but are legally employed “at will” and can be dismissed in a heartbeat? Since the turn of the twentieth century, the spectrum of organizations formed as “corporations” has grown to encompass every thing from these huge, publicly traded, for-profit business corporations to nonprofit corporations devoted to charity or social or political advocacy. Tracing the Court’s twentieth- and twenty-first-century corporate rights jurisprudence, we show that the Court dramatically expanded the scope of protections for corporations without accounting for the range of corporations that had emerged. In the early twentieth century, for example, the Court granted corporations Fourth Amendment protection against unreasonable searches and seizures, reasoning that such protection was warranted by the fact that a corporation is “an association of individuals.” More significantly, the Court transformed a small number of cases recognizing media companies as having freedom of press and membership organizations such as the NAACP as having freedom of association into robust First Amendment protections for all corporations without distinguishing among the purposes and structures of the corporations at issue. The Court recognized corpora-

The Supreme Court’s View of Corporate Rights

tions of all types as having freedom of speech protections for commercial speech and corporate political spending rights. Despite our modern landscape of corporations, the Court has continued to deploy the argument that granting rights to the corporation is simply a mechanism for assuring the rights of the individuals who are “associating together” in the corporation. But it has also added a series of ad hoc rationales involving vague claims about the public interest and the interests of consumers and listeners. To be sure, the corporate form is used for organizations that can plausibly be regarded as associations of individuals— small entrepreneurial firms, or family businesses, cooperatives, membership organizations, and nonprofits organized to carry out some religiously or ethically motivated mission, or to engage in political advocacy. In fact, Citizens United, the corporation that was found to have freedom of speech rights in early 2010, was one of these “other kinds” of corporations—a nonprofit corporation formed by a group of individuals to advocate for certain public advocacy positions. But the Court has often failed to draw these distinctions, and has explicitly written its decisions broadly, to apply to all corporations, not just those that can appropriately be described as associations whose members are protected when the corporation is granted the right. In a recent instance where the Court has attempted to draw lines, the 2014 Hobby Lobby case concerning religious liberty, it has overlooked competing interests that undercut the rationale for according a derivative right. This has seriously muddied the waters of corporate rights law, and dismantled the basic framework laid down more than a century ago of recognizing corporate rights only when it is necessary to protect the rights of human persons represented by the corporation.

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CHAPTER 8

Corporations and the Fourteenth Amendment RUTH H. BLO CH NAOMI R. LAMOREAUX

All persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States and of the State wherein they reside. No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws. —U.S. Constitution, Amendment XIV, Section 1

This familiar opening to the Fourteenth Amendment to the Constitution, ratified in 1868 in the aftermath of the Civil War, is the foundation of our modern concept of civil liberties.1 It is also conventionally viewed as the foundation of constitutional rights for corporations. 2 The purpose of this essay is to challenge this view by demonstrating the very limited protections that corporations obtained under the amendment for a full century after its enactment. Of course, to some extent corporations have always possessed the legal attributes of individual human beings. The main reason for creating them in the first place was to allow people to join together, hold property, and sue and be sued in their collective name as if they were a single person. But just because corporations had some aspects of personhood did not mean they possessed all the rights and powers of human beings. As Chief Justice John Marshall famously wrote in his Dartmouth College opinion half a century before the Fourteenth Amendment was ratified, “A corporation is an artificial being, invisible, intangible, and existing only in contemplation of law. Being the mere creature of law, it possesses only those properties which the charter of its creation confers upon it, either expressly, or as incidental to its very existence.”3 Over the en286

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suing decades, the Supreme Court had frequent occasions to restate this view.4 According to the conventional wisdom, the Court undermined this basic principle of limited corporate personhood in 1886, in the case of Santa Clara v. Southern Pacific Railroad, when it interpreted the Fourteenth Amendment as protecting corporations.5 As we will show in this essay, this view of the Court’s decision is largely incorrect. Instead, beginning with the cases leading to Santa Clara, the justices on the Court drew increasingly careful distinctions among the various clauses of the Fourteenth Amendment. Some parts of the amendment they applied to corporations, in par ticu lar the phrases involving property rights. But other parts, such as the clauses regarding due process protections for liberty and the privileges and immunities of citizens, they emphatically did not. Throughout, moreover, the justices consistently followed Marshall in treating corporations as artificial persons whose legal rights were much more limited than those of the natural persons who made them up. To the extent that they extended constitutional protections to corporations during this period, they did so with the specific aim of safeguarding the property of the corporations’ human owners. Liberty rights, as distinct from property rights, belonged only to humans.6 We devote the major part of this essay to documenting the Court’s parsing of the Fourteenth Amendment and the extent to which the distinction between liberty and property structured the Court’s decisions deep into the twentieth century. We then turn to the circumstances that gradually undermined the limited way in which the Court had extended Fourteenth Amendment protections to corporations. The most important change concerned the kinds of cases that raised Fourteenth Amendment issues. Through the 1920s, these cases almost exclusively involved business corporations. When the Court first began in the early twentieth century to hear suits involving other types of corporations, it initially decided them in exactly the same way, with the justices viewing members of nonprofit corporations as if they had the same limited property interests as shareholders in business corporations. By the second third of the century, however, this blanket application of precedent had become increasingly untenable, and the Court began in certain cases to extend Fourteenth Amendment liberty rights to corporations. Although these rulings followed from the special circumstances of the cases, the language the Court used in its opinions could be interpreted as applying to corporations more generally. The decisions also muddied the

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waters because the Court never overturned any of the precedents distinguishing the amendment’s protections for corporate liberty from its protections for corporate property. It was in this context of mounting confusion that corporations began to challenge laws that prohibited them from contributing to political campaigns. The first campaign finance laws had been passed during the early twentieth century, a period in which the prevailing interpretation of the Fourteenth Amendment kept the courts from regarding restrictions on corporate contributions as posing significant constitutional issues. In 1978, however, in First National Bank of Boston v. Bellotti, the Supreme Court overturned a Massachusetts statute banning corporations from spending their funds to influence ballot referenda unless the outcome would materially affect their business interests.7 Although the decision hinged on more general issues of censorship and not on the question of whether corporations were constitutionally protected persons, Justice Lewis F. Powell Jr. offered an incomplete and misleading interpretation of the late nineteenth-century precedents in a footnote to his majority opinion. Citing Santa Clara, he asserted that corporations had long possessed the same Fourteenth Amendment protections as natural persons.8 This seemingly small intervention was reported in the headnotes to the case and thus added significantly to the existing confusion. The Bellotti decision for the first time raised the possibility that all corporations—whether nonprofit or for-profit—had First Amendment rights.9 Bellotti, in turn, was an important precedent for the Supreme Court’s ruling in Citizens United v. Federal Election Commission (2010), invalidating the part of the Bipartisan Campaign Reform Act of 2002 that prohibited corporations and unions from spending their funds on “electioneering communications.” Once again, although the Court made its decision on grounds other than the nature of corporate personhood, Citizens United compounded the conceptual muddle. Running roughshod over the Court’s long-standing commitment to the principle that corporations were artificial persons that lacked liberty rights, the majority flatly declared that “First Amendment protection extends to corporations” and thereby opened the floodgates to new constitutional claims by corporations.10 To some extent, high court justices have always stretched and even distorted precedents to fit their views, but the assertions in Citizens United are particularly unmoored from the Court’s past decisions. For at least a century following the Fourteenth Amendment’s ratification, the Court consistently

Corporations and the Fourteenth Amendment

maintained—despite quite dramatic shifts in its political composition and in the ideological views of the justices—that corporations were artificial persons with much more limited constitutional protections than the human persons who made them up. The idea that corporations have First Amendment rights is a recent invention. In the sections that follow, we recover the lost history of the Supreme Court’s cautious and very limited application of Fourteenth Amendment protections to corporations with the aim of underscoring the radical character of the Court’s recent decisions.

Santa Clara and Corporate Property Rights The reported version of the Supreme Court’s decision in the case of Santa Clara v. Southern Pacific Railroad (1886) begins with a statement attributed to Chief Justice Morrison R. Waite at the start of oral arguments: The Court does not wish to hear argument on the question whether the provision in the Fourteenth Amendment to the Constitution, which forbids a State to deny to any person within its jurisdiction the equal protection of the laws, applies to these corporations. We are all of opinion that it does.11 There is no comparable statement about corporations and the Fourteenth Amendment in the Court’s actual decision because the justices deliberately ducked the constitutional questions raised by the case and instead based their ruling solely on California law. Indeed, Waite made his announcement precisely for the purpose of heading off any discussion of broader constitutional issues. How, then, did it come to be treated as precedent? And what exactly was the precedent it set? The decision to print the statement in the first place seems to have been the initiative of the Court’s reporter, J. C. Bancroft Davis. Davis had originally submitted it for Waite’s approval in the form of a paraphrase, not a direct quotation. Waite responded that Davis expressed “with sufficient accuracy what was said before the argument began,” but added, “I leave it with you to determine whether anything need be said about it in the report inasmuch as we avoided meeting the constitutional question in the decisions.” Davis not only left the statement in the report but set the paraphrase in quotation marks.12 Needless to say, this provenance is rather strange for a statement that would be repeatedly cited as precedent by the Supreme Court and other legal

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bodies, especially given that Waite’s purpose in making it was precisely to avoid a ruling on the constitutional issue. The answer to the question of how the announcement came to be treated as precedent is very simple: It was the doing of Justice Stephen J. Field.13 Field had written the circuit court opinion in the case and had used the occasion to articulate his views on the larger constitutional issues that he thought were at stake. When he could not convince the other justices to take a similarly broad position, he turned Waite’s statement into precedent by referencing it in subsequent Supreme Court opinions. To understand the meaning of the precedent, therefore, it is important to understand Field’s agenda and how he used the Santa Clara case to further it. Field was a man of enormous ambition. He had trained as a lawyer in New York but then rushed to join the swarm of migrants heading to California in 1849 to find gold. Arriving in San Francisco, he discovered that he could make his way upward more quickly in politics than at the gold fields. A longtime Democrat, he shared the Jacksonian suspicion of those who used their political connections to secure corporate or other privileges, but also (like many Jacksonians) he did not hesitate to exploit his own connections for political advantage. Within a decade of his arrival, he had jumped from alcalde of the city of Marysville to the California legislature to the state supreme court, where he rose to the position of chief justice. In 1863 President Abraham Lincoln appointed him to the U.S. Supreme Court. At that time, Supreme Court justices “rode circuit,” hearing cases alongside local federal judges. Lincoln needed a westerner to cover the newly formed California circuit, and Field, loyal to the Union though a Democrat, had the necessary qualifications for the job.14 It was while riding circuit in California that Field heard the cases that led to the Supreme Court’s Santa Clara decision. At stake was a provision of California’s 1879 constitution that assessed taxes on property held by railroads differently from other property. The provision was part of a political backlash against the considerable monopoly power that the transcontinental railroads exercised over California’s economy in the decades following the Civil War.15 It required the railroads to pay tax on the total value of their real estate holdings while other property owners were allowed to deduct the amount of mortgage debt they owed. Claiming the assessment was discriminatory and, as such, an unconstitutional violation of their rights to the equal protection of the law under the recently ratified Fourteenth Amendment, the railroads refused to pay the tax. They determined instead to make the Cali-

Corporations and the Fourteenth Amendment

fornia provision a test case in the hopes that a federal ruling in their favor would not only lower their immediate tax bills but, more importantly, buttress their defense against other burdens that the legislature might impose on them in the future.16 A number of California counties responded by suing the railroads for nonpayment of taxes, and the federal circuit court consolidated the suits into two cases, The Railroad Tax Cases and Santa Clara v. Southern Pacific Railroad Co., both of which it decided in favor of the railroads.17 Field, who heard the suits alongside a local federal judge, wrote opinions in both, asserting that the taxes violated the equal protection clause of the Fourteenth Amendment. “[I]n declaring that no state shall deny to any person within its jurisdiction the equal protection of the laws,” he pronounced, the Fourteenth Amendment “imposes a limitation upon the exercise of all the powers of the state which can touch the individual or his property. . . . Unequal exactions in every form, or under any pretense, are absolutely forbidden. . . . It is not possible to conceive of equal protection under any system of laws where arbitrary and unequal taxation is permissible; where different persons may be taxed on their property of the same kind, similarly situated, at different rates.”18 Contemporaries claimed that Field was a tool of the railroads, and there is plenty of evidence for the charge.19 Nonetheless, in finding that the taxes California imposed on the railroads were unconstitutional, Field was not, in fact, asserting that corporations were constitutionally protected persons. To the contrary, his opinion concerned the rights of the human persons who owned stock in these corporations and who were the ones who actually bore the burden of the unequal tax.20 According to Field, it would be “a most singular result if a constitutional provision intended for the protection of every person against partial and discriminating legislation by the states, should cease to exert such protection the moment the person becomes a member of a corporation.”21 A person did not lose his rights just “ because he may belong to a political body, or to a religious society, or be a member of a commercial, manufacturing, or transportation company.” The Fourteenth Amendment extended the equal protection of the laws to everyone everywhere, “whatever be his position in society or his association with others, either for profit, improvement, or pleasure.”22 In his later Supreme Court opinions citing the Santa Clara precedent, Field simply referred to Waite’s statement that corporations were persons within the meaning of the Fourteenth Amendment and did not reiterate the

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logic of the railroad cases.23 Whether this shorthand was a deliberate effort at generalization or just a convenience, it contributed to subsequent misunderstandings of the case.24 Moreover, it obscured Field’s larger agenda. As a result, most scholars have missed that Field was much less concerned with protecting corporate rights than with developing a capacious view of the Fourteenth Amendment and of the Court’s role in enforcing it.25 Field had fi rst advanced his novel version of federalism in 1873 in his dissent in the Slaughter-House Cases.26 These cases had been brought by butchers in New Orleans who claimed that a Louisiana statute forcing them to work under the auspices of an incorporated slaughterhouse monopoly violated their Fourteenth Amendment rights by depriving them without due process of the liberty to practice their craft. The majority of the Court adhered to the view that the Fourteenth Amendment had been enacted to protect the rights of former slaves, not to make the federal government the enforcer of civil rights more generally, and they ruled against the butchers. Field, however, used his dissent to argue for a more expansive interpretation that would give the Supreme Court a new role to play in safeguarding the liberty of all Americans against the depredations of state governments.27 Writing with Jacksonian outrage, Field defended the rights of the butchers against a privileged corporate monopoly. He characterized the Louisiana statute as a “naked case” where “a right to pursue a lawful and necessary calling, previously enjoyed by every citizen” was “taken away and vested exclusively for twenty-five years . . . in a single corporation.”28 The “distinguishing privilege of citizens of the United States,” he insisted, was an “equality of right, with exemption from all disparaging and partial enactments, in the lawful pursuits of life.”29 Unless the Court used the Fourteenth Amendment to insure that states adhered to the “fundamental idea upon which our institutions rest,” Field warned, “our government will be a republic only in name.”30 The concept of liberty that Field sought to protect in the Slaughter-House Cases was, it is impor tant to emphasize, an individual one, forged in opposition to the improper granting of corporate privileges by state governments. The California railroad suits were useful to Field because, like the Slaughter-House Cases, they furthered his goal of expanding the reach of the Fourteenth Amendment. But he did not apply his concept of liberty to corporations. To the contrary, he was quite explicit in limiting the protections afforded to corporations to cases involving infringements on property. As he explained in the Railroad Tax Cases, the Constitution protected the prop-

Corporations and the Fourteenth Amendment

erty of corporations because the property “in fact” belonged to “the corporators,” but it did not protect the life and liberty of corporations because “the lives and liberties of the individual corporators are not the life and liberty of the corporation.”31 We will return to the distinction between property and liberty below. Here, we will simply note that Field’s assertion that the Fourteenth Amendment protected corporate property but not corporate liberty would continue to shape the Court’s decisions for many decades and would, if anything, become more important in the early twentieth century, during the so-called Lochner era, when a majority of the Court finally embraced Field’s view of the Fourteenth Amendment.

The Fourteenth Amendment and State Regulation of Corporations Despite Field’s determination to expand federal judicial oversight of state governments, he never viewed the Fourteenth Amendment as limiting states’ ability to regulate corporations. Indeed, contrary to conventional wisdom, he most often cited Santa Clara in decisions upholding state regulatory initiatives. For example, just two years after Waite’s statement, he wrote an opinion validating a Kansas statute that made railroads liable for injuries to workers caused by the mismanagement or negligence of other employees. Citing the Santa Clara precedent “that corporations are persons within the meaning” of the Fourteenth Amendment, he pointed out that when legislation imposes “additional liabilities” on “particular bodies or associations,” it does not deny them “the equal protection of the laws, if all persons brought under its influence are treated alike under the same conditions.” The particularly “hazardous character of the business of operating a railroad would seem to call for special legislation . . . having for its object the protection of their employees as well as the safety of the public.” So long as the law made all railroad corporations “subject to the same liabilities,” the law was constitutional.32 The next year Field similarly upheld an Iowa law requiring railroads that failed to erect fences along their rights-of-way to reimburse farmers for livestock injured or killed by trains,33 and three years after that a South Carolina law that imposed a special tax on railroads to pay the costs of a commission the state had created to regulate them.34 Like most jurists at the time, Field followed Marshall in subscribing to the “concession” theory of corporations—the idea, as Field put it in his circuit court decision in Santa Clara, that “corporations are creatures of the state” and “could not exist independently of the law.” Precisely because they were

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its creatures, the state might prescribe the conditions “upon which they may be formed and continued.”35 That is, the state might regulate the activities of these “artificial” persons in the interests of the “natural” persons who were its real constituents. “Though railroad corporations are private corporations . . . , their uses are public. They are formed for the convenience of the public in the transportation of persons and merchandise, and are invested for that purpose with special privileges.”36 Thus, the state might legitimately impose additional burdens on railroads it had chartered to protect citizens from special hazards and create a commission to insure that freight charges were reasonable and fair.37 Of course, the Court might still overturn regulations that treated railroads differently from other businesses in a discriminatory way. For example, in an 1897 opinion written by David J. Brewer, it found unconstitutional a Texas law imposing on railroads, and railroads alone, a requirement to pay plaintiffs’ legal fees in damage suits.38 Field’s support for the assertion of state power over corporations can also be seen in his response to cases in which corporations sought to do business in states that had not chartered them. Because a major role of the federal courts was to decide interstate disputes, Field often faced the problem of what to do when corporations formed in states with lenient laws tried to set up shop in states whose laws were more restrictive. The problem was increasingly pressing in the decades following the Civil War when large corporations began to operate on a national scale. If states were required to grant free access to corporations formed in other jurisdictions—that is, if they had to allow corporations as a matter of course the privileges and immunities of citizens—their regulatory powers would be undermined. The result, Field warned, might be a race to the bottom in which corporations chartered in the most permissive jurisdictions would dominate everywhere.39 Field first confronted this issue in Paul v. Virginia, a Supreme Court case decided in 1869, just months after the Fourteenth Amendment was ratified.40 Although the case involved the privileges and immunities clause of Article IV of the original Constitution rather than the Fourteenth Amendment, it served as the precedent for a long stream of Fourteenth Amendment decisions denying corporations the privileges and immunities of citizens. The appellant, an insurance agent named Samuel Paul, had challenged a Virginia law requiring insurance corporations chartered in other states to obtain licenses and post bonds before doing business in Virginia. Field responded that the privileges and immunities guaranteed by Article IV did not extend to the “special privileges” that states granted in the form of corporate char-

Corporations and the Fourteenth Amendment

ters. The drafters of the Constitution had never intended “to give to the laws of one State any operation in other States.” Hence a corporation, “being the mere creation of local law,” could have “no legal existence beyond the limits of the sovereignty” that created it. Other states might admit such “foreign” corporations “upon such terms and conditions” as they thought “proper to impose,” or could even, if they wished, exclude them altogether. “The whole matter rest[ed] in their discretion.”41 After Paul v. Virginia, the Supreme Court repeatedly upheld states’ efforts to impose regulatory restrictions on corporations chartered by other jurisdictions.42 The Santa Clara precedent did not contradict these decisions, as Field, again speaking for the Court, explained in the 1888 case of Pembina Consolidated Silver Mining v. Pennsylvania.43 Pennsylvania had imposed a licensing tax on corporations chartered elsewhere that opened offices in the state, and a mining company had sued to void the levy. Reiterating his declaration in Paul v. Virginia that corporations had “no absolute right of recognition in other States,” Field stated once again that the privileges and immunities protected by Article IV applied only to natural persons, not corporations, and that states not only had the authority to regulate corporations chartered elsewhere but also could “exclude [them] entirely.”44 He then addressed explicitly the question of the applicability of the Fourteenth Amendment to the case. Echoing, but not citing, Waite’s statement in Santa Clara, he expressed “no doubt” that a private corporation was covered by the “inhibition of the amendment that no State shall deprive any person within its jurisdiction of the equal protection of the laws.” But, he explained, the equal protection that corporations “may claim is only such as is accorded to similar associations within the jurisdiction of the State.” Nothing in the Constitution prohibited a state from “discriminating in the privileges it may grant to foreign corporations.”45 The main limitation on a state’s regulatory authority over foreign corporations was that states could not interfere with interstate commerce. Field himself authored a couple of decisions in which the Court overturned licensing fees that states had imposed on the sales agents of out-of-state corporations on the grounds that the fees were effectively internal tariff barriers and hence unconstitutional restrictions on interstate commerce.46 However, the Court defined commerce so narrowly during this period that these issues did not often come into play. For example, Field declared in Paul v. Virginia that “[i]ssuing a policy of insurance is not a transaction of commerce.”47 More famously, Chief Justice Melville Fuller ruled in the 1895 antitrust case

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of United States v. E. C. Knight that manufacturing was not commerce but rather “transformation—the fashioning of raw materials into a change of form for use.” Commerce, by contrast, was simply “[t]he buying and selling and the transportation incidental thereto.”48 As Charles McCurdy has shown, Fuller’s distinction between manufacturing and commerce was a deliberate effort to preserve the authority of the states to regulate large-scale corporations chartered in other jurisdictions.49 If the Court held that the term “commerce” included “all such manufactures as are intended to be the subject of commercial transactions in the future,” Fuller warned, the result would be to invest Congress, “to the exclusion of the States, with the power to regulate, not only manufactures, but also agriculture, horticulture, stock raising, domestic fisheries, mining—in short, every branch of human industry.”50 At the same time as the justices deferred to the states by defining commerce narrowly, they upheld the constitutionality of state antitrust laws. Corporations repeatedly charged that these laws violated the equal protection clause of the Fourteenth Amendment or took property without due process, but the Court never accepted such arguments. The first such case arose from a move by Texas to oust the Waters-Pierce Oil Company, a Missouri corporation suspected of being part of the Standard Oil combine, for violating its antitrust laws. 51 Citing Paul v. Virginia, Pembina Consolidated Silver Mining v. Pennsylvania, and a number of subsequent decisions, Justice Joseph McKenna’s opinion for the Court made short shrift of the idea that corporations could invoke the Fourteenth Amendment to protect themselves from the operation of state antitrust laws. What right of contracting did the plaintiff in error, a foreign corporation, have in the state of Texas? McKenna held that the answer to this question could not be found “in the rights of natural persons,” but instead must be grounded “in the rights of corporations and the power of the State over them.” He then went on to explain that “a corporation is a creature of the law.” Its powers “are precisely what the incorporating act has made them, and can only be exerted in the manner which that act authorizes. . . . This is true as to domestic corporations. It has even a broader application to foreign corporations.”52 Waters-Pierce was only the first of many similar decisions.53 Occasionally, the Court found some aspect of a statute discriminatory or unconstitutionally vague, which was why corporations kept filing these lawsuits.54 But the basic principles laid out in Waters-Pierce continued to underpin the Court’s treatment of state antitrust cases. Perusing these opinions one after another,

Corporations and the Fourteenth Amendment

one senses the justices’ mounting exasperation as they fended off corporations’ attempts to claim that the states were discriminating against them in their antitrust prosecutions. Justice Oliver Wendell Holmes derided one such effort by a Standard Oil subsidiary as yet another “of the many attempts to construe the Fourteenth Amendment as introducing a factitious equality without regard to practical differences that are best met by corresponding differences of treatment.”55 A few years later, McKenna demolished a similar complaint by International Harvester, writing with obvious irritation that “this court has decided many times that a legislative classification does not have to possess such comprehensive extent,” and pointing out sarcastically that the corporation’s argument would mean that a “combination of all the great industrial enterprises . . . could not be condemned unless the law applied as well to a combination of maidservants or to infants’ nurses.”56 This stream of antitrust cases petered out by the 1920s, largely because the states stopped seriously enforcing their antitrust laws, not because the Court became less willing to uphold state regulatory authority.57 Finding it increasingly difficult to assert power over corporations whose operations were national in scope without harming their own economies, the states gradually ceded regulatory responsibility to the federal government, and the Supreme Court responded by working out a new rationale, the “rule of reason,” that facilitated federal regulation of state-chartered corporations.58 During the heyday of state regulation, however, the justices sometimes came down so strongly in support of state authority that they appeared to violate the spirit of Field’s original Santa Clara opinion. A good example is the 1898 case of Blake v. McClung, which involved an insolvent British mining company operating in Tennessee.59 Under Tennessee law, creditors who were residents of the state had higher priority than other creditors in the disposition of the company’s property. Some out-of-state creditors, including several individuals from Ohio and a corporation chartered in Virginia, sued on the grounds that the law violated their constitutional rights. The Court decided in favor of the individual claimants from Ohio, declaring that the privileges and immunities clause of Article IV prohibited Tennessee from discriminating in favor of its own citizens against those of other states. It did not, however, extend the same protection to the corporation from Virginia. Writing for the Court, Justice John M. Harlan asserted it was “well settled” that a corporation was “not a citizen” within the meaning of Article IV.60 Citing Santa Clara, he acknowledged that a corporation was a person

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within the meaning of the Fourteenth Amendment, but he declared that Tennessee’s law did not violate the amendment’s equal protection clause. That provision, he insisted, referred only to persons within the state’s jurisdiction. “[I]t is safe to say that a corporation not created by Tennessee, nor doing business there under conditions that subjected it to process issuing from the courts of Tennessee at the instance of suitors, is not, under the above clause of the Fourteenth Amendment, within the jurisdiction of that State.”61 Harlan’s logic is somewhat puzzling because the Tennessee law did not aim to regulate foreign corporations but simply to insure that creditors within the state had priority in the resolution of an insolvent company’s affairs. The Ohio creditors in the case included an individual and a firm operating as a partnership. The Court found that the rights of the individual and of the members of the partnership had been violated. If the members of the partnership had instead organized their fi rm as a corporation, their rights would not have been protected, even if every other aspect of their business was unchanged. Conversely, if the members of the Virginia corporation had orga nized as a partnership, the Court would have protected their rights. It is difficult to reconcile this decision with Santa Clara, unless one recognizes—contrary to the literature—that the Supreme Court during this period was not at all predisposed to thinking of corporations as having the same rights as natural persons.62

Property versus Liberty The justices drew an even starker line between the rights of natural and corporate persons in the 1906 case of Northwestern National Life Insurance Company v. Riggs.63 At issue was a Missouri law requiring insurance companies to pay out on policies in cases where the decedent had not been completely truthful on the application for insurance but where the deception was unconnected with the cause of death. The Northwestern National Life Insurance Company, a foreign corporation chartered by the state of Minnesota, sued to have the law overturned on the grounds that the statute violated its rights to due process and the equal protection of the laws under the Fourteenth Amendment. Harlan wrote the opinion for the Court finding against the company. Taking as his starting point the principles Field had previously laid down, Harlan acknowledged that corporations “may invoke the protection of that clause of the Fourteenth Amendment which declares

Corporations and the Fourteenth Amendment

that no State shall ‘deny to any person within its jurisdiction the equal protection of the laws.’ ”64 Also following Field, he agreed that a state had the power “to regulate the relative rights and duties of all persons and corporations within its jurisdiction . . . to provide for . . . the public good.”65 Missouri’s law, he ruled, was a reasonable exercise of these “police” powers because insurance companies had engaged in abusive practices, using innocent inaccuracies in applications as a pretext for denying claims. Moreover, because the law applied “alike to all life insurance companies doing business in Missouri,” it did not deny the company “the equal protection of the laws.”66 So far, these statements were standard case law. Then Harlan broke new ground by asserting that there was no basis for complaining that the statute was “inconsistent” with the liberty guaranteed by the Fourteenth Amendment: “The liberty referred to in that Amendment is the liberty of natural, not artificial persons.”67 The liberty to which Harlan was referring here is the clause of the Fourteenth Amendment declaring that states shall not “deprive any person of life, liberty, or property, without due process of law.” The idea that corporations were protected persons in the sense that their property could not be taken without due process had already been treated by the Court as a logical extension of the Santa Clara precedent.68 However, Northwestern National Life Insurance v. Riggs was the first time the Supreme Court addressed explicitly the question of whether corporations were persons whose liberty deserved protection as well. In asserting that they were not, Harlan did not feel compelled to cite any precedents. Indeed, he seems to have thought the point so obvious that it needed no justification. The idea that the Fourteenth Amendment protected the liberty of natural persons but not corporations had long been implied by the case law. As we saw above, Field had made this point as early as 1882 in his circuit court opinion in the Railroad Tax Cases.69 The reason Harlan and the other justices on the Court found the distinction so obvious was because they conceived of liberty in distinctly human terms. Just before he declared that corporations did not have Fourteenth Amendment protections for liberty, Harlan defi ned “the liberty guaranteed by the Fourteenth Amendment against deprivation” as embracing “the right to pursue a lawful calling and enter into all contracts proper, necessary and essential to the carry ing out of the purposes of such calling.”70 In support of this definition, he referenced Allgeyer v. Louisiana,71 a telling choice because Allgeyer was the most important precedent for Lochner v. New York, which the Court had handed down just one year earlier.72 Lochner, of course, was

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the case that gave its name to an entire era of Supreme Court jurisprudence based on the principle (called “substantive due process”) that the Fourteenth Amendment empowered the Court to invalidate state laws, such as those regulating conditions of labor, on the grounds that they unreasonably interfered with citizens’ liberties.73 Harlan had dissented in Lochner, arguing that the statute the Court had overturned (a law limiting bakers’ hours of work to sixty per week) was a legitimate application of the state’s police powers. In citing Allgeyer, however, he signaled his acceptance of the concept of liberty that underpinned the majority opinion in both cases.74 In the words of Justice Rufus Peckham, who wrote both the Allgeyer and Lochner decisions, liberty was “the right of the citizen to be free in the enjoyment of all his faculties; to be free to use them in all lawful ways; to live and work where he will; to earn his livelihood by any lawful calling; to pursue any livelihood or avocation, and for that purpose to enter into all contracts which may be proper, necessary and essential to his carry ing out to a successful conclusion the purposes above mentioned.”75 This definition of liberty was not original to Peckham but can be traced back through numerous Supreme Court opinions to the famous dissents by Field and Justice Joseph P. Bradley in the Slaughter-House Cases.76 Peckham linked his opinion with these earlier cases by quoting approvingly from Bradley’s concurring opinion in another New Orleans slaughterhouse case, Butcher’s Union Company v. Crescent City Company: “The right to follow any of the common occupations of life is an inalienable right; it was formulated as such under the phrase ‘pursuit of happiness’ in the Declaration of Independence, which commenced with the fundamental proposition that ‘all men are created equal, that they are endowed by their Creator with certain inalienable rights; that among these are life, liberty and the pursuit of happiness.’ This right is a large ingredient in the civil liberty of the citizen.”77 As this quotation aptly illustrates, the language the justices deployed in this line of opinions was all about human beings. The justices used nouns like “men” and “freemen,” repetitively employed the generalized masculine pronoun (which was not used for corporations), rhapsodized about the importance of choosing one’s path in life and work, and appealed above all to the Protestant notion of an avocation or calling.78 Moreover, the justices often used the terms “citizen” and “person” interchangeably, casually substituting the word “citizen” from the privileges and immunities clause for the word “person” in the due process clause. As Peckham wrote, “To deprive the citizen of such a right as herein described without due process of law is

Corporations and the Fourteenth Amendment

illegal.” 79 Similarly, Bradley asserted that the New Orleans slaughterhouse monopoly took from the affected butchers “the freedom of adopting and following” their chosen pursuit, “a material part of the liberty of the citizen, . . . without due process of law.”80 In Allgeyer, the focus on human persons is particularly clear. The case involved a Louisiana state law regulating the provision of marine insurance. The state had levied penalties on several citizens of Louisiana, members of a partnership, who had contracted for insurance with a corporation chartered and located in another state. Peckham began his opinion by paraphrasing Field, noting that if the corporation (the Atlantic Mutual Insurance Company) had operated in Louisiana, it would have come without question under the state’s control: “The State can impose such conditions as it pleases upon the doing of any business by those companies within its borders, and unless the conditions be complied with the prohibition may be absolute.”81 But there was no claim that Atlantic Mutual had done any business in the state. It was a New York corporation, and the citizens of Louisiana had made their contract with it in New York. The rights at stake in the case were those of individuals who had purchased the insurance. Louisiana had violated its citizens’ right to contract with out-of-state parties, in this case with a corporation, and that was an impermissible infringement on their liberty without due process of law.82 Thus the very human-centered understanding of liberty on which Harlan’s opinion in Northwestern National Life Insurance Company v. Riggs depended pervaded the late nineteenth-century case law. Although the case was the first in which the Supreme Court explicitly stated that corporations did not have Fourteenth Amendment protections for liberty, the ruling would be reiterated going forward. The very next year, the Court drew the same line in the same language in Western Turf Association v. Greenberg.83 Again Harlan wrote the opinion for the Court, upholding a California statute regulating places of public amusement against a challenge by an incorporated racetrack. After ruling that the statute did not violate the amendment’s equal protection clause because it applied “alike to all persons, corporations or associations” operating in this business, he went on to point out that the company could not claim the protection of the due process clause because “the liberty guaranteed by the Fourteenth Amendment against deprivation without due process of law is the liberty of natural, not artificial, persons.”84 Over the next few decades, as we discuss below, the Court would have many occasions to repeat this point.

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The Lochner-Era Court and Corporations Even when it was deciding liberty-of-contract cases involving corporations, the Court took pains to maintain the principle that the liberty rights of human persons did not extend to corporations. In Lochner v. New York, the case that gave the era its name, the firm at issue was an unincorporated bakery, but in later cases some of the parties were corporations.85 For example, the year following Western Turf Association v. Greenberg, Harlan wrote a decision in Adair v. United States overturning a Kentucky law that prohibited interstate carriers (railroads) from discriminating against employees who belonged to labor unions.86 The only references to corporations in Harlan’s opinion occurred in his summary of the statute at issue and the indictment. Other wise, Harlan avoided using the word corporation and instead went to great lengths to ground his decision in the rights of the individual who served as the railroad’s agent. Thus, he declared, “without stopping to consider what would have been the rights of the railroad company,” it was “sufficient in this case to say that as agent of the railroad company and as such responsible for the conduct of the business of one of its departments, it was the defendant Adair’s right—and that right inhered in his personal liberty, and was also a right of property—to serve his employer as best he could.” Adair’s job, which involved prescribing the terms of employment in the company, prompted Harlan to quote from a treatise by Thomas Cooley: “It is a part of every man’s civil rights that he be left at liberty to refuse business relations with any person whomsoever.” The statute, which “arbitrarily sanction[ed] an illegal invasion of the personal liberty as well as the right of property of the defendant Adair,” was therefore invalid.87 Similarly, in Adkins v. Children’s Hospital (1923), Justice George Sutherland studiously avoided referring to the corporate appellee as anything other than an employer.88 In this decision overturning a law fi xing minimum wages for female employees in private employment, Sutherland referred to corporations only twice. The first usage occurred when he summarized the statute being challenged (which stated that a violation of the act “by an employer or his agent or by corporate agents is declared to be a misdemeanor”); the second when he described the appellee in the suit as a “corporation maintaining a hospital for children in the District.”89 Otherwise, the liberty that Sutherland referenced was the liberty of individuals, of parties to an employment contract, or of employers and employees: “[T]he right to contract about one’s affairs is a part of the liberty of the individual protected”

Corporations and the Fourteenth Amendment

by the due process clause; “Within this liberty are contracts of employment of labor. In making such contracts, generally speaking, the parties have an equal right to obtain from each other the best terms they can as the result of private bargaining”; and finally, in none of a set of statutes upheld by the Court “was the liberty of employer or employee to fix the amount of wages the one was willing to pay and the other willing to receive interfered with.”90 The parties that brought these liberty-of-contract cases included a mix of individuals, corporations, and unincorporated businesses, and the Court does not seem to have taken any special notice of corporations, referring to all parties by their roles in the cases—for example, as “respondents,” “appellants,” or simply “employers.” The use of such blanket terms left an ambiguous legacy that enabled subsequent observers to interpret the Lochner-era cases as implicitly extending constitutional protections for liberty of contract to corporations.91 It is surely worthy of note, however, that the justices never articulated any such extension. All of the explicit statements they made during this period scrupulously distinguished the constitutional rights of corporations from those of natural persons. Two years after Adkins v. Children’s Hospital, for example, Justice James C. McReynolds, one of the stalwarts of the Court’s substantive due process rulings, acknowledged as a matter of established fact in Pierce v. Society of Sisters that corporations “cannot claim for themselves the liberty which the Fourteenth Amendment guarantees.”92 And the case law contains many subsequent restatements of this principle.93

Beyond Liberty of Contract Allgeyer, Northwestern National Life Insurance, Lochner, and the other substantive due process cases of the early twentieth century all centered on a par ticu lar kind of liberty: liberty of contract. The Constitution does not explicitly protect liberty of contract, so these decisions relied on the more expansive natural rights tradition that harkened back to the American Revolution.94 The Bill of Rights clearly protects other kinds of liberty, however, so the Supreme Court had to decide which, if any, of its provisions applied to corporations. Prior to the Lochner era, the Court had never directly addressed this question. A few of the Court’s decisions acknowledged the religious freedom of church corporations, but in those cases, the justices never discussed the question of corporate rights.95 All their other decisions about corporations drew on essentially the same set of principles as the contract

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cases. As we shall show, the Court extended constitutional protections to business corporations only where necessary to safeguard the rights of shareholders, and then only where the shareholders’ property rights were at stake. The first case in which the Court confronted the application of the Bill of Rights, Hale v. Henkel, was decided about a half year before Northwestern National Life Insurance v. Riggs.96 The case had its origin in the federal government’s ongoing antitrust investigation of the American Tobacco Company. A federal grand jury had subpoenaed Edwin F. Hale, secretarytreasurer of the MacAndrews and Forbes Company, a corporation suspected of colluding with American Tobacco, and demanded that Hale produce a number of documents, including all correspondence and agreements between the company, American Tobacco, and several other tobacco companies. Hale sued to overturn the subpoena on the grounds that it violated his own and the corporation’s rights under the Fourth and Fift h Amendments to the Constitution. Writing for the majority of the Court, Justice Henry  B. Brown found Hale’s personal invocation of the Fift h Amendment easy to dismiss because Congress had passed a law granting immunity from prosecution to people who testified or produced evidence in antitrust proceedings. The more difficult question was Hale’s claim that the corporation (which had no such immunity) was also shielded by the Fift h Amendment. In determining that it was not, Brown’s opinion fit squarely within the train of decisions that followed from Paul v. Virginia and Santa Clara. Unlike human persons, Brown wrote, corporations were creatures of the states that chartered them. When a state granted “certain special privileges and franchises” to a corporation, they could be held only “so long as it obey[ed] the laws of its creation.” States had to be able to insure that corporations met the conditions of their charters. Hence, they could legitimately require corporations “charged with an abuse of such privileges” to produce their books and papers. Brown did not cite any precedents for this ruling; the point just seemed obvious to him: “It would be a strange anomaly to hold that a State, having chartered a corporation to make use of certain franchises,” could not verify whether these franchises “had been abused.” Moreover, in this instance, Brown asserted, the states’ authority carried over to the federal government. Because the powers of the states were subordinate to those of Congress in matters of interstate commerce, the federal government had a similar right to compel testimony in cases involving commerce that extended across state lines.97

Corporations and the Fourteenth Amendment

Brown was more sympathetic to Hale’s claim that the Fourth Amendment protected the corporation against unreasonable searches and seizures. Using a logic similar to Field’s in his circuit court opinions in Santa Clara and the Railroad Tax Cases, Brown reasoned that a corporation was, “after all, but an association of individuals.” When these individuals organized themselves “as a collective body,” they did not waive any “constitutional immunities appropriate to such body.” Therefore, the corporation’s “property [could not] be taken without compensation.” The corporation could “only be proceeded against by due process of law,” and it was “protected, under the Fourteenth Amendment, against unlawful discrimination.” It should not be subject to unreasonable search and seizure, and in the present case, the grand jury’s subpoena was “far too sweeping in its terms to be regarded as reasonable.”98 Although this part of the opinion did not affect the disposition of the case (for other reasons the Court affi rmed the order to produce the subpoenaed documents), it underscores the Court’s choice to base the constitutional protections afforded corporations not on their status as legal persons but on the rights of the individual human beings who made them up. In effect, Brown was following Field in drawing a line between the rights that corporations derived from their human members and those that belonged only to the members as individuals. On one side of the line was the Fourth Amendment, which could be thought of as protecting property; on the other side was the Fift h Amendment’s clause against self-incrimination, which could be thought of as protecting liberty. The Court insisted on this distinction even though the conception of liberty at stake in this case was very different from Peckham’s focus on freedom of contract.99 The line that Brown drew in Hale v. Henkel would prove to be of lasting importance, figuring in majority Supreme Court opinions as late as the 1970s.100 A second set of cases concerning liberty rights that distinguished between corporate persons and natural persons centered on the income tax. Congress had passed a law establishing an income tax in 1894, but the Supreme Court had declared it unconstitutional the very next year in Pollock v. Farmers’ Loan and Trust Company.101 Even before the ratification of the Sixteenth Amendment in 1913, Congress tried again, enacting a corporate “excise” tax in 1909 that was, in effect, a levy on corporate income. The Court held this new tax constitutional in 1911 in Flint v. Stone Tracy Company.102 Justice William R. Day, who wrote the opinion for the Court, pointed out that it was immaterial whether the business dealings of corporations were substantially the same as those of partnerships or individual proprietorships. “The thing

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taxed is not the mere dealing in merchandise . . . but the tax is laid upon the privileges which exist in conducting businesses with the advantages which inhere in the corporate capacity of those taxed, and which are not enjoyed by private firms or individuals”—advantages like limited liability, the ability to concentrate management, and perpetual life. As artificial entities granted privileges by the state, corporations were different from natural persons, and it was their special advantages that justified the imposition of the tax.103 Flint v. Stone Tracy also involved Fourth Amendment rights because a passage in the 1909 corporate income tax law made tax returns a matter of public record and thus open to inspection.104 The plaintiff corporations charged that this feature of the statute constituted a violation of their protection against unreasonable searches and seizures. The Court disagreed, viewing the passage as a reasonable attempt by Congress to enforce the law and ensure the accuracy of returns.105 After the ratification of the Sixteenth Amendment, this pronouncement became precedent for a 1925 appeals court decision regarding personal income tax returns. In the Revenue Act of 1924, Congress had ordered the Commissioner of Internal Revenue to “cause to be prepared and made available to public inspection” a list of the names and addresses of all taxpayers “together with the amount of the income tax paid.”106 This list, which included both individual and corporate taxpayers, was published in many newspapers and provoked widespread outrage until Congress repealed that part of the law in 1926.107 Although protesters recognized that the law applied to human persons and corporations alike, they focused their ire on the harm this unwanted publicity would do to individuals, deploring the provision as “a scandalous march into the privacy of the citizen’s rights in which he thought he was protected by his constitution.”108 When an individual taxpayer sued in federal court on the grounds that the dissemination of personal information about his tax payments violated his Fourth Amendment rights, he too lost in the lower court and again on appeal. Echoing the decision in Flint v. Stone Tracy Co., the appeals court determined that the statute was an “appropriate means of securing the enforcement of the Income Tax Law.” Congress’s choice of mechanism may have been “unwise,” but it was not unconstitutional. In this instance, the Court may appear to have reversed the logic of previous cases by deciding that the Flint v. Stone Tracy precedent was “as applicable to natural persons as to corporations.” The point of both rulings, however, was to uphold the constitutionality of laws that placed certain limits on privacy rights. Neither

Corporations and the Fourteenth Amendment

ruling addressed the question of how far these rights might, in other circumstances, extend. Moreover, the opinion acknowledged that “the rights of natural persons are in many instances quite different from those of corporations.”109 Over time, the courts would become more solicitous of the privacy rights of individuals, but they would also increasingly differentiate them from the privacy rights of corporations. As Justice Robert H. Jackson declared in the 1950 Supreme Court case, United States v. Morton Salt Company, corporations “may and should have protection from unlawful demands made in the name of public investigation,” but they “can claim no equality with individuals in the enjoyment of a right to privacy.” Jackson went on to explain that corporations “are endowed with public attributes. They have a collective impact on society, from which they derive the privilege of acting as artificial entities. . . . Even if one were to regard the request for information in the case as caused by nothing more than official curiosity, nevertheless law-enforcing agencies have a legitimate right to satisfy themselves that corporate behavior is consistent with the law and the public interest.”110 Here, the stream of precedents deriving from Flint v. Stone Tracy Co. and Hale v. Henkel came together. Noting this merger, Justice William H. Rehnquist cited the two cases in a later decision upholding the anti–money laundering provisions of the Bank Secrecy Act of 1970. His opinion strongly reaffirmed Jackson’s distinction between the privacy rights possessed by individuals and those of corporations.111 The Court’s reluctance to extend constitutional rights to corporations is essential context for understanding why there were so few challenges to campaign fi nance laws that prohibited corporations from contributing money to candidates.112 As Adam Winkler has shown, Congress passed the first federal campaign finance statute, the Tillman Act of 1907, at a time of rising concern about the rights of investors in corporations. In the wake of a scandal in the life insurance industry, hearings held by the New York legislature (the famous Armstrong investigation of 1905) had revealed many types of corporate malfeasance, but the large amounts that corporations spent on political contributions incited the most public outrage. Commentators stressed the harm these expenditures infl icted on policyholders (the true owners of the companies). Not only were corporate funds being deployed to help elect politicians the owners did not necessarily support, but, still more galling, the executives were using the increased political influence they gained from these contributions to push for policies, such as

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weaker regulatory oversight, that were directly counter to policyholders’ interests.113 The first constitutional challenge to the ban on corporate political contributions came nearly a full decade later, in 1916, when several breweries charged under the law sued unsuccessfully in the hopes of getting their indictments quashed. The opinion of the federal judge who heard the case fit squarely into the stream of decisions we have been discussing. The judge had no doubt that corporations were different from natural persons. They were creatures of government, and therefore their campaign contributions could be regulated by their creators: “That Congress may control those corporations which the federal government has created goes for the saying.” The only question was whether Congress had the authority to regulate the political activities of state-chartered corporations. The judge determined that it did. The Tillman Act did not violate anyone’s First Amendment rights; its sole purpose was “to guard elections from corruption.” Corporations, as “artificial persons,” were “not citizens of the United States, and, so far as the franchise is concerned, must at all times be held subservient and subordinate to the government and the citizenship of which it is composed.”114 There were no more challenges of this kind to the campaign finance law until the passage in 1947 of the Taft-Hartley Act, which extended the prohibition against corporate campaign contributions to include labor unions.115

Beyond Business Corporations All of the corporations involved in the cases we have discussed so far, with the exception of Adkins, were for-profit businesses. During the first half of the twentieth century, however, the Court heard increasing numbers of lawsuits involving other types of corporations. Remarkably, as in Adkins, the new cases stimulated little or no reflection about the nature of corporate personhood.116 Outside the realm of the Fourteenth Amendment, there were a growing number of Supreme Court cases in which churches were parties. Many of them were corporations, yet corporate status played no role in the Court’s determination of their rights.117 In cases where the Fourteenth Amendment did come into play, the justices continued to apply to nonprofit corporations the parsing they had developed in the context of railroad and other business litigation, including Harlan’s rule that corporations had property rights but not liberty rights. Indeed, the justices generally treated members of nonprofit corporations as if they had the same limited property

Corporations and the Fourteenth Amendment

interests in their organizations as shareholders in for-profit corporations. It seemed to make little difference to them that the purposes of educational, charitable, and advocacy corporations implicated a much broader set of rights than those of for-profit companies. This tendency to homogenize decisions involving for-profit and nonprofit corporations was apparent as early as 1908 in Berea College v. Kentucky, the first case involving a secular not-for-profit corporation to be heard by the Supreme Court after the Civil War.118 The racially integrated college had sued to overturn a state Jim Crow law that it claimed violated its Fourteenth Amendment rights. Drawing the same distinction between liberty and property rights we saw in the business cases, the federal appeals court that heard the case ruled that “the right to teach white and negro children in a private school at the same time and place is not a property right” and therefore not constitutionally protected.119 Although the Supreme Court sustained that position, Justice Harlan argued in a dissenting opinion that the statute should be overturned because it infringed on the liberty right of individuals to pursue a calling. This liberty, which included the “sacred” right to “impart and receive education,” applied to students of all races and to “teachers who do not represent corporations,” even if not to corporations per se.120 But by construing the case as a matter of corporate rights, the Court’s majority managed altogether to avoid considering the law’s prohibition of mixed-race teaching. Relying on Harlan’s own distinction between the property rights of corporations and the liberty rights of individuals, the justices concluded, “Even if it were conceded that [the statute’s] assertion of power over individuals cannot be sustained, still it must be upheld so far as it restrains corporations.”121 Nearly two decades later, the Court applied essentially the same principles in Pierce v. Society of Sisters (1925), albeit this time ruling in favor of the corporation.122 Lawyers for an incorporated Catholic school argued that an Oregon law mandating that all children below a certain age attend public schools infringed on the corporation’s constitutional rights.123 Although the school was a religious organization, and the case potentially involved broader ideas about freedom than liberty of contract, Justice McReynolds shoehorned his opinion into the, by then, standard distinction between the liberty and property rights of corporations. Citing both Northwestern National Life Insurance v. Riggs and Western Turf Association v. Greenberg, McReynolds acknowledged that corporations “cannot claim for themselves the liberty which the Fourteenth Amendment guarantees.” But, he ruled, the appellees

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“have business and property” for which they can properly “claim protection” under the amendment.124 The Court similarly extended to nonprofit corporations its previous rulings that business corporations lacked the privileges and immunities of citizens. In cases involving the regulation of associations incorporated by other jurisdictions, the Court even permitted states to rid themselves of organ izations they found politically troublesome.125 During the 1920s, for example, several states moved to eject the Ku Klux Klan, a corporation chartered by the state of Georgia. Kansas’s attorney general filed a petition in 1922 with the state’s high court to oust the Klan on the grounds that it had not secured the permission of the state’s charter board to “do business” there, as was required of all foreign corporations. Registration was not really an option because at least two members of the three-person board were declared opponents of the Klan and would not have voted to allow the corporation to operate in Kansas. Nonetheless, the court agreed with the attorney general and ousted the organization on the basis of its failure to register. The Klan appealed to the U.S. Supreme Court, which declined to hear the case, allowing the action to stand.126 Because the Klan was an organization that promoted violence, the justices regarded its expulsion as eminently within the scope of the state’s police powers.127 The Court underscored its insistence on applying to nonprofit corporations the same constitutional principles it had developed for business corporations in the 1939 case of Hague v. Committee for Industrial Organization.128 Several individuals, labor unions, and a membership corporation (the American Civil Liberties Union [ACLU]) had mounted a Fourteenth Amendment challenge to a Jersey City ordinance that restricted their right of assembly. In a major civil rights victory for the plaintiffs, the Court upheld the challenge by the natural persons but did not rule in favor of the labor unions or the corporation (the ACLU). There were two separate opinions in the case. Justice Owen J. Roberts based the first of the two on the privileges and immunities clause of the Fourteenth Amendment. That clause applied to “natural persons,” not corporations, so “only the individual respondents may . . . maintain this suit.”129 In the second opinion, Justice Harlan Fiske Stone similarly ruled in favor of the individual challengers, declaring that “since freedom of speech and freedom of assembly are rights secured to persons by the due process clause, all of the individual respondents are plainly authorized . . . to maintain the present suit.” The ACLU, however, was not similarly authorized. As a corporation, it could not “be said to be

Corporations and the Fourteenth Amendment

deprived of the civil rights of freedom of speech and of assembly, for the liberty guaranteed by the due process clause is the liberty of natural, not artificial persons.”130 This principle that “the liberty guaranteed by the due process clause is the liberty of natural, not artificial persons” would continue to govern the treatment of nonprofit (as well as for-profit) corporations at least through the 1940s. When, for example, a membership corporation, the American League of the Friends of the New Germany of Hudson County, complained that the police had broken up a meeting in violation of their freedom of speech and assembly, the New Jersey Chancery Court ruled against the League because it was a “corporation and the rights mentioned run only to natural persons.” Citing Northwestern National Life Insurance v. Riggs and Western Turf Association v. Greenberg in his opinion, the vice chancellor asserted that, though the individual members had a right to assemble and speak their minds, “the corporation itself [had] no constitutional right to conduct a meeting or, by its agents, to speak.”131 A federal district court judge used all the same cases, as well as Hague v. CIO, as precedents when considering a civil rights suit brought by the Finnish Workers Federation against the city of Aberdeen, Washington, determining that “the conclusion is inescapable that plaintiff being a corporation, cannot maintain this action.”132 A federal appeals judge included the same citations in a ruling against a constitutional challenge mounted by the Joint Anti-Fascist Refugee Committee, which had been designated a subversive organization by the U.S. government. According to the judge, “only the members, not the Committee, can seek redress for alleged impairment of members’ constitutional rights of freedom of speech and assembly. Those rights are personal to the individual members.” Even though the Committee’s purposes were “altogether charitable,” it had “no authority to assert or protect constitutional liberties and privileges of its individual members.”133

Reaffirming Corporate Property Rights The principle that corporations did not have liberty rights not only survived the Lochner era intact but seemed so well established by the 1930s that it inspired efforts by two liberal justices to strip corporations of their Fourteenth Amendment protections for property by overturning Santa Clara. Both of these efforts were so spectacularly unsuccessful that they had the ironic consequence of strongly reaffirming the Santa Clara precedent. Justice Hugo

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Black mounted the first attack in 1938 in a dissenting opinion in Connecticut General Life Insurance Co. v. Johnson.134 Connecticut General earned premiums by reinsuring policies issued by companies in other states, and California sought to tax its income from contracts that originated in California. The company objected that it was not doing business in California and that the taxes violated its rights under the due process clause of the Fourteenth Amendment. Agreeing with the company’s claim, California’s high court dismissed the suit, but the U.S. Supreme Court reversed on appeal. After offering a short explanation of why he thought the Court’s decision in the case was wrong, Black turned to the main point of his dissent: “I do not believe the word ‘person’ in the Fourteenth Amendment includes corporations.”135 Citing Western Turf Association v. Greenberg that the liberty guaranteed by the amendment “is the liberty of natural, not artificial persons,” Black argued that the word “person” should be interpreted in a similarly limited way throughout. After all, the amendment’s first sentence defined citizens as “persons born or naturalized in the United States.” “Person” in that sentence clearly referred to human beings, and there was no reason to think that the drafters had anything else in mind when they used the word “person” again later in the amendment.136 Reminding readers of the circumstances that had originally inspired Congress to pass the Fourteenth Amendment, and the manner in which it had been ratified, he sarcastically observed that “the people were not told that the states of the South were to be denied their normal relationship with the Federal Government unless they ratified an amendment granting new and revolutionary rights to corporations.”137 None of the other justices supported Black’s plea to reverse Santa Clara, but Black later found an ally in William O. Douglas, who joined the Court the next year. Dissenting in the 1949 case of Wheeling Steel v. Glander, another suit involving taxes imposed on a foreign corporation, Douglas argued that the Santa Clara precedent should be overturned.138 Going over much the same ground as Black in the Connecticut General case, he pointed out that the link between the words “citizen” and “person” in the amendment’s fi rst sentence showed that the drafters meant to restrict both to human beings. He then cited Western Turf Association v. Greenberg to make the point that corporations were neither citizens in the meaning of the privileges and immunities clause nor persons in the sense of receiving the due process protections for liberty. The Court, he

Corporations and the Fourteenth Amendment

acknowledged, had treated corporations as persons within the meaning of the equal protection clause, and had also extended due process protections for property to corporations. But, he argued, that way of parsing the amendment made no sense, and as a consequence, those precedents should be reversed. “It requires distortion,” Douglas insisted, “to read ‘person’ as meaning one thing, then another within the same clause and from clause to clause.”139 No justice besides Black joined Douglas’s dissent. Justice Jackson, who wrote the majority opinion in the Wheeling Steel case, responded incredulously to Douglas’s objections, appending a note to his decision to explain why it had never even occurred to him to discuss whether “the protections of the Fourteenth Amendment are available to a corporation.” He acknowledged that Black had once before dissented from this view, “but the challenge did not commend itself, even to such consistent liberals as Mr. Justice Brandeis and Mr.  Justice Stone,” and he had “supposed it was no longer pressed.”140 In the current term, Jackson pointed out, Douglas himself had written two opinions in cases in which corporations had made Fourteenth Amendment claims without expressing any doubts that the “corporations had standing to raise the questions or were entitled to protection of the Amendment.” Moreover, both Douglas and Black had joined the majority in two other recent cases “striking down state action as conflicting with corporate rights” under the Fourteenth Amendment.141

A New Deal (and Civil Rights) for Corporations This strong restatement of Santa Clara came at a time when changes associated with the New Deal and, a bit later, the Civil Rights Movement were undermining other elements of the original parsing of the Fourteenth Amendment. In the first place, the expanded defi nition of interstate commerce that the Supreme Court embraced during the late 1930s substantially limited states’ ability to regulate the activities of foreign corporations, effectively weakening the precedents that denied corporations the privileges and immunities of citizens. In the second, the Court began to carve out exceptions to the rule that corporations lacked liberty rights. These exceptions occurred under very special circumstances, but because the Court did not accordingly qualify its language, the cases created considerable confusion about the extent of corporations’ constitutional protections. Taken together, these developments had the unintended consequence of heightening the relative importance of

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the Santa Clara precedent while obscuring the logic that had both originally justified it and limited its scope. Shortly after the inauguration of President Franklin D. Roosevelt in 1933, the new administration convinced Congress to pass a series of measures designed to increase purchasing power and reverse the severe decline in employment afflicting the nation. The Supreme Court declared unconstitutional two of the most important statutes, invalidating key parts of the National Industrial Recovery Act in 1935 and the Agricultural Adjustment Act in 1936.142 These decisions, among others that set back the New Deal agenda, spurred Roosevelt to contemplate increasing the size of the Supreme Court so that he could “pack” it with jurists more favorable to his policies. He never put this plan into effect, however, because retirements and changes in the views of some of the justices on the Court made it unnecessary. In 1937 the Court began to reverse its earlier positions and hold impor tant pieces of New Deal legislation constitutional.143 A key aspect of the change—and the part that most affected states’ authority to regulate corporations chartered by other jurisdictions—was the Court’s adoption of an expanded definition of interstate commerce. In a 1937 case upholding the constitutionality of the National Labor Relations Act, which guaranteed workers the right to organize and bargain collectively, the Court not only reversed its insistence in E. C. Knight that manufacturing was not commerce but defended the statute’s constitutionality by warning of the “paralyzing consequences” that industrial strife in a single manufacturing enterprise would have for interstate commerce.144 Just a few years later, in upholding the second Agricultural Adjustment Act, the Court treated the on-farm consumption of intermediate goods as interstate commerce. Ruling that a farmer who produced more than his allotment of wheat had to pay a penalty, even though he fed the surplus to animals on his own farm and did not attempt to sell it, the Court accepted the act’s definition that marketing a crop included “feeding [it] (in any form) to poultry or livestock, which, or the products of which, are sold, bartered, or exchanged.”145 This broad new definition of interstate commerce not only laid the foundation of our modern regulatory system but also considerably reduced the states’ powers under the traditional interpretation of the privileges and immunities clause. The principle that states could regulate and even exclude foreign corporations had always been constrained by the injunction that they could not thereby interfere with interstate commerce. As the definition of interstate commerce broadened, the scope for state regulation narrowed.

Corporations and the Fourteenth Amendment

In another impor tant change, the Court also abandoned the idea, enshrined in Lochner, that labor regulations unconstitutionally interfered with workers’ liberty of contract unless they were clearly necessary for the protection of public health and safety. The breakthrough case, West Coast Hotel Company v. Parrish (1937), involved a minimum wage law for women enacted by the state of Washington.146 Writing for the Court, Justice Charles Evans Hughes maintained that the Constitution “speaks of liberty,” not freedom of contract. Liberty, he went on, implied “the absence of arbitrary restraint, not immunity from reasonable regulations and prohibitions imposed in the interests of the community.” Protective regulations were especially necessary in cases such as the one at hand, where there was great “inequality in the footing of the parties,” where “a class of workers” was “in an unequal position with respect to bargaining power and thus . . . relatively defenceless [sic] against the denial of a living wage.” Previous decisions that overturned such regulations were wrong. They represented “a departure from the true application” of constitutional “principles governing the regulation by the State of the relation of employer and employed.”147 Although the Court was now willing to recognize workers’ vulnerability in bargaining as individuals with their employers, it was not yet ready to extend constitutional protections to the organizations they formed to strengthen their positions. As we saw in the 1939 case of Hague v. CIO, the Court still insisted that only the individual plaintiffs and not the unions or the ACLU (a corporation) had standing to sue for infringement of their First Amendment rights of assembly and speech. But once the justices acknowledged that ordinary people were often powerless to assert their own interests, it was a relatively small step to concede that the organizations representing them had to be allowed to assert rights on their behalf. The Court would soon take this step during the Civil Rights Movement. Paving the way for this change was a third important development: the radical expansion of the Court’s First Amendment jurisprudence that began during the 1920s and accelerated during the New Deal and Civil Rights eras. The First Amendment restrained the federal government: “Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.”148 In a series of cases involving the suppression of dissent after World War I, however, the Supreme Court interpreted the Fourteenth Amendment as “incorporating” the First—that is, as applying it

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to the states—and began to consider the constitutionality of state and local laws that plaintiffs claimed infringed their First Amendment rights.149 Almost all of these cases involved individuals, most notably political radicals and then religious proselytizers such as Jehovah’s Witnesses.150 The only corporations to bring First and Fourteenth Amendment cases to the Court during this period were news organizations seeking enforcement of freedom of the press. The first such case, Grosjean v. American Press Company in 1936, followed essentially the same logic as the other cases involving corporations we have considered so far.151 Invalidating a punitive tax on large newspapers levied by Louisiana in retaliation for the papers’ negative coverage of Governor Huey Long, the Court was more solicitous of the rights of the readers of the paper than of the corporation itself. The statute, it decided, was “a deliberate and calculated device in the guise of a tax to limit the circulation of information to which the public is entitled in virtue of the constitutional guarantees.”152 Although the opinion contained the blanket statement that “a corporation is a ‘person’ within the meaning of the equal protection and due process of law clauses” of the Fourteenth Amendment—without distinguishing between liberty and property rights—the aspect of the decision that bore most directly on the rights of corporations only concerned the tax’s infringement on property rights.153 Perhaps because of this continued emphasis on property rights, the Court interpreted Grosjean narrowly. In the 1940s, for example, when newspaper and other media corporations argued that federal labor laws imposed an impermissible burden on the freedom of the press, the Court ruled against their requests for exemptions.154 The only for-profit corporations granted First Amendment claims by the Court between the 1930s and the 1960s were motion picture companies contesting New York’s censorship of their films as “sacrilegious” and “immoral.”155 When the Court began to apply the First Amendment more broadly to media corporations during the mid-1960s, it did not rely on the idea that corporations had liberty rights but instead, as in Grosjean, on the importance to the public of a free press: “Debate on public issues should be uninhibited”; “[these] guarantees are not for the benefit of the press so much as for the benefit of all of us.”156 The first significant departure from the Court’s long-term position on corporate rights came during the 1950s in response to attacks on civil rights organizations such as the National Association for the Advancement of Colored People (NAACP) and the Congress of Racial Equality (CORE). A

Corporations and the Fourteenth Amendment

number of southern states sought to block desegregation efforts by using their regulatory powers over foreign corporations to expel the NAACP and CORE, both corporations chartered by the state of New York, in much the same way as Kansas had moved against the KKK in 1922.157 The NAACP and CORE, unlike the Klan, were committed to non-violence, and their agenda of desegregation was one that the Court was already on record as supporting. Moreover, the moves against them occurred in a context in which state regulatory powers over foreign corporations had already been eroded by the Court’s expansive federalism. It is not surprising, therefore, that the Court came to a very different conclusion in these cases and overturned the states’ actions. The most important of these cases originated in a suit fi led in 1956 by Alabama’s attorney general to enjoin the NAACP from operating in the state because it had failed to register as a foreign corporation. The attorney general demanded as part of the registration process that the organization produce a number of records, including its membership lists, to document its activities within the state. When the NAACP refused to produce the lists, an Alabama court cited the organization for contempt. Over the next decade, the case bounced back and forth between state and federal courts, ultimately resulting in two impor tant U.S. Supreme Court decisions, both written by Justice John  M. Harlan (the second). These decisions are most famous for articulating for the fi rst time a constitutional right of association: “It is beyond debate that freedom to engage in association for the advancement of beliefs and ideas is an inseparable aspect of the ‘liberty’ assured by the Due Process Clause of the Fourteenth Amendment, which embraces freedom of speech.”158 But the decisions also addressed Alabama’s use of its authority over foreign corporations to compel the production of the NAACP’s membership lists. The Court determined that Alabama had not provided a convincing justification for its demand. To the contrary, the requisition so infringed on “the right of the members to pursue their lawful private interests privately and to associate freely with others in so doing as to come with the protection of the Fourteenth Amendment.”159 Although the Supreme Court did not overturn Paul v. Virginia in the NAACP decisions, it certainly weakened the precedent.160 Moreover, in these and other civil rights decisions, the Court went a long way toward adding liberty to the list of protections afforded to corporations under the Fourteenth Amendment’s due process clause. In the 1963 case of NAACP v. Button, for example, the Court overturned Virginia’s attempt to penalize the organ-

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ization for providing legal representation to plaintiffs in discrimination suits in violation of a statutory ban against “the improper solicitation of any legal or professional business.”161 The NAACP challenged the ban on the grounds, among others, that the statute abridged “the freedoms of the First Amendment, protected against state action by the Fourteenth.” Writing for a unanimous Court, Justice William J. Brennan Jr. ruled that the NAACP had standing to “assert this right on its own behalf, because, though a corporation, it is directly engaged in those activities, claimed to be constitutionally protected, which the statute would curtail.” The Court then found that the corporation’s rights had been violated.162 In another important case that same year, a federal appeals court reversed a Mississippi court order granting a preliminary injunction against CORE for organizing demonstrations against a segregated restaurant in a city bus terminal. The appeals court declared that the injunction against CORE was “an unconstitutional abridgment of the First Amendment rights, as protected by the Fourteenth Amendment, as a prior restraint on freedom of speech.”163 The court never asserted that CORE, a corporation, had free speech rights. Rather, the decision was couched in terms of the dangers of censorship and the importance of not allowing worries about potential breaches of the peace to rationalize infringing on “the fundamental rights to speak, assemble, seek redress of grievances and demonstrate peacefully.”164 The majority opinion never even mentioned that CORE was a corporation. However, a dissenting judge made much of this fact. Noting that there was “only one appellant, a New York corporation,” he complained that the decision was the first instance he had found “where freedom of speech on the part of a corporate defendant is used as the basis for reversing.” He then quoted Stone’s opinion in Hague v. CIO that a corporation cannot “be deprived of the civil rights of freedom of speech and of assembly, for the liberty guaranteed by the due process clause is the liberty of natural, not artificial, persons.”165 The Supreme Court refused in 1963 to hear the CORE case on appeal,166 leaving the law in an ambiguous position. Did CORE itself have rights under the First Amendment or were the rights at stake in the case simply those of its members? Did the precedent apply by extension to all corporations, forprofit and not-for-profit alike? Or was it specific to organizations like CORE, whose very reason for being was to take up the cause of people who were powerless to defend their rights on their own? The answers to these questions were by no means clear, as became apparent the very next year, in a com-

Corporations and the Fourteenth Amendment

pletely unrelated case brought by the corporate owner of a ski lodge that was suing the state of Vermont for an action it claimed unconstitutionally and unfairly benefited its competitors. Trying to understand the trends in the recent case law, the federal judge who heard the suit concluded that the extent of the constitutional rights that business corporations could claim under the Fourteenth Amendment had become murkier as a result of the CORE decision. In his view, it was no longer certain that corporations did not have due process protections for liberty, though it was also by no means evident that they did. The judge allowed the suit to proceed on the only firm basis that he thought was then available—the principle that corporations came “within the purview of the Equal Protection clause of the Fourteenth Amendment”—in other words, Santa Clara.167

Bellotti, Citizens United, and the Invention of Corporate Liberty Rights The civil rights decisions of the 1950s and early 1960s left the constitutional rights of corporations in a highly ambiguous condition. Although the potential for confusion had always been present in the case law, the Court had previously taken pains to prevent misunderstanding. As we have seen, when Field cited Waite’s statement at the start of oral arguments in Santa Clara as precedent, he carefully explained that corporations did not have liberty rights or the privileges and immunities of citizens. Similarly, although Lochner-era justices allowed corporations to be parties to liberty-of-contract cases, they always made it clear that “the liberty guaranteed by the Fourteenth Amendment against deprivation without due process of law is the liberty of natural, not artificial, persons.”168 Now, however, the Court sowed confusion by breaking with precedent without admitting that it had done so. Silently abandoning the tradition of distinguishing between corporate property and human liberty, the justices missed the chance to pinpoint the par ticu lar kinds of corporations that had standing to make Fourteenth Amendment claims. The extent of the resulting muddle became apparent in 1978 when the Supreme Court overturned a Massachusetts law regulating corporate political spending in First National Bank of Boston v. Bellotti.169 Writing for the majority, Justice Powell began by echoing the Court’s position in Grosjean and other media cases, stating that the justices’ primary concern was to insure the public’s right to hear a diversity of opinions. Deliberately

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rejecting the state court’s framing of the issue around “whether and to what extent corporations have First Amendment rights,” he insisted that was “the wrong question” because the First Amendment served broader “societal interests.” “The proper question . . . [was] not whether corporations ‘have’ First Amendment rights and, if so, whether they are coextensive with those of natural persons.” Rather, it was whether the Massachusetts statute “abridge[d] expression that the First Amendment was meant to protect.”170 Powell held that it did. In his view, the statute constituted a prior restraint on discussion that prevented members of the public from obtaining a full range of views on a topic on which they were being asked to vote. “The inherent worth of the speech in terms of its capacity for informing the public does not depend upon the identity of its source, whether corporation, association, union, or individual.”171 However, confusion set in a few pages after this statement, when Powell asserted in a footnote that “[i]t has been settled for almost a century that corporations are persons within the meaning of the Fourteenth Amendment.” He cited Santa Clara and a follow-on opinion by Harlan that corporations had due process protections for property, but ignored all of the other case law on corporations and the Fourteenth Amendment.172 Powell’s erroneous footnote might seem like a small thing, but it popped up in the headnotes to the case and from there found its way into the case law. Thus, a federal district judge in 1991 cited Bellotti as signaling the Court’s rejection of the position that the “liberty guaranteed by the Fourteenth Amendment against deprivation without due process of law only applies to natural persons.” Numerous lower court judges at both the state and federal levels repeated this assertion.173 In a dissenting opinion, Justice Rehnquist objected to Powell’s misleading summary of precedent. Rehnquist acknowledged that the Court had decided “at an early date” that a “business corporation is a ‘person’ entitled to the protection of the Equal Protection Clause of the Fourteenth Amendment,” though, as he noted, the decision had been made “with neither argument nor discussion.” “Likewise, it soon became accepted that the property of a corporation was protected under the Due Process Clause of that same Amendment.” But, he reminded his colleagues, the Court “soon thereafter” concluded that the liberty protected by the same due process clause was “the liberty of natural, not artificial persons.”174 That is, the Court had traditionally held that the part of the Fourteenth Amendment most relevant to the protection of speech rights did not apply to corporations.

Corporations and the Fourteenth Amendment

Rehnquist recognized that the root of the confusion lay in the Court’s previous reluctance to draw a line between corporations that had liberty rights and those that did not. In his dissent he attempted to remedy the situation by inferring from the case law how the Court had implicitly distinguished among types of corporations. He pointed out that there had been only two “considered and explicit departures from the holding” that corporations did not have due process protections for liberty. The Court had held in Grosjean v. American Press Company “that a corporation engaged in the business of publishing or broadcasting enjoys the same liberty of the press as is enjoyed by natural persons,” and it had ruled in NAACP v. Button “that a nonprofit membership corporation organized for the purpose of ‘achieving . . . equality of treatment by all government, federal, state and local, for the members of the Negro community’ enjoys certain liberties of political expression.”175 The question at issue in Bellotti—“whether business corporations have a constitutionally protected liberty to engage in political activities”—had never before “been squarely addressed by any previous decision of this Court.”176 Quoting Marshall’s famous description of a corporation as “an artificial being, invisible, intangible, and existing only in contemplation of law,” Rehnquist made the case that the question should be decided in the negative. “A State grants to a business corporation the blessings of potentially perpetual life and limited liability to enhance its efficiency as an economic entity. It might reasonably be concluded that those properties, so beneficial in the economic sphere, pose special dangers in the political sphere.” “Indeed,” Rehnquist concluded, articulating the concern that, as we have seen, led to the passage of the original federal campaign fi nance law in 1907, “the States might reasonably fear that the corporation would use its economic power to obtain further benefits beyond those already bestowed.”177 Other attempts to draw a line between types of corporations followed. Coming at the problem from a very different context, Justice William J. Brennan  Jr. similarly distinguished between business corporations and nonprofits in a case involving the free exercise of religion.178 An employee of an incorporated nonprofit gym owned by the Mormon Church brought the case to contest his dismissal for not being a member in good standing of the Church. Congress had exempted religious organizations from the section of the 1964 Civil Rights Act that prohibited discrimination in employment on the basis of religion. The question at issue was whether that exemption carried over to corporations, like the gym, that were organized by churches but

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were not obviously religious in their purpose.179 The Court decided in favor of the gym, and Brennan wrote a concurring opinion that hinged on the fact that the gym was “not organized as a profit-making commercial enterprise.” To Brennan, the fact that it was a nonprofit corporation made “colorable a claim that it is not purely secular in orientation.”180 Nonprofit organizations differed from for-profit corporations in Brennan’s view because they “may not distribute any surplus to the owners” and instead must use their earnings “to finance the continued provision of the goods or ser vices” they provide. “Furthermore, unlike for-profit corporations, nonprofits historically have been organized specifically to provide certain community ser vices, not simply to engage in commerce.” Churches provided such ser vices “as a means of fulfi lling religious duty and of providing an example of the way of life a church seeks to foster.” Because a law forcing such organizations to hire the unfaithful had “substantial potential for chilling religious activity,” he supported giving them a categorical exemption from labor regulations.181 For him, church-affi liated corporations could legitimately claim religious exemptions only if they refrained from crossing the line between nonprofit and for-profit activities. A federal appeals judge for the Fift h Circuit proposed an alternative set of criteria in a 1981 civil rights suit instigated by the Church of Scientology. Quoting from the Supreme Court’s decision in the fi rst NAACP case, the judge explained that the corporation in that instance was the “appropriate party to assert” constitutional rights on behalf of its constituents for the simple reason that “it and its members are in every practical sense identical.” Continuing the quotation, he pointed out that the NAACP, “which provides in its constitution that ‘[a]ny person who is in accordance with [its] principles and policies . . .’ may become a member, is but the medium through which its individual members seek to make more effective the expression of their own views.” The judge thus used the NAACP case to highlight the circumstances under which a nonprofit membership corporation might assert constitutional rights to liberty—that is, when its purpose was to further the views of its individual members and when anyone who agreed with those views could belong.182 In the area of campaign finance, the Supreme Court was, in fact, moving toward a very similar distinction between the rights of advocacy organizations and those of corporations more generally. Although direct political contributions by corporations and labor unions were restricted by law, since the 1950s the Court had allowed members of those organizations to collect

Corporations and the Fourteenth Amendment

money through separate political funds, later known as Political Action Committees (PACs).183 In a 1986 case, the Court went further and articulated an exemption from the campaign finance laws for nonprofit corporations formed to promote particular causes.184 The case involved an advocacy organization, Massachusetts Citizens for Life, Inc. (MCFL), which had published and disseminated a newsletter listing political candidates that supported its positions. The Court held that MCFL, though a corporation, had three features that should exempt it from federal restrictions on corporate political spending: First, it was formed for the express purpose of promoting political ideas, and cannot engage in business activities. . . . Second, it has no shareholders or other persons affi liated so as to have a claim on its assets or earnings. This ensures that persons connected with the organization will have no economic disincentive for disassociating with it if they disagree with its political activity. Third, MCFL was not established by a business corporation or a labor union, and it is its policy not to accept contributions from such entities. This prevents such corporations from serving as conduits for the type of direct spending that creates a threat to the political marketplace.185 When the Supreme Court considered the case of Citizens United v. FEC in 2010, the justices thus had available a wealth of prior opinions about the constitutional rights of corporations which drew lines between types of associations.186 Citizens United was a nonprofit corporation organized for advocacy purposes, and it professed in its brief to be “funded predominantly by donations from individuals who support [its] ideological message.”187 As Justice John Paul Stevens indicated in his dissenting opinion, “the Court could have expanded the MCFL exemption to cover §501(c)(4) nonprofits [like Citizens United] that accept only a de minimis amount of money from for-profit corporations.”188 The Court’s majority, however, rebuffed Stevens’s suggestion and instead adopted a ruling that obliterated all such distinctions—not only between nonprofit and for-profit corporations but also between corporate and human speakers. Justice Kennedy, who wrote the opinion on behalf of the majority, followed Powell’s example in Bellotti but went considerably further. On the one hand, he too based his decision on the public’s imperative need for uncensored information. “Speech restrictions based on the identity of the speaker,” he asserted, “are all too often simply a means to control content.”

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He then quoted Powell’s injunction that “political speech does not lose First Amendment protection ‘simply because its source is a corporation.’ ”189 On the other hand, Kennedy, unlike Powell, turned a decision that only implicitly extended constitutional protections to corporations into one that did so explicitly. Citing NAACP v. Button and the long string of freedom of the press cases that followed Grosjean without, however, taking any notice of their exceptional features, he baldly stated, “The Court has recognized that First Amendment protection extends to corporations.”190 Like Powell’s erroneous footnote in Bellotti, Kennedy’s misleading assertion popped up in the headnotes to the decision and quickly proved enormously influential. Moreover, precisely because it ran roughshod over all contrary case law, the decision empowered other kinds of corporations to challenge government regulations on First Amendment grounds. A good example of this proliferating effect is the suit brought by Hobby Lobby Stores, Inc., a for-profit retailer seeking a religious exemption from the contraception mandate in the Affordable Care Act. A divided Supreme Court found in favor of Hobby Lobby in 2014 but dodged the constitutional issue at the heart of the case.191 Writing for the majority, Justice Samuel A. Alito Jr. claimed to base his ruling narrowly on the Religious Freedom Restoration Act (RFRA) of 1993. He also claimed to be engaged in a linedrawing exercise that limited the ruling’s application to closely held, familyrun corporations whose members shared sincere religious beliefs. In fact, however, Alito indulged in a more expansive logic that belied these disclaimers, suggesting both that the decision had larger constitutional ramifications and that the extension of free exercise rights potentially applied to corporations of all types. For example, he was not content simply to reference the federal Dictionary Act when determining that RFRA’s definition of a person included corporations. Pouncing on the admission by the Department of Health and Human Ser vices “that a nonprofit corporation can be a ‘person’ within the meaning of RFRA,” he proceeded to assert that “no conceivable defi nition of the term includes natu ral persons and nonprofit corporations, but not for-profit corporations.”192 Declaring that “a corporation is simply a form of organization used by human beings to achieve desired ends,” he insisted that, when the courts extend rights to corporations (“whether constitutional or statutory”), the purpose is to safeguard the rights of the people who make them up. “[P]rotecting the free-exercise rights of corporations like Hobby Lobby . . . protects the religious liberty of the humans who own and control those companies,” he proclaimed, just as “pro-

Corporations and the Fourteenth Amendment

tecting corporations from government seizure of their property without just compensation protects all who have a stake in corporations’ financial well-being.”193 In contrast to Grosjean, Bellotti, and Citizens United, Alito made no pretense of concern for the rights of the general public. The decision was a naked assertion of the rights of the corporation over both the rights of its employees and the police powers of the government. Some commentators have observed that we are entering a new Lochner era, in which the Court habitually overturns regulatory statutes on the grounds that they infringe on liberty.194 Whatever the truth of the latter part of this observation, the current Roberts Court has broken dramatically with early twentieth-century precedents bearing on corporate rights. During the original Lochner era, the Court based its rulings on the rights of individuals. Even though the justices decided some liberty of contract cases in favor of corporate parties, they studiously maintained that corporations themselves did not possess liberty rights. In fi nding for the corporate plaintiffs in Citizens United and Hobby Lobby, the Court’s majority has moved so far in the opposite direction as effectively to efface the legal distinction between natural persons and artificial corporations. Th is distinction, as we have shown, was a fundamental legal principle articulated by Chief Justice Marshall in the early years of the American republic, and it remained vital at least through the Civil Rights era, when the Court held that in some circumstances nonprofit advocacy organizations needed standing as corporations to defend poor and powerless people who could not assert constitutional rights on their own. The idea that for-profit corporations other than the media have First Amendment or other liberty rights is a recent invention. The assertion in Citizens United that “the Court has recognized that First Amendment protection extends to corporations” is not only a serious distortion of history but a change that radically shifts the balance of power within American democracy toward corporations.

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Modern Corporate Challenges

CHAPTER 9

Two Cheers for Vertical Integration Corporate Governance in a World of Global Supply Chains NELSON LICHTENSTEIN

Garment factory fires, building collapses, and other tragedies in East Asia and the Indian subcontinent have become endemic within the far reaches of the supply chains that put clothing and other consumer goods on the shelves of thousands of big-box stores in Europe and North America. Even before the collapse of the Rana Plaza garment factory complex near Dhaka in April 2013—killing 1,124 souls—the death toll from Bangladesh factory fires had risen to more than 700 over the previous decade. As recently as November  2012, a devastating fire killed 112 people at the Tazreen garment factory, which had been churning out goods for Wal-Mart without the company’s knowledge. Three things are notable even in the headline news. First, the flow of cheap and abundant goods, on which millions of consumers in the West now depend, offers the contemporary global corporation a powerful legitimating rationale, even as North Americans and Europeans would feel a sense of disquiet should they probe into the actual commercial and economic mechanisms that have so closely linked the factory districts of Asia and Central America with Western warehouses and stores. Wal-Mart is explicit about why it is the largest retailer in the world: “Saving people money so they can live better.” Meanwhile, Apple advertises that its lifestyle-enhancing computers and phones are “Designed by Apple in California,” which, of course, leaves barely unstated the existence of scores of factories and hundreds of thousands of workers who actually manufacture them in China.1 Second, the system of subcontracting and outsourcing that constitutes the bottom of the supply chains on which the Wal-Marts and Apples depend remains opaque, not only to the government, the public, and the workers, but even to the retailers and brands that pay for the product and set standards for its price, quality, and production schedule. Such was the backdrop 329

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to the Tazreen fire. The factory was working flat-out to meet the Christmas rush in the West. Wal-Mart had terminated its relationship with the factory due to safety concerns, but one of its subcontractors continued to use Tazreen without its knowledge, and clothes for the huge American retailer were still being produced there months later. Smoldering remains of the store’s “Faded Glory” brand were found in the embers.2 But third, if even corporate headquarters in Bentonville could not quite determine the set of manufacturers who actually produced all the product designated for company stores, there was little doubt, either among outside observers or corporate insiders, that Wal-Mart and other retail giants bore some sense of responsibility for the tragedies, if only because they were the ultimate paymasters and orchestrators of the production and distribution chain that sustained nearly 5,000 Bangladesh garment factories. Echoing long-standing demands from anti-sweatshop organizers and South Asian unionists, The New York Times editorialized that only stiff government safety regulations and a renewed sense of social responsibility on the part of the big garment buyers could avert future tragedies. “Lawmakers began improving industrial safety in earnest after the 1911 fire at New York’s Triangle Shirtwaist factory,” noted the Times. “The collapse of Rana Plaza should play a similar galvanizing role now.”3 We have before us a failure of corporate governance, not just in terms of any individual set of companies doing business in South Asia, but systematically, as a function of the nature of the supply chains that combine two seemingly contradictory phenomena: a high level of integration between manufacturers and the brands and retailers that source their product from these far-flung vendors, combined with a legal regime that absolves those who command the various links in the supply chain of the kind of responsibility—moral, economic, and legal—attached to those in formal leadership of the vertically structured corporation that once seemed so central to the American polity. As the chapters in this volume have made clear, innovations in the corporate form have repeatedly complicated the capacity of the state to regulate the commercial or political activities undertaken by these organizations so as to make them more congruent with a democratic polity. Although U.S. corporations have been chartered and structured in a remarkably wide variety of ways over the last two centuries, the corporate form that Progressives and New Dealers saw as the object of the reform impulse was one in which managerial authority coincided with virtually the entire process that

Two Cheers for Vertical Integration

produced and / or distributed a tangible good or ser vice.4 Most American companies have not been as vertically integrated as Ford, U.S. Steel, or IBM in their heyday, but that unified organizational structure served as a template whose imaginative reach was enormously influential, certainly in terms of regulatory law, labor relations, and public perception. To the extent that these entities could be held responsible and accountable, they could be regulated and reformed. Wagner-era labor law, for example, sought the internal democratization of the corporation by postulating a pluralistic division of economic power in which “management” committed a large slice of the entire production organization—today we would call this the supply chain—to abide by a contract negotiated between itself and a union or unions representing a majority of the workforce.5 That vertically integrated structure is today largely in eclipse because of the disaggregation and fragmentation of the firm. We live in a world, domestic and international, of supply chains, contract production, temp work, franchising, and self-employment. Regardless of the actual content of regulatory law, such atomization has subverted the capacity of the polity to subject the corporation to democratic control. But it would be a mistake to assert that the global market has simply become more potent and pervasive, depriving even the management of modern firms like Amazon, Wal-Mart, and Nike of the administrative power held by those once at command of General Motors and General Electric. Nothing could be further from the truth, because as this chapter demonstrates, contemporary supply chains, whatever the legal, corporate, or global form, are highly integrated production and ser vice entities in which top management utilizes new forms of technology to exercise a level of comprehensive and intrusive control that would have been the envy of even the most energetic executives of the early twentieth century. Th is essay explains some of the reasons, often labor-related, for the erosion of the vertically integrated corporation, not just in terms of global sourcing strategy, but from a domestic perspective as well. From the 1950s onward, the attempt to elude the burden of the New Deal era regulatory regime, including the encouragement it offered to trade unions, proved a powerful incentive for management in many heretofore highly integrated firms to outsource labor, disaggregate production, and franchise their products and ser vices. This has created a regime of “fissured employment,” to use the phrase coined by management theorist David Weil, in which executives and the firms over which they preside have sought to absolve themselves of

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the legal and economic responsibilities that were once thought intrinsic to the managerial function.6 In the final section of this essay, I explore two examples of how such fissures in the employment relationship have been and can be reassembled, reintegrating the supply chain to once again create the semblance of a vertically integrated corporation in which the legal responsibility of top management parallels the operational control they never fully relinquished. The fi rst example of this sort explores the way in which “jobbers agreements” in the mid-twentieth-century U.S. garment industry created a triangular bargaining relationship between unionized workers, contract manufacturers, and the jobbers—larger retailers and branded clothing firms—who were the most powerful economic actors in the industry. The second example explores the contemporary effort, arising out of the Rana Plaza tragedy, to recreate a legal construct not dissimilar from the jobbers agreements in their heyday. This is the Accord on Fire and Building Safety, signed by more than 180 brands and retailers, mainly European, along with the main Bangladesh unions and the key industry association in that country.

Two Cheers for Vertical Integration During the first half of the twentieth century the large, vertically integrated corporation seemed the dominant template for business organization and an engine of economic growth. The radical decrease in transportation and communication costs in the nineteenth century created conditions for the collapse of geographical barriers and the increasing integration of the domestic market. Larger markets allowed a shift to higher-fi xed-cost methods of production and distribution, which in turn lowered unit costs at higher and higher levels of output. As this essay will discuss below, not all firms and markets underwent this transformation, but many of the most iconic firms, employing large and growing workforces, underwent a transformation in which wholesalers, vendors, merchants, and other market makers were marginalized in favor of a visible managerial hand. With its own rubber plantations, glass plants, and steel mills, and a dealer network that was formally independent but under Dearborn’s thumb, Ford took vertical integration to an orga nizational extreme; likewise, United Fruit, with its own Central American banana plantations, came to defi ne the imperial corporation; while U.S. Steel, with its captive coal and iron mines, seemed an industrial autocracy. AT&T advanced corporate research and development (Bell Labs)

Two Cheers for Vertical Integration

even as women manufacturing operatives at Western Electric served as research subjects for innovations in what we would today call human resource management. For these companies and all those that sought to emulate their vertical structure, supply chains and labor markets gravitated toward an internalization and bureaucratization during these decades. Even mid-century retailers like Sears and A & P took ownership control of some heretofore independent supply firms in their respective supply chains.7 In the early 1930s, when Ronald Coase, then a young British socialist, first spent time in the United States, he visited Detroit and came up with a puzzle: How could economists say that Lenin was wrong in thinking that the Russian economy could be run like one big factory, when Ford, General Motors, and other vertically integrated firms seemed to be doing very well indeed? They were privately owned planning bureaucracies—a point Peter Drucker would later make in his own far more extensive study of GM management. But not all corporations were gigantic. Some were small, highly competitive, and limited to but one part of the value production chain. In his seminal essay of 1937, “The Nature of the Firm,” Coase answered his own query with an insight about why firms exist in the first place. They were “islands of conscious power” like lumps of butter coagulating in a pail of free-market buttermilk. Outside the firm, price movements direct production, but within a firm, market transactions are eliminated and replaced by the entrepreneurcoordinator, who directs production.8 So firms are, in part, planning bureaucracies. But unlike in the Soviet Union, where coercive methods were the norm, in a capitalist economy differential market or transaction costs determine the degree of vertical integration of any given firm in any given market. If markets were costless, reliable, and transparent, firms would not exist. Instead, executives would build product or sell services through a plethora of arm’s-length transactions. But because markets for goods and labor are costly to use due to transport and communication expenses as well as custom, expectations, and regulation, the most efficient production processes often take place in a firm, which requires a managerial stratum necessary for non-market coordination. Alfred Chandler would later historicize this insight in his masterwork, The Visible Hand: The Managerial Revolution in American Business, published in 1977.9 From the Populists and Progressives through the waning years of the New Deal impulse, the accommodation of the vertically integrated corporation to a more democratic and republican ethos has, of course, been a central

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hallmark of political and economic reform. What is not so obvious, however, is that the very subordination of the market to the bureaucratic management of these corporations greatly strengthened the hand of the early twentiethcentury reformers. If managers rather than markets guided the fate of these large institutions, then their legitimacy, or at least that of their governance structure, might well be called into question.10 The key text for this effort, the book that a contemporary described as “the law, the logic and the philosophy of the New Deal,” was The Modern Corporation and Private Property, published in August 1932 by Adolf Berle and Gardiner Means. Berle was a lawyer and Means an economist. Both were the offspring of Congregational ministers, and both were familiar with the practical operation of the American corporation. Their collaboration began before the financial crash; indeed, when the book appeared three years later, they hardly took note of the Great Depression, because their argument hardly depended on the existence of an immediate economic crisis. But the book, which instantly became a controversial classic, provided an ideological rationale for New Deal planning, consumer activism, labor organizing, and financial regulation of the large corporation, and by extension, of all American capitalism. Berle and Means argued that America’s two hundred largest corporations, which then controlled one-third of the national wealth, had themselves abridged the fundamentals of a liberal capitalist order. Berle and Means were not Brandeisian “small is beautiful” trustbusters. The giant corporation was “the flower of our industrial organization.” Concentration was a problem, but not for its own sake. Something more fundamental was wrong in that the immense power of those who ran America’s largest corporations was essentially unfettered, not only by the state, but also by those who were their ostensible masters: the shareholders themselves.11 Not only had oligarchy replaced competition, but also, and of even more consequence, management usurped the prerogatives of traditional ownership. If the shareholders had therefore lost control of the corporation to a set of unelected, self-perpetuating managers, then the modern corporation could best be understood not in terms of “the traditional logic of property and profits . . . not in terms of business enterprise but in terms of social organization.” And like the church, the military, and the state, such power had to be either regulated or democratized if a republican government were to exist. The rise of these illegitimate controlling elements, with their potential for abuse, have now “placed the community in a position to demand that

Two Cheers for Vertical Integration

the modern corporation serve not alone the owners or the control but all society.” Over and over again they wrote, the American corporation has “ceased to be a private business device” and has become “a major social institution.”12 Although historians have subsequently demonstrated that in the early twentieth century there were relatively few firms in which a dispersed range of stockholders were effectively disenfranchised by professional managers, this critique of the corporation nevertheless exemplified a turn toward the “socioeconomic” mode of reformist thought identified by Howard Brick in his Transcending Capitalism: Visions of a New Society in Modern American Thought. With Thorstein Veblen, who denounced the “make-believe” property rights of modern shareholders, and Rudolf Hilferding, who postulated a new era of “organized capitalism,” many reformers in the middle decades of the twentieth century rejected the vocabulary of Smithian competitiveness.13 Private property, private enterprise, individual initiative, the profit motive, wealth, and competition have simply “ceased to be accurate” ways of naming the most impor tant features of modern business.14 As Roland Marchand has pointed out, large corporations themselves adopted some of this same rhetoric, if only to accommodate reform impulses, by describing themselves not so much as a competitive business entity but as an “institution” infused with all of the connotations of civic beneficence characteristic of other non-market entities, including hospitals, universities, foundations, and even government agencies. Colby Chester of General Foods admonished fellow industrialists that the American businessman could no longer “consider his work done when he views the income balance in black at the end of an accounting period.” Now it was “necessary for him to demonstrate the social virtue of these accomplishments to the public.” Likewise, Owen D. Young of General Electric remarked in 1936 that as “a great public institution,” General Electric had to accept “more and more obligations for public discourse and public activities.”15 And this was the era, as Julia Ott reminds us, when the New York Stock Exchange and big, investor-owned corporations such as American Telephone & Telegraph declared themselves the harbingers of a new era of shareholder democracy.16 If big, vertically integrated corporations were not market mechanisms themselves and if shareholders were thought to exercise neither proprietary nor popular control, then the door was open to outside regulation and internal reform. As a Roosevelt brain truster, Adolf Berle and other likeminded reformers played a large role in writing some of the key regulatory

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laws of the early New Deal, laws designed to correct the specific abuses illuminated by The Modern Corporation and Private Property and the many books, investigations, and congressional hearings that followed. Even more important, and important for the thesis of this essay, was the rise of labor. Corporate reformers of the New Deal era wanted a labor movement first to serve as a Keynesian mechanism, whereby aggregate demand might be enhanced without an even greater dependence on government spending and public employment projects. Without a broad income tax, a welfare state, or a large military, the state capacity for such countercyclical Keynesianism simply did not exist.17 But even more important, and at the time far more popular, was the effort to get inside the black box of the corporation to constitutionalize its internal operations, equalize wages, and make top management responsible and responsive to other stakeholders, of which organized labor seemed the most significant. Such a labor movement would police the new wage and hour laws, rationalize and make more equitable wages throughout every stage in the corporate value chain, and make corporate executives accountable for decisions once thought the exclusive prerogative of management. During World War II and the generation that followed, experiments in tripartite governance—labor, management, and public / government—were frequently proposed and sometimes instituted. Corporatist arrangements of this sort almost always faced bitter opposition from the private sector, but a sizable slice of top executives did, reluctantly, accommodate themselves to collective bargaining over wages and the quaintly named “fringe benefits” that would loom so large on corporate account books from the 1950s onward. These New Deal / laborite reforms had a large impact on the internal structure of the working class and of the corporation itself: real wages more than doubled in the era 1939 to 1973; wage inequalities among working-class occupations declined, internal labor markets, often with formal systems of seniority promotion, became highly validated, and during a mid-century era that economists have called the great compression, income inequality declined. The pay gap between executives and line workers shrank, but of equal import, so too did the distance between the incomes of janitors and office workers, between garment workers and auto workers, and between retail clerks and truck drivers.18 In his contribution to this volume, Adam Winkler has noted the extent to which controversies over the role of trade union expenditures in political campaigns influenced the emerging set of laws governing corporate political

Two Cheers for Vertical Integration

expenditures as well.19 Under the leadership first of John L. Lewis and then Sidney Hillman, the industrial unions invented the modern political action committee (PAC). Conservatives hated this new laborite initiative, but eventually realized that corporations and their allies could deploy this technique for collectively aggregating campaign funds with even more effectiveness. Politicians and the courts saw a parallelism between union and corporate PACs, although as recent history has demonstrated, this is a profound misconception. The number of corporate PACs increased tenfold in the 1970s while those of labor remained nearly constant.20 Moreover, union PACs can only be effective when they raise funds, either by voluntary contribution or through dues, from the union membership itself. But before Citizens United, corporate PACs rarely sought money from or even appealed to their shareholders. Instead they raised large sums, far more than the unions, from the executive ranks, where such pseudo-voluntary contributions were often required to remain in good career standing. Although these corporate PACs would begin to have enormous influence in the 1970s and after, the mid-twentieth-century heyday of the vertically integrated firm coincided with the rise of a social democratic reformism in the United States that promised to marginalize the market and subordinate the profit motive to institutional growth and stability. This may have been wishful thinking in the long run, but for several decades it offered Progressives and New Dealers a powerful sense that history was on their side.21 Berle and Means thought that if capitalism were to survive, “the control of the great corporations should develop into a purely neutral technocracy, balancing a variety of claims by various groups in the community and assigning to each a portion of the income stream on the basis of public policy rather than private cupidity.”22 Indeed, many students of postwar management now saluted the separation of share ownership from management control. It would not lead to the hegemony of an overweening and self-interested executive strata, but instead to a more rational business technocracy. “We now know that management is a generic function of all organizations, whatever their specific mission,” wrote Peter Drucker in Post-Capitalist Society. “It is the generic organ of the knowledge society.”23 Since the vertically integrated corporation had, in effect, socialized production, corporate managers could pursue goals other than profits, including sales, growth, and the prestige that came from producing high-quality products of advanced technology. “Progress Is Our Most Important Product,” asserted General Electric in one of its mid-century advertising campaigns. And as Ralph Dahrendorf put it, “Never

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has the imputation of a profit motive been further from the real motives of men than it is for modern bureaucratic managers.”24 All of this seemed antiquated by the end of the 1970s, a decade characterized by a chronic profit squeeze, a stock market slump, and the dramatic rise to policy prominence of conservative intellectuals, politicians, and economists who sought to return to a world antedating that of Berle, Means, Drucker, and Keynes. Milton Friedman’s 1970 manifesto, “The Social Responsibility of Business Is to Increase Its Profits,” published in the New York Times Magazine, proved a clarion call. Asserting that the corporation was an “artificial person,” in which the shareholders should reign supreme, Friedman declared those executives who concerned themselves with the “social responsibilities of business” little more than thieves, who abrogated unto themselves or their favored interests the corporate earnings that rightfully belonged either to shareholders, consumers, or even workers, whose wages were depressed when companies failed to maximize profits.25 Corporations had to obey the law, of course, but Friedman’s repudiation of the idea that corporations did have or should have a social and political character devalued the idea that these institutions were bureaucratic entities whose growth and perpetuation necessarily marginalized the profit motive.26 The ideas of intellectuals like Milton Friedman might have had little traction had not the rise of foreign competition begun to put major U.S. firms under enormous pressure while at the same time depriving reformers of the idea—and perhaps the reality—that the top two hundred corporations monopolized so much of the market. In any one country that might still be true, but now the playing field was truly global. There were no longer three car companies with an oligopolistic grip on one continental market, but nearly a dozen global competitors in this key industry, thus, for the first time in decades, subjecting the once insular managers at Ford and General Motors to real competitive pressures and an insecure hold on power. When the GM board, frustrated by the Japanese competitors who had stolen market share, actually fired CEO Robert Stempel in 1992, the shock waves spread far and wide.27 Indeed, many firms now seemed ripe for a takeover by another set of managers who could, in the parlance of the time, boost “shareholder value,” now increasingly seen as the essential raison d’être of the firm. By the end of the 1980s, nearly one-third of all companies on the Fortune 500 had received takeover bids during the previous decade.28 In recent decades a new economic theory of the firm has shifted the focus of corporate law and analysis

Two Cheers for Vertical Integration

from questions of social and economic power to the maximization of value for investors—from collective concepts to individualist ones—thus sharply devaluing the message Berle and Means offered three-quarters of a century ago. As Dalia Tsuk put it in a recent history of the rise and fall of their influence, the law and economics scholars of the 1970s and 1980s turned the corporation—a social, economic, and political organization—into a “contractual arrangement, a tool of making profits for investors.”29 Naomi Lamoreaux and her co-authors have argued that the integration of mass distribution with mass production in large Chandlerian firms may have enabled producers to lower the cost of goods dramatically, but the tradeoff has been a significant loss of flexibility.30 Much of this arose from the long lead times and high capital requirements necessary to generate high levels of productivity in a vertically integrated firm, but this inflexibility was also the product of that set of social democratic structures that once seemed intrinsic to the New Deal era’s vertically integrated firm. While businessmen have sometimes thought such a regulatory order necessary in times of depression and war (or Cold War), economic recovery and social stability invariably evoke a search for new strategies designed to once again enable American capital to enjoy the managerial flexibility that seemed essential once the most oppressive economic and political threat had lifted. Asserting that “market forces and the information age” had beaten the Soviets, Forbes columnist Peter Huber argued that such impulses would soon dissolve America’s largest economic organizations. “If you have grown accustomed to a sheltered life inside a really large corporation,” he advised, take care: “The next Kremlin to fall may be your own.”31 The unionized, regulated, and vertically integrated firm is well into the process of disaggregation. All the big automakers have either spun off or kept commercially separate the many parts of production infrastructure that remain essential to their businesses. Apple makes no computer products, but purchases them from Foxconn and other Asian vendors. Nike operates in a similar fashion when it comes to the hundreds of millions of shoes it sells each year. FedEx uses independent contractors to drive its fleet of red and blue trucks. Amazon hires labor contractors, including Schneider Logistics, Roadlink Workforce Solutions, and Skyward Employment Ser vices to staff and supervise scores of new fulfi llment centers.32 The franchising of hotels, motels, and restaurants is now a pervasive way to off-load risk and generate virtually capital-free growth. In 1999, Wyndham Corporation, which owns Ramada, Howard Johnson’s, Super 8, and Days Inn brands, franchised all of

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its 6,383 properties.33 Cash-strapped municipalities outsource a remarkable range of ser vices once thought core functions of government, while even the most secretive and sensitive federal agencies contract with a vast array of outside vendors for some of the most important work. In an essay entitled “The Vanishing Hand,” economist Richard Langlois wrote, “Vertical disintegration and specialization is perhaps the most significant organizational development of the 1990s.”34 And there is little evidence to say that the process has ceased in subsequent years.35 The economic and sociological impact has been significant. Employment in the temporary help ser vices industry—which includes firms like Kelly Ser vices, for office workers, and various suppliers of blue-collar warehouse labor—more than doubled to 2.3 million between 1990 and 2008.36 And if one adds to this number all those workers who are ostensibly self-employed or contract workers, the total number of contingent workers rises to over 11 million. Meanwhile, more than 8 million workers are employed by companies which are franchisees, beholden to much larger firms like McDonald’s.37 Indeed, the Census Bureau reports that of the 4.3 million business establishments it has surveyed, more than 10  percent were franchisees, accounting for $1.3 trillion in sales.38 And finally there are the contract manufacturers, at home but mainly abroad, who are integral and subordinate links in the global supply chains that put athletic shoes, consumer electronics, and so many other products on big box shelves. Wal-Mart alone is estimated to have more than 5,000 vendors in East Asia, employing a workforce that numbers in the millions.39 It would be a large mistake to think that the transformations outlined above mean that the hand of management has become any less potent or that the market now governs decisions once made on a command and control basis within the firm. Coase’s buttermilk remains highly coagulated because, even when supply chains exist in a formally free market economy, fi rms at the apex of those chains retain enormous power amounting to de facto operational control. What has changed are the power relations within the supply chain and the legal, political, and moral imperatives that once governed and constrained the administration of the vertically integrated corporation.

Integrated Production, Fissured Employment Two consequential examples of the process are offered here. The first explores the rise of temporary employment firms whose enormous success in

Two Cheers for Vertical Integration

transforming employment relations within many heretofore vertically integrated corporations required a minor revolution in New Deal era employment law. The second traces the way in which giant retailers came to create a series of global supply chains that, while composed of a disparate set of legally and organizationally autonomous “vendors,” have in fact been as well controlled and as hierarchical as the most vertically integrated corporation of the old economy. In the Progressive Era and for many years afterward, reformers thought private employment agencies hardly a step above the exploitative padrones who herded immigrant laborers to construction projects and truck farms in order to skim wages, win kickbacks, and sell jobs. As a consequence, most states strictly regulated employment agencies while making the job search function an integral part of the ser vices provided by state unemployment compensation agencies. Many state laws required employment agents to register, obtain a state license, and post bond. They capped fees charged to workers and prohibited fee sharing between agents and employers. Many even banned the practice of sending scabs to replace union workers on strike. For example, in 1955, the Supreme Court of Nebraska ruled that Manpower, Inc. was not an employer itself, but “obviously” an employment agency which must comply with state licensing laws.40 But Manpower and other early temp agencies resisted such a classification; instead they argued that they were themselves employers of labor who performed a ser vice, like a painting firm whose employees worked at the direction of the homeowner, or an accounting company that provided bookkeeping ser vices for a corporate customer. Temp agencies did not charge fees to workers as employment agents did; instead, they made money on the “mark-up”—the difference between what temp agencies charged firms and that which it paid to workers. In the late 1950s and throughout the 1960s, temp agencies advanced this orga nizational theory in all the key state legislatures, their case materially advanced by the Kelly Girl imagery they propounded—a cultural trope designed to convince the public that glamorous female office workers, whose relationship to the paid employment was advertised as episodic and voluntary, in no way sought to undermine existing wage standards, employment ladders, or union power. Temp agencies waged a two-pronged fight: avoiding the classification of employment agency would satisfy the industry’s own desire to be free from unwanted state regulation, while gaining designation as the actual employer of temporary workers would satisfy its clients’ desire not to be so designated, thus giving their clients access to labor without the obligations or expectations

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that had been politically or culturally embedded in core industry and office jobs. While the former goal was important, the latter was absolutely essential, for unless the temporary help firms were accepted in practice as legal employers, their raison d’être would disappear.41 They won a sweeping victory, both judicial and political. By the 1980s, the U.S. Employment Ser vice began to refer job seekers at its free public offices to private employment agencies; and indeed, the federal government itself greatly expanded its own use of part-time and temporary workers in the 1980s.42 But if the Kelly Girl ideal provided a cultural opening for the temporary employment agencies, the engine powering their vast expansion in the 1970s and 1980s arose out of a corporate determination to subvert or displace New Deal era labor regimes by severing the employer-employee relationship between workers and those user firms on whose premises they work. As the recession of the mid-1970s exacerbated corporate anx ieties, Management Review cata logued the advantages of hiring what were now often called permatemps: “The employees do not affect the unemployment insurance rate if they have to be terminated, they do not add to the cost of fringe benefits or payroll maintenance, and they are outside the company’s normal policy requirements for personnel.”43 This arrangement allowed the clients of temporary employment firms to utilize labor while avoiding many of the specific social, legal, and contractual obligations that have increasingly been attached to employer status since the New Deal. By giving user firms almost absolute control over the duration of a worker’s stay and over what tasks workers could be directed to do while on the job, the “temporary” solution enabled large firms to “downsize” their labor force and deprive it of “voice” without actually reducing labor input or limiting control and direction of that workforce.44 New Deal employment relations—of the sort expected at vertically integrated firms—have therefore been utterly fissured and then rhetorically scrambled. In this new frame, all the terms in the resultant triangular employment relationship are given new meanings. The employment agent becomes an “employer”; the client employer becomes a “customer”; the work performed becomes a “ser vice”; and the worker becomes a “consumer” of the ser vices of the temporary employment firm.45 Thus, when in a recent lawsuit Wal-Mart and its labor contractor, Schneider Logistics, were charged with depriving some 568 workers at a California distribution center of nearly five million dollars in wages, the big retailer declared itself disinterested and innocent. Although the warehouse was partially owned by Wal-Mart and all the goods therein were destined

Two Cheers for Vertical Integration

for Wal-Mart stores, a retail company executive declared that Wal-Mart was merely Schneider’s customer. “We have a set of business needs that we pay them to meet just like any company might hire an accounting firm to do taxes or an advertising firm to help launch a new product.”46 Franchising and independent contracting function in the same spirit, although in this case the workers, or the petty managers who employ so many fast food or other ser vice workers, are defined as entrepreneurs themselves, even though their product is uniform across the nation, their work routine is hyper-standardized, and their profit margins are small—thus leading to high levels of franchisee bankruptcy. As the Taco Bell franchise agreement states: You must operate your facilities according to the methods, standards, and procedures (the “System”) that Taco Bell provides in minute detail. . . . [The franchisee] shall faithfully, completely, and continuously perform, fulfi ll, observe and follow all instructions, requirements, standards, specifications, systems and procedures contained therein; including those dealing with the selection, purchase, storage, preparation, packaging, ser vice and sale (including menu content and presentation) of all food and beverage products, and the maintenance and report of Restaurant buildings, grounds, furnishings, fi xtures, and equipment, as well as those relating to employee uniforms and dress, accounting, bookkeeping, record retention and other business systems, procedures and operations.47 Given such a contractual imbalance of power—some have likened it to sharecropping—it was only reasonable for a Washington Post reporter to ask, “Here’s a problem for the protesters demonstrating at fast-food restaurants across the country to demand $15 an hour: Whom are they talking to, exactly? A global megacorporation or a locally-owned small business?”48

Rise of the Retailers Many of these same patterns and tropes have become apparent and pervasive with the rise of the big-box retailers that command a set of global supply chains, made possible by the telecommunications revolution, innovations in container shipping, and the growth of low-cost East Asian manufacturing. These supply chains are functionally well-integrated and utterly dominated by big-box retailers like Wal-Mart and Home Depot. Managers in Bentonville,

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Atlanta, and elsewhere exercise the kind of organizational control, sans legal or financial responsibility, that has become apparent in the temporary employment industry and that so offended critics of corporate governance in the first half of the twentieth century. Ironically, the retail industry universe demonstrates how a renewed commitment to vertical integration at one end of the supply chain can coexist in simultaneous fashion with a disaggregation overseas. The brands and retailers that stand at the apex of these supply chains have generated a vertically integrated entity by bringing many of the procurement and distribution functions, once carried out by independent salesmen, manufacturer’s representatives, wholesalers, and vendors, under tightly centralized control. Wal-Mart pioneered many of these innovations in the late 1970s and early 1980s. Unlike Kmart, then a company nearly five times larger than the Bentonville institution, Wal-Mart owned and controlled its own internal warehouse and distribution system, thus making logistics, not merchandising, a core competency. With the gradual transformation of its warehouse operation, where goods are stored until needed, into a distribution system composed of scores of distribution centers in which goods are in continuous motion, Wal-Mart reaped enormous productivity dividends. Unlike Kmart, where the famed “blue light specials” were an admission of logistics failure—a periodically desperate effort by store managers to sell surplus stock at fire-sale prices—Wal-Mart’s more rationalized vendor supply system enabled the company to avoid any store site buildup of extra product, thereby enabling the company to keep storesite warehousing to a minimum and maintain “an always low price” sales policy. If the new distribution centers represented Wal-Mart’s muscle and bone, the corporate logistics operation needed a ner vous system as well. The home office in Bentonville, Arkansas, required a sea of data that the company could instantly translate into a complete picture of its sales, profits, expenses, and inventory. In the early 1970s, managers were still using the post office to mail in their sales and expense records each week. A decade later, they used the telephone to dial up a central computer in Bentonville, but the information flow was still neither fluid nor entirely reliable.49 Sam Walton needed a technological fi x, a system that in the last quarter of the twentieth century would have the same transformative impact as the telegraph and the telephone a century before. And he got it, courtesy of the grocers, with the arrival of the Universal Product Code.

Two Cheers for Vertical Integration

Today the bar code is so omnipresent that we forget that life once existed before almost every thing we bought had a UPC symbol affi xed, that familiar oblong square of ten white and black computer-readable lines and spaces. The idea for a machine-readable price tag had been around since the 1930s. It became technologically feasible in the early 1960s, when lasers were finally perfected. But the real impulse for the development of a bar code, and the cooperation it would demand from both manufacturers and supermarket retailers, came later in that decade. Then product proliferation, inflation, and the upswing of unionism in the ser vice sector led to the creation of an industry-wide effort to establish uniform technological and informational standards through a system that could read not just the price, but a whole suite of other characteristics, on tens of thousands of separate products.50 Wal-Mart was at the forefront of this UPC transition. As early as 1980, when only 35 percent of all of its own merchandise came into its stores with the UPC bar attached, Wal-Mart put a scanner in a Grapevine, Texas, store. Soon checkout productivity jumped by 50 percent and Wal-Mart managers began giving out pins to exceptionally proficient cashiers—those who could scan 500 items per hour.51 By the middle of the 1980s, almost all Wal-Mart stores were tied into the UPC system, well ahead of Kmart, Sears, and most department stores. The company insisted that all vendors adopt a set of “Voluntary Interindustry Commerce Standards,” which required all supply chain elements to adopt UPC codes on all merchandise. A 1986 order from Wal-Mart headquarters to all vendors was anything but voluntary: “Universal Product Codes are required for all items BEFORE ORDERS WILL BE WRITTEN.”52 The rise of the bar code has had two dramatic and immediate consequences. First, it has enabled supermarkets and discount stores to manage sales, complexity, and product proliferation without getting paralyzed. From the 1950s through the 1970s, the size of the average supermarket remained about the same. Most were about 20,000 square feet and they carried about 9,000 items. But twenty years after the introduction of the bar code, this new technology enabled the supermarkets, which were now branching out into cosmetics, videos, toys, and clothing, to stock up to 60,000 items. This made possible the de facto merger of the grocery-selling supermarkets and the general discounters, who had always concentrated on apparel and hard goods. Without the bar code to speed sales, facilitate instant price changes, and manage inventory, this dramatic retail expansion would have generated gridlock at the checkout counter. Thus could Wal-Mart manage the five-fold

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expansion in the size of one of its typical stores, from about 40,000 square feet in the 1970s to nearly 200,000 square feet early in the twenty-fi rst century. A satellite-based telecommunications system proved essential to the management of this huge flow of information. Here Wal-Mart took the lead, deploying between 1985 and 1987 the world’s largest private, integrated satellite communications network, which beamed data, voice, and video communications to and from corporate headquarters and more than 1,500 stores, all via a single communications satellite in geostationary orbit 22,300 miles above the equator.53 The bar code was not just a device that eliminated labor costs or increased efficiency within a single firm. Even more important, the bar code was the tool that enabled retailers to leverage their enormous buying power against that of the manufacturers and suppliers. Before the deployment of this new technology, manufacturers possessed the best information about sales trends, shifts in demand, and even how the competition was doing. An individual retailer might not know the true state of their sales until an end-of-the-quarter inventory, but a manufacturer would get a steady stream of signals from the numerous retailers it served, from market research, and from its own sales force and its wholesalers. Indeed, some vendors restocked supermarket shelves on their own schedule, relying on historic sales figures and their own best estimate of future prospects. But with the automatic, electronic collection of point-of-sale data, information and power shifted to the retailer.54 And the bar code helped in merchandizing itself. The information created by all those bar code swipes over the checkout scanner generated billions and billions of bits of information that poured into Wal-Mart’s data warehouse. Retailers and vendors now knew when and where to replenish the vacant shelves, but Bentonville also collected “market-basket data” from the billions of customer receipts, so Wal-Mart, and its vendors, could drill into the data to find out what products were likely to be purchased together, what kind of customer bought them, and at what time of day, week, and year. This meant that Wal-Mart was sitting on an information trove so vast and detailed that it far exceeded what many manufacturers knew about their own products. As Fortune observed, “P&G could no longer bully its way into the stores, waving figures a retailer couldn’t dispute that showed Tide was outselling All and was therefore entitled to more shelf space.”55 Soon Wal-Mart—followed by other brands and retailers—was in a position to virtually dictate the terms of its contract on price, volume, delivery, schedule, packaging, and quality.

Two Cheers for Vertical Integration

Indeed, to this day, the company hands its suppliers detailed “strategic business planning packets” each year. A manufacturer that fails to meet its sales target—or has data-documented problems with orders, delivery, restock, or returns—can expect even tougher negotiations from Bentonville in the future. This “cements Wal-Mart’s power over vendors” observed the Wall Street Journal,56 ensuring that “Wal-Mart lives in a world of supply and command,” as one retail analyst observed in 2004.57 Many manufacturers established offices in Bentonville with teams fully dedicated to furthering their partnership with Wal-Mart. One of the first was Procter & Gamble Co. (P&G). But, so intimate was the relationship between P&G and Wal-Mart that soap company executives feared that the autonomy and creativity of their company had been compromised. P&G had to rotate staffers out of northwest Arkansas after a few years because they identified as much with Wal-Mart as with the Cincinnati consumer products manufacturer. “The people were paid by P&G and sat in a P&G office, but it was like they were working for Wal-Mart and P&G equally,” admitted one Cincinnati-based executive. “The payroll just happened to come from P&G.”58

Global Supply Chains It did not take long for Wal-Mart and other retailers to put this system into operation on a world-wide basis. We live in a world of rigid, hierarchical “supply chains” organized and controlled by the retailers of North America and Europe. More than half of all the containers and half the value of the   trade that moves from East Asia to Los Angeles, Newark, Felixstowe (UK), Rotterdam, and Hamburg are destined for the shelves of Wal-Mart, Tesco, Carrefour, Target, and the like. These merchants control the supply chain, they squeeze their commodity-producing vendors, and they shift production from one venue to another with ease and economy. Just as nineteenth-century cotton houses could switch their source of supply from Mississippi to India or Egypt, so too can cell phones, sweatshirts, and tennis shoes find their manufacturing home in Honduras, the Pearl River Delta, Ho Chi Minh City, or Bangladesh.59 The phrase “supply chain” is of recent derivation. The historical sociologist Emmanuel Wallerstein had first developed the idea of a “commodity chain” in the 1970s as part of his world systems schema. The “commodity chain” concept, wrote Wallerstein, “refers to a network of labor and production

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processes whose end result is a finished commodity.” In contrast to the dominant analytical paradigm of most economists, which merely traced economic flows between states, Wallerstein and his collaborators started with the final production operation, such as shipbuilding or food processing, and moved sequentially backward through the trading and production chain in order to understand the international division of labor and key sites of capitalist power and privilege throughout the geographically dispersed production chain.60 Most in business had never heard of Wallerstein, but in the 1980s consulting firms like Bain & Company coined the phrase “value chain management” or “supplier rationalization” to describe how large companies, often retailers and branded manufacturers, purchased components and materials from foreign vendors and transformed them into saleable goods. Industrial relations scholars Frederick Abernathy and John Dunlop also used a similar phrase, “commodity channels,” as recently as 1999 to describe the way apparel moved from Asian and Central American suppliers to North American retailers. In the twenty-first century, however, the artful “supply chain,” with its sense of hard linkages and buyer—not producer—driven dominance, has become the pervasive terminology, both among executives in the field and scholars in the academy.61 However, this tight coordination takes place not by formally integrating the supply chain into one legal, corporate entity, but by creating a pseudomarket whereby management exercises its will and power. Therefore, the great retailers of Europe and the United States have no legal or even much moral responsibility for those who labor along many of the links in their supply chain. In China, Bangladesh, and elsewhere, millions of workers supply the products that end up on the shelves of all the big-box retailers. But none of these people work directly for Wal-Mart, Apple, or the other big retailers and powerful brands who require the production of such a continuous stream of consumer durables. Most firms have established “corporate social responsibility” staffs, but such initiatives are but a pale substitute for the absolute legal and administrative responsibility that reformers once thought a core function of management.62 The disaggregation of the vertically integrated corporation and its replacement by a legally attenuated supply chain has been greatly advanced by the organizational and technological revolution outlined above. But politics and finance certainly have played their role. Because late twentiethcentury international buyers avoid the legal, and as far as possible the

Two Cheers for Vertical Integration

moral, responsibility for the status of the labor that creates their wealth, they fi nd it more politically and econom ically convenient than even the most brutal manufacturing master to turn a blind eye to the conditions under which production takes place at the base of their global supply chains.63 The experience of the United Fruit Company, a global enterprise that symbolized the imperial ambitions of the vertically integrated conglomerate, is a case in point. By 1960, United Fruit owned vast plantations and directly employed tens of thousands of workers in the “banana republics” of Central America. But the rise of worker militancy and nationalist sentiment in many of these countries, as well as increasing criticism within the United States, persuaded corporate managers to off-load their Latin properties, transforming the base of their supply chain into a set of independent local growers and contract producers. Long before the efficiencies generated by satellite communications or big data, United Fruit, which soon became but one unit of United Brands, became a marketing company, which, in the words of historian Marcelo Bucheli, “conspicuously dismantled” its own banana empire “largely to ensure itself a continued place on the top of the banana world.”64 Wal-Mart also tried to put some distance between itself and its Far Eastern and Latin American vendors during the years when it transitioned away from the well-publicized “Buy American” promotional campaign with which the company became identified in the late 1980s. Founder Sam Walton did not deny that Asian imports were rising, but he sought to distance the company from this uncomfortable fact, especially following the brutal suppression of the Chinese democracy movement in Tiananmen Square in 1989. Walton was also disturbed by charges of human rights abuses in supplier factories, both in Central America and along the Pacific Rim. “Keep this under the radar,” Walton told a key procurement manager during the 1980s.65 One way to do that was to create a buffer, a buying agency that would purchase Asian products without showing Wal-Mart’s hand. That Wal-Mart was thereby retreating from its relentless effort to strip costs and bureaucracy out of its procurement system may well demonstrate the sensitivity with which Walton viewed the issue. “The decision was to go to an exclusive buying agency,” remembered a Wal-Mart buyer closely involved with the operation. “The main reason for going into [the deal] was not to be exposed as going into Communist China.”66

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So Wal-Mart set up Pacific Resources Export Limited (PREL) as its exclusive buying agent, a shadow organization really, which shifted onto its payroll virtually the entire Wal-Mart buying staff in Asia. PREL soon had twenty-nine offices from Dhaka to Seoul. With a staff of over 700, it was the largest commissioned buying agent in the world.67 PREL served Wal-Mart well, although it proved unable to actually shield the big retailer from the criticism that it confronted in the 1990s, when instances of abominable and illegal working conditions came to light in vendor factories. PREL hired Filipino inspectors, not Chinese or U.S. nationals, to annually visit some of the 5,000 factories from which Wal-Mart sourced its products because they knew English and were prepared to travel widely. They had a checklist, covering both product quality and factory working conditions. On occasion, PREL pulled a contract from a vendor whose hazardous conditions posed a threat, either to the workers themselves or to Wal-Mart’s reputation. For example, PREL dropped a factory in Shenzhen two years before a fire there killed thirty-nine people. An inspector had noted that four exits were blocked. If the factory had still been a Wal-Mart vendor, a PREL spokesman told a reporter in 2001, the story on the front page of The New York Times would have read, “39 Dead at Wal-Mart factory in China.” “When you’re No. 1, everybody’s shooting at you,” he rued.68 (Wal-Mart abolished PREL in 2002 after China had become, with U.S. support, a full-fledged member of the World Trade Organization. The company then moved its Asian procurement office to Shenzhen.) Commodity importers and retailers were not the only firms to dismantle a vertically integrated supply chain. The same disaggregation process took place in manufacturing. In the 1990s, reports the sociologist and supply chain theorist Gary Gereffi, nearly all major North American product-level electronic firms, and several important European companies as well, made the decision to get out of manufacturing, or rather to purchase from a relative handful of huge contract manufacturers the components and products that would later achieve a distinctive branded character as they passed through their supply chains. “The key insight,” concluded Gereffi, “is that coordination and control of global-scale production systems, despite their complexity, can be achieved without direct ownership.”69 Following Gereffi’s lead, economic sociologists have identified a set of variations on this way of looking at the production process. Gereffi himself contrasted the retail / brand led supply chains with the more capital intensive, producer-driven commodity chains, in which manufacturers control

Two Cheers for Vertical Integration

and often own several tiers of vertically organized suppliers. Other studies suggested that the buyer-driven and producer-driven categories did not adequately capture the range of governance forms observed in actual chains, leading to a proliferation of variations on the original theme of “drivenness.” These include traditional, centuries-old commodity chains that market agricultural products such as coffee and sugar, where trading houses, not unlike the old East India Company, play the role of lead firm. Others have found that research intensive industries such as soft ware are best understood as technology-driven chains. But regardless of the variations on this theme, the retail supply chains are both large and consequential, accounting for approximately one-half of all world trade and far more when one calibrates just the consumer goods that are shipped across the Pacific, today the main highway of world trade.70 No one knows how many companies or how many workers supply WalMart with the products that fi ll its shelves because no one really knows, or can know, the extent of the vast subcontracting system, which stands at the heart of the sweatshops universe that fi lls the production end of the WalMart supply chain. Every supply chain consists of a series of subordinate entities whose prices, production schedules, and labor costs are put under relentless pressure by the firm or institution that is the ultimate buyer of the product.71 Indeed, this is the essence of “sweatshop” production, which derives its historic, derogatory meaning from the “sweater,” the Victorian-era middleman, who took advantage of the poverty and unemployment endemic in London’s East End to subcontract garment cutting and sewing to scores of desperate families, many of whom were migrants to the British metropolis from a countryside where tenants and farmhands had been dispossessed by the new international trade in wheat and wool.72

Reform and Reintegration? What forces exist today that might counter or ameliorate the hegemony now exercised by the merchant capitalists of our time? Most obviously, the wave of worker militancy that has swept through many of China’s factories may well transform the financial and political calculations of those executives who have for almost a generation depended on that country as a cheap source of manufacturing labor. High-profi le strikes at Honda, Toyota, and other workplaces have represented just the most visible tip of an iceberg of working-class economic aspiration and democratic discontent. Each year the

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Chinese government reports more than 100,000 “mass incidents” involving workers, peasants, and other citizens protesting against local elites who have seized their land, corrupted municipal government, or created intolerable working conditions at their workplace. All this has led to a near doubling of real wages in Chinese manufacturing districts during the last decade, a phenomenon that parallels Beijing’s effort to expand the Chinese domestic market.73 Thus, as labor costs rise in South China, the retailers and brands of Europe and North America have been compelled to find new sources of supply. Indeed, Wal-Mart and other retailers are now in the process of moving much production to Bangladesh, Vietnam, and the interior districts of China, where a lower-wage workforce is still plentiful. And Foxconn is investing billions in a set of Brazilian factories to fulfill the world’s insatiable demand for more iPhones and iPads. Moreover, if the dollar continues to decline in value against the yuan and other currencies, much more sourcing may be returned to the United States, where stagnant wages and high levels of unemployment have made American labor far more competitive. But of course, if such a shift in the global supply chain does take place, should all else remain equal, this geographical switch hardly implies a substantial reduction in the power or a change in the character of these merchantdominated supply chains themselves.74 A more significant transformation, put forward by some geographers, sociologists, and economists, is that retail dominance of the global supply chains is but a temporary phenomenon, and that the manufacturers will shortly reassert their pricing power and their capacity to offer higher wages and better working conditions. There is evidence that this might be taking place in East Asia where Flextronics, the manufacturer of a huge proportion of all computer and TV components, with 100,000 workers in Shenzhen, also employs some 10,000 engineers. Likewise, Yue Yen Industrial, with 250,000 shoe workers in East Asia and 15  percent of the global market in athletic shoes, may well brand its own products and compete directly with Nike and Reebok instead of being their silent, subordinate supply house. The rise in the value of the Chinese currency may aid in this rebalancing of power within the supply chain.75 Foxconn, in particular, which produces a wide array of electronic products for Apple, Nokia, Hewlett-Packard, and other branded “manufacturers,” might be well positioned to upend the supply chain should it choose to market its own brand of consumer electronics in Asia. With more than one

Two Cheers for Vertical Integration

million workers spread among scores of Chinese production facilities, Foxconn has the resources to make the leap to branded distribution. But whether this would generate much benefit for the workers is an open question, given the company’s stolid response to the epidemic of suicides, which swept through Foxconn’s flagship manufacturing complex at Longhua, near Shenzhen, where 300,000, mainly migrants, worked during the spring and summer of 2010. Sometimes described as a “ labor camp” Foxconn’s Longhua facility employed one-third of the company’s entire Asian workforce. As in all its factories, labor rights are few, security omnipresent, and Taylorite production methods the norm. Workers wear uniforms color-coded by their department. Every factory building and dormitory has security checkpoints with guards standing by 24 hours a day.76 Power for Asian manufacturing executives does not necessarily translate into better conditions for the workers who labor at the far end of the supply chain. In the Progressive Era, the Consumer’s League and the Women’s Trade Union League deployed the weapons of the weak—investigation, exposure, moral suasion, and boycott—to civilize American capitalism. Today these same tactics are utilized by numerous non-governmental organizations (NGOs) that monitor, expose, berate, and measure the working conditions and environmental standards that exist in the factories from which WalMart and other retailers source their product. Human Rights Watch, the Fair Labor Association, the Worker Rights Consortium, and the numerous Hong Kong-based groups keep the pressure on Wal-Mart, Nike, Disney, and Target. They play a role that in part fills the vacuum once occupied either by the trade unions or the regulatory state during the era of vertically integrated corporations and continental markets.77 In response to the reputational threat that the NGOs can episodically mount, brands and retailers have developed their own sometimes quite elaborate codes of social responsibility, administrated by hundreds of company employees at home and abroad. In existence for almost twenty years, the effectiveness of these internal monitoring arrangements remains subject to considerable debate. In general, they have some impact at the margins, especially in terms of environmental standards and standardization of working hours, but studies conducted by Chinese sociologists have also found that, in actual operation, such codes make no fundamental transformation in the way big retailers go about purchasing their goods or in the way their contractors and subcontractors go about producing them. The resultant squeeze on workers’ wages and working conditions remains intact.78

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Therefore, in recent years, the main effort put forward by labor-oriented NGOs has been to push for the de facto reintegration, on a legal and financial basis, of the global supply chains. Prodded by United Students Against Sweatshops and the Worker Rights Consortium, several universities have demanded the establishment of a “designated supplier program” which would force retailers and brands to source their product from but a few, large, carefully monitored factories. Leveraging the power inherent in the $4 billion collegiate apparel market, USAS and the WRC forced Russell Athletic to reopen a factory in Honduras that had been shut down after workers successfully unionized, at the same time persuading the brand not to fight unionization at its seven other factories in Honduras.79 Likewise, supply chain reformers have insisted that those who source products from distant contractors and subcontractors acquire a legal obligation to the workers at the bottom of the supply chain, even when subcontractors fail local laws and abridge their contacts. Thus, after much wrangling and protest, Adidas agreed to pay severance to 2,700 Indonesian factory workers when their employer, PT Kizone, failed to pay the $1.8 million owed them when the company abruptly shut down in 2011.80 Not unexpectedly, some domestically made brands have tried to take promotional advantage of such controversy. On the storefront of every American Apparel outlet is the slogan: “Made in Downtown  L.A.: Vertically Integrated Manufacturing.”81 The most important initiative undertaken by the anti-sweatshop NGOs has come in the wake of the 2013 Rana Plaza disaster in Bangladesh. But, before discussing the provisions of this precedent-setting Accord on Fire and Building Safety, it is important to recognize that the compact, which seeks to advance a legal, contractual reintegration of employment obligations and relations in the global supply chains of our day, has had a remarkable historical antecedent, based on reforms in the U.S. garment industry during an era when the structure of production and distribution in that economic sector resembled those of East Asia today. In the early twentieth century, there were some vertically integrated firms, like Hart, Schaffner & Marx, which were also pioneers in the sort of welfare and collective bargaining arrangements that prefigured the New Deal. But most of the garment industry was fragmented and disorganized. “Jobbers” were designers, apparel fi rms, retailers, or even big manufacturers like HS&M that contracted out all or part of their work to “a protean sea of tiny enterprises,” as historian Steve Fraser described the “rag trade” in his biog-

Two Cheers for Vertical Integration

raphy of the labor leader Sidney Hillman. “They inhabited an economic underworld where chiseling, subterfuge, and tainted goods were the common currency.” As in East and South Asia today, where manufacturers scramble for contracts from Nike, Zara, Target, and H&M, the outside manufacturer of early twentieth-century New York “defended his razor-thin margin of profit by means both legitimate and shady, but especially by exerting a constant downward pressure on wages and working conditions.”82 The International Ladies’ Garment Workers’ Union (ILGWU) argued that jobbers and contractors were actually “joint employers” in an “integrated process of production,” if only because the small, labor-intensive firms that actually did the sewing and assembling of the garments did not own, design, invest in, or purchase any of the materials needed for production. The contractors did not maintain any showrooms or employ salesmen. Their sole task was to provide a ser vice function, to supervise the productive process in the same way that a foreman or plant supervisor got out production and controlled labor costs in an “inside shop.”83 Reflecting the sentiment that would later be common coin among the brands and retailers anxious to limit their responsibility for working conditions in the twenty-first-century global supply chains over which they presided, the jobbers and merchants of New York ridiculed the ILGWU determination that ultimate responsibility for conditions in the industry lay with those who designed, purchased, and sold the garments produced by the small contract shops. Asserted a lawyer for the Merchant Ladies’ Garment Association, “The union is endeavoring to call the jobbers manufacturers. The union has tried to reduce the contractor to the status of a foreman for the purposes of these negotiations. . . . If the contractors of this industry are not living up to union rules, that is the union’s problem. If the contractors do not produce in sufficiently large shops to suit the union, that is their problem. If the contractors are in any way obnoxious to the union in their methods of treating workers, the union knows how to handle that situation.”84 For two mid-century generations, the ILGWU prevailed. The New Deal’s National Recovery Administration (NRA) created codes of fair competition that did, in fact, mandate joint liability for jobbers and contractors, eliminating the capacity of the jobber to evade industrial responsibility and thereby greatly ameliorate “the jobber-contractor evil.”85 Although the NRA itself imploded in 1935, the garment unions created a stable system of triangular bargaining in which the union first negotiated a collective bargaining

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agreement with the jobber, then negotiated an agreement with the contractors, and then finally the jobber and the contractors negotiated an agreement with each other. As a retired union official told sociologist Jennifer Bair decades later, “The ILGWU recognized that the jobber was the lynchpin of the industry. Contractors couldn’t pay anything unless the jobber paid it to him or for him. The trick was to get as much as you could in the contract to protect the workers and the union.”86 These jobber agreements regulated not only wages and working conditions but also the structure of the relationship between the merchants and the contract manufacturers. Jobbers were required to submit a list of all their key contractors and were not permitted to remove any of these designated contracts from their production networks. They could not shop around for lower wages or even for a more productive subcontractor. These agreements integrated the industry by discouraging arm’s-length, one-shot deals between jobbers and contractors; instead, the ILGWU successfully sought to lock jobbers into longer-term relationships of mutual dependence with their contractors. And because union jobbers were obligated to use union contractors, contract manufacturers had an incentive to join the relevant employers’ association and thereby become party to the collective contract signed between that association and the union. By 1935, the ILGWU represented approximately 70 percent of all women’s apparel workers in America, and by the late 1940s, garment industry wages stood at nearly 85 percent of those in manufacturing.87 All this is not ancient history. To the extent that garment manufacture in Bangladesh retains an industrial ecology not dissimilar from that of 7th Avenue a century before, then it is not an accident that similar solutions will be put on offer. The May 2013 Accord on Fire and Building Safety, signed by more than 180 global brands and retailers, by the powerful Bangladesh Garment Manufacturers Association, and by two international union federations, IndustriALL and UNI, replicates key features of the ILGWU jobber agreements. Pushed forward by NGOs like the college- and university-based Worker Rights Consortium and the European Clean Clothes Campaign, the Fire and Safety Accord was the product of a multiyear series of negotiations that only reached resolution in the immediate wake of the Rana Plaza tragedy. The Accord rejects the voluntary Corporate Social Responsibility codes of conduct model and instead mandates that all signatories sign legally binding contracts that generate a joint financial responsibility on the part of the Bangladesh contract manufacturers and the global brands and retailers.88

Two Cheers for Vertical Integration

There are three ways in which the Accord reflects core principles of the old jobbers agreements. First, the Accord regulates the buying practices of apparel brands and retailers. It requires them to make a multiyear commitment to supplier factories, a major deviation from the industry’s footloose norm. And these buying firms are specifically required to help pay for factory safety upgrades, thus generating something close to an “investment” by the top of the supply chain in the bottom. Second, the Accord calls for workers’ representatives to be empowered participants, with a steering committee composed equally of union representatives and officials from participating companies. The Bangladesh unions are comparatively far weaker than the New Deal era ILGWU, but their hand is strengthened by the role played by the international union confederations, by the International Labor Organization, and by the NGO community, which today plays a role not dissimilar from that of the middleclass, labor-oriented Consumer’s League of a century ago. And finally, the Accord, like the jobbers agreements and collective bargaining agreements generally, are not mere general statements of intent or privately promulgated corporate codes of conduct. Instead, they are legally binding, contractual obligations, whose enforcement, should consultation and ILO arbitration fail, can take place in the court of the home country of the signatory party against whom enforcement is sought. Th is is important because of the corruption, politicization, and systematic employer bias of so many judicial systems in Bangladesh and other Asian apparelmanufacturing countries.89 Significantly, the new legal obligations inherent in the Accord generated resistance from those American retailers, including Gap, Wal-Mart, and at least fifteen other companies that source product in Bangladesh. The retailers refused to sign the Accord and instead established a rival Bangladesh Workers Safety Initiative.90 “The liability issue is of great concern, at least on this side of the Atlantic,” asserted a lawyer for the National Retail Federation. “For U.S. corporations, there is a fear that someone will try to impose liability and responsibility if something goes awry in the global supply chain.”91 Precisely. The vertical integration or disaggregation of corporate supply chains, both domestic and international, are indeed products of a technical-organizational calculus that measures transaction costs in such a way as to make a distended value chain possible and profitable. Ronald Coase was right about that, but so too are all those analysts of corporate management, from Adolph Berle and

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Gardiner Means on down to our own time, who understand that managerial capacity to command and control is also created and sustained by a set of legal structures and political / reputational pressures that create incentives for the distended sourcing strategies and fissured employment regimes which have diminished the vertically integrated corporation. This kind of enterprise reconfiguration has proven just as damaging to efforts to regulate and democratize the corporation as is the new latitude these entities have won when it comes to their capacity to spend large amounts of money in American politics. The reintegration of the corporation, both global and domestic, is therefore a decisive frontier in the century-long battle to once again impose on these large economic entities a measure of social responsibility and legal accountability. It seems unlikely that global supply chains will, at any time in the foreseeable future, actually transform themselves into a vertically integrated institution, a la General Motors or IBM in the 1950s, or that McDonald’s will simply purchase from its franchisees 10,000 brick and mortar restaurants. But a measure of de facto integration, especially in terms of environmental and labor-related issues, seems entirely possible.92 If the most powerful entities recognize that they are, in effect, “joint employers” when they contract with a much weaker link in the supply chain, then a large step forward will have been taken, once again creating a legal and organizational environment in which the real holders of economic and administrative power can be held responsible for their activities or lack thereof.

CHAPTER 10

Citizens United, Personhood, and the Corporation in Politics ADAM WINKLER

Democratic lawmakers rose to their feet when President Barack Obama criticized the previous week’s decision by the Supreme Court of the United States. Looking down at the six justices in attendance at the annual State of the Union Address, the president declared, “With all due deference to separation of powers, last week the Supreme Court reversed a century of law that I believe will open the floodgates for special interests—including foreign corporations—to spend without limit in our elections. I do not think American elections should be bankrolled by Amer ica’s most power ful interests or, worse, by foreign entities.”1 The applause was vigorous, and contrasted sharply with the stillness of the justices themselves, who by custom avoid showing emotion at State of the Union speeches. Only Justice Samuel Alito, who was part of the majority in Citizens United v. FEC,2 acknowledged the president’s comment, shaking his head in disagreement. Few decisions of the Supreme Court have triggered as much controversy and criticism as Citizens United. The Court in that case held unconstitutional a federal campaign fi nance law prohibiting business corporations and unions from spending general treasury funds on broadcast advertisements featuring candidates for federal office in the weeks just before an election. Writing for a five-member majority, Justice Anthony Kennedy explained that under the First Amendment, the “government may regulate corporate speech through disclaimer and disclosure requirements, but it may not suppress that speech altogether.”3 From newspaper editorials to talk radio, Americans from across the political spectrum criticized the decision. The New York Times editorial board called the decision “radical,” warning that it promised to “thrust politics back to the robber-baron era of the 19th century.”4 Sixteen states, including some conservative states like Montana, adopted resolutions or sent Congress official requests to pass a constitutional amendment overturning the Supreme Court’s decision.5 They have been 359

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joined by over 200 municipalities, townships, and other local governments.6 An ABC / Washington Post poll found that 80 percent of Americans opposed the decision.7 Much of the criticism focused on two features of Citizens United. The first, suggested by President Obama in his State of the Union Address, was the Court’s judicial activism. Citizens United called into question over a century of special campaign finance law restrictions on corporations and, in doing so, overturned two of the Court’s own previous decisions. One of those decisions, McConnell v. Federal Election Commission, was handed down just seven years earlier and upheld the exact same provision in federal law that Citizens United struck down.8 “Citizens United is a distinctive product of the . . . aggressive conservative judicial activism of the Roberts Court,” wrote The New Yorker’s legal analyst, Jeff rey Toobin.9 The second major theme in the criticism of Citizens United was that the Court had read corporate personhood into the Constitution. As the Times editorialized, “Most wrongheaded of all is its insistence that corporations are just like people and entitled to the same First Amendment rights.”10 The idea that corporations were people was widely mocked by late-night comedians and political pundits. One man in San Rafael, California, made headlines when, after he received a ticket for driving alone in the carpool lane, he claimed that the corporate papers he had on the passenger seat meant two “ legal persons” were in the vehicle.11 Corporate personhood also became the focal point of a nationwide reform movement, led by organizations like Move to Amend and Public Citizen.12 Representative Jim McGovern of Massachusetts proposed a “People’s Rights Amendment”: “We the people who ordain and establish this Constitution intend the rights protected by this Constitution to be the rights of natural persons. People, person, or persons as used in this Constitution does not include corporations.” As McGovern explained, “Corporations are not people. They do not breathe. They do not have children. They do not die in war. They are artificial entities which we the people create and, as such, we govern them, not the other way around.”13 Citizens United was certainly an assertive, groundbreaking decision that established new rights for business corporations to spend money to influence elections. Supporting the charge of activism, the Court reached out to overturn two relatively recent precedents that neither of the parties asked the Court to overturn. The activist label, however, obscures the ways in which Citizens United follows longer, established patterns in constitutional law and

Citizens United, Personhood, and the Corporation in Politics

campaign finance regulation. As the essays in this volume have made clear, since the early days of the Republic, the Supreme Court has been asked to rule on whether and how various provisions of the Constitution apply to corporate entities. Corporations have asserted constitutional rights as a way of defeating burdensome regulations and unwanted taxation. Frequently the Court has sided with corporations, dating back to the first corporate rights cases in the early 1800s. Even before Citizens United, corporations had many of the same rights as individuals under the Constitution.14 Critics who focus their reform efforts on ending corporate personhood also miss impor tant subtleties about how the Court has theorized and reasoned about corporate rights. While the Court has occasionally mentioned corporate personhood in corporate constitutional rights cases, the Court’s logic has tended to rely on two very different rationales for protecting corporations—one based on the nature of the corporation and the other on the nature of the Constitution. In numerous corporate rights cases, especially with those relating to political rights, the justices have conceptualized the corporation not as a person, akin to a natu ral human being, but as an association, akin to a voluntary membership group. According to this view, the corporation is comprised of various constituent members who come together to pursue common goals: incorporators who form the entity; managers who run it; shareholders who invest capital; employees who offer labor and ser vices. According to the Court’s logic, all these people who make up the corporation are real human beings, and they clearly have constitutional rights. Just as members of voluntary associations such as the NAACP, the NRA, or the ACLU can exercise their rights collectively, so can those people who associate together within the business corporation. If corporations are refused constitutional protection, the Court reasons, the individuals who associate together in the corporation are denied their rights. Corporations do not have rights because they are people. They have rights because they are associations of people.15 Yet the Court has not been entirely consistent in basing the extension of corporate rights on an associational conception of the firm. In the latter half of the twentieth century, the Court often all but ignored the corporate form and focused instead on the nature of the Constitution as a restraint on government. The justices explained that, in their view, the text of the Constitution prohibits government from enacting certain kinds of laws regardless of the identity of who is affected. If the government passes a law that restricts

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speech, that law violates the First Amendment. Here, the question is not whether the corporate challenger is entitled to a certain right to do something. The question is whether the state is prohibited from restricting that activity. This perspective has allowed the justices to avoid the tricky question of whether corporations as such have individual rights and makes the corporation’s personhood largely irrelevant. This chapter examines Citizens United and the history of electoral regulation of corporations dating back to the Tillman Act of 1907, the first federal law restricting corporate money in politics. It shows that, in this realm of law, the corporation has been conceptualized not primarily as a person but as an association. The corporation as association molded the law’s earliest restrictions on corporate political spending and continues to shape both legislation and Supreme Court decisions. The associational model has not, however, been stagnant. It has evolved considerably over the past century and by and large in one direction: toward expanding opportunities for corporations to participate in campaigns. At the time of the Tillman Act, the corporation was envisioned to be a dangerous form of association. The corporate form was criticized for enabling management to misuse shareholder money, leading to new restrictions on corporate contributions and expenditures on behalf of candidates. In the mid-twentieth century, lawmakers increasingly opened up avenues for limited corporate political participation through political action committees, or PACs. While still protecting shareholders, the PAC rules allowed managerial employees to finance the corporation’s campaign activity. Citizens United represents a third stage, one in which the corporation is treated as a beneficial form of association for employees and shareholders. Under this view, special restrictions on corporate politics are inappropriate because firms represent the interests of their stakeholders. These developments in the field of corporate politics were not merely conceptual. Resonating with underlying changes in corporate law and finance, these changes also profoundly impacted the legal rules pertaining to corporate involvement in elections. In doing so, they continually opened up more space for businesses to exert influence in campaigns and served to legitimate a role for the corporation in electoral politics. When Citizens United first arrived at the Supreme Court, it appeared to be a relatively minor case, one unlikely to stir anything but the most cursory media attention. A nonprofit organization named Citizens United had pro-

Citizens United, Personhood, and the Corporation in Politics

duced a 90-minute documentary about the former first lady and New York senator, Hillary Clinton.16 With the unimaginative title, “Hillary: The Movie,” the critical documentary was designed to raise doubts about the presumptive presidential nominee of the Democratic Party in the 2008 election. Citizens United sought to air its Hillary documentary on television through video on demand in the months before the election. According to the Federal Election Commission, however, airing the documentary was illegal because it was funded partially with corporate money. The FEC relied on the Bipartisan Campaign Reform Act of 2002.17 One of the BCRA’s provisions barred the use of corporate treasury funds to finance an “electioneering communication,” which the law defined as a television or radio advertisement that mentioned a federal candidate’s name and was broadcast thirty days before a primary or sixty days before a general election. The provision was designed to close what some reformers saw as a loophole in the existing campaign finance system. Corporations had been prohibited for nearly a century from making any contribution to a candidate for federal office. They had similarly been barred from taking out advertisements that expressly advocated for the election or defeat of a par ticu lar candidate. Yet, if the ads stopped short of explicitly endorsing a candidate and were not coordinated with any candidate—so-called “independent expenditures”—then corporations were allowed to provide financing from their general treasuries. The BCRA was designed to stop corporations from paying for ads of this sort, which many people saw as the functional equivalent of an endorsement. The FEC determined that “Hillary: The Movie” was an electioneering communication covered by the law. Because a small amount of corporate money had been used to finance the film, the FEC ruled that Citizens United could not air it (or commercials for it) during the weeks leading up to the election. Ted Olson, the former Solicitor General of the United States and counsel for Citizens United, told the justices that the FEC’s interpretation was mistaken. Congress was trying to stop television and radio advertisements, not feature-length documentaries. Olson did not challenge the constitutionality of the BCRA rules themselves. There was no need to. The Supreme Court had already upheld the very provisions on corporate spending right after the BCRA was passed. Indeed it was Olson, then working for the Bush administration, who successfully defended the law in the Supreme Court in the McConnell case. All Olson had to do now was show that the FEC erred in treating a feature-length documentary the same

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as a commercial. “This sort of communication was not something that Congress intended to prohibit,” Olson told the justices. Cases about the niggling details of campaign finance law do not usually make headlines or lead to landmark rulings. Yet, from time to time, something happens in a Supreme Court hearing that unexpectedly seems to transform what would be a minor case into one of far greater significance. Drew Days III, President Bill Clinton’s Solicitor General, discovered this in 1994, when he defended a federal law that made it a crime to possess a gun near a school.18 Days’s argument was that Congress had the authority to pass the gun-free school zones law under the Constitution’s commerce clause. Although possession of a gun is not necessarily “commercial” activity, Days could be confident in the case’s outcome given that the Supreme Court had not invalidated a federal law for exceeding Congress’s commerce power in nearly seventy years. Just a few minutes into the hearing, however, Justice Sandra Day O’Connor asked, “What is there that Congress could not do, under this rubric, if you are correct?” Surprisingly, Days had no answer. The justices pounced on Days, repeatedly insisting he identify a limit to Congress’s power to regulate interstate commerce. Five months after he was unable to draw a boundary, the Court struck down the gun law and began what legal scholars called the Court’s “federalism revolution.” This renewed scrutiny of federal laws would lead to the invalidation of several important congressional enactments and become the basis for challenging the Affordable Care Act, President Obama’s controversial healthcare reform law. In the hearing on Citizens United’s case, a similar turning point came just after Ted Olson finished his argument to the justices. Malcolm Stewart, a deputy solicitor general, rose to the podium to defend the FEC’s ruling that “Hillary: The Movie” was an electioneering communication barred under the BCRA. A fi fteen-year veteran of the Solicitor General’s office, Stewart was an experienced Supreme Court advocate. He had argued more than forty cases at the high court and was twice the recipient of the John Marshall Award, the highest honor bestowed by the Department of Justice for excellence in lawyering. Stewart, however, appeared surprised when Justice Alito asked if the government’s argument would also allow government to prohibit publication of a book if it mentioned a candidate for federal office and was financed by a corporation. When Stewart said yes, the tenor of the argument changed. “The government’s position,” asked Alito incredulously, “is that the First Amendment allows the banning of a book if it’s published by a corporation?” Given that most books are published by corporations,

Citizens United, Personhood, and the Corporation in Politics

Stewart’s argument alarmed several of the justices, including Chief Justice John Roberts. A minor case about the applicability of the BCRA to a partisan documentary about an unsuccessful presidential candidate, one destined to be seen by very few people, was cast in a new light by Alito’s piercing question. It was now a case about whether Congress could ban books. In fairness to Stewart, the majority of justices on the Roberts Court in 2009, when the case was argued, had previously expressed grave reservations about the electioneering communications provisions and campaign finance law more generally. In 2007 the Court significantly eroded the electioneering communications rules in Federal Election Commission v. Washington Right to Life.19 The same five justices that would later vote together in Citizens United— Chief Justice John Roberts and Justices Samuel Alito, Anthony Kennedy, Antonin Scalia, and Clarence Thomas—held that the electioneering communications restrictions could only be applied to a limited range of ads, those incapable of being interpreted as anything other than outright advocacy for or against a named candidate. As a result of Washington Right to Life, it became easy for corporations and unions to finance election ads so long as the ads were not obvious endorsements. Washington Right to Life suggested that a majority of the Court was already prepared to gut, if not overturn entirely, the electioneering communications provisions of the BCRA. Nonetheless, Stewart’s admission raised the stakes in Citizens United. Banning books is the quintessential form of censorship and the First Amendment would be seriously undermined if it were read to allow government such leeway, especially in the context of elections. Ted Olson had only asked the Court for a narrow ruling that would allow this one documentary to be aired without calling into question the broader regulatory authority of the government over campaign materials. Stewart’s admission, however, crystallized the larger constitutional issue, bringing to the fore the implications of the broad authority the FEC was claiming. Even if the Court’s majority was prepared to write a narrow opinion along the lines Olson requested, after Alito’s question and Stewart’s inapt response, it would be hard for the justices to avoid the question of whether the government can ban corporatefinanced books. Three months later, the Supreme Court ordered the Citizens United case to be reargued. Only this time, the Court asked the parties to address a different question than had originally been asked. Now the justices wanted to know if the First Amendment ever permitted government to impose special

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campaign finance restrictions on corporations. It subsequently became known that the reargument was ordered as a compromise between those justices who were prepared to strike down the BCRA’s corporate spending restrictions and those who objected to deciding that broader issue when none of the parties had even briefed or argued it. The case was heard a second time in September of 2009, but with the votes obvious to all, there was none of the drama of the earlier hearing. Th ree of the justices, Kennedy, Scalia, and Thomas, were on record as opposed to special restrictions on corporations in campaign finance law. Two other justices, the Chief Justice and Alito, had led the skeptical questioning of Stewart. It seemed clear that five votes were there to allow Citizens United to air its documentary—but the Court could have issued a narrow ruling along those lines without a rehearing. Even Elena Kagan, the newly appointed Solicitor General making her first appearance at the high court in the second Citizens United hearing, sensed that five justices were prepared to go further and strike down the BCRA’s corporate financing rules entirely. She disavowed Stewart’s earlier argument about the government’s authority to ban books and tried to persuade the Court to rule narrowly, carving out an exception for Citizens United’s documentary. At one point, Kagan told the Court, “If you are asking me, Mr. Chief Justice, as to whether the government has a preference as to the way in which it loses, if it has to lose, the answer is yes.” Despite Kagan’s preference, the ruling by the Supreme Court announced in January of 2010 was far-reaching. Not only were the BCRA’s rules on corporate financing of “electioneering communications” invalidated, the Court also overturned two previous decisions upholding special limits on corporate political spending. “The First Amendment has its fullest and most urgent application to speech uttered during a campaign for political office,” Kennedy explained, writing for the majority. “Premised on mistrust of governmental power, the First Amendment stands against attempts to disfavor certain subjects or viewpoints. Prohibited, too, are restrictions distinguishing among different speakers, allowing speech by some but not others.” Under “our law and our tradition,” Kennedy concluded, “it seems stranger than fiction for our Government to make this political speech [by a corporation] a crime. . . . The civic discourse belongs to the people, and the Government may not prescribe the means used to conduct it.” Justices Stephen Breyer, Ruth Bader Ginsburg, and Sonia Sotomayor joined John Paul Stevens’s dissent, which insisted that, in “the context of election to public office, the distinction between corporate and human

Citizens United, Personhood, and the Corporation in Politics

speakers is significant.” Corporations, Stevens noted, “cannot vote or run for office.” “The financial resources, legal structure, and instrumental orientation of corporations raise legitimate concern about their role in the electoral process.” The Court’s decision, he argued, “marks a dramatic break from our past.” The first laws to restrict the involvement of business corporations in electoral politics arose around the beginning of the twentieth century. As the essays of Bank and Mehrotra, Crane, and Novak in this volume show in some detail, the rise of the large national corporation at the end of the nineteenth century sparked a populist backlash as Americans became increasingly convinced that big corporations and the executives who controlled them were exercising an undue influence in the marketplace. Yet, the Progressive concern was not exclusively about corruption of the market; it was also about the corruption of electoral politics. Reformers sought legislation that would preserve the central mechanism of democratic self-governance, elections, from being overwhelmed by big business.20 It was a highly publicized public scandal that propelled Congress in 1907 to pass the first federal campaign finance law: the Tillman Act, which barred corporations from making “money contributions” to candidates for federal office.21 James Hazen Hyde, the vice president of the Equitable Life Insurance Company, was often featured in the New York gossip pages and after one especially lavish party the papers discovered that Hyde had charged the expenses to the company. Joseph Pulitzer’s New York World ran with the story, portraying the party as a shameful example of how insurance company executives misused the policyholders’ money to enrich themselves. Prompted by Pulitzer’s steady stream of stories, which ran on the front page for months, the New York State legislature in 1905 launched an investigation into the financial practices of insurance companies. To lead the inquiry of what came to be known as the Armstrong Committee, lawmakers tapped a little-known lawyer unaffiliated with any of the major insurance and financial firms. His name was Charles Evans Hughes and his investigation would expose widespread corporate corruption and propel him to national fame. Hughes became such a celebrity that he was elected governor of New York two years later and was mentioned as a viable candidate for president. What captured the public’s imagination more than anything else was Hughes’s discovery that insurance companies were making contributions to candidates running for office.22 In the twenty years previous, election

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campaigning had undergone an incredible transformation that historian Mark Wahlgren Summers called “politics’ own industrial revolution.”23 As a result of civil ser vice reform in the 1880s, the traditional means of financing campaigns—assessments imposed on bureaucrats appointed by elected officials—were closed off. In addition, the machines that delivered election victories in many cities saw their power diminished by the widespread adoption of the secret ballot, which made it more difficult to watch over the polls on Election Day.24 As machine-driven campaigns were replaced by campaigns reliant on appeals to the public for support, candidates increasingly employed professional staffs, public rallies, and advertisements designed to motivate partisans.25 In the political marketplace, money was a must. As Mark Hanna, the Republican strategist behind William McKinley’s 1896 and 1900 successful campaigns for the presidency, was rumored to have joked, “There are two things that are important in politics. The first is money, and I cannot remember what the second one is.”26 This industrialization of electoral politics came at a price. Big business, increasingly fearful of regulation, stepped in to make up the shortfall in candidates’ campaign funds.27 Yet, until Charles Evans Hughes’s investigation revealed insurance company contributions, no one knew for sure the role corporations were playing in the financing of American elections. The life insurance scandal confirmed the rumors and propelled Congress and numerous states to act to protect democracy. Exemplified by the Tillman Act, these laws are often thought to reflect the Progressive era hostility to big business.28 Corporations had to be restricted, in this view, to reduce their political power and their dominating influence on policy. While fear of the overwhelming influence of business was certainly an important motivation for early restrictions on corporate political activity, the story was in fact more complex. The turn-of-the-century public debate over corporate money in politics also focused on novel concerns about the ability of corporations to misuse “other people’s money.” Corporate executives were accused of taking the funds belonging to the policyholders and shareholders to buy political influence, often to secure legislation seemingly designed to serve the interests of executives rather than the interests of the policyholders and shareholders.29 This associational understanding of corporate political activity, pitting one group within the corporation (executives) against another (policyholders and shareholders), was built on emerging changes in corporate structure and public investment. The end of the nineteenth century and the beginning de-

Citizens United, Personhood, and the Corporation in Politics

cades of the twentieth were marked by the law’s increasing separation of the ownership of enterprise from its control.30 Much of the literature on the separation of ownership and control in American corporations focuses on the most notorious large corporations of the era: the railroads. Yet it was another type of corporation that featured prominently in the efforts to restrict corporate political spending: insurance companies.31 While the turn of the century saw exponential growth in public stockholding in railroad companies and other industrial corporations, ownership of stock remained confined to the wealthier classes. The policyholders of insurance companies, by contrast, were middle- and upper-middle-class Americans whose money was effectively invested in large, national firms run increasingly by professional managers.32 Regardless of whether insurance companies were organized as stock corporations or as mutuals, the public debate cast the policyholders as the owners of the firms.33 Management had fiduciary duties to the policyholders in both types of firms but, as the Armstrong Committee’s hearings revealed, the policyholders had little power to discipline management to ensure compliance. According to a contemporary account in the Atlantic Monthly, “That the policy-holders do not control the management of a mutual life insurance company is abundantly clear, and that they cannot, a little reflection makes equally evident.”34 Citing recently enacted laws, such as one in New York that made it harder for policyholders to sue executives for breach of fiduciary duties by requiring advance approval of the state attorney general, critics charged that the traditional safeguards had been “removed by the legislature at the instigation of the Wall Street insurance corporations and gamblers” who sought freedom “to use the trust funds of policy holders recklessly and wastefully.”35 Executives of the insurance companies were widely criticized for using political contributions, fi nanced by the policyholders, to obtain new laws that protected the executives from the policyholders’ oversight. The problem with corporate money in politics, in other words, was not just that the corporation was an entity that had grown too big and powerful. Corporate political expenditures were also an abuse of people within the corporation, who saw their money being used against them and their interests by executives. This associational view of corporate political corruption was featured in President Theodore Roosevelt’s call for campaign finance reform. “[D]irectors,” he said, “should not be permitted to use stockholders’ money for such purposes.”36 The Tillman Act of 1907 was welcomed by reformers like Perry Belmont, who raved that a “check has been put upon

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the large secret contributions of corporations. . . . Stockholders and policyholders no longer helplessly witness the expenditure of corporate funds for political purposes.”37 The law did not prevent business interests from continuing to exert their power and influence whenever possible. Unlimited contributions by individuals were still allowed, and in the elections that followed, federal campaigns received most of their funding from Cleveland Dodge, Bernard Baruch, John D. Rockefel ler, and a handful of other industrialists and financiers.38 As a result, even after the Tillman Act, business influence remained strong. By and large, the thrust of the Tillman Act was to provide minimal protection for shareholders from having what was thought to be their money used to directly finance campaigns for elected office. Nonetheless, the law became a model for regulating corporate politics, and thirtyone states enacted similar provisions around the turn of the twentieth century. “Everywhere, campaign contributions were forbidden.”39 In the decades after the Tillman Act, the regulation of corporate money in electoral politics was profoundly shaped by campaign finance debates about labor unions. Unions began to actively fund federal campaigns in the 1936 election, when the Congress of Industrial Organizations (CIO) and the American Federation of Labor (AFL) spent heavily to support the reelection of President Franklin Roosevelt.40 Efforts to rein in union spending would follow along the pathway cleared three decades earlier: unions were added to the same provision of federal law that prohibited corporate contributions. Unions would push back against these restrictions much harder than business corporations, however, and they succeeded in carving out broad exceptions to these rules. Business corporations, equated to the unions by federal statute and judicial decision, would turn out to be at least equal beneficiaries.41 Prior to 1936, unions had remained on the sidelines of campaign finance, spending by one estimate less than $96,000 for political activity between 1906 and 1925. To support Roosevelt’s campaign and that of other Democrats, however, unions spent nearly $750,000 in 1936 alone. Th is sudden rise of union money led a congressional committee investigating campaign funds to recommend prohibiting unions from making contributions or expenditures in support of candidates. In 1943, spurred by wartime coal strikes that undermined the political support for labor, a temporary ban on union campaign funds was adopted as part of the Smith-Connolly Act. The prohi-

Citizens United, Personhood, and the Corporation in Politics

bition was made permanent by the Taft-Hartley Act of 1947. The goal of the law, according to proponents, was to “place these labor organizations on the same plane as corporations.” According to David Sousa, the union ban “marked the emergence of a pluralistic regime in campaign finance, one embracing the activities of private interest groups and centered on a vision of democratic balance among contending group forces.”42 While reducing the perceived undue influence of labor and balancing union and corporate power were impor tant elements of the push to ban union political spending, internal organizational dynamics also played a role. Much of the rhetoric employed by proponents focused on the same danger previously identified with corporate contributions: other people’s money corruption. Union leaders, it was argued, should not be able to use the union members’ money for political purposes.43 This frame was solidified by the headline-making protest in 1944 by celebrity filmmaker and popular radio host Cecil B. DeMille, a fervent anticommunist who refused to pay a one-dollar assessment imposed on all members by the American Federation of Radio Artists to fund a campaign against an open shop measure on the California ballot.44 Senator Robert Taft credited the DeMille controversy for passage of the permanent union ban and, on the floor of the Senate, gave voice to the associational dangers of unions: why should union members “be forced to contribute money for the election of someone to whose election they are opposed?”45 Philip Murray, the president of the CIO, decided to defy the union funding ban.46 He published an op-ed on the front page of the CIO News, the organization’s magazine, urging members to vote for Ed Garmatz, a candidate running in a special election for a Maryland congressional seat. In the oped, Murray readily acknowledged that his endorsement amounted to an illegal expenditure in violation of the Taft-Hartley Act. That law, however, was in Murray’s view a violation of the unions’ First Amendment rights and he dared the government to prosecute him. Murray was indicted and his case went to the Supreme Court. The justices in United States v. CIO were sympathetic to Murray’s interpretation of the Constitution but rested their decision to throw out his indictment on statutory grounds.47 The justices ruled that the Taft-Hartley Act did not apply to Murray’s endorsement because it was published in the organization’s in-house newsletter and was not targeted to the general public. As a result it was a matter of internal communications rather than an expenditure to influence the electorate within the meaning of the law. “It

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is unduly stretching language to say that the members or stockholders are unwilling participants in such normal organizational activities, including the advocacy thereby of governmental policies affecting their interests, and the support thereby of candidates thought to be favorable to their interests,” Justice Stanley Reed wrote for the majority.48 Reed’s reading of the TaftHartley Act was dubious as a matter of legislative history; the animating idea behind reform was that union members were not willing participants in political advocacy. Yet such a narrowing construction of the statute was necessary, in the Court’s view, to avoid what Reed called the “gravest doubts” about the law’s constitutionality. After CIO, unions continued to push the boundaries of campaign finance law, supporting candidates through both in-house newspapers and advertisements intended for a broader audience. In 1957, after the United Automobile Workers funded a television advertising campaign endorsing congressional candidates, the Supreme Court again suggested that unions could not be prevented from making political expenditures financed voluntarily by members—this time, regardless of the intended audience. Although the factual record was too incomplete for the Court in United States v. Autoworkers to determine how the UAW ads were financed, the case was remanded to the trial court with instructions to determine if the ads had been “paid for out of the general dues of the union membership or may the funds be fairly said to have been obtained on a voluntary basis.”49 The signal was not lost on union lawyers, who advised their clients to funnel more of their political spending through political committees—legally separate entities that raised money from individual union members but kept segregated from the union’s general treasury. Although workplace pressures and union fundraising techniques may have undermined the voluntariness of some member contributions, the unions, buoyed by the favorable Supreme Court rulings, could maintain a colorable claim of only spending money on politics that came from consenting members. The separate political entities created by unions, which came to be known as PACs, received explicit endorsement by the Supreme Court in 1972’s Pipefitters v. United States.50 The Nixon administration prosecuted the leaders of Pipefitters Local 562 in St. Louis for making political contributions to candidates through the union’s PAC in violation of the Taft-Hartley Act. Although the Department of Justice was after Pipefitters’ president Lawrence  L. Callanan and Jimmy Hoffa attorney Morris Shenker, who were known to have ties to the mob, the campaign finance charges were all that

Citizens United, Personhood, and the Corporation in Politics

was left after several previous attempts to secure convictions against them had failed.51 The indictment targeted the Pipefitters’ use of general treasury funds to pay the administrative expenses associated with operating the political committee, even as the union financed actual contributions given to candidates solely from voluntary member donations. Because the segregated fund pursued the union’s goals and was run by union people, the government argued, it was “merely a subterfuge through which the union itself made proscribed political contributions.”52 The union was convicted but the Supreme Court reversed. The Pipefitters Court held that the union’s political committee was sufficiently separate from the union itself to avoid running afoul of Taft-Hartley. The law only required that the political committee “be separate from the sponsoring union only in the sense that there must be a strict segregation of its monies from union dues and assessments.” Moreover, the union contribution ban did not apply to “political funds financed in some sense by . . . voluntary donations” because the “dominant concern in requiring that contributions be voluntary was, after all, to protect the dissenting stockholder or union member,” wrote Justice William Brennan for the majority.53 When union members contributed voluntarily, as had been the case with the Pipefitters’ contributions, unions were free to use that money to fi nance political spending. Although business corporations were not involved in any of the Supreme Court rulings on union political activity under Taft-Hartley, the Court in each case explicitly linked corporations with labor unions. Not only were the political contributions of each barred by the same statutory provision, the Court suggested they were each entitled to establish segregated political funds to finance political contributions. This equation of the rights of unions with the rights of corporations was done uncritically, the justices assuming that the same rules should apply to both without any explanation. Nonetheless, the linkage offered businesses a way to skirt the long-standing ban on corporate campaign contributions. By the late 1960s, a handful of corporations, led by California’s aerospace companies, were following the unions’ lead and forming “good government” or “civic action” committees with segregated funds that raised money to finance political activity.54 The new corporate political committees tended to avoid soliciting shareholders, who, at least in public companies, were not likely to contribute. In large corporations, managers and executives were the ones asked to give instead. Given their place in the corporate hierarchy, they were much less

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likely than shareholders to say no. For the white-collar worker William H. Whyte, writing in 1956, called the “organization man”—a conformist, lifetime employee whose personal identity was in many ways wrapped up with that of the firm55—corporate politics could also be portrayed as a positive good. It served the same values as his own electoral activity yet, representing a group, was likely to speak with a louder voice and be more effective. The corporation was still using other people’s money for its own political activity, although at least now it like the unions could say the funds were raised voluntarily. Congress gave formal sanction to corporate and union PACs in the Federal Election Campaign Act of 1972 (FECA) and its subsequent amendments. The law clarified that corporations and unions were barred from contributing general treasury funds to candidates. They could, however, use those funds to administer PACs in the company’s name so long as the money that went to candidates came from voluntary donations from members. Watergate followed soon after, spurring amendments to the FECA to limit contributions to candidates and expenditures on their behalf.56 Yet, despite the fact that nineteen companies pled guilty to contributing general treasury funds to federal candidates as part of the Watergate scandal, Congress made no significant changes to the corporate political funding rules. To some lawmakers, the Supreme Court left Congress with little choice but to allow PACs; as one said, the rules were designed “to codify the court decisions.”57 To other lawmakers, the Court’s decisions may have been a convenient excuse to keep open one of the wellsprings of money needed to fuel increasingly expensive campaigns dependent upon expensive television and radio ads to reach voters. For all the new reforms after Watergate, the cost of campaigning continued to climb dramatically, from approximately $175 million for all federal, state, and local campaigns combined in 1960 to $1.2 billion in 1980.58 PACs were thus attractive vehicles for corporations seeking access and candidates seeking funds. The corporate PAC rules suggested by the Supreme Court and then legislated by Congress in the FECA had the effect of legitimating a measure of corporate participation in elections. In contrast to the Tillman era reforms, which cast corporate politics as harmful to the shareholders, the segregated fund rules created a lawful way for corporations to directly support candidates on behalf of employees. Corporations no longer had to shy away from electoral politics nor illegally funnel money to candidates through covert contributions by executives that would be later repaid at bonus time. Cor-

Citizens United, Personhood, and the Corporation in Politics

porations could now openly engage in electoral politics. To do so, however, meant politicizing the workplace. Raising PAC money required persuading corporate employees to give, bringing electioneering and partisanship to the office. “We talk about the PAC and what it means to the company and what it means to them as individuals,” one company’s government relations liaison recounted, explaining how he and the firm’s lobbyist held employee meetings with each work unit.59 By 1980, nearly one-third of all federal campaign funds came from business PACs.60 By 2000, over two-thirds of all PAC money contributed to candidates came from business.61 Even as PACs became a powerful tool for corporate political participation, the Supreme Court never held that business corporations possessed the same First Amendment speech rights to influence elections as ordinary individuals. Outside of campaigns, however, the Court was beginning to recognize First Amendment speech rights of business corporations more generally in a line of cases beginning in the 1930s. The rise of a free press jurisprudence would be hailed as one of the triumphs of twentieth-century Progressive constitutionalism.62 Yet this historic development would eventually make it harder to justify campaign finance restrictions on corporations. Business corporations’ freedom of speech and of the press fi rst came to the Supreme Court in 1936 as a result of Huey Long’s notorious war with the Louisiana newspapers.63 Unhappy with the newspapers’ politics and, perhaps more, their portrayal of him, Long was determined to force the newspapers into line, especially the powerful Times-Picayune. Long forces enacted a special 2  percent tax on the advertising revenue of the state’s largest newspapers in 1934 and the newspapers challenged the tax as a violation of the news corporations’ speech rights. In the Supreme Court, the Louisiana Attorney General insisted that, as corporations, the publishers could not assert any constitutional rights. “[T]his is only partly true,” replied Justice George Sutherland for a unanimous court in Grosjean v. American Press Company.64 While corporations could not claim the protection of every right, a “corporation is a ‘person’ within the meaning of the equal protection and due process clauses.” Th is was a proposition first put forward by the Court in Pembina Consolidated Mining Company v. Pennsylvania,65 decided in 1888 (though often mistakenly attributed to an earlier case that avoided the question, Santa Clara County v. Southern Pacific Railroad).66 While the Court had declined to extend other liberty rights to corporations, such as the right against self-incrimination

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under the Fift h Amendment,67 the Grosjean Court held that speech and press rights extended to Louisiana’s newspaper companies. Despite citing corporate personhood, Grosjean in other ways reflected a subtle shift in focus away from corporate identity and toward the Constitution as a limitation on government censorship regardless of the speaker’s identity. Sutherland introduced his discussion of the freedom of the press by recounting how the First Amendment was inspired by over a century of efforts by the British government to quell the expression of political dissent. Likening Long’s law to the infamous Tax on Knowledge, adopted by Parliament in 1712, Sutherland insisted that the freedom of the press was added to the Constitution “to preclude” government “from adopting any form of previous restraint upon printed publications.” Such censorship violates “the natu ral right of the members of an orga nized society, united for their common good, to impart and acquire information about their common interests.” The freedom of the press was protected not primarily because corporations had First Amendment rights but because “[i]n the ultimate, an informed and enlightened public opinion was the thing at stake.” This view of the First Amendment, in which its central value was public education and its method was to prevent government interference with the marketplace of ideas, would come to define the core meaning of freedom of speech in the years to come. It made the identity of the speaker decreasingly relevant, such that by 1964, when the Court held that The New York Times had broad speech rights to publish even potentially false information about public officials in the landmark New York Times v. Sullivan68 case, the newspaper’s corporate form was never mentioned in any of the opinions. The corporation had become constitutionally invisible. The development of speech protections for entities taking the corporate form was also influenced by the Civil Rights Movement. Southern states tried to restrict the influence of the National Association for the Advancement of Colored People, which challenged these efforts on constitutional grounds. The NAACP’s foes claimed that the organization, which took the corporate form, was not entitled to constitutional rights. The Supreme Court disagreed. As the Court did often in the civil rights era, old doctrines were discarded or reformed in the ser vice of desegregation. In NAACP v. Alabama ex rel. Patterson, the court held that nonprofit membership corporations can assert the rights of their members.69 Five years later, in NAACP v. Button, the Court recognized the speech and association rights of nonprofit membership corporations like the NAACP in the ser vice of their members.70

Citizens United, Personhood, and the Corporation in Politics

Here, corporate standing to assert constitutional claims was deemed necessary to defend the rights of members. Their coming together within the corporate form was confirmation of the common goals that could be undermined by censorship.71 By the 1970s, media corporations and incorporated nonprofit membership groups had well established constitutional protections under the First Amendment. The place of ordinary business corporations to participate in the marketplace of ideas, however, remained unsettled. Such firms would receive a significant boost that decade, largely due to a lawsuit brought by anticorporate crusader Ralph Nader. Nader did not set out to help corporations. As the leading consumer-rights advocate of the early 1970s, he set out to help the people who bought goods from corporations. Business corporations nonetheless would once again be the beneficiaries of progressive reform. Virginia law barred pharmacies from advertising the prices they charged for prescription drugs. Nader’s consumer-rights organization, Public Citizen, spearheaded a challenge to the law because it prevented people from comparing prices and inflated the costs of medication. Justice Harry Blackmun’s opinion for the Court in Virginia State Pharmacy Board v. Virginia Citizens Consumer Council72 not only ruled in Nader’s favor but also established the foundation for a new category of protected First Amendment expression for for-profit businesses: commercial speech. The Supreme Court had previously held that “purely commercial advertising” was not protected by the First Amendment.73 Nader’s case, however, was different. Borrowing from Public Citizen’s argument in the briefs, Blackmun explained that the consumer interests involved changed the constitutional calculus. “The question” in the case was the extent of First Amendment protection enjoyed by consumers “as recipients of the information, and not solely, if at all, by the advertisers themselves who seek to disseminate the information.” Rather than say that pharmacies had a right to speak, Blackmun said that the consumers had a right to hear what the pharmacies said. The Supreme Court would continue to develop Nader’s “listeners’ rights” argument in the years to follow, with no case more important for corporate politics than 1978’s First National Bank of Boston v. Bellotti.74 Striking down a Massachusetts ban on corporate expenditures to support or oppose ballot measures, the Court adopted Nader’s reasoning and declared that because the speech at issue concerned matters of public importance it could not be barred regardless of the identity of the speaker. “It is the type of speech

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indispensable to decision making in a democracy, and this is no less true because the speech comes from a corporation rather than an individual,” wrote Justice Lewis Powell for the majority. The “role” of the First Amendment was to afford “the public access to discussion, debate, and the dissemination of information and ideas” regardless of the speaker’s identity. First Amendment principles “prohibit government from limiting the stock of information from which members of the public may draw.” That it was Powell writing was appropriate, as the Bellotti litigation was precisely the type of political mobilization on the part of business Powell had called for in his influential memorandum to the Chamber of Commerce penned just months before his appointment to the high court.75 Responding to the rising tide of environmental protection, consumer rights, and workplace safety laws, Powell called attention in his memorandum to the “assault on the enterprise system.” This period had seen what James Q. Wilson elsewhere referred to as “the most powerful wave of antibusiness legislation to come out of Congress since the first Roosevelt administration,”76 and Powell exhorted corporate America to forsake its traditional “apathy” and fight back “aggressively and with determination—without embarrassment and without the reluctance which has been so characteristic of American business.” First National Bank of Boston followed Powell’s advice, both in politics and the courts. As written, the law was an easy target for a legal attack because Massachusetts had regulated on the basis of viewpoint: the law only applied to speech on ballot measures that did not “materially affect[] any of the property, business, or assets of the corporation.” Such viewpoint discrimination ran afoul of the libertarian free speech principles first articulated by Progressives earlier in the century.77 Bellotti remained an outlier for over two decades. Never overturned, the Supreme Court nonetheless ignored its reasoning and in a series of cases approved of campaign finance restrictions on business corporations. In FEC v. National Right to Work Committee, decided in 1982, the Court upheld the FECA’s requirement that corporate PACs solicit contributions only from “members” and not the general public.78 In FEC v. Massachusetts Citizens for Life, decided in 1986, the Court endorsed the federal PAC rules applicable to a “traditional corporation organized for economic gain” while crafting an exception for ideological, nonprofit membership associations.79 In Austin v. Michigan Chamber of Commerce, decided in 1990, the Court upheld a state law prohibiting corporations from using general treasury funds to make independent expenditures in support of candidates. In FEC v. Beaumont,

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decided in 2003, the Court affirmed the constitutionality of requiring an advocacy group that accepted donations from business corporations to use a PAC to make contributions to candidates.80 In McConnell v. FEC, also from 2003, the Court upheld the Bipartisan Campaign Reform Act’s prohibition on corporate funding of electioneering communications—the same provisions Citizens United would overturn.81 In these cases, the justices repeatedly endorsed the principle Bellotti rejected: that business corporations could be subject to special restrictions in elections. Such restrictions were justified, according to National Right to Work Committee, to prevent the “substantial aggregations of wealth amassed by the special advantages” of the corporate form from being converted into political war chests, and “to protect the individuals who have paid money into a corporation . . . from having that money used to support political candidates to whom they may be opposed.” Bellotti, whose reasoning conflicted with both these rationales, was rarely cited. When it was, the case was limited to its facts: spending restrictions in ballot measure campaigns, which were distinct from candidate elections because there was no candidate to be corrupted. As such, Bellotti could be presented as “entirely consistent”82 with the later decisions, masking the lack of any clear logical connection between the candidate / referendum distinction and the two underlying justifications for limiting corporate money in politics. Corporations had large aggregates of wealth to deploy in both candidate and ballot measure campaigns and, in either case, shareholder money might be used to further partisan politics the shareholders might oppose. The threats from corporate funds may have been the same in candidate and ballot campaigns, but the distinction served the purpose of limiting the impact of Bellotti and allowing Congress and state legislatures considerable leeway in restricting corporate campaign funds. While following the pattern of post-Bellotti cases in upholding restrictions on corporate campaign financing, Austin was nonetheless an impor tant turning point. It was in this case that Justice Antonin Scalia, in dissent, cast business corporations for the fi rst time as a type of beneficial voluntary membership association for shareholders. Like the members of the NAACP or Massachusetts Citizens for Life, shareholders use the corporate form to pursue their mutual interests. “Those individuals who form that type of voluntary association known as a corporation,” Scalia wrote, understand that “management may take any action that is ultimately in accord with what the majority . . . of the shareholders wishes, so long as that action is designed to

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make a profit. That is the deal.” Given this voluntary arrangement, there was no more compelling reason for the government to restrict the speech of a business than there was for the government to restrict the speech of the NAACP. There is not “any difference between for-profit and not-for-profit corporations insofar as the need for protection of the individual member[].” Scalia’s view of the corporation resonated with contemporary academic theorizing about the corporation and the proper role of the government in overseeing corporate governance. Academics in the late 1970s working in the field of corporate law began to argue that a corporation was not an entity created by state grant but was instead a “nexus of contracts”—a web of voluntary agreements among corporate stakeholders.83 Proponents of this theory argued that because the corporation was made up of voluntary contracts, there was little need for government regulation of corporate behavior designed to help one group of stakeholders. Laws protecting shareholders from managerial misconduct were largely unnecessary because anyone who opposed a proposed course of corporate conduct could choose not to affiliate with that firm. Shareholders were able to protect themselves in the marketplace, disciplining undesirable management behav ior by selling their stock.84 This theory, which “successfully reoriented legal discourse on corporations,”85 became central to the law and economics movement that was blossoming at the University of Chicago when Scalia was a law professor there from 1977 to 1982. Scalia shared the movement’s skepticism about the need for government regulation to protect shareholders. Shareholders unhappy with corporate politics, Scalia argued in his Austin dissent, can simply sell their shares.86 The nexus theory corresponded with larger developments in corporate finance and management that empowered shareholders. Declining profits and anemic economic growth in the 1970s turned attention to the perceived shortfalls of entrenched managers, who were often portrayed as unresponsive to shareholder interests. Capturing the mood, economist Michael Jensen cited managers’ “inability to adapt to changing economic circumstances” and charged them with causing “widespread waste and inefficiency.”87 A surge in takeover activity saw shareholders seize control from what Peter Drucker called “enlightened-despot management”88; executive compensation was recalibrated to be more responsive to shareholders through stock options; institutional investors, like pension and mutual funds, grew in size and boardroom influence; and the old “Wall Street Rule” of support or sell was displaced by a new investor activism manifest in shareholder proposals

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and proxy contests. Many of the ultimate investors remained powerless, such as the individual pensioners who rarely knew where their money was invested (and, if they did know and wanted to sell, faced financial penalties for doing so). Nonetheless, the marketplace overall shifted decidedly in favor of shareholder interests, placing “more power to shape company enterprise in the hands of owners, less in the hands of top managers.”89 By the start of the twenty-first century, the norm of operating publicly held corporations to maximize the wealth of shareholders—often termed “shareholder primacy”—had been “fully internalized by American managers.”90 The empowerment of shareholders undermined shareholder protection as a rationale to justify government interference with both the economic marketplace and the political marketplace. By 2004, the Republican Party had adopted a libertarian approach to each of those domains. The impact on constitutional doctrine would be felt after the reelection of President George W. Bush that year. In his first term, Bush signed into law the Bipartisan Campaign Reform Act—the law requiring corporations to use PACs to finance electioneering ads that would be the basis of the Citizens United litigation. In Congress, support for the law was bipartisan by Washington standards, with Democrats voting overwhelmingly in favor and Republicans voting against by a nearly equal margin. In Bush’s second term, the retirements of Chief Justice William Rehnquist and Justice Sandra Day O’Connor opened up seats on the Supreme Court. Filled by Chief Justice John Roberts and Justice Samuel Alito, the remade Court embraced an anti-regulatory stance on campaign finance. Whereas earlier majorities tended to defer to Congress on campaign measures, the Roberts Court was far less forgiving. Over the new Court’s first eight years, a slim majority struck down or narrowed each of the half-dozen campaign finance laws to come before the justices.91 The difference in the Court was manifest in two decisions on the BCRA’s corporate electioneering communications provision. Immediately after the law was enacted, Republican Senator Mitch McConnell spearheaded a constitutional challenge to the new corporate funding rules and other aspects of the BCRA. In upholding the provision pertaining to corporations, the Rehnquist Court, in a majority opinion by Justice Sandra Day O’Connor, explained that it was “ ‘simply wrong’ to view the provision as a ‘complete ban’ on expression rather than a regulation. . . . ‘The PAC option allows corporate political participation without the temptation to use corporate funds for political influence, quite possibly at odds with the sentiments of some shareholders or members.’ ”92 O’Connor, a Reagan appointee, noted the

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Court’s “prior decisions regarding campaign finance regulation, which ‘represent respect for the legislative judgment that the special characteristics of the corporate structure require particularly careful regulation.’ ”93 McConnell was decided in 2003, two years before O’Connor retired and was replaced by Alito. In 2010, when the Supreme Court returned to the corporate electioneering communications provision in Citizens United, Alito sided with Justice Anthony Kennedy’s majority opinion, which took a starkly different view of corporate spending restrictions, replacing deference with distrust. “The law before us is an outright ban,” Kennedy wrote. Rather than respect for legislative judgments, the Citizens United majority insisted that “strict scrutiny” was required to insure that the government did not “ban political speech simply because the speaker is an association that has taken on the corporate form.” With regard to the alternative of financing ads with a PAC, the majority said that was not an effective substitute. The “PAC is a separate association from the corporation” and, in light of recordkeeping and administrative requirements, represents an overly “burdensome alternative[].” In the new majority’s view, the problem was that the corporation and its PAC were not identical—even though it was the Court itself that, in the union cases years earlier, had separated them. For all the criticism of Citizens United for making corporations “people,” Kennedy’s majority opinion never endorsed corporate personhood. None of the briefs fi led in support of Citizens United, including the organization’s own, argued that corporations were people and therefore entitled to the same constitutional rights as individuals. And nothing in the majority opinion depended on corporations being people. Instead, Citizens United emphasized two other arguments: Nader’s “listeners’ rights” argument and Scalia’s view of the corporation as a beneficial association. On listeners’ rights, the Court said, “The First Amendment protects speech and speaker, and the ideas that flow from each” in contrast to the BCRA, which prevented “voices and viewpoints from reaching the public and advising voters on which persons or entities are hostile to their interests.” The public, not the government, had “the right and privilege to determine for itself what speech and speakers are worthy of consideration.” On personhood, Kennedy’s majority opinion eschewed the idea entirely, referring instead to “corporations or other associations.” “If the First Amendment has any force, it prohibits Congress from fining or jailing citizens, or associations of citizens, for simply engaging in political speech.” Under the law, “certain disfavored associations of citizens—those that have taken on the

Citizens United, Personhood, and the Corporation in Politics

corporate form—are penalized for engaging in the same political speech.” Citizens United’s speech was not protected because the organization was a person. Its speech was protected because the organization was a means for ordinary people to come together for mutual purposes. Those people, both individually and in their associated form, had constitutional rights, including the right to speak on political issues at election time. Consistent with the beneficial association view of corporations articulated in Justice Scalia’s Austin dissent, Citizens United also rejected the premise that shareholders need special laws to protect them from managerial misconduct in the realm of campaign fi nance. “There is,” Kennedy wrote, “ little evidence of abuse that cannot be corrected by shareholders ‘through the procedures of corporate democracy.’ ” Although Kennedy did not elaborate on what exactly those procedures were, they might be linked to two ideas in democratic theory: exit and voice. Shareholders can exercise voice through corporate elections for board candidates and shareholder proposals. Shareholders can exit by selling their shares, which if done by enough investors could dissuade management from making campaign expenditures. For shareholders to be able to discipline management in these ways, however, requires that shareholders actually know about the campaign expenditures management is making. Kennedy may have mistakenly believed that federal election law gave shareholders this information through mandatory disclosure requirements. “[D]isclosure permits citizens and shareholders to react to the speech of corporate entities in a proper way,” he wrote. “Shareholder objections raised through the procedures of corporate democracy can be more effective today because modern technology makes disclosure rapid and informative. . . . With the advent of the Internet, prompt disclosure of expenditures can provide shareholders and citizens with the information needed to hold corporations and elected officials accountable for their positions and supporters.” Federal law, however, did not (and to this day does not) require disclosure of corporate financing of election ads. The Federal Election Commission, charged with interpreting and applying federal campaign finance law, might have expanded disclosure to fulfill the purposes of the BCRA but deadlocked. The result was that the governing rules required disclosure only when a contributor, be it individual or corporate, finances a specific, identifiable ad.94 If the contributor supports advertisements or expenditures more generally—as virtually every contributor does—the gift need not be disclosed. In other words, the key element

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the Court recognized as necessary for shareholder empowerment in the field of campaign finance remained largely hy pothetical. Citizens United, as a legal precedent, was read by lower federal courts to undermine other barriers to corporate money in politics. In SpeechNow.org v. FEC, the U.S. Court of Appeals for the District of Columbia Circuit held that the logic of the Supreme Court’s decision meant that corporations, unions, and individuals could give unlimited amounts to PACs to finance independent expenditures, such as election ads.95 Citizens United, the court explained, “resolves this appeal.” The result was the Super PAC—a political action committee that did not give directly to candidates but was able to accept unlimited contributions to finance independent ads to help candidates. Led by Chevron, which gave one contribution of $2.5 million, businesses gave over $70 million to Super PACs in the 2012 election cycle96—an amount that might have drawn more scrutiny were it not overshadowed by casino magnate Sheldon Adelson’s $91 million to Super PACs supporting Republican presidential candidates.97 In the 2012 cycle, 1,272 Super PACs, led by Restore Our Future for the Republicans and Priorities USA Action for the Democrats, reported spending over $620 million on election ads and related expenditures.98 Corporations may have been reluctant to give more to Super PACs because that is one form of corporate spending on politics that is required to be disclosed. For companies that sell to the general public or worry about their public image, political giving can be hazardous—as retail giant Target discovered in 2010 when its contributions to MN Forward, a nonprofit that supported a Minnesota gubernatorial candidate opposed to same-sex marriage, triggered a customer boycott. Only nine Fortune 500 companies contributed to Super PACs in 2012 and corporate giving skewed toward lesser-known and privately held companies.99 As one corporate lobbyist put it, for corporations in the public eye, “nondisclosure is always preferred.”100 Corporations and others who favor discretion could alternatively direct their money to trade associations, nonprofit 501(c) organizations, and 527 committees that unlike Super PACs do not have to disclose their donors. In the 2012 election, “dark money” spending by outside groups exceeded $300 million.101 Chemical manufacturer Dow and financial ser vices firm Prudential contributed over $3 million to fund political spending by the U.S. Chamber of Commerce. Politically active computer chip maker Qualcomm, forced to disclose its political giving as part of a settlement agreement with the New York State Comptroller, revealed that it gave more to dark money

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groups than to disclosed political committees.102 An investigation in Montana uncovered the script used by Western Tradition Partnership, a 501(c)(4), to raise money from corporations to oppose candidates seeking to protect the environment: We’re a 501(c)(4) organization. Corporate contributions are completely legal under this program. There’s no limit on how much you can give. It’s confidential. We’re not required to report the name of any contributor or amount of any contribution that we receive. No politician, no bureaucrat, no radical environmentalist will ever know that you helped to make this program possible. You can just sit back on election night and see what a difference you’ve made.103 The difficulty of discovering the identity of donors to dark money groups was highlighted in Colorado by a 527 committee called Colorado Citizens for Accountable Government, which spent over $1.5 million on state house and senate races in 2010. Like a Russian doll, the 527 received most of its donations from Colorado Leadership Fund Political Committee, another 527, which in turn received substantial sums from another 527 committee, the Colorado Leadership Fund. Only due to unusual circumstances was it revealed that Farmers Insurance and Altria / Philip Morris had each made six-figure donations.104 Overall, it was estimated that Citizens United accounted for approximately $1 billion in new election spending.105 Corporations and individuals gave, as did unions. Reversing the pattern of business groups taking opportunistic advantage of progressive reforms, the AFL-CIO established its own Super PAC, Workers’ Voice, to support pro-union, mostly Democratic candidates.106 Unions were also freed by Citizens United to use general treasury funds to advocate publicly for candidates, rather than just internally to union members. In 2012, the California Teachers Association matched the $1.8 million spent by the California Chamber of Commerce on state races.107 If, as one former FEC chairman put it, “Citizens United put a Supreme Court Good-Housekeeping-seal-of-approval on corporations being allowed in elections,”108 unions also took advantage of the endorsement. It may be several more election cycles before the impact of Citizens United on corporate political spending is fully understood. Because of the risks, many companies have refrained from supporting candidates or maintained their previous practice of contributing directly to candidates through ordinary corporate PACs.109 Although overshadowed by their Super sisters,

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which finance independent ads, candidate-oriented PACs set new records for contributions to candidates in 2012. As usual, most of that money came from corporate PACs, led by Honeywell ($3.1 million), AT&T ($2.5 million), and Lockheed Martin ($2.2 million).110 Of course, federal elections tell part of the story of Citizens United’s effect. Federal campaigns are already saturated with money, making it more difficult for companies to have a major impact on the outcome. Citizens United’s influence may be more acute in elections that do not typically involve large amounts of money or trigger the same level of public scrutiny, like those for state judges or local elected officials. Companies may find better return on investment from spending in such smaller, lower-profile races. Although a significant reform movement to overturn Citizens United has arisen, its prospects are not promising. Because Citizens United rests on the Court’s interpretation of the First Amendment, only a constitutional amendment (or another Supreme Court decision) could reverse it. Amending the Constitution is always challenging, all the more so when it involves carving out an exception to the much-revered First Amendment. An amendment to overturn Citizens United confronts the additional problem of personhood. While “corporations are not people” has broad public resonance, that was not the basis of Citizens United. Eliminating corporate personhood might not succeed in overturning the Court’s ruling and could have the unwelcome effect of undermining the free speech rights of media corporations like the New York Times Company and Fox Entertainment Group. Indeed, if corporations have no constitutional rights, then a corporation whose property is taken by the government would have no right to just compensation, and corporations charged with crimes would not even be entitled to due process of law. Legislative and regulatory options to respond to Citizens United are also limited. Because corporate funding itself cannot be prohibited, reformers have proposed increasing disclosure of corporate giving. They’ve made little headway in Washington. An effort to pass federal legislation known as the DISCLOSE Act ran aground on the partisan shoals of the Capitol. In 2013, the Securities and Exchange Commission announced it was considering a rule to require public companies to disclose their political giving but, despite receiving a record 600,000 public comments, declined to act. In the SEC’s published list of priorities for 2014, the corporate disclosure proposal was  dropped. A “Shareholders Protection Act” that would amend the Securities Exchange Act of 1934 to require disclosure—in addition to requiring

Citizens United, Personhood, and the Corporation in Politics

special shareholder approval—for public companies’ political activity has little chance of passing so long as Republicans, who oppose reform, remain a majority in the House. Even if disclosure is mandated, the end result is uncertain. Based on the skittishness of some executives, we might expect that disclosure to discourage many firms from giving. Other firms, however, especially those in heavily regulated industries or those who are already politically active, might end up giving more. A cautionary lesson for disclosure advocates may come from another recent effort to restrain corporate management through sunlight. In the 1990s, corporate reformers pushed for increased disclosure of executive salaries, aiming to shame boards from being too generous. The opposite appears to have happened, as boards sought to hire above average executives and, to attract them, offered above average pay. Disclosure may have fueled a one-way ratchet that led compensation to skyrocket. If corporations know exactly what competitor firms are spending on politics, they may increase their own spending to maintain their relative influence. Or they may begin to spend because they see other firms doing so successfully with little backlash. Disclosure is, at best, only a partial solution. Citizens United has changed the political landscape and undermined a long tradition, dating back to the Tillman Act, of treating business corporations differently in elections. Yet, the decision also followed other established patterns coloring campaign finance and constitutional law. Like the corporate PAC rules that developed in the mid-twentieth century, Citizens United opened up room for corporations to play an increasingly large role in elections. It did not do this on the basis of personhood; rather, the Court approached the corporation as an association of people in what was the latest twist on an older idea. Echoing Nader’s “listeners’ rights” argument, Citizens United also said that the First Amendment was a limit on government regardless of the identity of the speaker. In these ways, Citizens United was at once both revolutionary and conventional.

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Notes

Introduction 1. Citizens United v. Federal Election Commission, 558 U.S. 310 (2010); Burwell v. Hobby Lobby Stores, 134 S. Ct. 2751 (2014). 2. Louis D. Brandeis, Other People’s Money and How the Bankers Use it (New York: F. A. Stokes, 1914); John R. Commons, Legal Foundations of Capitalism (New York: Macmillan, 1932); Adolf A. Berle Jr. and Gardiner C. Means, The Modern Corporation and Private Property (New York: Macmillan, 1933); John Kenneth Galbraith, American Capitalism: The Concept of Countervailing Power (Boston: Houghton Mifflin, 1952). 3. Richard L. McCormick, “The Discovery that Business Corrupts Politics: A Reappraisal of the Origins of Progressivism,” American Historical Review 86 (April 1981): 247–274; Adam Winkler, “ ‘Other People’s Money’: Corporations, Agency Costs, and Campaign Finance Law,” Georgetown Law Journal 92 (June 2004): 871–940. 4. Dartmouth College v. Woodward, 17 U.S. 518 (1819), 636. 5. Santa Clara County v. Southern Pacific Railroad, 118 U.S. 394 (1886); Northwestern National Life Insurance Co. v. Riggs, 203 U.S. 243 (1906) at 255. 6. National Association for the Advancement of Colored People v. Alabama, 357 U.S. 449 (1958). 7. Susan B. Car ter et al., Historical Statistics of the United States: Earliest Times to the Present, Millennial ed. (New York: Cambridge University Press, 2006), Series Ch13–18. The first major democracy spawned many more corporations relative to population than anywhere else in the world. See Leslie Hannah, “A Global Corporate Census: Publicly Traded and Close Companies in 1910,” Economic History Review 68 (May 2015): 548–573. 8. Internal Revenue Ser vice, “Statistics of Income—2013, Corporate Income Tax Returns,” https://www.irs.gov/pub/irs-soi/13coccr.pdf, accessed September 5, 2016. 9. National Center for Charitable Statistics, “Quick Facts about Nonprofits,” http://nccs.urban.org/statistics/quickfacts.cfm, accessed September 5, 2016. 389

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10. Saumitra Jha, “Financial Asset Holdings and Political Attitudes: Evidence from Revolutionary England,” Quarterly Journal of Economics 130 (August 2015): 1485–1545; Robert Brenner, Merchants and Revolution: Commercial Change, Political Conflict, and London’s Overseas Traders, 1550–1653 (Princeton, NJ: Princeton University Press, 1993); and Dan Bogart, “The East Indian Monopoly and the Transition from Limited Access in England, 1600–1813,” NBER Working Paper 21536 (2015). 11. See Jennifer Levin, The Charter Controversy in the City of London, 1660–1688, and Its Consequences (London: Athlone Press, 1969); Steve Pincus, 1688: The First Modern Revolution (New Haven, CT: Yale University Press, 2009). 12. On the Royal African Company, see William A. Pettigrew, Freedom’s Debt: The Royal African Company and the Politics of the Atlantic Slave Trade, 1672–1752 (Chapel Hill: University of North Carolina Press, 2013). 13. Bogart, “East Indian Monopoly.” 14. J. Lawrence Broz and Richard S. Grossman, “Paying for Privilege: The Political Economy of Bank of England Charters, 1694–1844,” Explorations in Economic History 41 (January 2004): 48–72. 15. Ron Harris, Industrializing English Law: Entrepreneurship and Business Organization, 1720–1844 (Cambridge: Cambridge University Press, 2000), chap. 3. 16. There is a large literature, but see especially Bernard Bailyn, The Ideological Origins of the American Revolution (Cambridge, MA: Harvard University Press, 1967). 17. Quoted in Arthur Meier Schlesinger, The Colonial Merchants and the American Revolution, 1763–1776 (New York: Columbia University, 1918), 274. 18. John Joseph Wallis, “The Concept of Systematic Corruption in American History,” in Corruption and Reform: Lessons from America’s Economic History, ed. Edward L. Glaeser and Claudia Goldin (Chicago: University of Chicago Press, 2006), 23–62; William J. Novak, “A Revisionist History of Regulatory Capture,” in Preventing Regulatory Capture: Special Interest Influence and How to Limit It, eds. Daniel Carpenter and David A. Moss (New York: Cambridge University Press, 2014), 25–48. 19. Bernard Bailyn, The New England Merchants in the Seventeenth Century (Cambridge, MA: Harvard University Press, 1955); Jason Kaufman, “Corporate Law and the Sovereignty of States,” American Sociological Review 73 (June 2008): 402–425. 20. Richard L. Bushman, From Puritan to Yankee: Character and the Social Order in Connecticut, 1690–1765 (Cambridge, MA: Harvard University Press, 1967); Armand Budington DuBois, The English Business Company after the Bubble Act (1938; repr., New York: Octagon Books, 1971); Kaufman, “Corporate Law.” 21. Quoted in Kaufman, “Corporate Law,” 410. See also Joseph Stancliffe Davis, Essays in the Earlier History of American Corporations (Cambridge, MA: Harvard University Press, 1917), 1: 3–29.

Notes to Pages 8–10

22. See Pauline Maier, “The Revolutionary Origins of the American Corporation,” William and Mary Quarterly 50 (January 1993): 51–84; Oscar Handlin and Mary Flug Handlin, Commonwealth: A Study of the Role of Government in the American Economy, rev. ed. (Cambridge, MA: Harvard University Press, 1969); Louis Hartz, Economic Policy and Democratic Th ought: Pennsylvania, 1776–1860 (Cambridge, MA: Harvard University Press, 1948); Andrew M. Schocket, Founding Corporate Power in Early National Philadelphia (DeKalb: Northern Illinois University Press, 2007); Ronald E. Seavoy, The Origins of the American Business Corporation, 1784–1855: Broadening the Concept of Public Service during Industrialization (Westport, CT: Greenwood Press, 1982); and Brian Phillips Murphy, Building the Empire State: Political Economy in the Early Republic (Philadelphia: University of Pennsylvania Press, 2015). 23. James Willard Hurst, The Legitimacy of the Business Corporation in the Law of the United States, 1780–1970 (Charlottesville: University of Virginia Press, 1970); William J. Novak, “The American Law of Association: The LegalPolitical Construction of Civil Society,” Studies in American Political Development 15 (October 2001): 163–188. 24. Handlin and Handlin, Commonwealth; Maier, “Revolutionary Origins”; Naomi R. Lamoreaux, Insider Lending: Banks, Personal Connections, and Economic Development in Industrial New England (New York: Cambridge University Press, 1994); James Willard Hurst, A Legal History of Money in the United States, 1774–1970 (Lincoln: University of Nebraska Press, 1973). 25. Maier, “Revolutionary Origins,” 76–77; Bray Hammond, Banks and Politics in America: From the Revolution to the Civil War (Princeton, NJ: Princeton University Press, 1957), 53–64. 26. Bruce A. Campbell, “John Marshall, the Virginia Political Economy, and the Dartmouth College Decision,” American Journal of Legal History 19 (January 1975): 40–65. 27. Stanley I. Kutler, Privilege and Creative Destruction: The Charles River Bridge Case (Philadelphia: Lippincott, 1971). 28. Bruce A. Campbell, “Dartmouth College as a Civil Liberties Case: The Formation of Constitutional Policy,” Kentucky Law Journal 70, no. 3 (1981– 1982): 643–706. 29. Dartmouth College, 17 U.S. 518. 30. On reservation clauses, see William P. Wells, “The Dartmouth College Case and Private Corporations,” Report of the Ninth Annual Meeting of the American Bar Association (1886): 229–256. 31. Charles River Bridge v. Warren Bridge, 36 U.S. 420 (1837). See Kutler, Privilege and Creative Destruction. 32. Dartmouth College, 17 U.S. at 636. 33. Eric Hilt, “Early American Corporations and the State” (Chapter 1); Jessica L. Hennessey and John Joseph Wallis, “Corporations and Organizations in the United States after 1840” (Chapter 2).

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Notes to Pages 10–11

34. For the number of corporations chartered each year, see Robert E. Wright, Corporation Nation (Philadelphia: University of Pennsylvania Press, 2014), 50–51. Early studies of the shift from special to general incorporation include Hurst, Legitimacy of the Business Corporation; Hartz, Economic Policy and Democratic Thought; and John W. Cadman, The Corporation in New Jersey: Business and Politics, 1791–1875 (Cambridge, MA: Harvard University Press, 1949). 35. See Naomi R. Lamoreaux and John Joseph Wallis, “States, Not Nation: The Sources of Political and Economic Development in the Early United States,” Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise, American Capitalism Working Papers, AC / No.1 / March 2016. 36. “AN ACT to confer on certain associations . . . the powers and immunities of corporations . . . ,” Pennysylvania, April 6, 1791. Unless other wise noted, all citations to acts are from the Session Laws of the respective state, available at www.heinonline.org. 37. “AN ACT to enable all the religious denominations in this State to appoint trustees who shall be a body corporate . . . ,” New York, April 6, 1784. 38. “AN ACT to institute an university . . . ,” New York, April 13, 1787; and “AN ACT to incorporate Medical Societies . . . ,” New York, April 4, 1806. 39. For an overview of these restrictions, see Ruth H. Bloch and Naomi R. Lamoreaux, “Voluntary Associations, Corporate Rights, and the State: Legal Constraints on the Development of American Civil Society, 1750–1900,” NBER Working Paper 21153 (2015). 40. See Lamoreaux, Insider Lending. 41. On Massachusetts, see Qian Lu and John Wallis, “Banks, Politics, and Political Parties: From Partisan Banking to Open Access in Early Massachusetts,” NBER Working Paper 21572 (2015); Handlin and Handlin, Commonwealth. On Pennsylvania, see Anna J. Schwartz, “The Beginning of Competitive Banking in Philadelphia, 1782–1809,” in Money in Historical Perspective, ed. Schwartz (Chicago: University of Chicago Press, 1987), 3–23; John Majewski, “Toward a Social History of the Corporation: Shareholding in Pennsylvania, 1800–1840,” in The Economy of Early America: Historical Perspectives & New Directions, ed. Cathy Matson (University Park: Pennsylvania State University Press, 2006), 294–316; Schocket, Founding Corporate Power; and Hartz, Economic Policy and Democratic Thought. More generally, see John Jay Knox, A History of Banking in the United States (New York: B. Rhodes & Co., 1900); Hammond, Banks and Politics in America; and Howard Bodenhorn, State Banking in Early America: A New Economic History (New York: Oxford University Press, 2002). 42. Only one additional bank—also a Federalist enterprise—was chartered in New York City before 1810. On the Manhattan Bank, see especially Brian Phillips Murphy, “ ‘A Very Convenient Instrument’: Aaron Burr, the Man-

Notes to Pages 11–14

hattan Company, and the Election of 1800,” William and Mary Quarterly 65 (April 2008): 233–266. 43. In addition to Hilt’s essay in this volume, see Howard Bodenhorn, “Bank Chartering and Political Corruption in Antebellum New York: Free Banking as Reform,” in Corruption and Reform: Lessons from America’s Economic History, eds. Edward L. Glaeser and Claudia Goldin (Chicago: University of Chicago Press, 2006), 231–257. 44. See Daniel A. Crane, “The Dissociation of Incorporation and Regulation in the Progressive Era and the New Deal,” in this volume (Chapter 3). 45. “AN ACT relative to Incorporations for Manufacturing Purposes,” March 22, 1811. In addition to Hilt’s chapter in this volume, see Hilt, “When Did Ownership Separate from Control? Corporate Governance in the Early Nineteenth Century,” Journal of Economic History 68 (September 2008): 645–685; and Hilt, “Corporation Law and the Shift toward Open Access in the Antebellum United States,” NBER Working Paper 21195 (2015). 46. Naomi R. Lamoreaux, “Revisiting American Exceptionalism: Democracy and the Regulation of Corporate Governance: The Case of Nineteenth-Century Pennsylvania in Comparative Context,” in Enterprising America: Businesses, Banks, and Credit Markets in Historical Perspective, eds. William J. Collins and Robert A. Margo (Chicago: University of Chicago Press, 2015), 25–71; Hilt, “Corporation Law.” 47. Hartz, Economic Policy and Democratic Thought, 40. For the statutes, see Commonwealth of Pennsylvania, Laws of the General Assembly (Harrisburg, PA: A. Boyd Hamilton, 1855). 48. See Hennessey and Wallis, “Corporations and Organizations.” 49. Hilt, “Corporation Law.” 50. Charles M. Yablon, “The Historical Race: Competition for Corporate Charters and the Rise and Decline of New Jersey: 1880–1910,” Journal of Corporation Law 32 (Winter 2007): 323–380. Corporations organized under New Jersey’s 1875 general law could not, however, engage in banking or insurance or in businesses that required a right of way. See William H. Corbin, The Act Concerning Corporations in the State of New Jersey, Approved April 7, 1875 Corporation . . . (Jersey City, NJ: Frederick D. Linn & Co., 1881), § 11. 51. Christopher Grandy, “New Jersey Corporate Chartermongering, 1875–1929,” Journal of Economic History 49 (September 1989): 677–692. The amendments were embodied in a complete revision of the state’s general incorporation statutes in 1896. See Acts of the One Hundred and Twentieth Legislature of the State of New Jersey (Trenton: MacCrellish & Quigley, 1896), 277–317. 52. Grandy, “New Jersey Corporate Chartermongering”; Wiley B. Rutledge Jr., “Significant Trends in Modern Incorporation Statutes,” Washington University Law Quarterly 22 (April 1937): 305–343; Henry N. Butler, “Nineteenth-Century Jurisdictional Competition in the Granting of Corporate Privileges,” Journal of Legal Studies 14 (January 1985): 129–166;

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Notes to Pages 14–15

Harwell Wells, “The Modernization of Corporation Law, 1920–40,” University of Pennsylvania Journal of Business Law 11 (Spring 2009): 573–629. 53. Crane, “Dissociation of Incorporation and Regulation.” Some scholars have viewed the charter-mongering competition instead as a race to the top because it eliminated inefficient state regulations. See especially Ralph K. Winter Jr., “State Law, Shareholder Protection, and the Theory of the Corporation,” Journal of Legal Studies 6 (June 1977): 251–292; and Roberta Romano, The Genius of American Corporate Law (Washington, DC: AEI Press, 1993). For the argument that it was a race to the bottom, see William L. Cary, “Federalism and Corporate Law: Reflections on Delaware,” Yale Law Journal 83 (March 1974): 663–705; Ralph Nader, Mark Green, and Joel Seligman, Taming the Giant Corporation (New York: W. W. Norton, 1976); and Lucian Arye Bebchuk, “Federalism and the Corporation: The Desirable Limits on State Competition in Corporate Law,” Harvard Law Review 105 (May 1992): 1435–1510. 54. Moreover, corporations that shifted their domiciles to Delaware did not also move their production facilities, so the cost of losing the charter-mongering competition was relatively low. See Roberta Romano, “Law as a Product: Some Pieces of the Incorporation Puzzle,” Journal of Law, Economics, & Organization 1 (Autumn 1985): 225–283; Grandy, “New Jersey Corporate Chartermongering”; Bruce G. Carruthers and Naomi R. Lamoreaux, “Regulatory Races: The Effects of Jurisdictional Competition on Regulatory Standards,” Journal of Economic Literature 54 (March 2016): 52–97. 55. See the essay in this volume by Bloch and Lamoreaux, “Corporations and the Fourteenth Amendment” (Chapter 8). See also Gerard Carl Henderson, The Position of Foreign Corporations in American Constitutional Law: A Contribution to the History and Theory of Juristic Persons in Anglo-American Law (Cambridge, MA: Harvard University Press, 1918). 56. U.S. Bureau of Corporations, Trust Laws and Unfair Competition (Washington, DC: Government Printing Office, 1916), esp. chap. 4; Henry R. Seager and Charles A. Gulick Jr., Trust and Corporation Problems (New York: Harper & Brothers, 1929), chap. 17; “A Collection and Survey of State Anti-trust Laws,” Columbia Law Review 32 (February 1932): 347–366; James May, “Antitrust Practice and Procedure in the Formative Era: The Constitutional and Conceptual Reach of State Antitrust Law, 1880–1918,” University of Pennsylvania Law Review 135 (March 1987): 495–593. 57. Paul v. Virginia, 75 U.S. 168 (1869); Pembina Consolidated Silver Mining v. Pennsylvania, 125 U.S. 181 (1888). 58. See Bloch and Lamoreaux, “Corporations and the Fourteenth Amendment.” The cases include Waters-Pierce Oil Co. v. Texas, 177 U.S. 28 (1900); National Cotton Oil Co. v. Texas, 197 U.S. 115 (1905); Smiley v. Kansas, 196 U.S. 447 (1905); Waters-Pierce Oil Co. v. Texas, 212 U.S. 86 and 212 U.S. 112 (1909); Hammond Packing Co. v. Arkansas, 212 U.S. 322 (1909); and Standard Oil Co. of Indiana v. Missouri, 224 U.S. 270 (1912).

Notes to Pages 15–16

59. On the time path of state antitrust activity, see May, “Antitrust Practice and Procedure,” 495–593; and May, “Antitrust in the Formative Era: Political and Economic Theory in Constitutional and Antitrust Analysis, 1880–1918,” Ohio State Law Journal 50 (issue 2, 1989): 257–395. 60. See, for example, Thomas K. McCraw, Prophets of Regulation (Cambridge, MA: Harvard University Press, 1984); McCraw, ed., Regulation in Perspective: Historical Essays (Cambridge, MA: Harvard University Press, 1982); Morton Keller, Regulating a New Economy: Public Policy and Economic Change in America, 1900–1933 (Cambridge, MA: Harvard University Press, 1990); Martin J. Sklar, The Corporate Reconstruction of American Capitalism: The Market, The Law, and Politics (New York: Cambridge University Press, 1988); Herbert Hovenkamp, Enterprise and American Law, 1836–1937 (Cambridge, MA: Harvard University Press, 1991); Harold U. Faulkner, The Decline of Laissez Faire, 1897–1917 (New York: Rinehart & Company, 1951). 61. See, for example, Bernard Schwartz, ed., The Economic Regulation of Business and Industry: A Legislative History of U.S. Regulatory Agencies, 5 vols. (New York: R. R. Bowker Company, 1973). 62. Hilt, “Early American Corporations”; Hennessey and Wallis, “Corporations and Organizations.” 63. Bank of Augusta v. Earle, 38 U.S. 519 (1839), 588. 64. Hurst, Legitimacy of the Business Corporation. 65. For the most recent critiques of this long-standing myth concerning both legislative and administrative regulation, see Jerry L. Mashaw, Creating the Administrative Constitution: The Lost One Hundred Years of American Administrative Law (New Haven, CT: Yale University Press, 2012); Nicholas R. Parrillo, Against the Profit Motive: The Salary Revolution in American Government, 1780–1940 (New Haven, CT: Yale University Press, 2013); William J. Novak, “The Myth of the ‘Weak’ American State,” American Historical Review 113 (2008): 752–772. 66. On public utilities, see Bruce Wyman, The Special Law Governing Public Ser vice Corporations and All Others Engaged in Public Employment, 2 vols. (New York: Baker, Voorhis & Co., 1911); Felix Frank furter, The Public and Its Government (New Haven, CT: Yale University Press, 1930); and Rexford G. Tugwell, The Economic Basis of Public Interest (Menasha, WI: The Collegiate Press, 1922). On antitrust and competition policy, see Milton Handler, Cases and Other Materials on Trade Regulation (Chicago: Foundation Press, 1937); Laura Phillips Sawyer, “California Fair Trade: Antitrust and the Politics of ‘Fairness’ in U.S. Competition Policy,” Business History Review, 90 (2016): 31–56; and Rudolph J. R. Peritz, Competition Policy in Amer ica (New York: Oxford University Press, 1996). On taxation, see Steven A. Bank, From Sword to Shield: The Transformation of the Corporate Income Tax, 1861 to Present (New York: Oxford University Press, 2010); R. Alton Lee, A History of Regulatory Taxation (Lexington: University Press of Kentucky, 1982).

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Notes to Pages 17–21

67. Ernst Freund, The Police Power: Public Policy and Constitutional Rights (Chicago: Callaghan & Company, 1904), 359; William J. Novak, The People’s Welfare: Law and Regulation in Nineteenth-Century America (Chapel Hill: University of North Carolina Press, 1996). 68. Thorpe v. Rutland and Burlington Railroad Company, 27 Vt. 140 (1855), 144, 147, 149–150, 155–156. For a fuller discussion of this impor tant police power case, see Novak, People’s Welfare, 109–110. 69. Robert E. Cushman, The Independent Regulatory Commissions (New York: Oxford University Press, 1941). 70. Alfred D. Chandler, Giant Enterprise: Ford, General Motors and the Automobile Industry (New York: Harcourt Brace, 1964); Naomi R. Lamoreaux, The Great Merger Movement in American Business, 1895–1904 (New York: Cambridge University Press, 1985); Olivier Zunz, Making America Corporate, 1870–1920 (Chicago: University of Chicago Press, 1990). 71. Robert G. McCloskey, American Conservatism in the Age of Enterprise, 1865–1910 (Cambridge, MA: Harvard University Press, 1951); Arnold M. Paul, Conservative Crisis and the Rule of Law: Attitudes of the Bar and Bench, 1887–1895 (Ithaca, NY: Cornell University Press, 1960); William M. Wiecek, The Lost World of Classical Legal Thought: Law and Ideology in America, 1886–1937 (New York: Oxford University Press, 1998). See also Bloch and Lamoreaux, “Corporations and the Fourteenth Amendment.” 72. Frank Norris, The Octopus: A Story of California (New York: P. F. Collier, 1901); Brandeis, Other People’s Money; Berle and Means, The Modern Corporation. For important secondary treatments of this theme, see Matthew Josephson, The Robber Barons: The Great American Capitalists, 1861–1901 (New York: Harcourt Brace, 1934); McCormick, “The Discovery that Business Corrupts Politics”; Howard Brick, Transcending Capitalism: Visions of a New Society in Modern American Thought (Ithaca, NY: Cornell University Press, 2006); Sabeel Rahman, Democracy against Domination (New York: Oxford University Press, 2016). 73. Richard White, Railroaded: The Transcontinentals and the Making of Modern America (New York: W. W. Norton & Company, 2011); Michael Kazin, The Populist Persuasion: An American History (New York: Basic Books, 1995); Sklar, Corporate Reconstruction. 74. Crane, “Dissociation of Incorporation and Regulation.” 75. Munn v. Illinois, 94 U.S. 113 (1877); Nebbia v. New York, 291 U.S. 502 (1934). 76. Ellis W. Hawley, The New Deal and the Problem of Monopoly: A Study in Economic Ambivalence (Princeton, NJ: Princeton University Press, 1966); Alan Brinkley, The End of Reform: New Deal Liberalism in Recession and War (New York: Alfred A. Knopf, Inc., 1995); Arthur M. Schlesinger Jr., The Age of Roosevelt, Volume I: Crisis of the Old Order, 1919–1933 (New York: Houghton Mifflin, 1957). 77. Thomas K. McCraw, ed., Creating Modern Capitalism: How Entrepreneurs, Companies, and Countries Triumphed in Three Industrial Revolutions (Cambridge, MA: Harvard University Press, 1995), 320.

Notes to Pages 22–24

78. Quoted in Roy A. Schotland, “A Sporting Proposition—SEC v. Chenery,” in Administrative Law Stories, ed. Peter L. Strauss (New York: Foundation Press, 2006): 168–189, 166. 79. Ibid., 168. 80. Nelson Lichtenstein, “Two Cheers for Vertical Integration: Corporate Governance in a World of Global Supply Chains” (Chapter 9); Roland Marchand, “Where Lie the Boundaries of the Corporation? Explorations in ‘Corporate Responsibility’ in the 1930s,” Business and Economic History, 26 (1997): 80–100. 81. James T. Sparrow, Warfare State: World War II Americans and the Age of Big Government (New York: Oxford University Press, 2011). 82. Hawley, The New Deal and the Problem of Monopoly; Jason Scott Smith, “The Great Transformation: The State and the Market in the Postwar World,” in Boundaries of the State in US History, eds. James T. Sparrow, William J. Novak, and Stephen W. Sawyer (Chicago: University of Chicago Press, 2015), 127–156. See also Mark R. Wilson, Destructive Creation: American Business and the Winning of World War II (Philadelphia: University of Pennsylvania Press, 2016); Jennifer Mittelstadt, The Rise of the Military Welfare State (Cambridge, MA: Harvard University Press, 2015). 83. Galbraith, American Capitalism; Galbraith, The New Industrial State (Boston: Houghton Mifflin, 1967); C. Wright Mills, The Power Elite (New York: Oxford University Press, 1956). 84. Friedrich A. Von Hayek, Freedom and the Economic System, Public Policy Pamphlet No. 29 (Chicago: University of Chicago Press, 1939), 28. For later classic elaborations of this theme, see Hayek, The Road to Serfdom (Chicago: University of Chicago Press, 1944), and Milton Friedman, Capitalism and Freedom (Chicago: University of Chicago Press, 1962). 85. Edward A. Purcell Jr., The Crisis of Democratic Theory: Scientific Naturalism and the Problem of Value (Lexington: University Press of Kentucky, 1973); Angus Burgin, The Great Persuasion: Reinventing Free Markets since the Depression (Cambridge, MA: Harvard University Press, 2012); David Harvery, A Brief History of Neoliberalism (New York: Oxford University Press, 2005). 86. Gary S. Becker, “Competition and Democracy,” Journal of Law and Economics 1 (1958): 105–109, 109. 87. Ronald H. Coase, “The New Institutional Economics,” Journal of Institutional and Theoretical Economics 140 (1984): 229–231, 230. As Frank Knight noted about Veblen in the margins of his own personal copy of Rexford Tugwell’s The Trend in Economics (New York: Alfred A. Knopf, 1924): “I don’t understand why so many economists with brains fall for Veblen. I think him a ranter.” 88. Adam Winkler, “Citizens United, Personhood, and the Corporation in Politics” (Chapter 10); Ronald Coase, “The Nature of the Firm,” Economica 4 (1937): 386–405; Oliver Williamson and Sidney Winter, The Nature of the

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Notes to Pages 24–26

Firm: Origins, Evolution, and Development (New York: Oxford University Press, 1991); Michael C. Jensen and William H. Meckling, “The Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure,” Journal of Financial Economics 3 (1976): 305–360. 89. Lichtenstein, “Two Cheers for Vertical Integration”; Milton Friedman, “The Social Responsibility of Business is to Increase Profits,” New York Times Magazine, September 13, 1970. For a similar discussion of the move away from Berle and Means in this period, see Kenneth Lipartito and Yumiko Morii, “Rethinking the Separation of Ownership from Management in American History,” Seattle University Law Review 33 (2010): 1025–1063. 90. Richard Hofstadter, “What Happened to the Antitrust Movement? Notes on the Evolution of an American Creed,” in The Business Establishment, ed. Earl F. Cheit (New York: John Wiley, 1964), 113–151; Jason Scott Smith, “What Did Happen to the Antitrust Movement?” Reviews in American History 30 (2002): 639–645. 91. Jonathan Levy, “From Fiscal Triangle to Passing Through: Rise of the Nonprofit Corporation” (Chapter 6); Steven A. Bank and Ajay K. Mehrotra, “Corporate Taxation and the Regulation of Early Twentieth-Century American Business” (Chapter 5). 92. Henry Hansmann and Reinier Kraakman, “The End of History for Corporate Law,” Georgetown Law Journal, 89 (2001): 439–468; Francis Fukuyama, The End of History and the Last Man (New York: Free Press, 1992). 93. The World Bank, From Plan to Market: World Development Report 1996 (New York: Oxford University Press, 1996). Already by 2002, the World Bank had revised its approach in Building Institutions for Markets: World Development Report 2002 (New York: Oxford University Press, 2002). 94. “Is the First Amendment Being Misused as a Deregulatory Tool?—The Abrams Institute First Amendment Salon,” Balkinization, http://balkin .blogspot.com/2015/04/is-first-amendment-being-misused-as.html. 95. David Vogel, “The ‘New’ Social Regulation in Historical and Comparative Perspective,” in McCraw, Regulation in Perspective, 155–186. 96. Cass R. Sunstein, After the Rights Revolution: Reconceiving the Regulatory State (Cambridge, MA: Harvard University Press, 1990). 97. Edward J. Balleisen and Marc Eisner, “The Promise and Pitfalls of CoRegulation: How Governments Can Draw on Private Governance for Public Purpose,” in New Perspectives on Regulation, eds., David Moss and John Cisternino (Cambridge, MA: The Tobin Project, 2009), 127–150; Cary Coglianese and Evan Mendelson, “Meta-Regulation and Self-Regulation,” in Oxford Handbook of Regulation, eds., Robert Baldwin, Martin Cave, and Martin Lodge (New York: Oxford University Press, 2010); John Braithwaite, “Enforced Self-Regulation: A New Strategy for Corporate Crime Control,” Michigan Law Review 80 (1982): 1466–1507. 98. See, for example, Kate Andrias, “The New Labor Law,” Yale Law Journal (forthcoming, 2016).

Notes to Pages 27–38

99. Winkler, “Citizens United, Personhood.” 100. The Railroad Tax Cases, 13 F. 722 (1882) at 746–747. See also Justice John M. Harlan’s opinions in Northwestern National Life Insurance Co., 203 U.S. 243; and Western Turf Association v. Greenberg, 204 U.S. 359 (1907). 101. See Winkler, “ ‘Other People’s Money,’ ” as well as his essay in this volume, “Citizens United, Personhood.” 102. See Levy’s essay in this volume, “From Fiscal Triangle to Passing Through.” See also Bloch and Lamoreaux, “Voluntary Associations.” 103. Hague v. CIO, 307 U.S. 496 (1939) at 514. For additional cases from the 1930s and 1940s, see the essay in this volume by Bloch and Lamoreaux. 104. NAACP, 357 U.S. 449; NAACP v. Button, 371 U.S. 415 (1963); NAACP v. Alabama, 377 U.S. 288 (1964). See also Congress of Racial Equality v. Douglas, 318 F.2d 95 (1963), which the Supreme Court refused to hear on appeal in Burt v. Congress of Racial Equality, 375 U.S. 829 (1963). 105. First National Bank of Boston v. Bellotti, 435 U.S. 765 (1978) at 775–776. 106. Id. at 780. 107. Id. at 822. 108. Citizens United, 558 U.S. at 342. 109. Burwell, 134 S. Ct. 2751. 110. Id. at 2768–2769. 111. Quoted in Hawley, The New Deal and the Problem of Monopoly, 472. 112. Keller, Regulating a New Economy, 23. 113. Lochner v. New York, 198 U.S. 45 (1905) at 75.

1. Early American Corporations and the State The author would like to thank Naomi Lamoreaux, Bill Novak, John Wallis, the Tobin Project’s staff, and participants at the conferences organized by the Tobin Project for their helpful feedback on this chapter. 1. Citizens United v. Federal Election Commission, 558 U.S. 310 (2010). 2. Stevens cited Thomas Jefferson’s 1816 letter stating that “I hope we shall . . . crush in [its] birth the aristocracy of our monied corporations which dare already to challenge our government to a trial of strength and bid defiance to the laws of our country” (p. 36). 3. Id., 36–38. 4. Id., 2–3. 5. Oscar Handlin and Mary Flug Handlin, Commonwealth: A Study of the Role of Government in the American Economy: Massachusetts, 1774–1861 (Cambridge, MA: Belknap Press, 1969), 106. 6. John Wallis has conceptualized such manipulation of the economy for political ends as “systematic corruption,” which is distinct from “venal corruption” in which the political process is manipulated for personal gain. “The Concept of Systematic Corruption in American History,” in Corruption and Reform: Lessons from Amer ica’s Economic History, eds.

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Notes to Pages 38–40

Edward L. Glaeser and Claudia Goldin (Chicago: University of Chicago Press, 2006). 7. Aurora [Philadelphia], January 11, 1819; New York Governor Daniel D. Tompkins, Annual Message of 1812, in New York Commercial Advertiser, January 31, 1812. 8. See, for example, Louis Hartz, Economic Policy and Democratic Thought: Pennsylvania 1776–1860 (Chicago: Quadrangle Books, 1968); Edwin M. Dodd, American Business Corporations until 1860 (Cambridge, MA: Harvard University Press, 1954); John W. Cadman, The Corporation in New Jersey: Business and Politics, 1781–1895 (Cambridge, MA: Harvard University Press, 1949); Joseph G. Blandi, Maryland Business Corporations, 1783–1852 (Baltimore: Johns Hopkins University Press, 1934); Ronald E. Seavoy, The Origins of the American Business Corporation, 1784–1855 (Westport, CT: Greenview Press); and Handlin and Handlin, Commonwealth. 9. Michigan was the first to adopt a general statute for banks, in 1837, and New York followed in 1838. However, Michigan’s statute was poorly written and the regulations it imposed were easily circumvented, resulting in many disastrous failures. It was repealed in 1839. See the discussion below. 10. James Willard Hurst, The Legitimacy of the Business Corporation in the Law of the United States, 1780–1970 (Charlottesville: University Press of Virginia, 1970), 15; Oscar Handlin and Mary Flug Handlin, “Origins of the American Business Corporation,” Journal of Economic History 5, no. 1 (1945): 22. 11. Adolph A. Berle Jr. and Gardiner C. Means, The Modern Corporation and Private Property (New York: Macmillan, 1932), 130. 12. For example, they state that under general incorporation, “in place of a body which scrutinized, controlled and might prescribe arrangements, there was substituted a state official . . . who was obliged to fi le a document. . . . The ‘contract’ was thus drafted by incorporators.” Berle and Means, Modern Corporation, 136. 13. Among the great many popu lar books that make this argument is that of Lee Drutman and Charlie Cray, who claim that early corporation law “control[led] corporations in such a way that would guarantee that they served the public good, harnessing the ability of the corporate form to stimulate economic development while restraining the irresponsible and even destructive tendencies inherent in the corporate form. This was accomplished by close legislative control of the chartering process. Corporations were only chartered for specific purposes with clear limits on what they could do.” The People’s Business: Controlling Corporations and Restoring Democracy (San Francisco: Barrett-Koehler Publishers, 2004), 19. 14. Joseph S. Davis presents comprehensive tabulations of American business corporations chartered up to 1800. The number of charters actually granted exceeds thirty-two because several early corporations were granted charters by multiple states, or were granted successive charters within the same state.

Notes to Pages 41–43

Davis, Essays in the Earlier History of Corporations (Cambridge, MA: Harvard University Press, 1917). 15. Charter of the New-York Manufacturing Society, Laws of New York, March 16, 1790, chap. XXVI; charter of the Baltimore Insurance Fire Company, Laws of Maryland, April 1787, chap. XX; and charter of the Massachusetts Bank, Laws of the Commonwealth of Massachusetts, February 7, 1784. 16. See, for example, Hurst, Legitimacy, 36, 39. 17. As one anonymous anticorporate pamphlet argued, “every act of incorporation for the purpose of pecuniary profit, carries with it such privileges, as in the nature of things, the great mass of the people cannot exercise.” The pamphlet equated “exclusive privileges” with “monopoly.” Letter on the Use and Abuse of Incorporations, Addressed to the Delegation from the City of New York in the State Legislature (New York: G & C Carvill, 1827). 18. Daniel Raymond, Elements of Political Economy (Baltimore: F. Lucas Jun. and E. J. Coale, 1823), 2: 119. A strong advocate for equality among individuals, Raymond argued, “[Corporations] are always created for the benefit of the rich, and never for the poor. As the poor have no money to vest, they can derive no direct advantage from them. The rich . . . seek for an artificial combination, or amalgamation of their power, that its force may be augmented” (2: 119). 19. Thomas Cooper, Lecture on the Elements of Political Economy (Columbia, SC: McMorris and Wilson, 1831), 246. His contemporary William Gouge echoed this sentiment: “whatever power is given to [corporations] is so much taken from either the government or the people.” Gouge, A Short History of Paper Money and Banking in the United States (Philadelphia: T. W. Ustick, 1833), 41. 20. New-York Diary, February 1, 1793; New-York Spectator, July 17, 1811; NewYork Columbian, January 25, 1819. 21. Anonymous, Letter on the Use and Abuse, 7. 22. The history of New York’s manors is analyzed in Sung Bok Kim, Landlord and Tenant in Colonial New York: Manorial Society, 1664–1775 (Williamsburg, VA: Institute of Early American History and Culture, 1978). The patterns of office holding among the major landowning families in the colonial era are documented in Irving Mark, Agrarian Conflicts in Colonial New York, 1711–75 (New York: Columbia University Press, 1940). The continued influence of these families in the state’s early politics is documented in Frederic Cople Jaher, The Urban Establishment: Upper Strata in Boston, New York, Charleston, Chicago and Los Angeles (Urbana: University of Illinois, 1982). 23. New York’s 1777 constitution limited the influence of popu lar voters by creating a “Council of Appointment” that selected many impor tant officials such as the mayor of New York City, and by creating a “Council of Revision” within the state government that checked the power of the elected legislature. 24. On the culture of deference toward aristocratic elites, and its political significance, see Bernard Bailyn, The Ideological Origins of the American

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Notes to Pages 43–46

Revolution (Cambridge, MA: Harvard University Press, 1967), and David Hackett Fischer, The Revolution of American Conservatism: The Federalist Party in the Era of Jeffersonian Democracy (New York: Harper and Row, 1965). 25. For example, the mayor of New York City, who was appointed rather than elected, was not paid a salary but instead personally collected many licensing fees paid to the city, an extremely lucrative source of income. In the late 1780s that office was held by James Duane, who was also a New York State senator. See Hendrick Hartog, Public Property and Private Power: The Corporation of the City of New York in American Law, 1730–1870 (Ithaca, NY: Cornell University Press, 1983), and Sydney I. Pomerantz, New York: An American City, 1783–1803 (Port Washington, NY: Ira J. Friedman, 1965). 26. The founding of the New-York Manufacturing Society and that of similar firms in other cities is chronicled in Lawrence Peskin, Manufacturing Revolution: The Intellectual Origins of Early American Industry (Baltimore: Johns Hopkins University Press, 2003). 27. The political history of banking and bank chartering in New York is analyzed in detail below. 28. The list of stockholders for the Bank of New York in 1791 is in Alan Nevins, History of the Bank of New York and Trust Company, 1784 to 1934 (New York: Privately printed, 1934). That of the New-York Manufacturing Society is printed in the New York Daily Advertiser, March 17, 1789. A random 15 percent sample of households was taken from the 1791 New York City directory, by recording all of the entries on every sixth page. For a full description of the sources and methods used, see Eric Hilt and Jacqueline Valentine, “Democratic Dividends: Stockholding, Wealth, and Politics in New York, 1791–1826,” Journal of Economic History 72, no. 2 (2012): 332–363. 29. The manuscript tax assessment lists are held by the New York Municipal Archives, New York, NY. No alphabetical index exists for these lists. 30. The par value of the Bank of New York’s shares was $500, very close to the median household’s assessed wealth, as shown in Table 1.1. The New-York Manufacturing Society’s capital was divided into shares valued at the equivalent of $25, to make them more broadly accessible. 31. General Advertiser, January 23, 1792, quoted in Davis, Essays in the Earlier History, 1: 431–432. 32. Joyce Appleby, Capitalism and a New Social Order: The Republican Vision of the 1790s (New York: New York University Press, 1984), 74. 33. The story of this process is told in Dixon Ryan Fox, The Decline of Aristocracy in the Politics of New York, 1801–1840 (New York: Columbia University Press, 1919). 34. The 1821 constitution also eliminated the Council of Appointment and the Council of Revision from the state government. It is impor tant to note that for black voters, property qualifications were maintained.

Notes to Pages 47–52

35. Early charters only rarely granted privileges that were explicitly stated to be exclusive. However, the doctrine of vested rights held that their value could not be undermined by competition or by grants by the state to other corporations. Morton Horwitz notes that the “monopolistic and exclusionary” conception of property embodied in that conception of early charters “placed an unmanageable burden on continued economic growth,” and gradually evolved. Horwitz, The Transformation of American Law, 1780–1860 (Cambridge, MA: Harvard University Press, 1977), 111. 36. New York Senate Documents, February 6, 1822. 37. Bray Hammond, Banks and Politics in America from the Revolution to the Civil War (Princeton, NJ: Princeton University Press, 1957), 146. 38. Calculations based on data presented in Davis, Essays in the Earlier History; William C. Kessler, “A Statistical Study of the New York General Incorporation Act of 1811,” Journal of Political Economy 48 (1940): 877–882; and Richard Sylla and Robert E. Wright, “Corporation Formation in the Antebellum United States in Comparative Context,” Business History 55, no. 4 (2013): 653–669. These totals include corporations created through New York’s 1811 general statute, but do not include any corporations created through the general statutes of Ohio (1812), New Jersey (1816), or Illinois (1824). Little is known about the use of those statutes. It should also be emphasized that this is a count of incorporations rather than existing or operating businesses; many of those incorporations may not have produced an operating firm, and among those that did commence operations, many likely did not survive long. Data presented in Eric Hilt, “When Did Ownership Separate from Control? Corporate Governance in the Early Nineteenth Century,” Journal of Economic History 68, no. 3 (2008): 645–685, indicate that among all incorporations in New York State from 1790 through 1825, only 35 percent were in operation in 1826. 39. In the major economic sectors in which there were few incorporations, namely agriculture and trade or distribution (wholesale trade, shipowning, retailing, etc.), businesses preferred to be organized as small proprietorships or partnerships, and found the corporate form unattractive. In these sectors, businesses remained unincorporated not because they were excluded from corporate charters, but because they preferred different organizational forms. In 1822, New York offered businesses a new organizational form, the limited partnership, which was adopted by many New York City mercantile firms. The utilization of that law is analyzed in Eric Hilt and Katharine O’Banion, “The Limited Partnership in New York, 1822–1858: Partnerships without Kinship,” Journal of Economic History 69, no. 3 (2009): 615–645. 40. All data are presented in nominal terms. According to the David-Solar-based CPI for this period, the total increase in the price level from 1791 to 1826 was only 5.31 percent. 41. These latter measures were likely imposed in part to constrain large shareholders, thus helping to protect the interests of small shareholders and the

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community by preventing insiders from utilizing the corporation’s operations or resources for their own benefit. See Eric Hilt, “Shareholder Voting Rights in Early American Corporations,” Business History 55, no. 4 (2013): 620–635. 42. Hartz, Economic Policy, 262. 43. Hurst, Legitimacy, 39, echoes this argument: “special regulatory provisions [in charters] were at best of limited effect. They dealt with problems technically complex, difficult and varied in detail, and so woven into the shift ing context of a rapidly growing economy as to require continuing, specialized, expert supervision. Thus the regulatory goals set by legislatures could be achieved only through steady, strong, capable executive or administrative effort. In the nineteenth-century situation it was almost inevitable that we would not provide the necessary executive or administrative apparatus.” 44. Horwitz, Transformation, chap. 4. 45. Hartz, Economic Policy, 264, notes that Pennsylvania’s auditor general found that corporate disclosure requirements were routinely violated. 46. For example, the charter of the Phoenix Fire Insurance Company states that “it shall not be lawful for the said corporation to make any insurance . . . until the whole amount of the capital stock shall have been subscribed and paid for, or secured to be paid, by mortgages . . . public [debt] . . . [etc].” New York Laws, 1823, chap. 95. 47. A state attorney general could fi le an “information in the nature of quo warranto,” and if successful could have the corporation dissolved. Dodd, American Business Corporations, calls this procedure “straightforward.” 48. The earliest significant example of a general regulating act for business corporations is New York’s 1807 act for turnpike road companies (Laws of New York, March 13, 1807). Massachusetts in par ticu lar relied heavily on general regulating acts, adopting them for manufacturing companies in 1809, insurance companies in 1818, and banks in 1829. 49. Massachusetts’s 1829 act for banks explicitly addressed this issue by requiring that any new privilege granted to a bank must also be granted to all other banks. Qian Lu and John Wallis, “Banks, Politics, and Political Parties: From Partisan Banking to Open Access in Early Massachusetts,” in Organizations, Civil Society, and the Roots of Development, eds. Naomi Lamoreaux and John Wallis (Chicago: University of Chicago Press, forthcoming.) 50. The clearest examples of such terms were included in the general incorporation acts for banks, which gave the state authority over printing bank notes, and required incorporators of banks to transfer to the state adequate collateral for the notes before the state would transfer notes to the banks. See below. 51. See Jessica L. Hennessey and John Joseph Wallis, “Corporations and Organizations in the United States after 1840,” in this volume (Chapter 2). 52. Particularly beginning in the late 1840s and early 1850s, some states began to adopt packages of general acts applying to firms in a range of sectors all at

Notes to Pages 54–57

once, or to adopt single general incorporation acts that applied to both manufacturing firms and other classes of corporations such as railroads. 53. It was probably also the case that the corporate form was less essential to early manufacturing corporations, which typically had relatively small numbers of shareholders. Many successful manufacturing firms were, in fact, organized as partnerships. See, for example, Philip Scranton, Proprietary Capitalism: The Textile Manufacture at Philadelphia, 1800–1885 (New York: Cambridge University Press, 1983). Blocking access to incorporation would therefore not have substantially reduced entry in many manufacturing industries. 54. See Peskin, Manufacturing Revolution. 55. In keeping with legislative practice in Massachusetts, the act explicitly denied limited liability to the shareholders of manufacturing corporations. It was not until a revised version of the act was passed in 1830 that shareholders in manufacturing firms were granted limited liability in Massachusetts. See Dodd, American Business Corporations. 56. Seavoy, Origins, 64. The act refers to the directors of the fi rms as “trustees,” a term used in the 1784 statute. 57. “An Act Relative to Incorporations for Manufacturing Purposes,” Laws of New York, chap. LXVII, March 22, 1811. Seavoy, Origins, 65, describes the act as an “emergency measure to encourage investments in enterprises that would produce thread for household weaving at a time when the European textile supply was cut off.” 58. Laws of New York, chap. XLVII, February 25, 1815; chap. CCXXIII, April 14, 1817; and chap. LXVII, March 31, 1818. 59. This was typical of early general incorporation acts. Later, more comprehensive acts were gradually accompanied by constitutional provisions banning the provision of special act charters; all firms were eventually required to incorporate through general acts. See Susan Pace Hamill, “From Special Privilege to General Utility: A Continuation of Willard Hurst’s Study of Corporations,” American University Law Review 49 (1999): 81–177. 60. The census of 1810 does not report numbers of establishments for any other industry, and does not report values of installed capital for any industry. Data in the text are from the official returns of the census, published in 1814. 61. In the early nineteenth century, corporations wishing to operate in a state needed a charter from that state’s government; institutions chartered by other states were regarded as “foreign corporations” and were made subject to discriminatory treatment. See Gerard C. Henderson, The Position of Foreign Corporations in American Constitutional Law (Cambridge, MA: Harvard University Press, 1918). At the time, the high cost and slow pace of transportation and communication posed significant barriers to capital mobility. Even in the mid-nineteenth century, rates of return in manufacturing across regions differed substantially, implying a relatively low level of economic integration. Freed Bateman and Thomas Weiss, “Comparative

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Regional Development in Antebellum Manufacturing,” Journal of Economic History 35 (1975): 182–208. 62. A full tabulation of incorporations under the act is provided in Kessler, “Statistical Study.” 63. These new provisions included more detailed terms intended to protect creditors, such as a limitation on indebtedness and new disclosure requirements, as well as a procedure for reducing fi rms’ capital stocks, which existing judicial doctrines would other wise have treated as impairing the resources required for the protection of creditors. On the ‘trust fund’ doctrine with respect to corporate creditors, see Hurst, Legitimacy. 64. Statutes of Ohio, chap. 15, 1812; Laws of New Jersey, February 9, 1816; and Laws of Illinois, December 16, 1824. 65. As an illustration of the complexity of researching early corporation laws in different states, it is worth noting that most scholarly histories (for example, Hamill, “Special Privilege”) neglect to even mention these statutes. 66. Detailed data on all general acts for manufacturing enterprises and their terms are presented in Eric Hilt, “Corporation Law and the Shift toward Open Access in the Antebellum United States,” in Organizations, Civil Society, and the Roots of Development, eds. John Wallis and Naomi Lamoreaux (Chicago: University of Chicago Press, forthcoming.) 67. In 1840, the five states that would not adopt a general act prior to 1860 had granted 0.12 corporate charters per 100 residents; the twenty-four states that would adopt a general act by 1860 had granted only 0.05 charters per 100 persons in 1840. See Hilt, “Corporation Law.” 68. Laws of Maryland, 1852, chap. 322; Laws of Missouri, March 12, 1849; and Laws of Pennsylvania, 1849, no. 368. New York’s 1848 act removed the regulation on the size of the firms’ capital stock (Laws of New York, 1848, chap. 40). 69. Laws of Iowa, 1847, chap. 81; Laws of Georgia, December 22, 1847; and Laws of Louisiana, 1848, no. 100. 70. The terms of some Southern states’ general acts for manufacturing fi rms did not make incorporation automatic upon the fi ling of a certificate, but gave discretion over applications to a court or an elected official. For example, Mississippi’s law states that “the governor may require amendments [to certificates] or . . . withhold his approval entirely” (Revised Code of the Statute Laws of the State of Mississippi, 1857, Chapter 35, Section 1, Article 1). Presumably this discretion was intended to facilitate the exclusion of nonwhites or other groups from access to the corporate form. Other states were more explicit about excluding nonwhites; Georgia’s general statute is entitled, “An Act to authorize all the free white citizens of the State of Georgia . . . to prosecute the business of Manufacturing” (Laws of Georgia, December 29, 1847). See Hilt, “Corporation Law.” 71. In arguing for a hard-money system, Gouge, A Short History, presents a sophisticated analysis of these dangers.

Notes to Pages 60–62

72. Modern empirical research has shown that higher franchise values can promote stability in banking—see Rebecca S. Demsetz, Marc R. Saidenberg, and Philip E. Strahan, “Banks with Something to Lose: The Disciplinary Role of Franchise Value,” Federal Reserve Bank of New York Economic Policy Review, October 1996, 2–14. Franchise values can be enhanced by restraining competition. The greater historical stability of Canada’s banking system relative to that of the United States may be due in part to the market structure of Canadian banking, in which a small number of very large, profitable banks account for most of the industry. See Charles W. Calomiris and Gary Gorton, “The Origins of Banking Panics: Models, Facts, and Bank Regulation,” in U.S. Bank Deregulation in Historical Perspective, ed. Charles W. Calomiris (New York: Cambridge University Press, 2000). 73. This analysis follows that of Hammond, Banks and Politics. 74. Hammond, Banks and Politics, p. 574, explains Locofoco doctrine as “produced by the economic pressure which was exerted on the less fortunate part of the population by industry and enterprise, by steam and credit. It was the doctrine of men who had been till recently on farms but were now working in factories and had not as yet contrived a new language in which to express the ideas arising from their new experiences.” 75. Banking was prohibited in Texas in 1845, in Iowa and Arkansas in 1846, in California in 1849, and in Oregon in 1857. In addition, the 1847 constitution of Illinois, and the 1848 constitution of Wisconsin, required all banking legislation to be submitted to a popu lar referendum. Hammond, Banks and Politics. 76. In the 1780s, a rival group offered a competing proposal for the establishment of a bank, and as each could block the other’s efforts to obtain a charter, no bank was incorporated in New York for many years. The Bank of New York’s rival was an institution that was to be called the “Bank of the State of New York,” which was associated with some of the state’s major upstate landowners, and was to be capitalized partly by mortgages on land. Ultimately, the Bank of New York enjoyed the advantage that it could commence operations without a charter, and did so, whereas the rival bank, which was to be managed by the governor and six other directors, effectively required a charter for its proposed mode of doing business. See Henry W. Domett, A History of the Bank of New York, 1784–1884 (New York: G. P. Putnam’s Sons, 1884). 77. Domett, History, mentions at least two different attempts to obtain charters for banks in New York City. 78. Under the pretense of creating a water supply company, Burr obtained a charter for an enterprise with $2 million in capital, and virtually unlimited powers to engage in fi nancial transactions in perpetuity. The introduction of a new bank in the city, and one affi liated with Republican interests in par ticu lar, was a “minor revolution” in New York, as banking expanded beyond the Federalist monopoly and began to embrace a new generation of entrepreneurs. Hammond, Banks and Politics, 156.

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79. New York Laws, 1804, chap. 117. New York was the third state to enact such a statute; Massachusetts and New Hampshire enacted theirs in 1799, and another eleven states enacted similar statutes over the fi fteen-year period subsequent to 1804. 80. Hammond, Banks and Politics. This dynamic was by no means unique to New York. For example, in 1803, the Bank of Pennsylvania offered to pay the state $200,000 in exchange for denying the Bank of Philadelphia a corporate charter. Hartz, Economic Policy, 54. 81. W. Harrison Bayles, “A History of the Origin and Development of Banks and Banking in the City of New York,” McMaster’s Commercial Cases, 19 (1916): 145–147. 82. Howard Bodenhorn, “Bank Chartering and Political Corruption in Antebellum New York: Free Banking as Reform,” in Corruption and Reform: Lessons from America’s Economic History, eds. Claudia Goldin and Ed Glaeser (Chicago: University of Chicago Press, 2006). 83. For example, the Exchange Bank of New York City, owned by Republican financier Jacob Barker, commenced commercial banking operations in 1815 without a charter. The stockholders of some of the incorporated banks in the city promptly initiated a lawsuit against Barker to enforce the Restraining Act and shut down Barker’s unincorporated bank. However, Barker was the bank’s sole owner, and the New York Supreme Court held that the restraining statute applied only to banking “associations,” rather than individuals, and sided with Barker (Bristol v. Barker, 14 Johns. 205 (NY Sup. Ct. 1817)). The legislature then amended its restraining statute to prohibit individuals from acting as banks (New York Laws, 1818, chap. 236). But Barker’s allies successfully lobbied to grant him an exemption from the restraining statute for a period of three years. Ultimately, the bank faced runs and failed in 1819 (New York American, June 30, 1819). 84. New York Laws, 1816, chap. 52. 85. Banknote tables in New York City newspapers report market prices for these notes, indicating that they circulated in the city. See, for example, the New York Columbian, March 18, 1817. 86. People ex rel. Attorney General v. Utica Insurance, 15 Johns. 358 (NY Sup. Ct. 1818). This long and detailed decision issued by the New York Supreme Court touched on a number of complex issues relating to the power of corporations, and was quite influential. 87. The firm applied to the legislature for a modification of its charter to include banking powers, but its efforts were unsuccessful. When it became clear that the firm would never be able to operate as a bank again, a large fraction of the capital stock was returned to its investors. Albany Argus, January 31, 1820. 88. New York Laws, 1818, chap. 97. 89. Unlike banknotes, which were perpetual and payable to the bearer on demand, post notes were payable to order at some specified future date—they had a maturity. Essentially, they functioned like a post-dated check.

Notes to Pages 64–67

90. Among other things, the Regency’s losses were tied to its decision to force a popu lar politician largely identified with the construction of the Erie Canal, DeWitt Clinton, from the board that oversaw the canal. Clinton was an enemy of the Regency but removing him from office was an unpopu lar act of overreach. 91. New York senator Charles Dudley, New York American, 1825. An influential political pamphlet on banks echoed this sentiment: “what else can we say of all those gross instances of fraud and imposture to which it has given rise? All those combinations of unprincipled and designing men, who have been enabled to prey upon society solely through the influence which has been given to them by the act of the Legislature; which appears, in such cases, more like the betrayer than the guardian of the poor and the ignorant. . . .” John MacVickar, Hints on Banking, In a Letter to a Gentleman in Albany; By a New Yorker (New York: Vanderpool & Cole, 1827). 92. Albany Argus, April 22, 1825. 93. Cadwallader D. Colden, in Albany Argus, March 24, 1825. 94. New York Senate Documents, no. 156, February 28, 1825. The state’s 1821 constitution contained a provision requiring a two-thirds majority to approve all corporate charters, and it was unclear to some whether a general incorporation act was therefore constitutional. This is one reason why some proposed authorizing limited partnerships, instead of corporations, to freely enter the banking industry. 95. MacVickar’s 1827 pamphlet, Hints on Banking, argues for the adoption of free banking on exactly these grounds. 96. Bodenhorn, “Bank Chartering.” 97. Laws of New York, 1838, chap. 60. The act refers to the banks as “associations,” in an attempt to avoid designating them as corporations and therefore potentially contradicting the constitutional requirement that two-thirds of the legislature approve any new corporations. 98. Whig Horace Greeley, quoted in Michell Snay, Horace Greeley and the Politics of Reform in Nineteenth-Century America (Lanham, MD: Rowman & Littlefield, 2011), 33. 99. Initially the bonds could include those of any state government, and mortgages could also be used. The law was later modified so that only New York State bonds, or federal bonds, could serve as collateral for notes. The origin of this regulation is likely MacVickar’s 1827 pamphlet, Hints on Banking. See Fritz Redlich, The Molding of American Banking: Men and Ideas (New York: Hafner, 1951). 100. The scale of this increase in bank incorporations following the 1838 general incorporation act for banks, which illustrates the extent to which bank chartering had been suppressed under the prior regime, refutes the notion that the Regency’s policy had optimally restricted entry into banking. 101. The success of free banking in New York and other states is analyzed in Arthur J. Rolnick and Warren E. Weber, “New Evidence on the Free Banking

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Era,” American Economic Review 73 (1983): 1080–1091; Gerald P. Dwyer, “Wildcat Banking, Banking Panics, and Free Banking in the United States,” Federal Reserve Bank of Atlanta Economic Review, December 1996, 1–20; and Matthew Jaremski, “Free Bank Failures: Risky Bonds versus Undiversified Portfolios,” Journal of Money, Credit and Banking 42, no. 8 (2010): 1565–1587. 102. Howard Bodenhorn, State Banking in Early America: A New Economic History (New York: Oxford University Press, 2003). 103. State-owned banks were created in many Southern states—Alabama, Arkansas, Georgia, Kentucky, South Carolina, and Tennessee—as well as Illinois. Bodenhorn, State Banking. 104. John Wallis, “Constitutions, Corporations, and Corruption: American States and Constitutional Change, 1842 to 1852,” Journal of Economic History, 65, no. 1 (2005): 211–256. 105. This was the State Bank of Illinois, which collapsed in 1842. See Hammond, Banks and Politics. 106. Howard H. Preston, History of Banking in Iowa (Iowa City: State Historical Society of Iowa, 1922). 107. John Jay Knox, A History of Banking in the United States (New York: Bradford Rhodes & Co., 1900). 108. With New York’s act, the comptroller prints and registers all bank notes, and provides them to new banks only after those banks have transferred to the comptroller high-quality collateral: bonds of the federal government or New York State government (or that of other states, as approved by the comptroller) of equal amount (Laws of New York, 1838, chap. 260, section 2). In contrast, Michigan’s statute gives the banks control over the printing of their notes, and simply states that the new banks must “furnish good and sufficient security” equal to the full amount of their circulation or indebtedness. In addition, the collateral itself was permitted to be of considerably lower quality: “mortgages upon real estate” in Michigan, or in “bonds”—personal IOUs—“issued by resident freeholders” (Laws of Michigan, 1837, no. 47, section 11). 109. Hammond, Banks and Politics, 601. 110. Knox, History of Banking. 111. The figure depicts all states that ever enacted a free banking statute and therefore includes Michigan among those states, but Michigan repealed its 1837 act in 1839. 112. Two states actually implemented free banking before general incorporation for manufacturing firms: Georgia and Alabama. Georgia’s free banking act was implemented in 1838; its general act for manufacturing was in 1847. Alabama’s free banking act was passed in 1849, and its general act for manufacturing was passed in 1852. (Laws of Georgia, December 26, 1838, December 22, 1847; Laws of Alabama, 1849, no. 74, Code of Alabama, 1852, Part 2, Title 2, Chapter 3.) The average, which is actually 4.1 years, is calculated from the 18 states that adopted both.

Notes to Pages 70–80

113. The states repealing free banking statutes were Michigan, which repealed its 1837 act in 1840, but then introduced a new one in 1855; Connecticut, which repealed its 1852 act in 1855; and Tennessee, which repealed its 1852 act in 1858. 114. Hugh Rockoff, The Free Banking Era: A Reexamination (New York: Arno Press, 1975). 115. Stevens’s claim that incorporation via special charters was a response to the danger of corporate power is implied by the statement that individual charters “reflected” hostility toward corporations (p. 36). 116. Scalia writes, “[I]t is far from clear that by the end of the 18th century corporations were despised. If so, how came there to be so many of them?” (p. 2).

2. Corporations and Organizations in the United States after 1840 This chapter has benefitted from comments provided by Naomi Lamoreaux, Bill Novak, and the participants at the Tobin conferences, as well as incorporating ideas from the drafts of the other papers at the conference. Eric Hilt and Dan Crane’s papers have been particularly helpful. 1. Richard L. McCormick, “The Discovery That Business Corrupts Politics: A Reappraisal of the Origins of Progressivism,” American Historical Review 86, no. 2 (1981): 247–274. 2. We identify “business” corporations explicitly in the essay, and use the word “corporation” to refer to all the organizations that states explicitly recognize and structure using the corporate form. 3. This depiction is too simple, since the same rules will generate different entity benefits for different groups, and even a general incorporation law may be interpreted in a way that creates corporate privileges for one specific group. We are abstracting from that for the moment, but will return to the problem later. This is particularly relevant for political organizations and political parties. 4. John Joseph Wallis, “The Concept of Systematic Corruption in American Economic and Political History,” in Corruption and Reform, eds. Edward L. Glaeser and Claudia Goldin (Chicago: University of Chicago Press, 2006). 5. Bernard Bailyn, The Ideological Origins of the American Revolution (Cambridge, MA: Harvard University, 1967). Wallis, “The Concept of Systematic Corruption,” develops the idea of systematic corruption in detail and traces it from its origins in the Roman Republic up through the late nineteenthcentury United States. As a term, “corruption” is an anachronism. It had a distinctly different meaning in the early nineteenth century that had passed out of usage by the late nineteenth century. Ideas about corruption and governance are often termed “the Republican synthesis.” The literature is summarized in Robert E. Shalhope, “Toward a Republican Synthesis: The Emergence of an Understanding on Republicanism in American Historiog-

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raphy,” William and Mary Quarterly 29 (1972): 49–80, and Robert E. Shalhope, “Republicanism and Early American Historiography,” William and Mary Quarterly 39 (1982): 334–356. The central texts are: Bailyn, The Ideological Origins; Gordon Wood, Creation of the American Republic (Chapel Hill: University of North Carolina Press, 1969); and J. G. A. Pocock, The Machiavellian Moment: Florentine Political Thought and the Atlantic Republican Tradition (Princeton, NJ: Princeton University Press, 1975). The literature is enormous and growing. 6. John Trenchard and Thomas Gordon, Cato’s Letters, ed. Ronald Hamowry (Indianapolis: Liberty Fund, 1995). 7. Guy Stevens Callender, “The Early Transportation and Banking Enterprises of the States,” Quarterly Journal of Economics 17, no. 1 (1902): 111–162. 8. Richard Sylla, John B. Legler, and John Joseph Wallis, “Banks and State Public Finance in the New Republic: The United States, 1790–1860,” Journal of Economic History 47, no. 2 (1987): 391–403; John Joseph Wallis, Richard Sylla, and John Legler, “The Interaction of Taxation and Regulation in Nineteenth Century Banking,” in The Regulated Economy: An Historical Approach to Political Economy, eds. Claudia Goldin and Gary Libecap (Chicago: University of Chicago Press, 1994). 9. The most obvious of these was the Albany Regency in New York. 10. John Joseph Wallis, “Constitutions, Corporations, and Corruption: American States and Constitutional Change, 1842 to 1852,” Journal of Economic History 65, no. 1 (2005): 211–256. 11. Debates and Proceedings of the Minnesota Constitutional Convention (St. Paul: Earle S. Goodrich Territorial Printer, 1857), 127. 12. Debates and Proceedings of the Constitutional Convention of the State of Illinois, Vols. 1 and 2 (Springfield, IL: E. L. Merritt & Brother, 1870), 1:512. 13. There are a number of ways to formalize this type of argument. David P. Baron and John A. Ferejohn, “Bargaining in Legislatures,” American Political Science Review, 83, no. 4 (1989): 1181–1206, have a very general form of the argument. Barry R. Weingast, “A Rational Choice Perspective on Congressional Norms,” American Journal of Political Science, 23, no. 2 (1979): 245–262, presents a clear model of why legislators might find it in their interest to adopt “universal” policies where every legislator is guaranteed a minimum benefit from legislation, and applies that to explain congressional norms. Jessica L. Hennessey, “Loss of Control: Legislature Changes and the State-Local Relationship,” Constitutional Political Economy 25, no. 4: 407–433, has an application with respect to general incorporation acts for cities in the nineteenth century. Wallis, “Constitutions, Corporations, and Corruption,” develops a similar logic with respect to internal improvement financing. 14. Report of the Debates and Proceedings of the Convention for the Revision of the Constitution of the State of Ohio, 1850–51, Vols. 1 and 2 (Columbus, OH: S. Medary, 1851), 1:354.

Notes to Pages 86–90

15. Proceedings and Debates of the Constitutional Convention of the State of Michigan, 1907–1908, Vols. 1 and 2 (Lansing, MI: Wynkoop, Hallenbeck, Crawford Co., 1908), I2:818. 16. The provision in the Indiana Constitution of 1851 had 17 sections, each specifying a type of law that had to be general. 17. Robert V. Remini, Andrew Jackson: The Course of American Empire, vol. 1, 1767–1821 (Baltimore: Johns Hopkins University Press, 1977), 57–69. 18. The word “general” gets used in multiple ways here. A general law applies equally to everyone, and a constitutional amendment that creates the presumption that the legislature will create general laws whenever possible  is, if you will, a “general general law.” Historically, general laws were urged against ‘private, special, or local laws’: “Until the mid- to latenineteenth century, state legislatures mostly enacted local, private, and special legislation, and very little general legislation. Local legislation refers to statutes that apply to localities rather than to the state as a whole. Private legislation refers to statutes benefitting individuals rather than the general public. Special legislation can be either local or private, and this term will be used throughout this study to describe local and private legislation. General legislation applies to the entire state.” Robert M. Ireland, “The Problem of Local, Private, and Special Legislation in the Nineteenth-Century United States,” American Journal of Legal History 46, no. 3: 271. 19. Debates and Proceedings of the Minnesota Constitutional Convention, 128. 20. Official Report of the Proceedings and Debates in the Convention Assembled at Frankfort, on the Eighth Day of September, 1890, to Adopt, Amend or Change the Constitution of the State of Kentucky, 4 vols. (Frankfort, KY: E. Polk Johnson, 1890), 3:3992. 21. Charles Chauncey Binney, Restrictions upon Local and Special Legislation in State Constitutions (Philadelphia: Kay & Brothers, 1984). 22. Ireland, “The Problem of Local,” 277–278. 23. Binney, Restrictions upon Local and Special Legislation, 6–7. The last quote is referenced to Maize v. State, 4 Ind. 342. 24. The Constitutional Debates of 1847, Collections of the Illinois State Historical Society, Vol. 14 (Springfield: Illinois State Historical Library, 1919), 651. 25. Debates and Proceedings of the Constitutional Convention of the State of Illinois, 1:597. 26. Leslie Hannah, “Corporations in the US and Europe 1790–1860,” Business History 56, no. 6 (2014): 865–899; Richard Sylla and Robert Wright, “Corporation Formation in the Antebellum United States in Comparative Context,” Business History 55, no. 4 (2013): 653–669. 27. John Joseph Wallis and Barry R. Weingast, “Dysfunctional or Optimal Institutions: State Debt Limitations, the Structure of State and Local Governments, and the Finance of American Infrastructure,” in Fiscal Challenges: An Interdisciplinary Approach to Budget Policy, eds. Elizabeth Garrett, Elizabeth A. Graddy, and Howell E. Jackson (New York: Cambridge University Press, 2008), provides citations and a review of the evidence.

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28. Report of the Debates . . . of Ohio, 1:347. 29. Debates and Proceedings of the Minnesota Constitutional Convention, 125–126. 30. There were many more general incorporation acts than there were constitutional provisions requiring legislatures to pass them. Many states had multiple acts covering different forms of corporations. Ronald E. Seavoy, The Origins of the American Business Corporation, 1784–1855 (Westport, CT: Greenwood Press, 1982), notes that New York had created a wide range of general acts after the 1846 constitution mandated them. 31. Jessica L. Hennessey, “Endogenous Institutional Change: The Transformation of the State-Local Relationship in the United States” (PhD diss., University of Maryland, 2009). Hennessey provides a historical description of home rule over time, as well as an analysis of why individual states chose to adopt home rule legislation. 32. Howe argued that municipalities needed freedom from “the jockeying measures of party bosses, the attempted passage of franchise grabs by the legislature, the interference by the state with the police and fire departments, [and] the burden of securing relief from excise and financial problems,” and should “be as free from the state as the state is as free from the nation at large.” Frederic C. Howe, The City, the Hope of Democracy (Seattle: University of Washington Press, 1905), 161–162. 33. Binney, Restrictions upon Local and Special Legislation, 15. 34. Proceedings . . . of Michigan, 2:809. 35. Christopher Grandy, “New Jersey Corporate Chartermongering, 1875–1929,” Journal of Economic History 49, no. 3 (1989): 677–692. 36. Naomi Lamoreaux, The Great Merger Movement in American Business: 1895–1904 (New York: Cambridge University Press, 1988). 37. Grandy, “New Jersey,” 679. 38. Douglass C. North, John Joseph Wallis, and Barry R. Weingast, Violence and Social Orders: A Conceptual Framework for Interpreting Recorded Human History (New York: Cambridge University Press, 2009). 39. Naomi R. Lamoreaux and Jean-Laurent Rosenthal, “Legal Regime and Contractual Flexibility: A Comparison of Business’s Organizational Choices in France and the United States during the Era of Industrialization,” American Law and Economics Review 7 (2005): 28–61. This paper shows that the corporate form was not the best suited form of organization for many businesses. Over the course of the twentieth century, states have moved steadily toward a wider range of corporate and other business forms—limited liability partnerships, for example.

3. The Dissociation of Incorporation and Regulation in the Progressive Era and the New Deal The author would like to thank the University of Michigan for its generous support of his research, as well as Bill Novak, Naomi Lamoreaux, and the coauthors and commenters who provided valuable feedback on this project.

Notes to Pages 110–114

1. Citizens United v. Federal Election Commission, 558 U.S. 310 (2010). 2. See Daniel A. Crane, “Antitrust Antifederalism,” California Law Review 96 (2008): 1. 3. McCulloch v. Maryland, 17 U.S. 316 (1819). 4. Herbert Hovenkamp, Enterprise and American Law, 1836–1937 (Cambridge, MA: Harvard University Press, 1991), 37. Hovenkamp notes that “Jackson’s outspoken opposition to reincorporation of the Second National Bank was based on his hatred of hard money and the National Bank’s dominance over state banks, not on any general hostility toward the corporation as a method of doing business.” Ibid. 5. William Letwin, Law and Economic Policy in America: The Evolution of the Sherman Antitrust Act (Chicago: University of Chicago Press, 1965), 65; see also John W. Cadman Jr., The Corporation in New Jersey, Business and Politics, 1791–1875 (Cambridge, MA: Harvard University Press, 1949), 188. 6. Richard S. Tedlow, The Rise of the American Business Corporation (New York: Harwood Academic Publishing, 1991), 8–9. 7. See Rudolph J. R. Peritz, Competition Policy in America: 1888–1992: History, Rhetoric, Law (New York: Oxford University Press, 1996), 10; Jonathan W. Singer, Broken Trusts: The Texas Attorney General Versus the Oil Industry, 1889–1909 (College Station: Texas A&M University Press, 2002). 8. Hovenkamp, Enterprise and American Law, 63. 9. See Eric Hilt’s chapter in this volume, “Early American Corporations and the State.” See also Melvin I. Urofsky, “Proposed Federal Incorporation in the Progressive Era,” American Journal of Legal History 26, no. 2 (1982): 160, 161. 10. For example, State ex rel. Att’y Gen’l v. Standard Oil Co., 49 Ohio St. 13713, 730 N.E. 279 (1892). 11. Bruce Bringhurst, Antitrust and the Oil Monopoly: The Standard Oil Cases, 1890–1911 (Westport, CT: Greenwood Publishing Group, 1979), 14. 12. In United States v. E. C. Knight Co., 156 U.S. 1 (1895), the Supreme Court rejected a federal antitrust challenge against combinations in sugar refi ning on the grounds that manufacturing is not commerce. 13. Hovenkamp, Enterprise and American Law, 249. 14. Singer, Broken Trusts, 7. 15. Ernst Von Halle, Trusts, Or, Industrial Combinations and Coalitions in the United States (New York: Macmillan, 1900), 94–96. 16. Phillip I. Blumberg, “The Transformation of Modern Corporation Law: The Law of Corporate Groups,” Connecticut Law Review 37 (2005): 605, 607; Marc Winerman, “The Origins of the FTC: Concentration, Cooperation, Control, and Competition,” Antitrust Law Journal 71 (2003): 1, 6. 17. Urofsky, “Proposed Federal Incorporation,” at 164. 18. Ibid. 19. Ibid. 20. The trend toward corporate liberalization began well before the passage of the Sherman Act and accelerated in the wake of the Sherman Act, facilitating the great merger wave that occurred between 1895 and 1904. Naomi R. Lamoreaux,

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Notes to Pages 114–116

The Great Merger Movement in American Business, 1895–1904 (New York: Cambridge University Press, 1985). 21. Thomas Cooley, A Treatise on the Constitutional Limitations which Rest upon the Legislative Power of the United States of the American Union, 3rd ed. (Boston: Little, Brown, 1874), 279 n.2. 22. Von Halle, Trusts, 92–97. 23. Christopher G. Tiedeman, A Treatise on State and Federal Control of Persons and Property in the United States (Union, NJ: The Lawbook Exchange, Ltd., 1900), 1:609–610. 24. Theodore H. Davis, “Corporate Privileges for the Public Benefit: The Progressive Federal Incorporation Movement and the Modern Regulatory State,” Virginia Law Review 77 (1991): 603, 619–621. 25. Hovenkamp, Enterprise and American Law, 229. 26. Lamoreaux, The Great Merger Movement; George Bittlingmayer, “Did Antitrust Policy Cause the Great Merger Wave?,” Journal of Law and Economics 28 (1985): 77; John J. Binder, “The Sherman Antitrust Act and the Railroad Cartels,” Journal of Law and Economics 31 (1988): 443; George F. Canfield, “Is a Large Corporation an Illegal Combination or Monopoly under the Sherman Anti-Trust Act?,” Columbia Law Review 9 (1909): 95, 113 n.27; Francis Walker, The Law Concerning Monopolistic Combinations in Continental Europe, Political Science Quarterly 20 (1905): 13, 39. Ralph Nelson has argued that the argument that the Sherman Act precipitated the merger wave is flawed because it was not until the Supreme Court’s 1898 decision in Addyston Pipe, which occurred midway through the merger wave, that firms would have believed that the Sherman Act provided an incentive to merge. Ralph L. Nelson, Merger Movements in American Industry, 1895–1956 (Princeton, NJ: Princeton University Press, 1959), 89–100, 106–126. 27. See H. L. Wilgus, “Need of National Incorporation Law,” Michigan Law Review 2 (1904): 358; E. W. Huffcut, “Constitutional Aspects of the Federal Control of Corporations,” American Law Review 34 (1900): 186; James B. Dill, “National Incorporation Laws for Trusts,” Yale Law Journal 11 (1902): 273; John Bell Sanborn, “Federal Control of Corporations,” American Law Review 37 (1903): 703; Walter S. Logan, “National Incorporation and Control of Corporations,” American Law Review 37 (1903): 237; John E. Parsons, “Federal Regulation of Corporations: A Dangerous Departure,” Green Bag 17 (1905): 135; Thomas Thacher, “Federal Control of Corporations,” Yale Law Journal 14 (1905): 301; E. Parmalee Prentice, The Federal Power over Carriers and Corporations (New York: Macmillan, 1907), 155; Charles W. Bunn, “Federal Incorporation of Railway Companies,” Harvard Law Review 30 (1917): 589. 28. Report of the Commissioner of Corporations, December 1904 (H.R. Doc. 165, 58th Cong., 3d Sess.), 40. 29. Wilgus, “Need of National Incorporation Law,” 372. 30. Dill, “National Incorporation Laws for Trusts,” 274.

Notes to Pages 117–121

31. See Logan, “National Incorporation and Control,” 53 (speech before New York State Bar Association advocating mandatory federal incorporation of interstate corporations as constitutional device to achieve comprehensive regulation). 32. E. C. Knight Co., 156 U.S. 1. 33. Noble v. Union River Logging R. R., 147 U.S. 165, 176 (1893). 34. See Allgeyer v. Louisiana, 165 U.S. 578 (1897). 35. William J. Curtis, “Federal Regulation of Corporations: A Public Necessity,” Green Bag 17 (1905): 138, 139. 36. See, e.g., Parsons, “Federal Regulation of Corporations.” 37. Curtis, “Federal Regulation of Corporations.” 38. E.g., California v. Central Pac. R. Co., 127 U.S. 1 (1888). 39. Parsons, “Federal Regulation of Corporations.” 40. Ibid., 137. 41. See Thacher, “Federal Control of Corporations”; see also Parsons, “Federal Regulation of Corporations”; Prentice, The Federal Power. 42. See Crane, “Antitrust Antifederalism,” 6–12. 43. Thacher, “Federal Control of Corporations,” 305. 44. Prentice, The Federal Power, 155. 45. Ibid., 307. 46. Ibid., 311. 47. Urofsky, “Proposed Federal Incorporation,” 168. 48. Ibid. 49. See Herbert Hovenkamp, “Antitrust Policy, Federalism, and the Theory of the Firm: A Historical Perspective,” Antitrust Law Journal 59 (1990): 75, 77. 50. Hans B. Thorelli, The Federal Antitrust Policy (Baltimore: Johns Hopkins Press, 1955), 513; Davis, “Corporate Privileges,” 603, 623–625. 51. Gabriel Kolko, The Triumph of Conservatism (New York: The Free Press, 1963), 133. 52. Edmund Morris, Theodore Rex (New York: Random House, 2001), 30. 53. Ibid. at 73. 54. Act of Feb. 14, 1903, 32 Stat. 827. 55. See FTC v. Gratz, 253 U.S. 421, 433 (1920). 56. Report of the Commissioner, 34. 57. Northern Securities Co. v. United States, 193 U.S. 197 (1904). 58. Roosevelt, Special Message to Congress 7 (April 27, 1908). 59. Letwin, Law and Economic Policy, 246. 60. H.R. 19745, 60th Cong., 1st Sess. (1908). The story of the Hepburn Bill’s initial momentum, languishment, and eventual defeat has been meticulously recounted by Martin Sklar. See Martin H. Sklar, The Corporate Reconstruction of American Capitalism, 1890–1916: The Market, the Law, and Politics (New York: Cambridge University Press, 1988), 228–285. 61. Sklar, Corporate Reconstruction, 228. 62. Ibid.

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Notes to Pages 121–126

63. Ibid., 235. 64. See Letwin, Law and Economic Policy, 248–249. 65. Sklar, Corporate Reconstruction, 245. 66. Ibid., 253. 67. Loewe v. Lawlor, 208 U.S. 274 (1908). 68. Sklar, Corporate Reconstruction, 261. 69. Ibid., 249–250. 70. Letwin, Law and Economic Policy, 252. 71. Standard Oil Co. v. United States, 221 U.S. 1 (1911). The public reaction to the Standard Oil decision was intense. It has been compared to Dred Scott, Brown v. Board of Education, and Roe v. Wade. See Nathan Gaskill, The Regulation of Competition (New York: Harper & Bros., 1936), 15; Peritz, Competition Policy in America, 61. 72. See Rudolph J. Peritz, “A Counter-History of Antitrust Law,” Duke Law Journal 1990 (1990): 263, 278. 73. Kirk H. Porter and Donald B. Johnson, National Party Platforms, 3rd ed. (Urbana: University of Illinois Press., 1961), 169. 74. Daniel A. Crane and Herbert Hovenkamp, The Making of Competition Policy: Legal and Economic Sources (New York: Oxford University Press, 2013), 105. 75. Ibid., 118. 76. Letwin, Law and Economic Policy, 269. 77. Wilson’s concerns were not frivolous. Although much of the external momentum for direct federal control of corporations came from populist voices, much of the proposed legislation was shaped by corporate interests, as was the Sherman Act itself. For instance, the House of Morgan apparently drafted the Hepburn Bill. Kolko, Triumph of Conservatism, 134. 78. Arthur S. Link, ed., Papers of Woodrow Wilson (Princeton, NJ: Princeton University Press, 1966), 25:148, 154. 79. Marc Winerman, “The Origins of the FTC: Concentration, Cooperation, Control, and Competition,” Antitrust Law Journal 71 (2003): 1, 42. 80. Letwin, Law and Economic Policy, 272. 81. Ibid. at 273. 82. Gary John Previts and Barbara Bubis Merino, A History of Accountancy in the United States (Columbus: Ohio State University Press, 1998), 184. 83. Ibid., 185. 84. Ibid. 85. First Annual Report, Bureau of Corporations (1904). 86. Ellis W. Hawley, The New Deal and the Problem of Monopoly: A Study in Economic Ambivalence, 2nd ed. (New York: Fordham University Press, 1995), 371. 87. Securities Exchange Act of 1934 §4(a), 48 Stat. at 885 (codified as amended at 15 U.S.C. § 78d(a) (2000). 88. See Refining Co. v. Amazon Petroleum Corp., 293 U.S. 388 (1935); A.L.A. Schechter v. United States, 295 U.S. 495 (1935).

Notes to Pages 126–128

89. See generally Daniel A. Crane, “The Story of United States v. Socony-Vacuum: Hot Oil and Antitrust in the Two New Deals,” in Antitrust Stories, eds. Eleanor Fox and Daniel A. Crane (New York: Foundation Press, 2007). 90. Hawley, New Deal and the Problem of Monopoly, 371. 91. Ibid., 371–372. 92. Ibid. 93. Ibid. 94. Rexford G. Tugwell, The Industrial Discipline and the Governmental Arts (New York: Columbia University Press, 1933), 201–202. 95. Ibid., 203. 96. Harold Gill Reuschlein, The Schools of Corporate Reform (Pittsburgh: University of Pittsburgh Press, 1950), 44. 97. Hammer v. Dagenhart, 247 U.S. 251 (1918). 98. A.L.A. Schechter, 295 U.S. 495. 99. United States v. Car ter Coal Co., 298 U.S. 238 (1936). 100. Reuschlein, Schools of Corporate Reform, 44. 101. See Hawley, New Deal and the Problem of Monopoly, 427 n.5. 102. NLRB v. Jones & Laughlin Steel Corp., 301 U.S. 1 (1937). 103. United States v. Darby, 312 U.S. 100 (1941). 104. Wickard v. Filburn, 317 U.S. 111 (1942). 105. West Coast Hotel Co. v. Parrish, 300 U.S. 379 (1937). 106. See generally H. Hewitt Pate, “Robert H. Jackson at the Antitrust Division,” Albany Law Review 68 (2005): 787; Spencer Weber Waller, Thurman Arnold: A Biography (New York: New York University Press, 2005), 78–110. 107. Hawley, New Deal and the Problem of Monopoly, 426 n.5. 108. See Steven A. Bank, “Tax, Corporate Governance, and Norms,” Washington and Lee Law Review 61 (2004): 1159, 1162 n.5 (“In large part, the securities laws enacted in 1933 and 1934 served as a de facto federal corporations law.”); Robert B. Thompson and Hilary A. Sale, “Securities Fraud as Corporate Governance: Reflections upon Federalism,” Vanderbilt Law Review 56 (2003): 859, 869 (“The government response to the excesses of the 1920s and to the pain of the Great Depression again led to calls for federal corporations law, but the New Deal Congress that passed securities litigation in 1933 and 1934 chose less intrusive means.”). 109. See, e.g., Ralph Nader, Taming the Giant Corporation (New York: W. W. Norton & Co., 1976); Ralph Nader, “The Case for Federal Chartering,” in Corporate Power in America, eds. Ralph Nader and Mark J. Green (New York: Grossman Publishers, 1973). Nader proposed a federal incorporation law, with related antimonopoly provisions, applicable to all industrial, retail, and transportation companies that sold over $250 million in goods or ser vices in the United States or employed more than 10,000 employees. See also Donald E. Schwartz, Federal Chartering of Corporations: An Introduction, Georgetown Law Journal 61 (1972): 71; Seymour J. Rubin, “Corporations and

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Society: The Remedy of Federal and International Incorporation,” American University Law Review 23 (1973): 265. 110. See, e.g., William Cary, “Federalism and Corporate Law: Reflections upon Delaware,” Yale Law Journal 83 (1974): 663; Donald E. Schwartz, “A Case for Federal Chartering of Corporations,” The Business Lawyer 31 (1976): 1125; Daniel Fischel, “The ‘Race to the Bottom’ Revisited: Reflections on Recent Developments in Delaware’s Corporation Law,” Northwestern University Law Review 76 (1982): 913, 920; Angela Karmel, “Is it Time for a Federal Corporation Law?,” Brooklyn Law Review 57 (1991): 55. 111. Corporate Rights and Responsibilities, Serial No. 94–95, Hearings Before the Senate Committee on Commerce, United States Senate, 94th Cong., 2d Sess. (1976) (statement of Sen. Durkin). See Joel Seligman, The Transformation of Wall Street, 3rd ed. (Frederick, MD: Aspen Publishers, 2003), 205–210. 112. See, e.g., Frank H. Easterbrook, “The Race for the Bottom in Corporate Governance,” Virginia Law Review 95 (2009): 685; Lucian Arye Bebchuck, “Federalism and the Corporation: The Desirable Limits on State Competition in Corporate Law,” Harvard Law Review 105 (1992): 1435; Cary, “Federalism and Corporate Law,” 663. 113. Daniel A. Crane, The Institutional Structure of Antitrust Enforcement, chap. 2 (New York: Oxford University Press, 2011). 114. Credit Suisse Secs. (USA) LLC v. Billings, 551 U.S. 264 (2007); Verizon Commc’ns Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398 (2004). 115. See, e.g., Lawrence M. Friedman, A History of American Law, rev. ed. (New York: Simon & Schuster, 2001), 390–403. 116. Thomas Thacher, “Corporations and the Nation,” Yale Law Journal 18 (1909): 263. 117. Pierce v. Society of Sisters, 268 U.S. 510, 535 (1925). 118. Northern Securities, 193 U.S. at 362 (Brewer, J., concurring). 119. See Northern Securities, 193 U.S. at 398 (White, J., dissenting). 120. Hale v. Henkel, 201 U.S. 43, 74–75 (1903). 121. Hale, 201 U.S. at 75. 122. Employer’s Liability Cases, 207 U.S. 463 (1908). 123. Bailey v. Drexel Furniture Co. (Child Labor Tax Case), 259 U.S. 20 (1922); see also Hammer, 247 U.S. 251 (declaratory judgment action brought by father of minor children). 124. A.L.A. Schechter, 295 U.S. 495. 125. Railroad Retirement Bd. v. Alton Ry., 295 U.S. 330 (1935). 126. Carter Coal Co., 298 U.S. 238. 127. Citizens United, 558 U.S. 310. 128. Lebron v. National R.R. Passenger Corp., 513 U.S. 374 (1995) (holding that Amtrak is part of the government for First Amendment purposes because Congress created the National Railroad Passenger Corporation “by special law, for the furtherance of governmental objectives, and retains for itself

Notes to Pages 136–139

permanent authority to appoint a majority of the directors of that corporation”). 129. See, e.g., Phillip Hamburger, “Unconstitutional Conditions: The Irrelevance of Consent,” Virginia Law Review 98 (2012): 479; Mitchell N. Berman, “Coercion Without Baselines: Unconstitutional Conditions in Three Dimensions,” Georgetown Law Journal 90 (2001): 1; Kathleen M. Sullivan, “Unconstitutional Conditions,” Harvard Law Review 102 (1989): 1413; Richard A. Epstein, “Unconstitutional Conditions, State Power, and the Limits of Consent,” Harvard Law Review 102 (1988): 4. 130. National Federation of Independent Business v. Sebelius, 132 S. Ct. 2566 (2012). 131. Kevin R. Kosar, Congressional or Federal Charters: Overview and Enduring Issues (Congressional Research Ser vice, April 19, 2013) http://www.fas.org /sgp/crs/misc/RS22230.pdf. A helpful list of Title 36 corporations and their charters can be found at http://www.law.cornell.edu/uscode/text/36/subtitle -II/part-B. 132. 36 U.S.C. § 220707(b). 133. 36 U.S.C. § 21905(b). 134. 36 U.S.C. § 20106(b). 135. 36 U.S.C. § 22105(c). 136. 36 U.S.C. § 2101. 137. See Kosar, Congressional or Federal Charters, 4 (reporting on a 2008 bill by Representative James P. Moran to remove limitations on political activities from the charter of the Gold Star Wives and arguments that the restriction amounted to an unconstitutional infringement on the First Amendment freedom to petition the government for redress of grievances).

4. The Public Utility Idea and the Origins of Modern Business Regulation In addition to the entire Tobin Project, his University of Michigan Law School workshop colleagues, and each of the individual contributors to this volume, the author extends special thanks to Nick Bagley, John Cisternino, Morton Horwitz, Jeremy Kessler, Naomi Lamoreaux, Nick Parrillo, Sabeel Rahman, Steve Sawyer, Ganesh Sitaraman, and Jim Sparrow for a steady flow of creative ideas, suggestions, and commentaries on this par ticu lar topic. 1. Eric Hilt, “Early American Corporations and the State” (Chapter 1); Jessica L. Hennessey and John Joseph Wallis, “Corporations and Organizations in the United States after 1840” (Chapter 2); Daniel Crane, “The Dissociation of Incorporation and Regulation in the Progressive Era and the New Deal” (Chapter 3)—all in this volume. 2. See, for example, William Letwin, Law and Economic Policy in America: The Evolution of the Sherman Antitrust Act (Chicago: University of Chicago Press, 1954); Ellis W. Hawley, The New Deal and the Problem of Monopoly: A Study

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Notes to Pages 139–141

in Economic Ambivalence (Princeton, NJ: Princeton University Press, 1966); Martin J. Sklar, The Corporate Reconstruction of American Capitalism: The Market, The Law, and Politics (New York: Cambridge University Press, 1988); Alan Brinkley, The End of Reform: New Deal Liberalism in Recession and War (New York: Knopf, 1995). 3. For a perfect example of this, see the overlapping and definitive treatments in the treatises of Bruce Wyman on Rate Regulation, Public Service Corporations, and Administrative Law. Wyman, Railroad Rate Regulation: With Special Reference to the Power of the Interstate Commerce Commission, 2nd ed. (New York: Baker, Voorhis & Co., 1915); Wyman, The Special Law Governing Public Service Corporations and All Others Engaged in Public Employment, 2 vols. (New York: Baker, Voorhis & Co., 1911); Wyman, The Principles of the Administrative Law Governing the Relations of Public Officers (St. Paul: Keefe-Davidson Co., 1903). 4. For a preliminary account of this larger legal-economic discourse concerning the “social control of capitalism,” see William J. Novak, “Law and the Social Control of American Capitalism,” Emory Law Journal, 60 (2010): 377–405. 5. The classic statement is A. V. Dicey’s “Lecture VI: The Period of Benthamism or Individualism” in Dicey, Lectures on the Relation between Law and Public Opinion in England during the Nineteenth Century, 2nd ed. (London: Macmillan, 1914), 126–210. For a more revisionist perspective, see Graham Wallas, “Jeremy Bentham,” Political Science Quarterly 38 (1923): 45–56; J. B. Brebner, “Laissez-Faire and State Intervention in Nineteenth- Century Britain,” Journal of Economic History, Supplement (1948): 59–70; Oliver MacDonagh, “The Nineteenth- Century Revolution in Government: A Reappraisal,” Historical Journal 1 (1958): 52–67; David Roberts, “Jeremy Bentham and the Victorian Administrative State,” Victorian Studies 3 (1959): 193–210. 6. Henry C. Adams, “Relation of the State to Industrial Action” and “Economics and Jurisprudence,” in Two Essays by Henry Carter Adams, ed. Joseph Dorfman (New York: Augustus M. Kelley, 1969); John R. Commons, Legal Foundations of Capitalism (New York: Macmillan, 1924); Louis Brandeis, Other People’s Money and How the Bankers Use It (New York: Harper Torchbooks, 1967), 43. 7. Richard T. Ely, “Statement of Dr. Richard T. Ely,” Publications of the American Economic Association 1 (1887): 14–20, 16. 8. James Willard Hurst, “Problems of Legitimacy in the Contemporary Legal Order,” Oklahoma Law Review 24 (1971): 224–238, 225–226 (emphasis added). 9. See, for example, William K. Jones, Cases and Materials on Regulated Industries (New York: Foundation Press, 1967); Richard J. Pierce Jr. and Ernest Gellhorn, Regulated Industries in a Nutshell (St. Paul: West Publishing Co., 1999); Joseph D. Kearney and Thomas W. Merrill, “The Great Transformation of Regulated Industries Law,” Columbia Law Review 98 (1998):

Notes to Pages 141–144

1323–1409; Randal C. Picker, “Network Industries” (syllabus, University of Chicago Law School, 2014), http://picker.uchicago.edu/NetIndus/Syllabus .htm. 10. Kenneth Culp Davis, Administrative Law and Government (St. Paul: West Publishing Co., 1960), 13–17. 11. Wyman, Special Law Governing Public Service Corporations, 1:29–33; Joseph Henry Beale Jr., A Selection of Cases on the Law of Carriers (Cambridge, MA: Harvard Law Review Publishing Association, 1898); Joseph Henry Beale and Bruce Wyman, Cases on Public Service Companies: Public Carriers, Public Works, and other Public Utilities (Cambridge, MA: Harvard Law Review Publishing Association, 1902); Joseph Henry Beale Jr. and Bruce Wyman, The Law of Railroad Rate Regulation with Special Reference to American Legislation (Boston: William J. Nagel, 1906); Felix Frank furter, A Selection of Cases under the Interstate Commerce Act (Cambridge, MA: Harvard University Press, 1915). 12. Wyman, Special Law Governing Public Service Corporations, 1:39–134. 13. Felix Frank furter, The Public and Its Government (New Haven, CT: Yale University Press, 1930), 83. 14. See, for example, the impor tant contemporary interventions of Randal C. Picker, “Network Industries,” and Nicholas Bagley, “Medicine as a Public Calling,” Michigan Law Review 114 (2015): 57–106. Of course, for the most recent resurgence of the public utility idea in contemporary policymaking, see the recent efforts of the FCC to reclassify broadband ser vices as public utilities under the common carrier provisions of Title II of the Federal Communications Act of 1934 in the interest of “net neutrality.” See Tim Wu, “Why Everyone Was Wrong about Net Neutrality,” New Yorker, February 26, 2015. For a wonderful popu lar assessment of the long and larger vitality of the public utility idea in communications, see Wu, The Master Switch: The Rise and Fall of Information Empires (New York: Alfred A. Knopf, 2010). 15. Nebbia v. New York, 291 U.S. 502 (1934). 16. Frank J. Goodnow, The American Conception of Liberty and Government (Providence: Standard Printing Company, 1916), 28–29. 17. For a somewhat more complete detailing of this multi-pronged critique focused more specifically on the problem of regulatory capture, see William J. Novak, “A Revisionist History of Regulatory Capture,” in Preventing Regulatory Capture: Special Interest Influence and How to Limit It, eds. Daniel Carpenter and David A. Moss (New York: Cambridge University Press, 2013), 25–48. 18. R. H. Coase, “The Federal Communications Commission,” Journal of Law and Economics 2 (1959): 1–40; George J. Stigler and C. Friedland, “What Can Regulators Regulate? The Case of Electricity,” Journal of Law and Economics 5 (1962): 1–16; Harold Demsetz, “Why Regulate Utilities?” Journal of Law and Economics 11 (1968): 55–65; Sam Peltzman, “Pricing in Public and Private Enterprise: Electric Utilities in the United States,” Journal of Law and

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Economics 14 (1971): 109–147; Richard A. Posner, “Taxation by Regulation,” Bell Journal of Economics and Management Science 2 (1971): 22–50. 19. See, for example, the survey from Leet Jurisdiction of Norwich between 1374 and 1391, from “common purchaser” to “common builder,” in Edward A. Adler, “Business Jurisprudence,” Harvard Law Review 28 (1914): 135–162, 149–151. Also see Wyman, “Historical Introduction,” in Special Law Governing Public Service Corporations, 1:1–36; Charles K. Burdick, “The Origin of the Peculiar Duties of Public Ser vice Corporations,” Columbia Law Review 11 (1911): 514–531, 616–638; Norman F. Arterburn, “The Origin and First Test of Public Callings,” University of Pennsylvania Law Review 75 (1927): 411–428; Benjamin F. Small, “Anti-Trust Laws and Public Callings: The Associated Press Case,” North Carolina Law Review 23 (1944): 1–24. 20. William Blackstone, Commentaries on the Laws of England: A Facsimile of the First Edition of 1765–1769 (Chicago: University of Chicago Press, 1979), 3:164. 21. Lane v. Cotton, 12 Mod. 472 (Eng., 1701), 484–485. 22. Wyman, “Historical Introduction,” 1:14; Matthew Hale, “De Portibus Maris,” in A Collection of Tracts Relative to the Law of England, ed. Francis Hargrave (Dublin: E. Lynch et al., 1787), 45–113. 23. Molly Selvin, “The Public Trust Doctrine in American Law and Economic Policy,” Wisconsin Law Review (1980): 1403–1442; Harry N. Scheiber, “The Road to Munn: Eminent Domain and the Concept of Public Purpose in the State Courts,” Perspectives in American History 5 (1971): 327–402. 24. Hale, “De Portibus Maris,” 77–78 (emphasis added). 25. See the cases discussed in my chapter on “Public Ways: The Legal Construction of Public Space,” in William J. Novak, The People’s Welfare: Law and Regulation in Nineteenth-Century America (Chapel Hill: University of North Carolina Press, 1996), 115–148. 26. Joseph K. Angell, A Treatise on the Law of Carriers of Goods and Passengers, By Land and By Water (Boston: Little, Brown, 1848); Isaac F. Redfield, The Law of Carriers of Goods and Passengers, Private and Public, Inland and Foreign, By Railway, Steamboat, and other Modes of Transportation; Also, the Construction, Responsibility, and Duty of Telegraph Companies, the Responsibility and Duty of Innkeepers, and the Law of Bailments (Cambridge, MA: Houghton and Co., 1869). See also Oliver Wendell Holmes Jr., “Common Carriers and the Common Law,” American Law Review 13 (1879): 609–631. 27. Joseph Henry Beale Jr., The Law of Innkeepers and Hotels: Including Other Public Houses, Theatres, Sleeping Cars (Boston: William J. Nagel, 1906), iii. Also see James Schouler, A Treatise on the Law of Bailments: Including Carriers, Innkeepers, and Pledge (Boston: Little, Brown, 1880), and Emlin McClain, A Selection of Cases on the Law of Bailments and Carriers: Including Ordinary Bailments, Pledges, Warehousemen, Wharfingers, Innkeepers, Postmasters and Public Carriers of Goods and Passengers, 3rd ed. (Boston: Little, Brown, 1914).

Notes to Pages 148–152

28. For some overviews of this nineteenth-century transformation to police power, see Ernst Freund, The Police Power: Public Policy and Constitutional Rights (Chicago: Callaghan & Company, 1904); Freund, Standards of American Legislation (Chicago: University of Chicago Press, 1917); John F. Dillon, Treatise on the Law of Municipal Corporations (Chicago: James Cockcroft & Company, 1872); Novak, People’s Welfare. 29. Commonwealth v. Alger, 7 Cushing 53 (Mass., 1851), 84–85. 30. These headings are culled from Laws of New York, 1781–1801, 2 vols. (Albany, 1802). See also The Revised Statutes of the State of Michigan (Detroit, 1838); The Revised Statutes of the Commonwealth of Massachu setts (Boston, 1836). 31. See, for example, “An Act Concerning Passenger Carriers,” Acts and Resolves of Massachusetts (1840), chap. 80, p. 224; “An Act Concerning Effects of Passengers Transported by Railroad Corporations and Other Common Carriers,” Acts and Resolves of Massachusetts (1851), chap. 147, pp. 645–647; The Charter and Ordinances of the City of Boston, Together with the Acts of the Legislature Relating to the City: Collected and Revised (Boston, 1834), chap. 28, “Licensed Houses,” 203–210; “An Act for the Due Regulation of Licensed Houses,” Acts and Resolves of Massachusetts (1832). 32. For the assize of bread, see Mayor of Mobile v. Yuille, 3 Ala. 137 (1841); on the mill acts, see the discussion of Morton J. Horwitz in The Transformation of American Law, 1780–1860 (Cambridge, MA: Harvard University Press, 1977); on rate-setting in the canal era, see Harry N. Scheiber, “The Rate-Making Power of the State in the Canal Era: A Case Study,” Political Science Quarterly 77 (1962): 397–413. 33. Beekman v. Saratoga & Schenectady Railroad Co., 3 Paige 45 (New York, 1831), 75. 34. Freund, Standards of American Legislation, iii, 68, 72. 35. Hilt, “Early American Corporations”; Hennessey and Wallis, “Corporations and Organizations.” 36. Resolves and Private Laws of the State of Connecticut, 1789–1865, 5 vols. (New Haven, CT: 1837–1871). 37. Freund, Police Power, 358–359. 38. James Willard Hurst, The Legitimacy of the Business Corporation (Charlottesville: University of Virginia Press, 1970), 17 (emphasis added). 39. Thorpe v. Rutland and Burlington Railroad Company, 27 Vt. 140 (1855), 142–143. 40. Id. at 150, 153–154. 41. Lumbard v. Stearns, 4 Cush. 60 (1849); “An Act to Incorporate the Springfield Acqueduct Company,” Acts and Resolves of the State of Massachusetts (1848) chap. 303. 42. Joseph Henry Beale, “Lemuel Shaw,” in Great American Lawyers: A History of the Legal Profession in America, 2 vols., ed. William Draper Lewis (Philadelphia: John C. Winston Company, 1907); Leonard W. Levy, The Law of the

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Notes to Pages 152–156

Commonwealth and Chief Justice Shaw (New York: Oxford University Press, 1957), 255, 259; Breck P. McAllister, “Lord Hale and Business Affected with a Public Interest,” Harvard Law Review 43 (1930): 759–791; Scheiber, “The Road to Munn.” 43. Jerry L. Mashaw, Creating the Administrative Constitution: The Lost One Hundred Years of American Administrative Law (New Haven, CT: Yale University Press, 2012). Also see the early pioneering work of Leonard White, nicely introduced in Richard R. John’s synthetic review, “In Retrospect: Leonard D. White and the Invention of American Administrative History,” Reviews in American History 24 (1996): 344–360. 44. “Resolve Incorporating the New-York and Stonington Rail Road Company” (passed May 1832), Resolves and Private Laws of the State of Connecticut from the Year 1789 to the Year 1836, 2 vols. (Hartford, 1837), 1019–1023. 45. Hilt, “Early American Corporations,” Hennessey and Wallis, “Corporations and Organizations,” and Crane, “Dissociation of Incorporation and Regulation.” 46. Frank furter, Public and Its Government. See also Robert Eugene Cushman, Studies in the Police Power of the National Government (Minneapolis: Minnesota Law Review, 1919–1920). 47. Alfred D. Chandler Jr., ed., The Railroads: The Nation’s First Big Business (New York: Harcourt, Brace & World, 1965). 48. Frank furter, Public and Its Government, 82. 49. Léon Duguit, Law in the Modern State, trans. Frida and Harold Laski (New York: B. W. Huebsch, 1919; London: George Allen & Unwin Ltd., 1921). 50. Freund, Police Power, 3–5. 51. John Dewey, The Public and Its Problems in Jo Ann Boydston, ed., John Dewey: The Later Works, 1925–1953 (Carbondale: University of Illinois Press, 1984), 2:303, 266 (emphasis added). On the broader implications of this new model of democratic statecraft, see William J. Novak, Stephen W. Sawyer, and James T. Sparrow, “Beyond Stateless Democracy,” Tocqueville Review / La revue Tocqueville 36 (2015): 21–41. 52. Frank furter, Public and Its Government, 81. In the United States, Richard John has most completely developed this impor tant historical insight. Richard R. John, Spreading the News: The American Postal System from Franklin to Morse (Cambridge, MA: Harvard University Press, 1995); and John, Network Nation: Inventing American Telecommunications (Cambridge, MA: Belknap Press of Harvard University Press, 2010). 53. Duguit, Law in the Modern State, 32–33, 38, 46–48. 54. Freund, Police Power; Wyman, Principles of Administrative Law; Frank J. Goodnow, The Principles of the Administrative Law of the United States (New York: G. P. Putnam’s Sons, 1905); Goodnow, Comparative Administrative Law: An Analysis of the Administrative Systems, National and Local, of the United States, England, France and Germany (New York: G. P. Putnam’s Sons, 1893).

Notes to Pages 157–162

55. Ernst Freund, “Police Power” in Cyclopedia of American Government, eds. Andrew C. McLaughlin and Albert Bushnell Hart (New York: D. Appleton & Co., 1914), 2: 706–710, 708 (emphasis added). 56. Rexford G. Tugwell, The Economic Basis of Public Interest (Menasha, WI: The Collegiate Press, 1922), v. 57. Felix Frank furter, “Foreword,” Yale Law Journal 47 (1938): 515–518, 517–518. 58. Beale and Wyman, Railroad Rate Regulation; Beale and Wyman, Cases on Public Service Companies; Wyman, Principles of Administrative Law. 59. Frank furter, Selection of Cases. 60. David Hume, A Treatise on Human Nature, 2 vols., eds. T. H. Green and T. H. Grose (London: Longmans, Green, and Co., 1874). 61. Jeremy Bentham, A Fragment on Government, eds. J. H. Burns and H. L. A. Hart (Cambridge: Cambridge University Press, 1988), 51. 62. For overviews on utilitarianism and the “Nineteenth-Century Revolution in Government,” see Oliver MacDonagh, “The Nineteenth-Century Revolution in Government: A Reappraisal,” Historical Journal 1 (1958): 52–67; and Arthur J. Taylor, Laissez-Faire and State Intervention in Nineteenth-Century Britain (London: Macmillan, 1972). John Dewey, Liberalism and Social Action, in The Later Works, 1925–1953, ed. Jo Ann Boydston (1935; Carbondale: Southern Illinois University Press, 1991), 11:1–65, 15, 17. 63. Tugwell, Economic Basis of Public Interest, 5, 23, 124. 64. For an early statement of the relation of monopoly and trust to problems of public utility, see Bruce Wyman, “The Law of Public Callings as a Solution of the Trust Problem,” Harvard Law Review 17 (1904): 157–173. For the best discussion of monopoly as just one justification for public utility regulation, again see Tugwell, Economic Basis of Public Interest. 65. John B. Cheadle, “Government Control of Business,” Columbia Law Review 20 (1920): 550–585, 585. 66. Tugwell, Economic Basis of Public Interest, 80–108, 102. 67. Bagley, “Medicine as a Public Calling,” 77. 68. Wyman, Special Law Governing Public Service Corporations, 1:xi. 69. Frank furter, Public and Its Government, 31. 70. Goodnow, American Conception, 28–29. 71. Frank furter, Public and Its Government, 82. 72. Charles Francis Adams, “A Chapter of Erie,” North American Review 109 (1869): 30–106, 30. 73. Charles Francis Adams Jr., “The Railroad System,” in Charles Francis Adams Jr. and Henry Adams, Chapters of Erie and other Essays (Boston: James R. Osgood, 1871), 333–429, 414. See also Arthur Twining Hadley, Railroad Transportation: Its History and Its Laws (New York: G. P. Putnam’s Sons, 1885). 74. Leonard D. White, “The Origin of Utility Commissions in Massachusetts,” Journal of Political Economy 29 (1921): 177–199. For more on Adams and the founding of the Massachusetts Board of Railroad Commissioners, see

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Notes to Pages 163–164

Thomas K. McCraw, Prophets of Regulation (Cambridge, MA: Harvard University Press, 1984). 75. Charles Francis Adams, The Regulation of All Railroads through the StateOwnership of One, Speech on Behalf of the Massachusetts Board of Railroad Commissioners (Boston: Osgood, 1873); “An Act to Establish a Board of Railroad Commissioners,” Acts and Resolves Passed by the General Court of Massachusetts (1869), chap. 408, 699–703; “An Act to Establish a Board of Railroad Commissioners,” Acts and Resolves Passed by the General Court of Massachusetts in the Year 1868 (Boston: Wright and Potter, 1869), chap. 408, 699–700; First Annual Report of the Board of Railroad Commissioners (Boston: Wright & Potter, 1870). In its second annual report, the Massachusetts Board of Railroad Commissioners noted in 1871 that, in the previous legislative session alone, “fift y-five Acts and two Resolves of a special nature relating to railroads were passed.” Second Annual Report of the Board of Railroad Commissioners (Boston: State Printers, 1871), 5. 76. See New London Northern Railroad Company v. Boston & Albany Railroad Company, 102 Mass. 386 (1869), 387–388, and Attorney General v. Norwich and Worcester Railroad Company, 113 Mass. 161 (1873), 168–169. 77. In 1871, however, the legislature did give the Board more direct powers to regulate the fares charged by street railways. “An Act Concerning Street Railway Corporations,” Acts and Resolves Passed by the General Court of Massachusetts in the Year 1871 (Boston: Wright and Potter, 1871), chap. 381, 730. 78. Massachusetts House Document 225 (1879); Annual Report of the Massachusetts Board of Railroad Commissioners, 24 (1892), 13–15. 79. Colorado, Connecticut, Iowa, Kentucky, Maine, Massachusetts, Michigan, Nebraska, New York, Ohio, Rhode Island, Vermont, Virginia, Wisconsin, as well as the territory of Dakota. Robert E. Cushman, The Independent Regulatory Commissions (New York: Oxford University Press, 1941), 25. 80. “An Act to Establish a Board of Railroad and Warehouse Commissioners, and Prescribe their Powers and Duties,” Public Laws of the State of Illinois (1871), 618–625. 81. The Constitution of the State of Illinois (1870), Article XI, Secs. 12, 15; Article XIII, Secs. 6, 7. 82. “An Act to Regulate Public Warehouses, and the Warehousing and Inspection of Grain,” Public Laws of the State of Illinois (1871), 762–774. “An Act to Provide for the Incorporation of Associations that may be Organized for the Purposes of Constructing Railways, Maintaining and Operating the Same; For Prescribing and Defining the Duties and Limiting the Powers of such Corporations when so Organized”; “An Act to Prevent Injury to Persons or Property at Railroad Junctions or Crossings”; “An Act to Prevent Unjust Discriminations and Extortions in the Rates to be Charged by the Different Railroads in this State for the Transportation of Freight on Said Roads”; “An Act Regulating the Receiving, Transportation and Delivery of Grain by

Notes to Pages 165–170

Railroad Corporations”; “An Act to Establish a Reasonable Maximum Rate of Charges for the Transportation of Passengers on Railroads in this State”; and “An Act Authorizing the Formation of Union Depots and Stations for Railroads in this State,” Public Laws of the State of Illinois (1871), 625–643. 83. “An Act to Prevent Extortion and Unjust Discrimination in the Rates Charged for the Transportation of Passengers and Freights on Railroads in this State,” Public Laws of the State of Illinois (1873), 135–140; “Schedule of Maximum Rates,” Public Laws of the State of Illinois (1874), 129. 84. Alabama, California, Georgia, Illinois, Kansas, Minnesota, Mississippi, Missouri, New Hampshire, and South Carolina. Cushman, Independent Regulatory Commissions, 26. 85. Though, see Jerry Mashaw’s equally convincing argument concerning earlier federal steamboat regulation in Mashaw, “Regulating Steamboats,” in Creating the Administrative Constitution, chap. 11. 86. First Report of the Railroad and Warehouse Commission of the State of Illinois, 4–7. 87. Ibid., 6. 88. Ibid., 17. Ira Y. Munn et al. v. The People of the State of Illinois, 69 Ill. 80 (1873). 89. First Report, 370–377. 90. Ibid., 378–394. 91. Ibid., 22. 92. Stephen Breyer, Regulation and Its Reform (Cambridge, MA: Harvard University Press, 1982), 36–70. Stephen G. Breyer et al., Administrative Law and Regulatory Policy, 5th ed. (New York: Aspen Law & Business, 2002), 267. 93. See, for example, the extraordinary “Report of J. H. Rowell,” Illinois state’s attorney, on his argument pursued at the Illinois commission’s initiative in People v. Chicago and Alton Railroad Company. 94. Sixth Annual Report of the Railroad and Warehouse Commission of the State of Illinois (Springfield, IL: D. W. Lusk, State Printer, 1876), 11. 95. As the above narrative suggests, the causes of this general turn to railroad rate regulation quickly outstrip the narrow confines of the so-called Granger Movement or the activism of the National Grange. Charles Fairman, “The So-Called Granger Cases, Lord Hale, and Justice Bradley,” Stanford Law Review 5 (1953): 587–679, 587. 96. Munn v. Illinois, 94 U.S. 113 (1877); Chicago, Burlington, and Quincy Railroad Company v. Iowa, 94 U.S. 155 (1877); Peik v. Chicago and North-western Railway Company and Lawrence v. North-western Railway Company, 94 U.S. 164 (1877); Chicago, Milwaukee, and St. Paul Railroad Company v. Ackley, 94 U.S. 179 (1877); Winona and St. Peter Railroad Company v. Blake, 94 U.S. 180 (1877); Stone v. Wisconsin, 94 U.S. 181 (1877). 97. For many years to come, Munn would be a lead-off case for most casebooks concerning public utilities. Felix Frank furter inaugurated a long tradition of routinely starting modern discussion of the legal regulation of public utilities

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with Munn v. Illinois. Felix Frank furter and James Forrester Davison, Cases and Other Materials on Administrative Law (New York: Commerce Clearing House, 1932), 685. See also Young B. Smith, Noel T. Dowling, and Robert L. Hale, Cases on the Law of Public Utilities (St. Paul: West Publishing Co., 1936), 7. 98. Bruce Wyman, “The Law of the Public Callings as a Solution of the Trust Problem II,” Harvard Law Review 17 (1904): 217–247, 222. 99. Max Lerner, “The Triumph of Laissez-Faire,” in Paths of American Thought, eds. Arthur M. Schlesinger Jr. and Morton White (Boston: Houghton Mifflin, 1963), 159. 100. Fairman, “The So-Called Granger Cases,” 588. Nebbia, 291 U.S. 502. 101. Harry N. Scheiber, “Law and Political Institutions,” in Encyclopedia of American Economic History: Studies of the Principal Movements and Ideas, ed. Glenn Porter (New York: Charles Scribner’s Sons, 1980), 2:487–508, 501–502. 102. Civil Rights Cases, 109 U.S. 3 (1883), 42. 103. Western Turf Association v. Greenberg, 204 U.S. 359 (1907), 362. 104. For a broad survey of state appellate usage of Munn to uphold regulation (as well as an excellent presentation of the legal and historical rationale), see Justice Samuel Blatchford’s opinion in Budd v. New York, 143 U.S. 517 (1892). 105. Schmidinger v. Chicago, 226 U.S. 578 (1913); Holden v. Hardy, 169 U.S. 366 (1898). 106. For an excellent survey, see Carl D. Thompson, Public Ownership: A Survey of Public Enterprises, Municipal, State, and Federal in the United States and Elsewhere (New York: Thomas Y. Crowell Co., 1925). 107. Felix Frank furter and Henry M. Hart Jr., “Rate Regulation” in Encyclopaedia of the Social Sciences, 15 vols. (New York: Macmillan, 1934), 13:104–112, 104 (emphasis added). 108. Tugwell, Economic Basis of Public Interest, 95. 109. Ben W. Lewis, “Public Utilities,” in Government and Economic Life: Development and Current Issues of American Public Policy, eds. Leverett S. Lyon and Victor Abramson (Washington, DC: The Brookings Institution, 1940), 2:616–745, 616. 110. Wyman, Special Law Governing Public Service Corporations,1:x. 111. Mary L. Barron, “State Regulation of the Securities of Railroads and Public Ser vice Companies,” in Annals of the American Academy of Political and Social Science 76 (March 1918): 167–190; Florence Kelley, “The Public Regulation of Wages, Hours, and Conditions of Labor of the Employes of Public Ser vice Corporations,” National Municipal Review 6 (1917): 31–40. 112. Wabash, St. Louis & Pacific Railway Company v. Illinois, 118 U.S. 557 (1886); Chicago, Milwaukee & St. Paul Railway Company v. Minnesota, 134 U.S. 418 (1890); Smyth v. Ames, 169 U.S. 466 (1898).

Notes to Pages 178–181

5. Corporate Taxation and the Regulation of Early Twentieth-Century American Business Earlier versions of this chapter were presented at the Northwestern University Pritzker School of Law, the Indiana University Ostrom Workshop in Political Theory and Policy Analysis, the University of Virginia School of Law’s Legal History Workshop, the Policy History Conference, the Law & Society Association Conference, Duke Law School’s Tax Policy Colloquium, and the American Bar Foundation Research Seminar. Thanks to participants in these venues for their useful feedback, and thanks to Rian Dawson and Jayce Born for their outstanding research assistance. 1. W. Elliot Brownlee, “Social Investigation and Political Learning in the Financing of World War I,” in The State and Social Investigation in Britain and the United States, eds. Michael J. Lacey and Mary O. Furner (New York: Cambridge University Press, 1993), 330 (quoting letter from automobile manufacturer Cleveland Dodge to U.S. Treasury Secretary William G. McAdoo, dated April 16, 1917). 2. Naomi R. Lamoreaux, The Great Merger Movement in American Business, 1895–1904 (New York: Cambridge University Press, 1985); Robert L. Nelson, Merger Movements in American Industry, 1895–1956 (Princeton, NJ: Princeton University Press, 1959); Alfred D. Chandler Jr. The Visible Hand: The Managerial Revolution in American Business (Cambridge, MA: Harvard University Press, 1977); David Bunting, The Rise of Large American Corporations, 1889–1919 (New York: Garland Publishing, Inc., 1987). 3. William G. Roy, Socializing Capital: The Rise of the Large Industrial Corporation in America (Princeton, NJ: Princeton University Press, 1997); Vincent P. Carosso, Investment Banking in America: A History (Cambridge, MA: Harvard University Press, 1970); Lawrence E. Mitchell, The Speculation Economy: How Finance Triumphed over Industry (San Francisco: BerrettKoehler, 2007); Julia C. Ott, When Wall Street Met Main Street: The Quest for an Investors’ Democracy (Cambridge, MA: Harvard University Press, 2011). 4. On the rise of public utility law, see Novak’s essay in this volume (Chapter 4). 5. On the early efforts for national incorporation, see Crane’s essay in this volume (Chapter 3). 6. The term “tax handles” is generally associated with the work of early developmental economists. See, e.g., Richard Musgrave, Fiscal Systems (New Haven, CT: Yale University Press, 1969), 125; Harley H. Hinrichs, “Determinants of Government Revenue Shares among Less-Developed Countries,” Economic Journal 75 (September 1965): 546–556. Political and economic historians have, of course, also recognized the importance of changing economic organization to the development of tax regimes. W. Elliot Brownlee, Federal Taxation in America: A History (New York: Cambridge University Press, 2016); Martin Daunton, Trusting Leviathan: The Politics of Taxation in Britain, 1799–1914 (Cambridge: Cambridge University Press, 2001), 14–15.

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Notes to Pages 181–184

7. James C. Scott, Seeing Like a State: How Certain Schemes to Improve the Human Condition Have Failed (New Haven, CT: Yale University Press, 1998). 8. Louis D. Brandeis, “The Curse of Bigness,” Harper’s Weekly, January 10, 1914; Louis D. Brandeis, Business—A Profession (Boston: Small, Maynard & Co., 1914), 118. Morton Keller, The Life Insurance Enterprise, 1885–1910: A Study in the Limits of Corporate Power (Cambridge, MA: Harvard University Press, 1963), 12–14. Michael McGerr, A Fierce Discontent: The Rise and Fall of the Progressive Movement in America, 1870–1920 (New York: Free Press, 2003), 169–174. 9. “The Increased Cost of Living,” American Economist, August 22, 1902, 95; Mark Aldrich, “Tariffs and Trusts, Profiteers and Middlemen: Popu lar Explanations for the High Cost of Living, 1897–1920,” History of Political Economy 45, no. 4 (2013): 693–746; Hugh Rockoff, “Banking and Finance, 1789–1914,” in The Cambridge Economic History of the United States, vol. 2, The Long Nineteenth Century, eds. Stanley L. Engerman and Robert G. Gallman (New York: Cambridge University Press, 2000), 665; Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the United States, 1867–1960 (Princeton, NJ: Princeton University Press, 1971), 152–174. 10. Douglas Irwin, “Tariff Incidence in the American Gilded Age,” Journal of Economic History 67, no. 3 (2007): 582–607; Ajay K. Mehrotra, Making the Modern American Fiscal State: Law, Politics, and the Making of the Modern American Fiscal State (New York: Cambridge University Press, 2013), chap. 5. 11. O. M. W. Sprague, “The American Crisis of 1907,” Economic Journal 18, no. 71 (1908): 353–372; Robert F. Bruner and Sean D. Carr, The Panic of 1907: Lessons Learned from the Perfect Storm (New York: John Wiley and Sons, 2009). 12. Pollock v. Farmers’ Loan & Trust Co., 158 U.S. 601 (1895). 13. Knowlton v. Moore, 178 U.S. 41 (1900); Spreckles Sugar Refining Co. v. McClain, 192 U.S. 397 (1904). 14. Edwin R. A. Seligman, “The Taxation of Corporations I,” Political Science Quarterly 5, no. 2 (June 1890). 15. Edwin R. A. Seligman, The Shifting and Incidence of Taxation, 2nd ed. (New York: Macmillan, 1899 [1892]). 16. Steven A. Bank, From Sword to Shield: The Transformation of the Corporate Income Tax, 1861 to Present (New York: Oxford University Press, 2010). 17. 44 Congressional Record 3137 (1909). 18. 44 Congressional Record 1424 (1909) (statement of Sen. Cummins). 19. Bank, From Sword to Shield, 65. 20. John D. Buenker, Income Tax and the Progressive Era (New York: Garland, 1985). 21. S. Doc. No. 61–98, at 1. 22. Ibid., 3. 23. Bank, From Sword to Shield.

Notes to Pages 184–188

24. Marjorie Kornhauser, “Corporate Regulation and the Origin of the Corporate Income Tax,” Indiana Law Journal 66 (Winter 1990); Reuven S. Avi-Yonah, “Corporations, Society, and the State: A Defense of the Corporate Tax,” Virginia Law Review 90 (2004). For more on the importance of corporate personhood in this period, see the essays by Blair and Pollman (Chapter 7) and Bloch and Lamoreaux (Chapter 8) in this volume. 25. S. Doc. No. 61–98, at 3. 26. McGerr, A Fierce Discontent; Keller, The Life Insurance Enterprise. 27. S. Doc. No. 61–98, at 3. 28. Kornhauser, “Corporate Regulation.” 29. Tariff Act of 1909, chap. 6, § 38, 36 Stat. 11, 112–113. 30. The law excluded “amounts received by [corporations] as dividends upon stock of other corporations.” Ibid. 31. Tariff Act of 1909, chap. 6, § 38(6), 36 Stat. 11, 116. 32. 44 Cong. Rec. 4038 (1909); Philip C. Jessup, Elihu Root (New York: Dodd, Mead & Co., 1938), 230; Kornhauser, “Corporate Regulation”; Avi-Yonah, “Corporations, Society.” 33. R. Rudy Higgens-Evenson, The Price of Progress: Public Services, Taxation, and the American Corporate State, 1877–1929 (Baltimore, MD: Johns Hopkins University Press, 2002); Glenn W. Fisher, The Worst Tax? A History of the Property Tax in America (Lawrence: University Press of Kansas, 1996); Clifton K. Yearley, Money Machines: The Breakdown and Reform of Governmental and Party Finance, 1860–1920 (Albany: State University of New York Press, 1970). 34. Harrison B. Spaulding, The Income Tax in Great Britain and the United States (London: P. S. King & Sons, 1927), 93–94. 35. Steven A. Bank, Kirk J. Stark, and Joseph J. Thorndike, War and Taxes (Washington, DC: Urban Institute, 2008): 51; Bank, From Sword to Shield, 58–62. 36. Bank, From Sword to Shield, 58–59. 37. In 1897, Standard Oil was the largest industrial corporation in the country, with over $256 million in total assets, and American Sugar was the third largest with $116 million in total assets. Bunting, Rise of Large American Corporations, 149. 38. Kornhauser, “Corporate Regulation”; Avi-Yonah, “Corporations, Society.” 39. Section II(A), subdivision (2), Underwood Tariff Act of October 3, 1913, 38 Stat. 166. 40. Ibid. at Section II(A)(2), 38, Stat. 166–167. 41. See, for example, Ernst Freund, The Legal Nature of the Corporation (Chicago: University of Chicago Press, 1897). On the influence of continental legal theories for American law, see generally Morton Horwitz, Transformation of American Law, 1870–1960: The Crisis of Legal Orthodoxy (New York: Oxford University Press, 1992), 179–180; Ron Harris, “The Transplantation of the Legal Discourse on Corporate Personality Theories: From German Codification to

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Notes to Pages 188–192

British Political Pluralism and American Big Business,” Washington & Lee Law Review 63 (2006): 1421–1478. 42. Santa Clara v. Southern Pacific Railroad, 118 U.S. 394 (1886). On the specific meanings of Santa Clara for corporate rights, see the essay by Bloch and Lamoreaux in this volume (Chapter 8). 43. U.S. Department of Commerce and Labor, Bureau of the Corporations, Taxation of Corporations: New England I (1909), 3. 44. Willford I. King, The Wealth and Income of the People of the United States (New York: Macmillan, 1915), 231–232, 80, 218–219. 45. W. Elliot Brownlee, “Wilson and Financing the Modern State: The Revenue Act of 1916,” Proceedings of the American Philosophical Society, 129:2 (1985), 173–210; Brownlee, Federal Taxation in America, 93–106; Mehrotra, Making the Modern American Fiscal State, chap. 7. 46. Arthur Link, Wilson: Campaigns for Progressivism and Peace 1916–1917 (Princeton, NJ: Princeton University Press, 1965), 62. 47. Federal Income Tax Rates, by Income Group Average Rates, 1913–1970, Historical Statistics of the United States, Millennial ed., vol. 5 (New York: Cambridge University Press, 2006), table Ea 758–772. Effective tax rates refer to the ratio of taxpayers’ total tax liability to total income. For those few taxpayers who had annual incomes that exceeded $1 million, the effective tax rate skyrocketed from 10 percent to over 70 percent between 1916 and 1918. W. Elliot Brownlee, “Historical Perspectives on U.S. Tax Policy toward the Rich,” in Does Atlas Shrug? The Economic Consequences of Taxing the Rich, ed. Joel B. Slemrod (New York: Russell Sage Foundation, 2000), 45. 48. 55 Cong. Rec. 5966 (1917) (statement of Sen. Furnifold Simmons). 49. Ibid. (Simmons, speaking about the undistributed profits tax proposal, reported that “[t]he corporate interests of the country without exception so far as I know protested and presented convincing facts to support their protest, that to require them at the present time either to distribute their surplus or to pay a tax of 15 per cent upon it if retained, would be several times the price of money in the open market; that it would under present conditions impose a serious handicap upon corporately conducted business.”) 50. Ibid. 51. Ibid.; Steven A. Bank, “A Capital Lock-In Theory of the Corporate Income Tax,” Georgetown Law Journal 94 (2006): 922–923. 52. Eight percent was established as the “reasonable rate of return,” and all profits above that level were taxed at graduated rates ranging from 8 percent to a maximum of 60 percent on corporate profits that were in excess of 32 percent of invested capital. Revenue Act of 1917, 40 Stat. 300 (1917). For an elementary and useful example of how excess profits were calculated, see Hugh Rockoff, America’s Economic Way of War: War and the U.S. Economy from the SpanishAmerican War to the First Gulf War (New York: Cambridge University Press, 2012), 116.

Notes to Pages 192–195

53. “The Excess Profits Tax—Discussion,” American Economic Review 10, no. 1 (March 1920): 19–32; W. Elliot Brownlee, “Economists and the Formation of the Modern Tax System in the United States: The World War I Crisis,” in The State and Economic Knowledge: The American and British Experiences, eds. Mary O. Furner and Barry Supple (Cambridge: Cambridge University Press, 1990), 401–434, 409–411; Mehrotra, Making the Modern American Fiscal State. 54. “Conscripting Capital,” Los Angeles Times, June 4, 1917, II4; “Where the Burden Shall Fall,” Puck, April 21, 1917, A7; “The Conscription of Wealth,” The Independent, April 28, 1917, 193. 55. “Helping the War Pay for Itself,” The Outlook, July 27, 1917, 319–320; “To Tax ‘Excess Profits,’ ” Literary Digest, January 27, 1917, 176; “The Excess Profits Tax,” New Republic, September 15, 1917, 174–175; Hugh Rockoff has estimated that the profits taxes accounted for roughly 40 percent of total war time taxes, making it the leading source of tax revenue. Rockoff, America’s Economic Way of War, 117–118. 56. C. L. King, The Regulation of Municipal Utilities (New York: D. Appleton, 1912); William G. Raymond, What is Fair? A Study of Some Problems of Public Utility Regulation (New York: John Wiley & Sons, 1918). 57. Edwin R. A. Seligman, “The Excess-Profits Tax,” The Nation, March 28, 1918, 365–366. 58. “Excessive Taxation of ‘Excess’ Profits,” Commercial and Financial Chronicle, September 1, 1917; “The Mysteries of the 8% Excess Profits Tax,” Commercial and Financial Chronicle, April 28, 1917; “Assails the Profits Tax; Counsel of Bankers’ Association Warns against Hasty Legislation,” New York Times, December 6, 1918. 59. Brownlee, “Social Investigation and Political Learning,” 330; Ronald F. King, Money, Time & Politics: Investment Tax Subsidies and American Democracy (New Haven: Yale University Press, 1993), 104. 60. “George O. May, “Methods of English War Profits Tax,” New York Times, September 4, 1917; Mehrotra, Making the Modern American Fiscal State, 335–336. 61. Robert Murray Haig (assisted by George E. Holmes), The Taxation of Excess Profits in Great Britain (Princeton, NJ: American Economic Association, 1920), 174–175. 62. Charles R. Geisst, Wall Street: A History (New York: Oxford University Press, 1997), 155. 63. Roy G. Blakey and Gladys C. Blakey, The Federal Income Tax (New York: Longman, Green and Co., 1940), 153. 64. David F. Houston, Annual Report of the Secretary of the Treasury (1920): 34. 65. Inaugural Address of Warren G. Harding, March 4, 1921, at 7, available at http://www.yale.edu/lawweb/avalon/presiden/inaug/harding.htm. 66. H.R. Rep. No. 67–350, at 1 (1921), reprinted in 1939–1 C.B. (pt. 2) at 168. 67. James Emery, “The Excess Profits Tax—An Unsound Fiscal Policy,” in Proceedings of the National Industrial Conference (National Industrial Conference Board, 1920), Special Report No. 9, p. 3.

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Notes to Pages 195–199

68. Blakey and Blakey, Federal Income Tax, 194. 69. Cong. Rec. vol. 61, p. 6861 (October 27, 1921) (statement of Sen. Smoot). 70. Thomas Adams, “Evolution v. Revolution in Federal Tax Reform,” Proceedings of the National Tax Association 16 (1924): 308–309. 71. “Hughes Here Pleads for Swift Justice,” New York Times, May 16, 1924, 3. 72. For more on the declining pace of merger activity at this time, see J. Keith Butters, John Lintner, and Willam L. Cary, Effects of Taxation on Corporate Mergers (Cambridge: Harvard University Press, 1951), 294; John M. Blair, Economic Concentration: Structure, Behavior and Public Policy (New York: Harcourt Brace Jovanovich, 1972), 264. 73. Hearings on H.R. 8245 Before the Senate Comm. On Fin., 67th Cong. 29 (1921) (hereafter, “1921 Senate Hearings”). 74. Ibid. at 12. 75. “Praises Present Tax Law,” New York Times, December 17, 1922. 76. Mellon to Hays, November 17, 1921, Record Group 56, General Records of the Department of Treasury, Correspondence of the Office of the Secretary of the Treasury, Central Files of the Office of the Secretary of the Treasury, 1917–32, Box 187, Folder “Tax—Exchanges of Property, 1921–1932,” National Archives and Record Administration, College Park, MD. 77. David F. Houston, “The Treasury’s Plan for Federal Taxes,” Review of Reviews 63 (1921): 53. See also “To Cut Tax by More Borrowing,” Literary Digest, April 9, 1921, 11; “For the Payment of the Debt,” New Republic, May 11, 1921, 310; Mehrotra, Making the Modern American Fiscal State, 348. 78. Edward B. Rosa, “Expenditures and Revenues of the Federal Government,” Annals of the American Academy of Political and Social Science 95 (1921): 1–2; Robert Bruce Watson, “The Trend of Federal, State, and Local Revenues in the United States,” Annals of the American Academy of Political and Social Science 95 (1921): 132–133. 79. See K. M. Williamson, “The Literature on the Sales Tax,” Quarterly Journal of Economics 35 (August 1921): 618–633; Randolph E. Paul, Taxation in the United States (Boston: Little, Brown, 1954), 128; Blakey and Blakey, Federal Income Tax, 190. 80. 1921 Senate Hearings at 360; Mehrotra, Making the Modern American Fiscal State, 379. 81. Blakey and Blakey, Federal Income Tax, 221, 241. 82. Andrew W. Mellon, Taxation: The People’s Business (New York: Macmillan, 1924): 13. 83. Ibid. at 104, 105–106. 84. “Tax Bill Conferees Clash over Changes,” New York Times, May 17, 1924, 1. 85. Blakey and Blakey, Federal Income Tax, 272. 86. Brandeis, “The Curse of Bigness”; see Steven A. Bank, “Taxing Bigness,” Tax Law Review 66 (2013): 379, 387–388. 87. “Senate to Decide Fate of Tax Bill,” Wall Street Journal, December 21, 1927, 18.

Notes to Pages 199–201

88. See “Senate Tax Cut Near $300,000,000,” New York Times, May 23, 1928, 6; Roy G. Blakey, “The Revenue Act of 1928,” American Economic Review 18 (1928): 429, 435. 89. Louis K. Liggett Co. v. Lee, 288 U.S. 517, 566–67 (1933) (Brandeis, J., dissenting). 90. Memorandum of May 19, 1932 of Raymond Moley and others for Franklin Delano Roosevelt, outlining a National Program for Recovery, available in Box 282, Folder 3, of the Hoover Institution Archives, Stanford University (“Memorandum of May 19, 1932”). 91. Ibid. at 2. 92. Adolf A. Berle and Gardiner C. Means, The Modern Corporation and Private Property (New York: Commerce Clearing House, Inc., 1932). See Daniel R. Fusfeld, The Economic Thought of Franklin D. Roosevelt and the Origins of the New Deal (New York: Columbia University Press, 1954), 207–208, 213. 93. Rexford G. Tugwell, The Industrial Discipline and the Governmental Arts (New York: Columbia University Press, 1933), 203–205. 94. Memorandum of May 19, 1932, 3. 95. Ibid. at 4. 96. Stock Exchange Practices: Hearing Before the Senate Committee on Banking and Currency on S. Res. 84, 73d Cong. 2319–2325 (1933). 97. Mark J. Roe, Strong Managers, Weak Owners: The Political Roots of American Corporate Finance (Princeton, NJ: Princeton University Press, 1994), 110–111; “The Man Who Will Question Morgan,” New York Times, May 21, 1933, sec. 8, 2. 98. One outgrowth of the Pecora Hearings was the adoption of a proposal for publicizing tax returns by requiring disclosure of the pink slip containing basic summary information that each taxpayer had to submit with his return. Unlike in 1909, this publicity was required for both corporations and individuals and was focused more on the revelations of widespread tax avoidance among wealthy individuals than it was on corporate regulation. See Marjorie E. Kornhauser, “Shaping Public Opinion and the Law: How a ‘Common Man’ Campaign Ended a Rich Man’s Law,” Law and Contemporary Problems 73 (2010): 123. 99. Subcommittee of the House Committee on Ways and Means, 73d Cong., 2d Sess., Preliminary Report on Prevention of Tax Avoidance (Comm. Print 1933): 39. 100. “Tax Bill Changes Offered by Borah,” New York Times, March 2, 1934, 38 (referring to Senator William Borah’s introduction of the Subcommittee recommendation in a Senate bill). 101. Statement of the Acting Secretary of the Treasury Regarding the Preliminary Report of a Subcommittee of the House Committee on Ways and Means Relative to Methods of Preventing the Avoidance and Evasion of the Internal Revenue Laws Together with Suggestions for the Simplification and Improvement Thereof, 73d Cong. (1933): 10.

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Notes to Pages 201–204

102. H.R. Rep. No. 73–704, at 14 (1934), reprinted in 1939–1 C.B. (pt. 2), at 564. 103. Hearings on H.R. 7835 Before the Senate Committee on Finance, 73d Cong. (1934) at 50 (brief of F. H. Clausen, Chairman of the Special Committee on Federal Taxation, U.S. Chamber of Commerce) (hereafter, “1934 House Hearings”). 104. Roswell Magill, “Effect of Taxation on Corporate Policies,” U.S. Law Review 72 (1938): 637, 639, n.9. 105. See Berle and Means, Modern Corporation; James C. Bonbright and Gardiner C. Means, The Holding Company: Its Public Significance and its Regulation (New York: McGraw-Hill Book Co., 1932); Steven A. Bank and Brian R. Cheffins, “The Corporate Pyramid Fable,” Business History Review 84 (Autumn 2010): 435. 106. 75 Cong. Rec. 7125 (1932) (statement of Representative Charles Cannon). 107. Ibid. 108. Blakey and Blakey, Federal Income Tax, 345. 109. 75 Cong. Rec. 7127 (1932). 110. 1934 House Hearings at 486. Railroads argued that the 1920 Transportation Act limited their ability to consolidate their lines in a single corporation. Ibid. at 503–504 (statement of Jacob Aronson of the New York Central Lines). 111. Bonbright and Means, The Holding Company, 227–228. 112. Franklin D. Roosevelt, “Message to Congress on Tax Revision,” American Presidency Project (June 19, 1935), http://www.presidency.ucsb.edu/ws/?pid =15088. 113. See Bank, “Taxing Bigness,” 379. 114. Roosevelt, “Message to Congress.” 115. Revenue Act of 1935, 49 Stat. 1014, 1015 § 102 (1935). 116. Mark Leff, The Limits of Symbolic Reform: The New Deal and Taxation, 1933–1939 (New York: Cambridge University Press, 1984), 143. 117. “A Conservative Tax Program,” New Republic 83 (1935): 208. 118. Leff, Limits of Symbolic Reform, 2. 119. Paul K. Conkin, The New Deal 2d ed. (New York: Crowell, 1975), 63. 120. Between 1932 and 1935, all corporations were subject to the same flat rate tax, which prevented raising corporate rates without harming small business. Bank, “Taxing Bigness,” 382. 121. Harley L. Lutz, “The Federal Revenue Act of 1935,” American Economic Review 26 (1936): 161, 167. 122. Howard Wood, “Standard Oil Chief Assails New Tax Plan,” Chicago Daily Tribune, August 6, 1935, 23. 123. 1935 Senate Hearings at 120 (statement of H. W. Prentis, Armstrong Cork Co.). 124. Steven A. Bank, “When We Taxed the Pyramids,” Florida State University Law Review 41 (2013): 39. 125. Brownlee, “Historical Perspective on U.S. Tax Policy,” 29, 51. 126. John Morton Blum, From the Morgenthau Diaries: Years of Crisis, 1928–1938 (New York: Houghton Mifflin, 1959), 308 (quoting Herman Oliphant, Treasury general counsel).

Notes to Pages 205–206

127. Alfred G. Buehler, The Undistributed Profits Tax (New York: McGraw-Hill, 1937), 29. 128. “Punishing Prudence,” New York Times, March 13, 1936, 22. 129. Revenue Act, 1936: Hearings on H.R. 12395 Before the House Committee on Ways and Means, 74th Cong., 2d Sess. (1936) at 739–40 (statement of Fred H. Clausen, chairman of the Committee on Federal Finance, Chamber of Commerce of the United States). 130. They hoped to accomplish this by limiting the rate of the undistributed profits tax to the same normal rate applied to dividends, which would make shareholders indifferent between distribution and retention. Bank, From Sword to Shield, 176. 131. Bank, From Sword to Shield, 164–183. 132. Revenue Act of 1936, § 101, 49 Stat. 1014 (1936). 133. On the shift from the attack on concentrated economic power in FDR’s first term toward a more general push toward increasing consumption and economic growth in his second term as a result of the recession in 1937, see generally Alan Brinkley, The End of Reform: New Deal Liberalism in Recession and War (New York: Alfred A. Knopf, Inc., 1995). 134. “Testimony before the Senate Special Committee to Investigate Unemployment Relief, January 4, 1938,” in Economic Balance and a Balanced Budget: Papers of Marriner S. Eccles, ed. Rudolph L. Weissman (New York: Harper & Brothers, 1940), 89, 91; Leff, Limits of Symbolic Reform, 209. 135. Bank, From Sword to Shield, 184–185; “Capital ‘Strikes’ Laid to Tax Laws,” New York Times, October 23, 1937, 25. 136. The capital stock tax, first enacted in 1916 during World War I, was a tax on the value of a corporation’s capital stock. Corporations had to declare their stock value and were assessed on that value. The tax was paired with an excess profits tax, which was imposed on profits that exceeded a percentage of the company’s declared capital stock value. So, if a corporation sought to evade the capital stock tax by declaring a low valuation, it would potentially get hit with a higher excess profits tax. In 1938, the capital stock tax was set at $1 for each $1,000 of fair value. Blakey and Blakey, Federal Income Tax, 453; Ellen R. McGrattan, “Capital Taxation during the U.S. Great Depression,” NBER Working Paper 16588 (2010), 13. 137. Bank, From Sword to Shield, 188–189; “Leaders to Push Business Tax Aid at Present Session,” Wall Street Journal, May 16, 1939, 1. 138. Bank, “When We Taxed the Pyramids,” 60. 139. Bank, Stark, and Thorndike, War and Taxes, 88–89. There was a higher rate schedule applicable to the average earnings approach that operated like a penalty for choosing that option. Paul, Taxation in the United States, 268. 140. Paul, Taxation in the United States, 271. 141. Ibid., 270. 142. Ibid., 295. 143. J. Keith Butters and John Lintner, Effect of Federal Taxes on Growing Enterprises, Study No. 1: The Lockheed Aircraft Corporation (Cambridge: Harvard

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Notes to Pages 206–215

University Press, 1944); J. Keith Butters and John Lintner, Effect of Federal Taxes on Growing Enterprises, Study No. 2: Polaroid Corporation (Cambridge: Harvard University Press, 1944). 144. Bank, From Sword to Shield, 191–201. 145. “Tax Report,” Wall Street Journal, January 30, 1946, 1. 146. C. P. Trussell, “Agree on Aid for Reconversion,” New York Times, May 11, 1945, 34; “Tax Relief Bill is Sent to Truman,” New York Times, July 21, 1945, 1.

6. From Fiscal Triangle to Passing Through The author would like to thank the contributors to and editors of this volume, as well as participants in workshops at the American Bar Foundation, the University of Virginia History Department, and the Harvard University Law School, for their criticism. Angus Burgin and Gregory Mark, who attended a Tobin Project workshop on the book manuscript, provided helpful suggestions on early drafts. Naomi Lamoreaux deserves special thanks for her thorough and thoughtful feedback. Finally, the author would like to acknowledge the Tobin Project for its institutional imagination and leadership. 1. Peter Drucker, Concept of the Corporation (New York: John Day, 1946), and another representative text, Edward S. Mason, ed., The Corporation in Modern Society (Cambridge, MA: Harvard University Press, 1959); both exclusively reserved the term “corporation” for business corporations. 2. Jon Van Til, Growing Civil Society: From Nonprofit Sector to Third Space (Bloomington: Indiana University Press, 2008). 3. From liberal to conservative, see Arthur M. Schlesinger, “Biography of a Nation of Joiners,” American Historical Review 50, no. 1 (October 1944): 1–25; Robert Nisbet The Quest for Community: A Study in the Ethics of Order and Freedom (New York: Oxford University Press, 1953). 4. See Charles Taylor, “Modes of Civil Society,” Public Culture 3, no. 1 (Fall 1990): 95–118. 5. Matthew Mancini, Alexis de Tocqueville: From His Times to Ours (New York: Rowman & Littlefield, 2006); Robert Nisbet, “Many Tocquevilles,” American Scholar 46 (1976 / 1977): 59–75. 6. Theda Skocpol, Diminished Democracy: From Membership to Management in American Civic Life (Norman: University of Oklahoma Press, 2003), chap. 3. 7. Gabriel A. Almond and Sidney Verba, The Civic Culture: Political Attitudes and Democracy in Five Nations (Princeton, NJ: Princeton University Press, 1963). 8. Julian E. Zelizer, Taxing America: Wilbur D. Mills, Congress, and the State, 1945–1975 (New York: Cambridge University Press, 1998), 85. 9. Norman I. Silber, A Corporate Form of Freedom: The Emergence of the Nonprofit Sector (Boulder, CO: Westview Press, 2001).

Notes to Pages 215–218

10. Peter Dobkin Hall, Inventing the Nonprofit Sector and Other Essays on Philanthropy, Voluntarism, and Nonprofit Organizations (Baltimore: Johns Hopkins University Press, 1992), 62–63. 11. Peter Frumkin, On Being Nonprofit: A Conceptual and Policy Primer (Cambridge, MA: Harvard University Press, 2002), 144. Per capita tax-exempt philanthropic donations to nonprofits peaked in the postwar decades as well. See Lester M. Salamon, ed. The State of Nonprofit America (Washington, DC: Brookings Institution Press, 2012), 27. 12. Joseph Angell and Samuel Ames, Treatise on the Law of Private Corporations Aggregate (New York, 1832). See also Pauline Maier, “The Revolutionary Origins of the American Corporation,” William and Mary Quarterly 50, no.1 (January 1993): 51–84; Hendrik Hartog, Public Property and Private Power: The Corporation of the City of New York in American Law, 1730–1870 (Ithaca, NY: Cornell University Press, 1989). 13. See Ruth H. Bloch and Naomi R. Lamoreaux, “Voluntary Associations, Corporate Rights, and the State: Legal Constraints on the Development of American Civil Society,” NBER Working Paper 21153 (2015). 14. William Lamartine Snyder, “Chap. 319. An Act for the Incorporation of Benevolent, Charitable, Scientific and Missionary Societies,” in Laws of the State of New York Relating to Religious Corporations: Also the Act Authorizing the Incorporation of Benevolent, Charitable, Scientific, and Missionary Societies, Together with the Statutes Relating to Burial Grounds and Cemeteries, and Notes of Judicial Decisions (New York: Baker, Voorhis & Co., 1879), 15. 15. An Act Concerning Associations for Religious, Charitable, Educational, and other Purposes, (Boston: Secretary of the Commonwealth, 2011) (passed June 27, 1874). 16. James J. Fishman, “The Development of Nonprofit Corporation Law and an Agenda for Reform,” Emory Law Journal 34 (Summer 1985): 61–83. 17. Peter Dobkin Hall, “A Historical Overview of Philanthropy, Voluntary Association, and Nonprofit Organizations in the United States, 1600–2000,” in The Nonprofit Sector: A Research Handbook, eds. W. W. Powell and R. Steinberg (New Haven, CT: Yale University Press, 2006), 37. Especially when interpreted by the Pennsylvania Courts; see Episcopal Academy v. Philadelphia et al., Appellants. 150 Pa. 565 (1892). 18. Pa. Const. of 1874, article III, section 1. After the panic of 1873, the Pennsylvania railroad, in debt and struggling to maintain dividend payments in the face of ner vous European investors, was moving into new lines of investment (like mining) to shore up profits and dividends. It was, in practice, becoming less a railroad corporation and more a for-profit corporation, a shift reflected and aided by the Pennsylvania legislature’s new general incorporation statute. See Richard White, Railroaded (New York: Norton, 2011), chap. 2; Albert J. Churella, The Pennsylvania Railroad, Volume 1: Building an Empire, 1846– 1917 (Philadelphia: University of Pennsylvania Press, 2012), chap. 11.

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Notes to Pages 219–222

19. Susan Pace Hamill, “From Special Privilege to General Utility: A Continuation of Willard Hurst’s Study of Corporations,” American University Law Review 49, no. 1 (October 1999): 81–180. 20. In this era, corporate profits often flowed into shareholder dividends. Rather than retaining them, in the 1870s large corporations distributed between 70 and 90 percent of their profits to their shareholders. See Jack W. Wilson and Charles P. Jones, “An Analysis of the S&P 500 Index and Cowles’s Extensions: Price Indexes and Stock Returns, 1870–1999,” Journal of Business 75, no. 3 (July 2002): table A1. 21. Gregory Mark, “The Personification of the Business Corporation in American Law,” University of Chicago Law Review 54, no. 4 (Autumn 1987): 1441–1483. Ron Harris, “The Transplantation of the Legal Discourse on Corporate Personality Theories: From German Codification to British Political Pluralism and American Big Business,” Washington and Lee Law Review 63, no. 4 (2007): 1421–1478. 22. Jonathan Levy, “Altruism and the Origins of Nonprofit,” in Philanthropy in Democratic Societies: History, Institutions, and Values, eds. Rob Reich, Chiara Cordelli, and Lucy Bernholz (Chicago: University of Chicago Press, 2016), 19–44. 23. Stanley N. Katz, Barry Sullivan, and C. Paul Beach, “Legal Change and Legal Autonomy: Charitable Trusts in New York, 1777–1893,” Law and History Review 3 (Spring 1985): 51–89; Olivier Zunz, Philanthropy in America: A History (Princeton, NJ: Princeton University Press, 2011), chap. 1. 24. Silber, Corporate Form of Freedom, 22–23. 25. See debate at 44 Cong. Rec. 4151 (1909). Kenneth C. Eliasberg, “Charity and Commerce: Section 501(c)(3)—How Much Unrelated Business Activity?” Tax Law Review 21, no. 53 (1965–1966): 55–58. 26. Arthur A. Ballantine, “Some Constitutional Aspects of the Excess Profits Tax,” Yale Journal 29, no. 6 (April 1920): 628–629. 27. Jonathan Levy, “Accounting for Profit and the History of Capital,” Critical Historical Studies 1, no. 2 (Fall 2014); H. Thomas Johnson and Robert S. Kaplan, Relevance Lost: The Rise and Fall of Management Accounting (Cambridge, MA: Harvard University Press, 1987), chap. 2; Margaret Levenstein, Accounting for Growth: Information Systems and the Creation of the Large Corporation (Stanford, CA: Stanford University Press, 1998), chap. 2. 28. The use of capital in the formula, to be precise, was a function of “stock turn,” or the ratio of sales to investments. And so the formula becomes: ROI = earnings / sales × sales / investments. Levenstein, Accounting for Growth, chap. 6; Johnson and Kaplan, Relevance Lost, 84–85. 29. R. H. Dunham, “Object of Accounting,” paper for the High Explosives Operating Department Superintendent’s Meeting No. 33 (New York, April 20–26, 1911), in System and Profits: Early Management Accounting at Du Pont and General Motors, ed. H. Thomas Johnson (New York: Arno Press, 1980), 17. See also Donaldson Brown, “Centralized Control with Decentralized

Notes to Pages 222–225

Responsibilities,” Annual Convention Series 57 (New York: American Management Association, 1927), 51; Brown, “Pricing Policy in Relation to Financial Control,” Management and Administration 7 (February 1924): 195–196; Levenstein, Accounting for Growth, chap. 3; Alfred D. Chandler Jr. and Stephen Salsbury, Pierre S. Du Pont and the Making of the Modern Corporation (New York: Harper & Row, 1971), chaps. 3–4. 30. Naomi R. Lamoreaux, The Great Merger Movement in American Business, 1895–1904 (New York: Cambridge University Press, 1988). 31. William Andrew Paton, Accounting Theory, with Special Reference to the Corporate Enterprise (New York: The Ronald Press Co., 1922), 472, 473–474. Paton drew from Irving Fisher’s prior accounting distinction between a “stock of wealth” and a “flow of income.” Fisher, The Nature of Capital and Income (New York: Macmillan, 1907). 32. Harris, “Transplantation.” 33. See David Runciman, Pluralism and the Personality of the State (New York: Cambridge University Press, 1997). 34. John Dewey, “The Historic Background of Corporate Legal Personality,” Yale Law Journal 35, no. 6 (April 1926): 655–673. 35. Max Radin, “The Endless Problem of Corporate Personality,” Columbia Law Review 32, no. 4 (April 1932): 643–667. The emphasis on practical capacities dovetailed with legal realism. See also Arthur W. Machen Jr. “Corporate Personality,” Harvard Law Review 24, no. 4 (February 1911): esp. 364–365; Felix S. Cohen, “Transcendental Nonsense and the Functional Approach,” Columbia Law Review 35, no. 6 (June 1935): esp. 810; Elvin R. Latty, “The Corporate Entity as a Solvent of Legal Problems,” Michigan Law Review 34, no. 5 (March 1936): 597–636; H. W. Ballantine, On Corporations (Chicago: Callaghan, 1946); Raoul Berger, “Disregarding the Corporate Entity for Stockholder’s Benefit,” Columbia Law Review 55, no. 6 (June 1955): 808–829. See also Dalia Tsuk Mitchell, “From Pluralism to Individualism: Berle and Means and 20th-Century American Legal Thought,” Law & Social Inquiry 30, no. 1 (2005): 179–225. 36. New Colonial Ice Co. Inc. v. Helvering, Commissioner of Internal Revenue, 292 U.S. 435 (1934). 37. Holmes to Laski, July 19, 1916, in Holmes-Laski Letters, vol. 1, ed. M. D. Howe (Cambridge, MA: Harvard University Press, 1956), 5–6. 38. Donnell v. Herring-Hall Marvin Safe Co., 208 U.S. 267, 274 (1908). 39. Klein v. Board of Tax Supervisors of Jefferson County, 283 U.S. 19, 23 (1930). 40. Moline Properties v. Commissioner of Internal Revenue, 319 U.S. 436 (1943). 41. Adolfe A. Berle Jr. and Gardiner C. Means, The Modern Corporation and Private Property (1932; repr., New York: Transaction, 1991). With this came studies proving the relative weakness of postwar shareholders in corporate governance. See J. A. Livingston, The American Stockholder (New York: Lippincott, 1958). 42. Drucker, Concept of the Corporation.

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Notes to Pages 225–228

43. Edward S. Mason, ed., The Corporation in Modern Society (Cambridge, MA: Harvard University Press, 1959), 4. 44. Brown, “Pricing Policy.” See also Joel Dean, “Measuring the Productivity of Capital,” Harvard Business Review (January–February 1954): 120–130. On GM, see Robert F. Freeland, The Strug gle for Control of the Modern Corporation: Organizational Change at General Motors, 1924–1970 (New York: Cambridge University Press, 2005). 45. Talcott Parsons, “The Motivation of Economic Activities,” Canadian Journal of Economics and Political Science 6, no. 2 (May 1940): 200. 46. Richard M. Cyert and James G. March, A Behavioral Theory of the Firm (New York: Prentice-Hall, 1963). 47. Fortune (August 1959), 103. 48. Cyert and March, A Behavioral Theory of the Firm. See also Herbert A. Simon, “Theories of Decision-Making in Economics and Behavioral Science,” American Economic Review 49, no. 3 (June 1959): 252–283. 49. Carl Kaysen, “The Social Significance of the Modern Corporation,” American Economic Review 47, no. 2 (May 1957): 313–314, 319. 50. Oliver E. Williamson, “Managerial Discretion and Business Behav ior,” American Economic Review 53, no. 5 (December 1963): 1033. 51. Archie B. Carroll et al., eds., Corporate Responsibility: The American Experience (New York: Cambridge University Press, 2012). 52. Paul J. Dimaggio and Walter W. Powell, “The Iron Cage Revisited: Institutional Isomorphism and Collective Rationality in Organizational Fields,” American Sociological Review 48, no. 2 (April 1983): 147–160. 53. A. P. Smith Manufacturing Co. v. Barlow, 13 N.J. 145, 98 A. 2d 581 (1953). 54. Hall, Inventing the Nonprofit Sector, 61. 55. O.D. 953, 4 Cum. Bull. 261 (1921). 56. Treas. Reg. 45, art. 517 (1918). 57. Eliasberg, “Charity and Commerce,” 55–58. 58. Trinidad v. Sagrada Orden de Predicadores, 263 U.S. 578 (1924). 59. Treas. Reg. 86, Article 101 (6)-1 (1944). 60. Eliasberg, “Charity and Commerce.” At the state level, during the New Deal unions were often newly granted incorporation rights. See Silber, Corporate Form of Freedom, 49. 61. Report of the Special Tax Study Committee to the House and Ways Committee, H.R. Doc. NO. 523, 80th Cong., 2d Sess. 15 (1947). See also Tax Exempt Organizations, Preliminary Report to the Joint Committee on Internal Revenue Taxation, Prepared by the Technical Staffs of the Joint Committee, the Treasury, and the Bureau of Internal Revenue pursuant to Section 5011 of the Internal Revenue Code, December 15, 1945. 62. Zunz, Philanthropy in America, 176. 63. Elisabeth S. Clemens and Doug Guthrie, Politics and Partnerships: The Role of Voluntary Associations in America’s Political Past and Present (Chicago: University of Chicago Press, 2010), 11.

Notes to Pages 228–231

64. Barry D. Karl and Stanley N. Katz, “The American Private Philanthropic Foundation and the Public Sphere, 1890–1930,” in Minerva 19, no. 2 (Summer 1981): 236–270. 65. FDR’s administrator of federal relief was the instigator. See Clemens, “In the Shadow of the New Deal: Reconfiguring the Roles of Government and Charity, 1928–1940,” in Clemens and Guthrie, Politics and Partnerships, 99. 66. Ibid., 104, 110. On mass philanthropy see also Zunz, Philanthropy, chaps. 3 and 6. 67. Skocpol, From Membership to Management, chap. 3. 68. Johnson was angry about a primary challenge funded by nonprofit foundations. See Patrick L. O’Daniel, “More Honored in the Breach: A Historical Perspective of the Permeable IRS Prohibition on Campaigning by Churches,” Boston College Law Review 42, no. 4 (July 2001): 733–769. 69. Rev. Rul. 55–269, 1955–1 C.B. 29. See Laura B. Chisolm, “Exempt Organization Advocacy: Matching the Rules to the Rationales,” Indiana Law Journal 63, no. 2 (1987–1988): 290. 70. Frank R. Baumgartner and Bryan D. Jones, Agendas and Instabilities in American Politics (Chicago: University of Chicago Press, 1993), 183. 71. Edwin R. Embree, “Timid Billions,” Harper’s Magazine 198 (March 1949): 30–33; Dwight Macdonald, The Ford Foundation: The Men and the Millions (New York: Reynal & Company, 1956). See Zunz, Philanthropy, chap. 6. 72. See, for instance, Morton Keller and Phyllis Keller, Making Harvard Modern: The Rise of Amer ica’s University (New York: Oxford University Press, 2001). 73. Mason, Corporation in Modern Society, 220. 74. Robert Gordon and James Howell, Higher Education for Business (New York: Columbia University Press, 1959). See also, the Rockefeller Foundation funded A. Dudley Ward, ed., Goals of Economic Life (New York: Harper & Bros., 1953). For the Ford Foundation’s general vision of postwar social science, see The Study Committee (H. Rowan Gaither Jr., Chairman), Report of the Study for the Ford Foundation on Policy and Program (Detroit: The Ford Foundation, 1949), which resulted only in the creation of the Center for the Advanced Study of the Behavioral Sciences in Stanford, CA. 75. See Ellen Condliffe Lagemann, The Politics of Knowledge: The Carnegie Corporation, Philanthropy, and Public Policy (Chicago: University of Chicago Press, 1998). 76. In normative liberal theory, the classic statement was John Rawls, “Distributive Shares,” in A Theory of Justice (Cambridge, MA: Harvard University Press, 1971), 258–274. See also Ronald Dworkin, “What is Equality? Part I: Equality of Welfare” Philosophy and Public Affairs 10, no. 3 (Summer 1981): 185–246. 77. On the for-profit side, see Nancy Maclean Freedom is Not Enough: The Opening of the American Workplace (Cambridge, MA: Harvard University Press, 2008).

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78. On the distinction between “distributive” versus “relational” equality, see Samuel Scheffler “What is Egalitarianism?” Philosophy and Public Affairs 31, no. 1 (2003): 5–39, and Elizabeth S. Anderson, “What is the Point of Equality?” Ethics 109, 2 (January 1999): 287–337. Whether it was the distinction between “distributive” and “relational” equality, or, at another point on the left ideological spectrum, a distinction between “redistribution” and “recognition,” there was a growing sense in this generation that income redistribution alone had left many impor tant inequalities untouched. Nancy Fraser, “From Redistribution to Recognition? Dilemmas of Justice in a ‘Post-Socialist’ Age,” New Left Review 212 (July / August 1995): 68–93. 79. See Silber, Corporate Form of Freedom. 80. Silber, Corporate Form of Freedom, chap. 3. 81. In re Boy Explorers of America, 67 N.Y.S.2d 108 (Sup. Ct. 1946). Silber, Corporate Form of Freedom, 61. See also “Judicial Approval as a Prerequisite to Incorporation of Non-Profit Organizations in New York and Pennsylvania,” Columbia Law Review 55, no. 3 (March 1955): 380–395. William H. Wood, “What are Improper Corporate Purposes for Nonprofit Corporations,” Dickinson Law Review 44 (October 1939–May 1940): 264–272; George H. P. Dwight, “Objections to Judicial Approval of Charters of Nonprofit Corporations,” Business Lawyer 12, no. 4 (July 1957): 454–457. 82. “State Control Over Political Organizations: First Amendment Checks on Powers of Regulation,” Yale Law Journal 66, no. 5 (February 1957): 546. The comment drew from postwar political science pluralism, which put groups, not individuals, at the center of political life. See, for instance, Earl Latham, The Group Basis of Politics (Ithaca, NY: Cornell University Press, 1952). 83. NAACP v. Patterson, 357 J.S. 449 (1958). 84. See Anthony Charles Vance, “Freedom of Association and Freedom of Choice in New York State,” Cornell Law Quarterly 46, no. 12 (Winter 1961): 290–305; Lloyd McAulay and Carroll Brewster, “In re Application of the Association for the Preservation of Freedom of Choice,” Howard Law Journal 6 (1960): 169–187. 85. Association for the Preservation for the Freedom of Choice, Inc. v. Shapiro, 214 N.Y.S.2d 388 (1961). 86. See Zunz, Philanthropy, chap. 7. 87. Clemens, “In the Shadow of the New Deal,” 107–108. 88. See, in general, Jennifer Mittelstadt, From Welfare to Workfare: The Unintended Consequences of Liberal Reform, 1945–1965 (Chapel Hill: University of North Carolina Press, 2005); Alice O’Connor, Poverty Knowledge: Social Science, Social Policy, and the Poor in Twentieth-Century U.S. History (Princeton, NJ: Princeton University Press, 2001); Zunz, Philanthropy, 214–220. 89. On Gardner and others, see Hall, Inventing the Nonprofit Sector, 102. 90. John H. Filer, Chairman, Giving in America: Toward a Stronger Voluntary Sector, Report of the Commission on Private Philanthropy and Public Needs

Notes to Pages 233–236

(Commission on Private Philanthropy and Public Needs: 1975), 35. Zunz, Philanthropy, 234 91. Steven Rathgeb Smith and Deborah A. Stone, “The Unexpected Consequences of Privatization,” in Remaking the Welfare State, ed. Michael K. Brown (Philadelphia: Temple University Press, 1988), 237. 92. See Alice O. O’Connor, “The Politics of Rich and Rich: Postwar Investigations of Foundations and the Rise of the Philanthropic Right,” in American Capitalism: Social Thought and Political Economy in the Twentieth Century, ed. Nelson Lichtenstein (Philadelphia: University of Pennsylvania Press, 2006), 228–248. 93. Tax-Exempt Foundations: Hearings on H. Res. 561, Before the Select Committee to Investigate Tax-Exempt Foundations and Comparable Organizations, 82d Cong. 344 (1952), 212–222. 94. Another Congressional hearing took place in 1954, and a Treasury investigation occurred in 1965. The 1969 legislation made foundations subject to annual disbursements of their endowments (eventually 5 percent), and greater administrative oversight, to ban them from politics, which was funded by an excise tax. Zunz, Philanthropy, 230. 95. Henry Ford II, “Henry Ford II: Text of Letter to Alexander Heard,” Foundation News (March / April 1977). 96. See Hall, Invention of the Nonprofit Sector; Zunz, Philanthropy, chap. 8; Emily Barman, “Classificatory Struggles in the Nonprofit Sector: The Formation of the National Taxonomy of Exempt Entities, 1969–1987” Social Science History 37, no. 1 (Spring 2013): 103–141. 97. See Greta R. Krippner, Capitalizing on Crisis: The Political Origins of the Rise of Finance (Cambridge, MA: Harvard University Press, 2012). 98. Levy, “Accounting for Profit and the History of Capital.” 99. Krippner, Capitalizing on Crisis, 27–57. 100. Gabriel Zucman, Teresa Lavendar Fagan, trans., The Hidden Wealth of Nations: The Scourge of Tax Havens (Chicago: University of Chicago Press, 2015). 101. GM: Forty-Eighth Annual Report, Year Ended December 31, 1956, p. 44. 102. Subsidiaries are now listed in Exhibit 21 of corporations’ public 10-K forms filed at the SEC. http://www.sec.gov/Archives/edgar/data/1288776/00011931250 7044494/dex2101.htm. 103. See Timothy Guinnane, Ron Harris, Naomi R. Lamoreaux, and Jean-Laurent Rosenthal, “Putting the Corporation in its Place,” Enterprise & Society 8, no. 3 (September 2007): 687–729. 104. Steven A. Bank, From Sword to Shields: The Transformation of the Corporate Income Tax, 1861 to Present (New York: Oxford University Press, 2010), 258–261; Eric Toder and Julianna Koch, “Fewer Businesses Are Orga nized as Taxable Corporations,” Tax Notes (August 6, 2007): 491.

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Notes to Pages 236–239

105. “Mitt Romney Says ‘Corporations are People,’ ” Washington Post, August 11, 2011. 106. On the rise of “porous institutions,” see Robert Wuthnow, Loose Connections: Joining Together in America’s Fractured Communities (Cambridge, MA: Harvard University Press, 1998), chap. 4. 107. See Lester M. Salamon, “The New Governance and the Tools of Public Action: An Introduction,” in The Tools of Government: A Guide to the New Governance, ed. Salamon (New York: Oxford University Press, 2002), 1–47; Michael Smith and Michael Lipsky, Nonprofits for Hire: The Welfare State in the Age of Contracting (Cambridge, MA: Harvard University Press, 1993). 108. Salamon, “The Resilient Sector,” in State of Nonprofit America, 26. 109. See Peter Frumkin and Alice Andre-Clark, “When Missions, Markets, and Politics Collide: Values and Strategy in the Nonprofit Human Ser vices,” Non-Profit and Voluntary Sector Quarterly 29, no. 1 (Supplement 2000): 141–163. 110. Frumkin, On Being Nonprofit, 78–79. William Ryan, “The New Landscape for Nonprofits,” Harvard Business Review 77, no. 1 (January–February 1999): 127–139. 111. See Michael McQuarrie, “Nonprofits and the Reconstruction of Urban Governance: Housing Production and Community Development in Cleveland, 1975–2005,” in Clemens and Guthrie, Politics and Partnerships, 237–268. Neal R. Peirce and Carol F. Steinbach, Corrective Capitalism: The Rise of America’s Community Development Corporations (New York: Ford Foundation, 1987). 112. Chiara Cordelli, “The Institutional Division of Labor and the Egalitarian Obligations of Nonprofits,” Journal of Political Philosophy 20, no. 2 (June 2012): 131–155; Jody Freeman and Martha Minow, Government by Contract: Outsourcing and American Democracy (Cambridge, MA: Harvard University Press, 2009). 113. Salamon, State of Nonprofit America, 11. 114. See, for instance, Stefan Toepler, “Caveat Venditor? Museum Merchandising, Nonprofit Commercialization, and the Case of the Metropolitan Museum in New York,” Voluntas: International Journal of Voluntary and Nonprofit Organizations 17, no. 2 (June 2006): 99–113. 115. Skocpol, Membership to Management. 116. Paul Arnsberger, Melissa Ludlum, Margaret Riley, and Mark Stanton, “A History of the Tax-Exempt Sector: An SOI Perspective,” Statistics of Income Bulletin, Winter 2008, 119, 121. 117. Gilbert M. Gaul and Neil A. Borowski, “The Profitable World of Nonprofits,” in Free Ride: The Tax-Exempt Economy, eds. Gaul and Borowski (New York: Andrews McMeel Publishing, 1993), chap. 1. 118. See David M. Cutler and Jill R. Horowitz, “Converting Hospitals from Not-for-Profit to For-Profit Status: Why and What Effects?” in The Changing Hospital Industry, ed. Cutler (Chicago: University of Chicago Press, 2000), 33.

Notes to Pages 239–243

119. Salamon, State of Nonprofit America. 120. Robert A. Katz and Antony Page, “The Role of Social Enterprise,” Vermont Law Review 35 (December 2010): 59–103. 121. See Eugene F. Fama and Michael C. Jensen, “Separation of Ownership and Control,” Journal of Law and Economics 26, no. 2 (June 1983): 301–325; Jensen, “Eclipse of the Public Corporation,” Harvard Business Review (September–October 1989); Henry Hansmann and Reinier Kraakman, “The End of History for Corporate Law,” in Convergence and Persistence in Corporate Governance, eds. Jefferey Gordon and Mark Roe (Cambridge: Cambridge University Press, 2004), 33–68. 122. Henry Hansmann, “The Role of Nonprofit Enterprise,” Yale Law Journal 89, no. 5 (April 1980): 835–901. See also Susan Rose-Ackerman, ed., The Economics of Nonprofit Institutions (New York: Oxford University Press, 1986). 123. The U.S. Supreme Court equated money and speech in Buckley v. Valeo, 424 U.S. 1 (1976). In First National Bank of Boston v. Bellotti, 435 U.S. 765 (1978), Powell said “type of speech indispensible to decision-making in a democracy, and this is no less true because the speech comes from a corporation rather than an individual.” 124. Regan v. Taxation Without Representation, 461 U.S. 540 (1983). 125. Roberts v. Jaycees, 468 U.S. 609 (1984). 126. Boy Scouts of America v. Dale, 530 U.S. 640 (2000). 127. McAulay and Brewster, “In re Application of the Association for the Preservation of Freedom of Choice.” 128. All the more odd since, in his Bellotti dissent, Rehnquist made clear his awareness of corporate privileges, warning that “the blessings of potentially perpetual life and limited liability . . . , so beneficial in the economic sphere, pose special dangers in the political sphere.” Bellotti, 435 U.S. at 765, 825 (White, Brennan, Marshall, & Rehnquist, dissenting). Perhaps the association between corporations and for-profit corporations (not nonprofits like the Boy Scouts) might explain this. 129. Silber, Corporate Form of Freedom, 169. 130. Skocpol, Membership to Management. 131. Bodiless heads, from Margaret Weir and Marshall Ganz, “Reconnecting People and Politics,” in The New Majority: Toward a Popular Progressive Politics, eds. Stanley B. Greenberg and Theda Skocpol (New Haven, CT: Yale University Press, 1997), 160. 132. Peter H. Lindert and Jeff rey G. Williamson, Unequal Gains: American Growth and Inequality since 1700 (Princeton, NJ: Princeton University Press, 2016). 133. The Court has made this argument at least ever since Bellotti. 134. Citizens United v. Federal Election Commission, 558 U.S. 310 (2010). 135. Despite the articulation of an “expressive” right in nonprofit cases like Roberts v. Jaycees, the Court continued to distinguish between for-profits and nonprofits according to their purposes. See Federal Election Committee v.

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Notes to Pages 243–249

Massachusetts Citizens for Life, Inc., 479 U.S. 238 (1986), and Austin v. Michigan State Chamber of Commerce, 494 U.S. 652 (1990). 136. Burwell v. Hobby Lobby Stores, Inc., 573 U.S. (2014).

7. The Supreme Court’s View of Corporate Rights The authors wish to thank Ruth Bloch, David Ciepley, Daniel Crane, Eric Hilt, Jessica Hennessey, Naomi Lamoreaux, Jonathan Levy, Nelson Lichtenstein, Gregory Mark, Ajay Mehrotra, David Moss, Bill Novak, Sabeel Rahman, Ciara Torres-Spelliscy, John Wallis, and Adam Winkler for helpful feedback and comments on earlier drafts. They also thank the Tobin Project and their stalwart research assistants, Achumboro Ataande, Jaega Haralambus, Rongxuan Li, Caitlin Snelson, Scott Edwards, and Kline Moore. All errors remain the responsibility of the authors. Parts of this chapter rely heavily on their prior article, Margaret M. Blair and Elizabeth Pollman, “The Derivative Nature of Corporate Constitutional Rights,” William & Mary Law Review 56 (2015): 1673–1743. 1. Citizens United v. Federal Election Commission, 558 U.S. 310 (2010). 2. Burwell v. Hobby Lobby Stores, Inc., 134 S. Ct. 2751 (2014). 3. Citizens United involved a constitutional claim, while Hobby Lobby involved interpretation of a statute. These cases are discussed in more detail in the third section of this chapter. 4. Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (1776; Project Gutenberg, 2009), http://www.gutenberg.org/dirs/3/3/0/3300 /3300-8.txt. See also Gary M. Anderson and Robert D. Tollison, “Adam Smith’s Analysis of Joint-Stock Companies,” Journal of Political Economy 90, no. 6 (1982): 1237–1256. 5. Quoted by John Poynder, Literary Extracts from English and Other Works; Collected During Half a Century: Together with Some Original Matter, vol. 1 (London: John Hatchard & Son, 1844), 268. 6. Paul Kens observes that: “The standard interpretation today is that the Santa Clara case established a doctrine of corporate personhood that eventually gave corporations most of the rights held by natural persons.” The Supreme Court under Morrison R. Waite, 1874–1888 (Columbia: University of South Carolina, 2010), 124. We discuss the Santa Clara case in the first section of this chapter. 7. Margaret M. Blair, “Corporate Personhood and the Corporate Persona,” Illinois Law Review 2013, no. 3 (2013): 785–820. 8. Bank of the United States v. Deveaux, 9 U.S. 61 (1809). 9. Ibid., 62, 74. Two other cases were argued and considered together with Deveaux, both involving insurance companies: Hope Insurance Co. v. Boardman, 9 U.S. 57 (1809), and Maryland Insurance Co. v. Woods, 9 U.S. 57 (1809). 10. Deveaux, 9 U.S. at 73, 83.

Notes to Pages 249–252

11. Id. at 91. 12. Id. at 86. 13. Id. at 65. 14. Id. at 87. 15. Id. at 88. 16. Louisville, Cincinnati and Charleston Railroad Company v. Letson, 43 U.S. 497, 554–556 (1844). 17. Marshall v. Baltimore & Ohio Railroad, 57 U.S. 314, 325–329 (1854). 18. The approach of Marshall v. Baltimore & Ohio R.R. prevailed until Congress codified diversity jurisdiction in 28 U.S.C. § 1332, Pub. L. No. 285–554, 72 Stat. 415 (1958). See Dudley O. McGovney, “A Supreme Court Fiction,” Harvard Law Review 56 (1943): 853–898; James W. Moore and Donald T. Weckstein, “Corporations and Diversity of Citizenship Jurisdiction: A Supreme Court Fiction Revisited,” Harvard Law Review 77 (1964): 1426–1450; Hertz Corp. v. Friend, 559 U.S. 77 (2010). 19. Trustees of Dartmouth College v. Woodward, 17 U.S. 518, 626–627 (1819). 20. Id. at 628. 21. Id. at 632–634. 22. Id. at 642. 23. Id. at 675 (Story, J., concurring). 24. Charles River Bridge v. Warren Bridge, 36 U.S. 420 (1837). See also Benjamin Fletcher Wright Jr., The Contract Clause of the Constitution (Cambridge, MA: Harvard University Press, 1938), 62–66, 161–164. Paul Kens also discusses Jacksonian sentiment against corporations and special privileges on the grounds that they concentrated power and resulted in economic inequality which threatened individual liberty. Justice Stephen Field: Shaping Liberty from the Gold Rush to the Gilded Age (Lawrence: University Press of Kansas, 1997). 25. Charles River Bridge, 36 U.S. at 536, 546–548. 26. Id. at 547; Wright, The Contract Clause. See also Charles W. Smith Jr., Roger B. Taney: Jacksonian Jurist (Chapel Hill: University of North Carolina Press, 1936; repr., New York: Da Capo Press, 1973), 110–120. 27. Bank of Augusta v. Earle, 38 U.S. 519 (1839). The case was joined by associated cases involving the Bank of the United States and the New Orleans and Carrollton Railroad Company. 28. Id. at 586–587. 29. Dodge v. Woolsey, 59 U.S. 331 (1856). 30. Id. at 331 (Campbell, J., dissenting). 31. See, e.g., Northwestern Fertilizing Co. v. Hyde Park, 97 U.S. 659 (1878); Ruggles v. Illinois, 108 U.S. 526 (1883); Stone v. Farmers’ Loan & Trust Co., 116 U.S. 307 (1886); Stone v. Ill. Cent. R.R., 116 U.S. 347 (1886); Stone v. New Orleans & N.E.R.R., 116 U.S. 352 (1886). Herbert Hovenkamp discusses the decline of the contract clause doctrine in the late nineteenth century. “The Classical Corporation in American Legal Thought,” Georgetown Law Journal

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Notes to Pages 252–255

76, no. 4 (1988): 1625–1627. See also Wright, The Contract Clause; Stephen A. Siegel, “Understanding the Nineteenth-Century Contract Clause: The Role of the Property-Privilege Distinction and ‘Takings’ Clause Jurisprudence,” Southern California Law Review 60 (1986): 36–54, 70–72. 32. See Morton J. Horwitz, The Transformation of American Law, vol. 2, 1870– 1960 (New York: Oxford University Press, 1992); Hovenkamp, “The Classical Corporation,” 1630–1632. 33. Paul v. Virginia, 75 U.S. 168 (1868). 34. U.S. Const., amend. XIV, § 1. 35. Slaughter-House Cases, 83 U.S. 36, 58–65 (1873). 36. Id. at 71–74, 83–110. 37. Munn v. Illinois, 94 U.S. 113 (1877); see also William J. Novak, “The Public Utility Idea and the Origins of Modern Business Regulation,” in this volume (Chapter 4). 38. See Kens, The Supreme Court, 8–9, 62–87. 39. Santa Clara v. S. Pac. R.R., 18 F. 385 (C.C.D. Cal. 1883); San Mateo v. S. Pac. R.R., 13 F. 722 (C.C.D. Cal. 1882). 40. Santa Clara, 18 F. at 387–393, 436. 41. Kens, Justice Stephen Field, 237–240; Carl Brent Swisher, Stephen J. Field: Craftsman of the Law (Washington, DC: The Brookings Institution, 1930), 247–263. 42. Santa Clara, 18 F. at 402. 43. Id. at 402–404 (punctuation altered for clarity). 44. Kens, Justice Stephen Field, 3. 45. Ibid., 3, 97, 239, 243–244, 266–267. 46. Santa Clara, 18 F. at 404–405; San Mateo, 13 F. at 743–744. 47. San Mateo, 13 F. at 743–744; Santa Clara, 18 F. at 404–405. 48. San Mateo, 13 F. at 744 (punctuation and capitalization altered for clarity). 49. Id. at 746–748; see also Santa Clara, 18 F. at 402, 408–409. 50. Santa Clara v. S. Pac. R.R., 118 U.S. 394, 396 (1886) (headnotes). 51. Id. 52. The Santa Clara opinion and its headnotes have generated skeptical inquiry and debate over the years. A “conspiracy theory” that arose regarding the draft ing of the Fourteenth Amendment and its use by corporations has been discounted. See John J. Flynn, “The Jurisprudence of Corporate Personhood: The Misuse of a Legal Concept,” in Corporations and Society: Power and Responsibility, eds. Warren J. Samuels and Arthur S. Miller (New York: Greenwood Press, 1987), 138. This debate and debunked conspiracy theory do not merit further elaboration here because, as we explain, shortly after Santa Clara, the Court recognized in other published opinions that corporations are included within the meaning of “person” in the Fourteenth Amendment. 53. Pembina Consolidated Silver Mining & Milling Co. v. Pennsylvania, 125 U.S. 181, 189 (1888).

Notes to Pages 255–258

54. Minneapolis & St. Louis Railroad Co. v. Beckwith, 129 U.S. 26, 28 (1889) (citing Santa Clara, 118 U.S. at 396, and Pembina Mining, 125 U.S. at 189); see also Home Ins. Co. of N.Y. v. New York, 134 U.S. 594, 606 (1890); Smyth v. Ames, 169 U.S. 522, 526 (1898); Lake Shore & M.S. Ry. Co. v. Smith, 173 U.S. 684, 690 (1899). The Court also extended Fift h Amendment due process protection to corporate property in a case in which an act of the secretary of the interior would have revoked and annulled a grant of public lands to a railroad corporation. Noble v. Union River Logging Railroad Co., 147 U.S. 165, 176 (1892). 55. Kens, The Supreme Court, 3. 56. For example, Horwitz, The Transformation of American Law, 75; Reuven S. Avi-Yonah, “Citizens United and the Corporate Form,” Wisconsin Law Review 2010, no. 4 (2010): 1001–1017. 57. Gregory A. Mark noted that “[t]he natural way to hold property was as an individual human being; the artificial way was as a corporation.” “The Personification of the Business Corporation in American Law,” University of Chicago Law Review 54, no. 4 (1987): 1449–1450, n. 23. 58. Blair and Pollman, The Derivative Nature. See also Ruth H. Bloch and Naomi R. Lamoreaux, “Corporations and the Fourteenth Amendment,” in this volume (Chapter 8). 59. See generally, Ron Harris, Industrializing English Law: Entrepreneurship and Business Organization, 1720–1844 (Cambridge: Cambridge University Press, 2000); see also Harold J. Berman, Law and Revolution: The Formation of the Western Legal Tradition (Cambridge, MA: Harvard University Press, 1983). 60. See, e.g., Norman F. Cantor, The Medieval Reader (New York: HarperCollins Publishers, Inc., 1994), 278. 61. See, e.g., K. N. Chaudhuri, The Emergence of International Business 1200–1800, vol. 4, The English East India Company (London: Frank Cass & Co. Ltd, 1965). 62. Dartmouth College, 17 U.S. at 626. 63. Joseph Stancliffe Davis, Essays in the Earlier History of American Corporations, vol. 2. (Cambridge, MA: Harvard University Press, 1917), 22–28. Eric Hilt, “Early American Corporations and the State,” in this volume (Chapter 1). 64. Davis, Essays in the Earlier History, 22–28. 65. Ibid., 24. Richard Sylla and Robert E. Wright count 247 charters issued from 1790 to 1799. “Corporation Formation in the Antebellum United States in Comparative Context,” Business History 55, no. 4 (2013): 651. 66. Hilt, “Early American Corporations.” 67. Shaw Livermore, Early American Land Companies: Their Influence on Corporate Development (New York: The Commonwealth Fund, 1939). 68. Livermore notes that “when faced with evidence of the existence of corporate mechanisms possessing every thing but charters, [courts] persisted in denying that they could be anything but partnerships.” Ibid., 5–6. 69. Livermore provides detailed descriptions of more than 25 such companies. Early American Land Companies.

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Notes to Pages 258–260

70. Unincorporated business firms with corporate characteristics, such as the so-called Massachusetts business trust, are still used in some contexts, primarily in circumstances where there might be tax advantages for the use of an unincorporated form. Steven B. Kray, “Asset Protection Strategies: Corporate Form, Organization, and Business Entities,” Stephens and Kray, accessed August 26, 2016, http://www.sklaw.net/asset-protection-strategies/. 71. Sylla and Wright, “Corporation Formation in the Antebellum United States,” 652, 654, table 1. See also Richard Sylla and Robert E. Wright, “Corporation Formation in the United States, 1790–1860: Law and Politics in Comparative Contexts.” Paper presented at the National Bureau of Economic Research, Inc. Summer Institute 2012: Development of the American Economy Workshop, Cambridge, MA, July 2012. 72. Henry Hansmann and Mariana Pargendler, “The Evolution of Shareholder Voting Rights: Separation of Ownership and Consumption,” Yale Law Journal 123 (2014): 959–962, 966–967. 73. Eric Hilt, “Corporate Governance and the Development of Manufacturing Enterprises in Nineteenth-Century Massachusetts,” in Enterprising America: Businesses, Banks, and Credit Markets in Historical Perspective, eds. William J. Collins and Robert A. Margo (Chicago: University of Chicago Press, 2015). 74. Alfred D. Chandler Jr., The Visible Hand: The Managerial Revolution in American Business (Cambridge, MA: Harvard University Press, 1977), 3. 75. Ibid., 50. 76. Hilt, “Corporate Governance and the Development.” 77. Ibid. 78. This can be discerned in George Heberton Evans Jr.’s book reporting the number of charters granted by year and industry in Maryland, New Jersey, New York, and Ohio. Business Incorporations in the United States, 1800–1943 (New York: National Bureau of Economic Research, Inc., 1948), 14–19, tables 7, 8, 9, and 10. Sylla and Wright also comment on the boom in bank and railroad construction in the 1830s. “Corporation Formation in the Antebellum United States,” 653. 79. Hilt, “Early American Corporations.” 80. Sylla and Wright, “Corporation Formation in the United States,” 28, table 4. 81. Joseph H. Sommer, “The Birth of the American Business Corporation: Of Banks, Corporate Governance, and Social Responsibility,” Buffalo Law Review 49 (2001): 1019–1035. 82. David J. Cowen, “The First Bank of the United States and the Securities Market Crash of 1792,” Journal of Economic History 60, no. 4 (2000): 1042. 83. Alfred S. Konefsky provides an extended discussion of the social milieu of the parties on each side of the Charles River Bridge case. “Simon Greenleaf, Boston Elites, and the Social Meaning and Construction of the Charles River Bridge Case,” in Transformations in American Legal History: Essays in Honor of Morton J. Horwitz, vol. 2, eds. Daniel W. Hamilton and Alfred L. Brophy (Cambridge, MA: Harvard University Press, 2010).

Notes to Pages 260–262

84. William J. Carney, “Limited Liability,” in Encyclopedia of Law and Economics, eds. Boudewijn Bouckaert and Gerrit De Geest (Cheltenham, UK: Edward Elger, 2000), 663–664. 85. R. Kent Newmyer, “Justice Joseph Story’s Doctrine of ‘Public and Private Corporations’ and the Rise of the American Business Corporation,” DePaul Law Review 25 (1976). 86. Sylla and Wright, “Corporation Formation in the United States,” 5. 87. Sylla and Wright, “Corporation Formation in the Antebellum United States,” 654, table 1. 88. Ibid, 653. Chandler estimated that more than 21,000 miles of railroad track were built in the United States in the 1850s, compared with only about 6,000 miles of track by the end of the 1840s. Visible Hand, 83. 89. Sylla and Wright, “Corporation Formation in the Antebellum United States,” 658. 90. Chandler, Visible Hand, 82. 91. Ibid., 82–83. 92. Jac C. Heckelman and John Joseph Wallis note that public investment accounted for 25 percent to 30 percent of fi nancing for all railroad investment prior to the Civil War, and about 15 percent of railroad investment from 1861 to 1873. “Railroads and Property Taxes,” Explorations in Economic History 34, (1997): 79–80. See also Car ter Goodrich, Government Promotion of Canals and Railroads, 1800–1890 (New York: Columbia University Press, 1960). 93. Charles W. McCurdy, “Justice Field and the Jurisprudence of GovernmentBusiness Relations: Some Parameters of Laissez-Faire Constitutionalism, 1863–1897,” Journal of American History 61, no. 4 (March 1975): 983. 94. Olcott v. Supervisors of Fond Du Lac County, 83 U.S. 678 (1872). 95. McCurdy, Justice Field, 984 (alterations in original). 96. Hansmann and Pargendler, “Evolution of Shareholder Voting Rights,” 958–973. 97. John Joseph Wallis and Barry R. Weingast, “Dysfunctional or Optimal Institutions? State Debt Limitations, the Structure of State and Local Governments, and the Finance of American Infrastructures,” in Fiscal Challenges: An Interdisciplinary Approach to Budget Policy, eds. Elizabeth Garrett, Elizabeth A. Graddy, and Howell E. Jackson (Cambridge: Cambridge University Press, 2008), 333. 98. Sylla and Wright, “Corporation Formations in the Antebellum United States,” 658, table 4. The counts by Sylla and Wright are based on special charters issued by state legislatures. A substantial number of these corporations were no longer in existence by 1860. 99. Naomi R. Lamoreaux and Jean-Laurent Rosenthal, “Organizational Choice and Economic Development: a Comparison of France and the United States during the Mid-19th Century” (unpublished manuscript, January 2005). 100. George Heberton Evans Jr., Business Incorporations in the United States, 1800–1943 (New York: National Bureau of Economic Research, 1948), 31.

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Notes to Pages 262–265

101. In some states these took the form of general incorporation statutes, while in others, state constitutions were changed to require general incorporation by registration, rather than by special statute. 102. Hilt, “Early American Corporations.” 103. Hilt, “Corporate Governance and the Development,” 82–83, table 2.1. 104. Ibid. 105. Ibid., 83–85, figure 2.2, table 2.2. 106. Ibid., 90–92, table 2.4. 107. Ibid. 108. Ibid. 109. Chandler, Visible Hand, 81–121. 110. Ibid., 122–133. 111. Ibid., 130–131. 112. Ibid., 133–143. 113. Ibid. 114. Ibid., 141–142. 115. Ibid., 134, 160–161, 167. See also Richard White, Railroaded: The Transcontinentals and the Making of Modern America (New York: W. W. Norton & Co., 2011). 116. Chandler, Visible Hand, 321. 117. Ibid., 321–322. 118. Previously published as “The Story of a Great Monopoly,” Atlantic Monthly, March 1881. Republished in Henry Demarest Lloyd, Lords of Industry (New York: G. P. Putnam’s Sons, 1910), 18. See also “The Modern Buccaneers,” HarpWeek, last accessed August 27, 2016, http://www.harpweek.com/09Cartoon /BrowseByDateCartoon.asp?Month=February&Date =25 (crediting Lloyd with the first use of this metaphor). 119. Chandler, Visible Hand, 323. 120. Ibid. See also Ralph W. Hidy and Muriel E. Hidy, Pioneering in Big Business, 1882–1911: History of Standard Oil Company (New York: Harper and Brothers, 1955), 46–48; Louis Galambos, The Public Image of Big Business in America, 1880–1940: A Quantitative Study in Social Change (Baltimore: Johns Hopkins University Press, 1975), 7. 121. Morton J. Horwitz, “Santa Clara Revisited: The Development of Corporate Theory,” West Virginia Law Review 88 (1986): 210; see also Galambos, Public Image, 7. 122. Chandler, Visible Hand, 438–439. See also Alfred D. Chandler and Stephen Salsbury, Pierre S. Du Pont and the Making of the Modern Corporation (New York: Harper & Row, 1971). 123. Galambos, Public Image. 124. Horwitz, “Santa Clara Revisited,” 209 (citing Navin and Sears, “The Rise of a Market for Industrial Securities, 1887–1902,” Business Historical Review 29 (1955): 105, 106). 125. Evans lists all corporations formed near the end of the nineteenth century with more than $20 million in capitalization that were formed in New Jersey,

Notes to Pages 265–267

the “chief home of the large corporation in this period.” Business Incorporations, 47–48. From 1846 through 1898, only 25 companies this large or larger were chartered in New Jersey, only 5 of which were chartered before 1890, and 4 of these were railroads, transportation, or public works firms. Then, in 1899, 50 such large corporations were chartered in New Jersey, a large share of which were manufacturing or distribution companies. Ibid. 126. Leslie Hannah, “The ‘Divorce’ of Ownership from Control from 1900 Onwards: Re-calibrating Imagined Global Trends,” Business History 49, no. 4 (2007): 404. 127. Examples include Singer sewing machines and Ivory soap in the 1860s and 1870s, and packaged food products such as Quaker Oats and Heinz Ketchup in the 1880s and 1890s. Marci L. Riskin, The Train Stops Here: New Mexico’s Railway Legacy (Albuquerque: University of New Mexico Press, 2005), 37; Suzanne Berger, Making in America: From Innovation to Market (Cambridge, MA: MIT Press, 2013), 44. Margaret M. Blair discusses how the use of the corporate form of organization, with separate entity status, facilitated the building of brand value by providing an entity to which a brand image could be tied in the public’s mind that was not dependent on the involvement of specific human persons. “The Four Functions of Corporate Personhood,” in Handbook of Economic Organization, ed. Anna Grandori (Cheltenham, UK: Edward Elgar, 2013), 449–450. 128. Robin Landa, Designing Brand Experience: Creating Power ful Integrated Brand Solutions (New York: Thomson Delmar Learning, 2006), xxii–xxiii. 129. Maury Klein reports that Huntington heirs owned 677,700 shares in 1900, estimated by Hannah to be about a third of the shares of Southern Pacific. Union Pacific, vol. 2: The Rebirth: 1894–1969 (New York: Doubleday, 1939); Hannah, “The Divorce,” 410. 130. Ted Nace, Gangs of America: The Rise of Corporate Power and the Disabling of Democracy (San Francisco: Berrett-Koehler Publishers, 2005), 89. 131. Ibid., 47–49; see also Naomi R. Lamoreaux, The Great Merger Movement in American Business, 1895–1904 (New York: Cambridge University Press, 1985); Horwitz, “Santa Clara Revisited,” 198–199. 132. Lamoreaux, Merger Movement; David Bunting, The Rise of Large American Corporations, 1889–1919 (New York: Garland Publishing, Inc., 1987). 133. Chandler, Visible Hand, 455. 134. Lamoreaux, Merger Movement; Chandler, Visible Hand, 320–339. 135. Lamoreaux, Merger Movement, 12. 136. Ibid., 14. 137. Sherman Antitrust Act, 15 U.S.C. §§ 1–7 (2006). Enforcement was weak during the first decade after the Sherman Act, but business leaders were on notice that activities in restraint of trade were illegal. Harland N. Prechel, Big Business and the State: Historical Transitions and Corporate Transformation, 1880s–1990s (Albany: State University of New York Press, 2000), 61–63. 138. Lamoreaux, Merger Movement, 2.

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Notes to Pages 267–270

139. Lamoreaux, Merger Movement, 1. 140. Horwitz, “Santa Clara Revisited,” 201–203; see also Prechel, Big Business, 32–41; Naomi R. Lamoreaux, “Partnerships, Corporations, and the Limits on Contractual Freedom in U.S. History: An Essay in Economics, Law and Culture,” in Constructing Corporate America: History, Politics, Culture, eds. Kenneth Lipartito and David B. Sicilia (Oxford: Oxford University Press, 2004), 48. 141. Horwitz, “Santa Clara Revisited,” 183. 142. Chandler, Visible Hand, 286. 143. Horwitz, “Santa Clara Revisited,” 210. 144. Chandler, Visible Hand, 288–289. 145. Chandler, Visible Hand, 224–235, 290; Galambos, Public Image. 146. Landa, Designing Brand Experience, xxii–xxiii, xxvi. James N. Gamble of the future Procter and Gamble Corporation, originally named his white soap formula P&G White Soap, but recognizing the value of branding changed the name to Ivory Soap, which bore no reference to the individual owners of the corporation. 147. Bunting, Rise, 13. Ralph L. Nelson as cited by Bunting (Rise, 36) found that between 1895 and 1919, 4,628 firms disappeared by being merged into corporations capitalized at more than $1 million. Merger Movements in American Industry: 1895–1956 (Princeton, NJ: Princeton University Press, 1959). 148. Bunting, Rise, 48. 149. Bunting’s book provides a list of the 100 largest industrial corporations in the United States in 1905. Rise, 165–166, table 17. Current names and status of the corporations mentioned are all based on Wikipedia, The Free Encyclopedia entries for each corporation. s.v. “Standard Oil,” accessed August 28, 2016, https://en.wikipedia .org /wiki /Standard _Oil; s.v. “United States Rubber Company,” accessed August 28, 2016, https://en.wikipedia .org /wiki / United _ States _ Rubber_Company; s.v. “JBS USA,” accessed August 28, 2016, https://en.wikipedia.org/wiki/JBS _USA; s.v. “Armour and Company,” accessed August 28, 2016, https://en.wikipedia.org/wiki/Armour_and _Company; s.v. “Nabisco,” accessed August 28, 2016, https://en.wikipedia.org /wiki/Nabisco; s.v. “DuPont,” accessed August 28, 2016, https://en.wikipedia.org /wiki /DuPont; s.v. “Westinghouse Electric Corporation,” accessed August 28, 2016, https://en.wikipedia.org /wiki/ Westinghouse _ Electric _Corporation; s.v. “NL Industries,” accessed August 28, 2016, https://en.wikipedia.org /wiki /NL _ Industries; s.v. “Kodak,” accessed August 28, 2016, https://en.wikipedia .org /wiki/Kodak; s.v. “Newport News Shipbuilding,” accessed August 28, 2016, https://en.wikipedia.org /wiki/Newport _ News _ Shipbuilding. 150. Bunting, Rise, 4. 151. Thomas W. Lawson, Frenzied Finance: The Crime of Amalgamated (London: William Heinemann, 1906), vii–ix. 152. Galambos, Public Image.

Notes to Pages 270–275

153. H. T. Warshow, “The Distribution of Corporate Ownership in the United States,” Quarterly Journal of Economics 39, no. 1 (1924): 16. 154. Bureau of Labor Statistics, CPI Inflation Calculator, http://www.bls.gov /data/inflation _calculator.htm. 155. Warshow, “Corporate Ownership,” 20. There are problems with this fi nding because Warshow grouped taxpayers by nominal income, unadjusted for inflation, rather than by income percentile, but without having access to the details behind table 1, it appears that the trend he identifies in the data would probably still be there if the data were properly adjusted. Ibid., 18, table 1. 156. Kenneth D. Allan, Explorations in Classical Sociological Theory: Seeing the Social World (Thousand Oaks, CA: SAGE Publications, Inc., 2013), 171–176; Richard Swedberg, The Max Weber Dictionary: Key Words and Central Concepts, s.v. “Bureaucracy” (Stanford, CA: Stanford University Press, 2005), 18–21. 157. Galambos, Public Image, 4. 158. Ibid. 159. Ibid., 261. 160. Ibid., 15. 161. Ibid., 18. 162. Multiple sources collect data on the number and prevalence of S corporations and nonprofit corporations, for example. Tax Statistics, IRS, last modified July 16, 2016, https://www.irs.gov/uac/tax-stats; National Center for Charitable Statistics, http://nccs.urban.org/; and “The U.S. Has More Individually Owned Businesses than Corporations,” Scott A. Hodge, Tax Foundation, last modified January 13, 2014, http://taxfoundation.org/blog/us-has-more -individually-owned-businesses-corporations. 163. Kathleen F. Brickey, “Corporate Criminal Accountability: A Brief History and an Observation,” Washington University Law Review 60 (1982): 396–402, 405–407. 164. Ibid., 408–415. 165. N.Y. Central & Hudson River R.R. Co. v. United States, 212 U.S. 481 (1909). 166. Id. at 495–496. 167. Hale v. Henkel, 201 U.S. 43 (1906). 168. Id. at 44–59; Herbert Knox Smith, U.S. Bureau of Corporations, Report of the Commissioner of Corporations on the Tobacco Industry: Capitalization, Investment, and Earnings (Washington, DC: U.S. Government Printing Office, 1911), 260–261. 169. Hale, 201 U.S. at 76. 170. Id. 171. Id. at 69. 172. For example, Fong Foo v. United States, 369 U.S. 141 (1962) (Fift h Amendment double jeopardy); United States v. Martin Linen Supply Co., 430 U.S. 564, 575–576 (1977) (same); Ross v. Bernhard, 396 U.S. 531, 532–534 (1970)

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Notes to Pages 275–277

(Seventh Amendment right to jury trial); S. Union Co. v. United States, 132 S. Ct. 2344 (2012) (Sixth Amendment Apprendi right to jury determination of any fact, other than a prior conviction, that increases a maximum criminal fine). 173. See W. Coast Hotel Co. v. Parrish, 300 U.S. 379, 400 (1937); see also Erwin Chemerinsky, Constitutional Law: Principles & Policies, 5th ed. (New York: Wolters Kluwer, 2015), 639–657. 174. Connecticut General Co. v. Johnson, 303 U.S. 77, 83–90 (1938) (Black, J., dissenting); Wheeling Steel Corp. v. Glander, 337 U.S. 562, 577–580 (1949) (Douglas, J., dissenting). 175. Multiple sources provide background history on the Tillman Act: United States v. UAW-CIO, 352 U.S. 567, 570 (1957); Adam Winkler, “Other People’s Money: Corporations, Agency Costs, and Campaign Finance Law,” Georgetown Law Journal 92 (2004): 880–881, 918–927. 176. UAW-CIO, 352 U.S. at 571 (quoting Federal Election Campaign Act of 1971: Hearings Before House Committee on Elections, 59th Cong. 12 (1906); Elihu Root, Addresses on Government and Citizenship, eds. Robert Bacon and James Brown Scott (Cambridge, MA: Harvard University Press, 1916), 143). 177. Winkler, “Other People’s Money,” 885–893. 178. See, e.g., UAW-CIO, 352 U.S. at 570, 576–577. 179. See Winkler, “Other People’s Money,” 873; Adam Winkler, “Citizens United, Personhood, and the Corporation in Politics,” in this volume (Chapter 10). 180. UAW-CIO, 352 U.S. at 572 (quoting 40 Cong. Rec. 96 (1905)). 181. Winkler, “Other People’s Money,” 927–937. 182. Mark Tushnet, “Corporations and Free Speech,” in The Politics of Law: A Progressive Critique, ed. David Kairys, 2nd ed. (New York: Pantheon Books, 1982), 253. 183. See, e.g., Valentine v. Chrestensen, 316 U.S. 52, 54 (1942) (“We are equally clear that the Constitution imposes no such [First Amendment] restraint on government as respects purely commercial advertising.”); Tamara R. Piety, Brandishing the First Amendment: Commercial Expression in America (Ann Arbor: University of Michigan Press, 2012), 1, 17. 184. Grosjean v. Am. Press Co., 297 U.S. 233, 243–244 (1936); NAACP v. Alabama, 357 U.S. 449, 460–467 (1958); NAACP v. Button, 371 U.S. 415 (1963). 185. Virginia State Board of Pharmacy v. Virginia Citizens Consumer Council, Inc., 425 U.S. 748, 749–770 (1976). 186. Id. at 765. 187. Id. at 761–770. 188. Id. at 783, 790 (Rehnquist, J., dissenting). 189. Id. at 787. 190. Central Hudson Gas & Elec. Corp. v. Pub. Servs. Comm’s of N.Y., 447 U.S. 557 (1980). 191. Id. at 566; see also Bd. of Trs. of State Univ. of N.Y. v. Fox, 492 U.S. 469, 473–480 (1989); 44 Liquormart, Inc. v. Rhode Island, 517 U.S. 484, 504–508 (1996).

Notes to Pages 278–281

192. Piety, Brandishing, 20–22; Erwin Chemerinsky and Catherine Fisk, “What Is Commercial Speech? The Issue Not Decided in Nike v. Kasky,” Case Western Reserve Law Review 54 (2004): 1143–1145; see also Central Hudson Gas & Elec. Corp., 447 U.S. at 561 (explaining commercial speech as “expression related solely to the economic interests of the speaker and its audience.”). 193. Buckley v. Valeo, 424 U.S. 1 (1976). 194. First National Bank of Boston v. Bellotti, 435 U.S. 765, 794–795 (1978). 195. Some scholars have noted the impor tant role that Justice Powell played during this period. Powell wrote a memorandum to the U.S. Chamber of Commerce titled “Attack on American Free Enterprise System” in 1971, shortly before President Nixon appointed him to the Court. In his memo, Powell urged organized business interests to take “more direct political action” to advance their positions and noted that “especially with an activistminded Supreme Court, the judiciary may be the most impor tant instrument for social, economic and political change.” See Washington and Lee University School of Law, Powell Memorandum: Attack on American Free Enterprise System, http://law2.wlu.edu/powellarchives/page.asp?pageid=1251; Ann Southworth, “Conservative Lawyers and the Contest Over the Meaning of ‘Public Interest Law,’ ” UCLA Law Review 54 (2005): 1241–1242. 196. Bellotti, 435 U.S. at 776. 197. Id. 198. Id. at 778–779. 199. Id. at 780, n.15. 200. Id. at 783. 201. Id. at 784. 202. Id. at 786–795. 203. Id. at 789–791. 204. Id. at 794. 205. See Elizabeth Pollman, “Citizens Not United: The Lack of Stockholder Voluntariness in Corporate Political Speech,” Yale Law Journal Online 119 (2009): 53–56. 206. Bellotti, 435 U.S. at 802–806 (White, J., dissenting). 207. Id. at 805. 208. Id. 209. Id. at 806. 210. Id. at 807. 211. Id. at 822 (Rehnquist, J., dissenting) (quoting Northwestern National Life Ins. Co. v. Riggs, 203 U.S. 243 (1906)); see also Bloch and Lamoreaux, “Corporations and the Fourteenth Amendment,” in this volume (Chapter 8). 212. Bellotti, 435 U.S. at 822–823. 213. Id. at 824–825. 214. Id. at 826. 215. Citizens United v. FEC, 558 U.S. 310 (2010).

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Notes to Pages 281–283

216. Most notably, in Austin v. Michigan Chamber of Commerce the Court adopted reasoning contrary to Bellotti without overruling it—holding that the unique, state-conferred characteristics of the corporate form justified upholding a state campaign fi nance restriction on independent political expenditures. 494 U.S. 652 (1990). Other case law during this period between Bellotti and Citizens United includes: FEC v. Mass. Citizens for Life, Inc., 479 U.S. 238 (1986); McConnell v. FEC, 540 U.S. 93 (2003); and FEC v. Wisconsin Right to Life, Inc., 551 U.S. 449 (2007). 217. Citizens United, 558 U.S. at 318–321. 218. See id. at 327 (explaining that the Court would not carve out an exception to the expenditure ban “for nonprofit corporate political speech funded overwhelmingly by individuals”). 219. Id. at 333–336. 220. Id. at 337–339. 221. Id. at 342, 346. 222. Id. at 362 (quoting Bellotti, 435 U.S. at 794). 223. Id. at 343, 349, 354, 356. 224. This is in contrast with the analysis provided in NAACP v. Button, where the Court made clear that in protecting a “nonprofit membership corporation,” it was protecting the members. 371 U.S. at 419, 428–429. 225. Citizens United, 558 U.S. at 354. 226. Massachusetts Citizens for Life, 479 U.S. at 257–259 (1986); see also Monica Youn, “First Amendment Fault Lines and the Citizens United Decision,” Harvard Law & Policy Review 5 (2011). 227. Citizens United, 558 U.S. at 406–407, 415–416 (Stevens, J., dissenting). 228. Id. at 419. 229. Id. at 420–421. 230. Id. at 423–424 (quoting FEC v. Beaumont, 539 U.S. 146, 161, n.8 (2003)). 231. Id. at 466. 232. Id. at 467. 233. Id. 234. Hobby Lobby Stores, 134 S. Ct. 2751. 235. Id. at 2796 (Ginsburg, J., dissenting).

8. Corporations and the Fourteenth Amendment The authors have benefitted greatly from helpful comments made by Jeremy Atack, Rebecca Chan, John Cisternino, Sally Clarke, Ted Fertik, Louis Galambos, David Gans, Timothy Guinnane, Carol Heim, Paul Kens, David Lamoreaux, Gregory Mark, David Moss, Steve Munch, William Novak, Claire Priest, Norman Silber, Dawn Teele, John Wallis, David Weiman, Mira Wilkins, Adam Winkler, John Witt, Larry Zacharias, two referees for Harvard University Press, participants in the Tobin Project conferences on “Corporations and American Democracy,” and members of the audience at

Notes to Page 286

Binghamton University’s Romano Lecture, the Columbia Business History Forum, and the plenary session on “Corporations and American Society” at the 2013 annual meeting of the Organization of American Historians. They are also grateful to Mathew Andrews for research assistance and to Yale University for financial support. 1. See, for example, Akhil Reed Amar, The Bill of Rights: Creation and Reconstruction (New Haven, CT: Yale University Press, 1998). 2. There has been a recent revival of interest in the old charge by Charles A. Beard and Mary R. Beard (see The Rise of American Civilization [New York: Macmillan, 1927], vol. 2, chap. 18) that the drafters of the Fourteenth Amendment aimed deliberately to extend constitutional protections to corporations. The Beards pointed as evidence to the assertions of Roscoe Conkling, a railroad lawyer who had been a member of the Joint Congressional Committee that drafted the amendment. Conkling argued that the shift from the word “citizen” in the first clause of the amendment’s second sentence to the word “person” in the second and third clauses was a conscious effort to extend the amendment’s protections to the many “individuals and joint stock companies” complaining to Congress about “invidious and discriminating State and local taxes.” As Howard Jay Graham painstakingly demonstrated, however, Conkling’s quotations from the Committee’s journal were selective and misleading, and a careful reading of the full document does not support the former senator’s intimations. See Graham, “The ‘Conspiracy Theory’ of the Fourteenth Amendment,” Yale Law Journal 47 (January 1938): 371–403. (Conkling’s statement is quoted on p. 371.) See also Graham, “The ‘Conspiracy Theory’ of the Fourteenth Amendment: 2,” Yale Law Journal 48 (December 1938): 171–194; and Louis B. Boudin, “Truth and Fiction about the Fourteenth Amendment,” New York University Law Quarterly Review 16 (November 1938): 19–82. See also John Fabian Witt, “Debunking a Progressive Constitutional Myth: or, How Corporations Became People, Too,” http:// balkin.blogspot .com /2012/10/debunking -progressive - constitutional . html, accessed August 22, 2016. The change in the amendment’s wording replicates a similar shift from the word “citizen” in the privileges and immunities clause of Article IV of the original Constitution to “person” in the Bill of Rights, as for example, in the Fift h Amendment’s injunction that “[n]o person shall . . . be deprived of life, liberty, or property, without due process of law.” As William J. Novak has pointed out, the Bill of Rights was much more focused on the language of personhood than on citizenship, which was not a welldeveloped concept at the time. See Novak, “The Legal Transformation of Citizenship in Nineteenth- Century Amer ica,” in The Democratic Experiment: New Directions in American Political History, eds. Meg Jacobs, Novak, and Julian E. Zelizer (Princeton, NJ: Princeton University Press, 2003), 85–119. 3. Dartmouth College v. Woodward, 17 U.S. 518 (1819) at 636.

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4. Examples from the post–Civil War era include Paul v. Virginia, 75 U.S. 168 (1869) at 177; Railroad Co. v. Harris, 79 U.S. 65 (1870) at 81; Railway Co. v. Whitton’s Administrator, 80 U.S. 270 (1872) at 283; Shields v. Ohio, 95 U.S. 319 (1877) at 323; and Fertilizing Co. v. Hyde Park, 97 U.S. 659 (1878) at 666–667. 5. Santa Clara County v. Southern Pacific Railroad, 118 U.S. 394 (1886). This view is especially prevalent in the popu lar literature. See Joel Bakan, The Corporation: The Pathological Pursuit of Profit and Power (New York: Free Press, 2004), 16; and also the movie of the same name, written by Bakan, codirected by Mark Achbar and Jennifer Abbott, and released in 2003 by Big Picture Media Corporation. Many legal scholars know better. See for example, Paul Kens, “Citizens United from a Historical Perspective: Corporate Person, Corporate Rights, and the Principle of Confiscation,” September 2013, available at SSRN, http://papers.ssrn.com/sol3/papers.cfm ?abstract _id=2367017. Nonetheless, the idea can easily be found in the scholarly literature. See, for examples, Martin J. Sklar, The Corporate Reconstruction of American Capital, 1890–1916: The Market, the Law, and Politics (New York: Cambridge University Press, 1988); Morton Keller, “The Making of the Modern Corporation,” Wilson Quarterly 21 (Autumn 1997): 58–69; Walter Dean Burnham, “Constitutional Moments and Punctuated Equilibria: A Political Scientist Confronts Bruce Ackerman’s ‘We the People,’ ” Yale Law Journal 108 (June 1999): 2237–2277; Dalia Tsuk, “Corporations without Labor: The Politics of Progressive Corporate Law,” University of Pennsylvania Law Review 151 (June 2003): 1861–1912; and Brian Balogh, A Government Out of Sight: The Mystery of National Authority in Nineteenth-Century America (New York: Cambridge University Press, 2009). 6. For a similar view of the Supreme Court during this period as protecting corporate property rather than liberty, see David H. Gans and Douglas T. Kendall, “A Capitalist Joker: The Strange Origins, Disturbing Past and Uncertain Future of Corporate Personhood in American Law,” Constitutional Accountability Center, http://theusconstitution.org/think-tank /narrative/capitalist-joker-corporations-corporate-personhood-and -constitution, accessed August 26, 2016. 7. First National Bank of Boston v. Bellotti, 435 U.S. 765 (1978). 8. Id. at 780, n. 15. Justice William H. Rehnquist pointed out the error in his dissenting opinion in the case (see p. 822), but as we show below, the damage was done. 9. Thus, a federal judge wrote in 2005 that earlier Supreme Court holdings indicating that corporations did not have “liberty interests safeguarded by the Fift h and Fourteenth Amendments” were “no longer viable” because the Court had “permitted corporations to assert First Amendment rights . . . and thus implied that corporations can assert liberty interests of some sort.” Coleman & Williams v. Wisconsin Department of Workforce Development, 401 F. Supp. 2d 938 (2005) at 943.

Notes to Pages 288–292

10. Citizens United v. Federal Election Commission, 558 U.S. 310 (2010) at 342. For a good example of this consequence, see Burwell v. Hobby Lobby Stores, 134 S. Ct. 2751 (2014). 11. Santa Clara County, 118 U.S. 394. 12. For the exchange between Waite and Bancroft, see C. Peter Magrath, Morrison R. Waite: The Triumph of Character (New York: Macmillan, 1963), 223–224; and Malcolm J. Harkins III, “The Uneasy Relationship of Hobby Lobby, Conestoga Wood, the Affordable Care Act and the Corporate Person: How a Historical Myth Continues to Bedevil the Legal System,” St. Louis University Journal of Health Law & Policy 7 (issue 2, 2014): 201–310 at 248. See also Witt, “Debunking a Progressive Constitutional Myth.” 13. See Harkins, “Uneasy Relationship,” for an intriguing analysis of the way in which Field established the precedent. 14. Paul Kens, Justice Stephen Field: Shaping Liberty from the Gold Rush to the Gilded Age (Lawrence: University Press of Kansas, 1997). 15. See Kens, Justice Stephen Field, chap. 5; and Richard White, Railroaded: The Transcontinentals and the Making of Modern America (New York: Norton, 2011). 16. Kens, Justice Stephen Field, 238. 17. The Railroad Tax Cases, 13 F. 722 (1882); and Santa Clara v. Southern Pacific Railroad Co., 18 F. 385 (1883). 18. Railroad Tax Cases, 13 F. at 733. The local judges wrote concurring opinions in both cases. 19. For example, Field discussed the case with the railroads’ officers, recommended that they hire his friend John Norton Pomeroy as their lawyer, and corresponded with Pomeroy about the litigation while the case was still ongoing. See Kens, Justice Stephen Field, chap. 8; and Magrath, Morrison R. Waite, 220–222. 20. This point was demonstrated long ago by Morton J. Horwitz and Gregory A. Mark. See Horwitz, “Santa Clara Revisited: The Development of Corporate Theory,” West Virginia Law Review 88 (Fall 1985), 173–224; Horwitz, The Transformation of American Law, 1870–1960: The Crisis of Legal Orthodoxy (New York: Oxford University Press, 1992), 66–70; and Mark, “The Personification of the Business Corporation in American Law,” University of Chicago Law Review 54 (Autumn 1987): 1447–1455. See also the essay in this volume by Margaret Blair and Elizabeth Pollman (Chapter 7). 21. Railroad Tax Cases, 13 F. at 744. 22. Santa Clara, 18 F. 385 at 398–399. 23. See, for example, Minneapolis and St. Louis Railway Co. v. Beckwith, 129 U.S. 26 (1889) at 28. 24. For the argument that the shorthand was purposeful, see Harkins, “Uneasy Relationship.” 25. An impor tant exception is Charles W. McCurdy, “Justice Field and the Jurisprudence of Government-Business Relations: Some Parameters of

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Laissez-Faire Constitutionalism, 1863–1897,” Journal of American History 61 (March 1975): 970–1005. 26. Slaughter-House Cases, 83 U.S. 36 (1873). 27. For Field’s dissent, see Slaughter-House Cases, 83 U.S. at 83–111. 28. Id. at 109–111. 29. Id. at 109–110. According to Howard Jay Graham, Field’s judicial activism was a response to the Paris Commune and threats of class legislation in the United States. See Graham, “Justice Field and the Fourteenth Amendment,” Yale Law Journal 52 (September 1943): 851–889. However, Field’s stance in the Slaughter-House Cases is more consistent with the Jacksonian opposition to state-granted corporate privileges discussed in the essay by Jessica Hennessey and John Joseph Wallis in this volume (Chapter 2). As Hennessey and Wallis show, the states themselves were addressing this issue by adopting constitutional provisions that would ban special acts like the Louisiana law that provoked the butchers’ suit. See also McCurdy, “Justice Field.” 30. Slaughter-House Cases, 83 U.S. at 110. 31. Railroad Tax Cases, 13 F. at 747. 32. Missouri Pacific Railway Co. v. Mackey, 127 U.S. 205 (1888) at 209–210. 33. Minneapolis and St. Louis Railway, 129 U.S. 26. 34. Charlotte, Columbia and Augusta Railroad Co. v. Gibbes, 142 U.S. 386 (1892). 35. Santa Clara, 18 F. at 402. 36. Charlotte, Columbia and Augusta Railroad, 142 U.S. at 393. 37. Missouri Pacific Railway, 127 U.S. 205; Minneapolis and St. Louis Railway, 129 U.S. 26; Charlotte, Columbia and Augusta Railroad, 142 U.S. 386. On this point, see also William Novak’s essay in this volume (Chapter 4). 38. Gulf, Colorado and Santa Fe Railway Co. v. Ellis, 165 U.S. 150 (1897). 39. Field offered a nightmarish version of this outcome in Paul v. Virginia, 75 U.S. at 181–182. On contemporary worries about such a race to the bottom, see the essay by Daniel A. Crane in this volume (Chapter 3). 40. Paul v. Virginia, 75 U.S. 168. 41. Id. at 180–181. 42. For additional background on Paul v. Virginia from a writer critical of the resulting line of decisions, see Gerard Carl Henderson, The Position of Foreign Corporations in American Constitutional Law: A Contribution to the History and Theory of Juristic Persons in Anglo-American Law (Cambridge, MA: Harvard University Press, 1918). For other cases citing Paul v. Virginia, see Gans and Kendal, “Capitalist Joker.” 43. Pembina Consolidated Silver Mining and Milling Co. v. Pennsylvania, 125 U.S. 181 (1888). 44. Id. at 185. 45. Id. at 188–189. 46. Welton v. Missouri, 91 U.S. 275 (1875); and Webber v. Virginia, 103 U.S. 344 (1881). For a discussion of these cases, see Charles W. McCurdy, “American Law and the Marketing Structure of the Large Corporation, 1875–1890,”

Notes to Pages 295–297

Journal of Economic History 38 (September 1978): 631–649. For an overview of commerce clause jurisprudence during this period, see especially Barry Cushman, “Formalism and Realism in Commerce Clause Jurisprudence,” University of Chicago Law Review 67 (Fall 2000), 1089–1150. 47. Paul v. Virginia, 75 U.S. at 183. 48. United States v. E. C. Knight Co., 156 U.S. 1 (1895) at 14. 49. Charles W. McCurdy, “The Knight Sugar Decision of 1895 and the Modernization of American Corporation Law, 1869–1903,” Business History Review 53 (Autumn 1979): 304–342. 50. E. C. Knight, 156 U.S. at 14. 51. Waters-Pierce Oil Co. v. Texas, 177 U.S. 28 (1900). 52. Id. at 43. 53. Examples include National Cotton Oil Co. v. Texas, 197 U.S. 115 (1905); Smiley v. Kansas, 196 U.S. 447 (1905); Waters-Pierce Oil Co. v. Texas, 212 U.S. 86 and 212 U.S. 112 (1909); Hammond Packing Co. v. Arkansas, 212 U.S. 322 (1909); and Standard Oil Co. of Indiana v. Missouri, 224 U.S. 270 (1912). 54. For an example of the former, see Connolly v. Union Sewer Pipe Co., 184 U.S. 540 (1902), overturning an Illinois statute that exempted agriculturalists and livestock dealers from the prohibition against combinations in restraint of trade. For an example of the latter, see International Harvester Co. of America v. Kentucky, 234 U.S. 216 (1914). 55. Standard Oil Co. of Kentucky v. Tennessee, 217 U.S. 413 (1910) at 420. 56. International Harvester Co. v. Missouri, 234 U.S. 199 (1914) at 212–213. 57. On the time path of state antitrust activity, see James May, “Antitrust Practice and Procedure in the Formative Era: The Constitutional and Conceptual Reach of State Antitrust Law, 1880–1918,” University of Pennsylvania Law Review 135 (March 1987): 495–593; and May, “Antitrust in the Formative Era: Political and Economic Theory in Constitutional and Antitrust Analysis, 1880–1918,” Ohio State Law Journal 50 (issue 2, 1989): 257–395. We have not been able to identify any cases from the 1920s in which the Supreme Court overturned a state regulatory statute on the grounds that it impermissibly discriminated against a corporate person protected by the Fourteenth Amendment. The few 1920s cases in which the Court cited Santa Clara’s statement about corporate personhood did not involve regulatory legislation. See Kentucky Finance Corp. v. Paramount Auto Exchange Corp., 262 U.S. 544 (1923); and Power Manufacturing Co. v. Saunders, 274 U.S. 490 (1927). There were also some cases overturning tax provisions that applied under special circumstances to corporations. These cases generally applied the due process principle without citing Santa Clara. See, for example, Thomas v. Kansas City Southern Railway Co., 261 U.S. 481 (1923); Air-Way Electric Appliance Corp. v. Day, 266 U.S. 71 (1924); and Hanover Fire Insurance Co. v. Harding, 272 U.S. 494 (1926). 58. See Standard Oil Co. v. United States, 221 U.S. 1 (1911); and United States v. American Tobacco Co., 221 U.S. 106 (1911). See also Naomi R. Lamoreaux,

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Notes to Pages 297–300

The Great Merger Movement in American Business, 1895–1904 (New York: Cambridge University Press, 1985), chap. 6. See also the essays in this volume by William J. Novak and Crane. 59. Blake v. McClung, 172 U.S. 239 (1898). 60. Blake, 172 U.S. at 259. Linda Przybyszewski has shown, however, that Harlan had little sympathy for states’ efforts to use their regulatory powers over foreign corporations to erect what were essentially trade barriers. See Przybyszewski, The Republic According to John Marshall Harlan (Chapel Hill: University of North Carolina Press, 1999), chap. 6. 61. Blake, 172 U.S. at 259–261. See also an opinion written that same term by Justice Joseph McKenna in Orient Insurance Co. v. Daggs, 172 U.S. 557 (1899). 62. Justice David J. Brewer wrote a dissenting opinion in the case that was also signed by Chief Justice Melville W. Fuller. Brewer’s objection was not based on the idea that the Virginia corporation was denied the equal protection of the laws. He argued, to the contrary, that the Court should not have found in favor of the Ohio plaintiffs either. The mining company was a foreign corporation, and as a consequence, Tennessee could set for its admission “such conditions as it sees fit” to protect residents of the state. Investors elsewhere had no basis for complaint. “Every one dealing with a foreign corporation is bound to take notice of the statutes of the State imposing conditions upon that corporation . . . , just as he must take notice of any mortgage or other incumbrance placed by the corporation” on its property. This dissent, therefore, effectively turned Santa Clara on its head, using Paul v. Virginia and other similar decisions to justify the denial of constitutional protections to natural as well as artificial persons in arenas that normally came within the scope of the privileges and immunities clause. Blake, 172 U.S. at 264. 63. Northwestern National Life Insurance Co. v. Riggs, 203 U.S. 243 (1906). 64. Id. at 253. Harlan did not cite Santa Clara here, but rather his own opinion in Blake v. McClung, where, however, he had cited the earlier case. 65. Id. Here again he cited one of his own opinions rather than Field’s. 66. Id. at 255. 67. Id. 68. See, for example, Covington & Lexington Turnpike R. Co. v. Sandford, 164 U.S. 578 (1896); and Smyth v. Ames, 169 U.S. 466 (1898). 69. Railroad Tax Cases, 13 F. at 747. 70. Northwestern National Life Insurance, 203 U.S. at 252–253. 71. Allgeyer v. Louisiana, 165 U.S. 578 (1897). 72. Lochner v. New York, 198 U.S. 45 (1905). 73. For overviews of the case and the era, see Paul Kens, Lochner v. New York: Economic Regulation on Trial (Lawrence: University of Kansas Press, 1998); and Howard Gillman, The Constitution Besieged: The Rise and Demise of Lochner Era Police Powers Jurisprudence (Durham, NC: Duke University Press, 1993).

Notes to Pages 300–302

74. See also Harlan’s opinion in Powell v. Pennsylvania, 127 U.S. 678 (1888) at 684. On Harlan’s embrace of the basic idea of substantive due process, see Przybyszewski, Republic According to John Marshall Harlan. 75. Allgeyer, 165 U.S. at 589. 76. Slaughter-House Cases, 83 U.S. 36. 77. Butchers’ Union Co. v. Crescent City Co., 111 U.S. 746 (1884) at 762. It seems that Peckham preferred to quote a concurring rather than a dissenting opinion, because Bradley basically repeated what he said earlier in the Slaughter-House Cases. 78. The use of masculine nouns and pronouns was not generic. The justices’ concept of liberty of contract did not extend to women, as Bradley made clear in his opinion in Bradwell v. State, handed down the day after the SlaughterHouse Cases. Concurring with the Court’s finding against Myra Bradwell, who had been denied a license to practice law by the state of Illinois solely because she was a woman, Bradley wrote the “privileges and immunities of women” were different from those of men, and that women did not have the right “to engage in any and every profession, occupation, or employment in civil life.” To the contrary, “the constitution of the family organization, which is founded in the divine ordinance, as well as in the nature of things, indicates the domestic sphere as that which properly belongs to the domain and functions of womanhood.” Bradwell v. State, 83 U.S. 130 at 140–141. See also Laura Krugman Ray, “The Figure in the Judicial Carpet: Images of Family and State in Supreme Court Opinions,” Journal of Legal Education 37 (September 1987): 331–345; and Martha Minow, “ ‘Forming Underneath Every thing That Grows’: Toward a History of Family Law,” Wisconsin Law Review 4 (1985): 819–898. 79. Allgeyer, 165 U.S. at 591 (our emphasis). 80. Butchers’ Union, 111 U.S. at 765 (our emphasis). This interchangeability is further evidence against the claims of conspiracy theorists such as Charles and Mary Beard, who attached much greater importance than the justices did to the shift from “citizen” to “person” in the Fourteenth Amendment’s second sentence. 81. Allgeyer, 165 U.S. at 583. 82. Id. at 589. Peckham took pains to distinguish this case from another involving California, where the Court had come to the opposite conclusion. In the California case, the contract had been made within the state, with an agent of the company, and so the company was considered to be operating in the state. See Hooper v. California, 155 U.S. 648 (1895). 83. Western Turf Association v. Greenberg, 204 U.S. 359 (1907). 84. Id. at 363. 85. Lochner, 198 U.S. 45. There is a large literature debating how laissez-faire the Lochner-era Court was in actuality. We searched the liberty-of-contract cases discussed in the literature to see how the Court handled cases involving corporations. See Kens, Lochner v. New York, 198–199 for an overview of this

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debate. We pulled the cases from Michael J. Phillips, The Lochner Court, Myth and Reality: Substantive Due Process from the 1890s to the 1930s (Westport, CT: Praeger, 2001), chap. 2. 86. Adair v. United States, 208 U.S. 161 (1908). 87. Id. at 172 and 180. For a similar focus on the liberty of the individual agent, see Coppage v. Kansas, 236 U.S. 1 (1915). Perhaps because of the Court’s distinction between the liberty rights of individuals and corporations, cases involving corporate employers were sometimes brought by individuals. See, for example, Bosley v. McLaughlin, 236 U.S. 385 (1915). 88. Adkins v. Children’s Hospital, 261 U.S. 525 (1923). 89. Id. at 541–542. The case was bundled with another (Adkins v. Lyons), in which the appellee was an individual, a female employee. That bundling may have made it easier to avoid focusing on corporations, but one fi nds a similar reluctance to refer to employers as corporations in other cases. See, for example, Chas. Wolff Packing Co. v. Court of Industrial Relations of the State of Kansas, 267 U.S. 552 (1925). 90. Adkins, 261 U.S. at 545 and 547 (our emphasis). Sutherland’s decision treated women as having a right to contract similar to men: “[W]hile the physical differences must be recognized in appropriate cases, and legislation fi xing hours or conditions of work may properly take them into account, we cannot accept the doctrine that women of mature age, sui juris, require or may be subjected to restrictions upon their liberty of contract which could not lawfully be imposed in the case of men under similar circumstances” (at 553). 91. See, for example, Gans and Kendall, “Capitalist Joker.” Some such claims are clearly stretches, however. In B. G. M. Enterprises v. Harris, 482 F. Supp. 1073 (1980) at 1077, a federal appeals court cited just one case in support of its claim that the Supreme Court “implicitly [found] in several cases that corporations had a liberty of contract which was protected by the Due Process Clause.” That case, Advance-Rumely Thresher Co. v. Jackson, 287 U.S. 283 (1932), upheld a North Dakota law that aimed to protect farmers from being pressured into buying expensive farm equipment that did not meet their needs. According to the law, “any person, firm or corporation purchasing any gas or oil burning tractor, gas or steam engine, harvesting or threshing machinery for their own use shall have a reasonable time after delivery for the inspection and testing of the same, and if it does not prove to be reasonably fit for the purpose for which it was purchased the purchaser may rescind the sale.” The suit was brought by a company (whether it was incorporated or not was not noted) against an individual farmer, whose liberty of contract was at stake. The only mention of the word corporation in the decision was in the above quotation from the statute. 92. Pierce v. Society of Sisters, 268 U.S. 510 (1925) at 535. 93. See Hague v. CIO, 307 U.S. 496 (1939) at 514; and the dissenting opinions in New York Life Insurance Co. v. Dodge, 246 U.S. 357 (1918) at 387; Connecticut General Life Insurance Co. v. Johnson, 303 U.S. 77 (1938) at 88; Wheeling

Notes to Pages 303–305

Steel Corp. v. Glander, 337 U.S. 562 (1949) at 579; and First National Bank of Boston, 435 U.S. at 822. For citations to the statement by other courts, see Applegate v. Travelers’ Insurance Co., 153 Mo. App. 63 (1910); Title Guaranty & Surety Co. v. Slinker, 42 Okla. 811 (1914); Andrus v. Business Men’s Acc. Ass’n of America, 283 Mo. 442 (1920); American League v. Eastmead, 15 Backes 487 (New Jersey Chancery Court, 1934); Oney v. Oklahoma City, 120 F. 2d 861 (1941); Finnish Workers Federation v. Horrocks, 42 F. Supp. 411 (1941); Mo Hock Ke Lok Po v. Stainback, 74 F. Supp. 852 (1947); and Joint Anti-Fascist Refugee Committee v. Clark, 177 F. 2d 79 (1949). 94. The justices found a precedent for their definition of liberty in Justice Bushrod Washington’s circuit court opinion in Corfield v. Coryell, 6 F. Cas. 546 (1823), and in the Declaration of Independence. For historical work on this tradition, see especially Michael P. Zuckert, Natural Rights and the New Republicanism (Princeton, NJ: Princeton University Press, 1994); Knud Haakonssen, “From Natural Law to the Rights of Man: A European Perspective on American Debates,” in A Culture of Rights: The Bill of Rights in Philosophy, Politics, and Law, 1791 and 1991, eds. Michael J. Lacey and Knud Haakonssen (New York: Cambridge University Press, 1991), 19–61; and James H. Hutson, “The Bill of Rights and the American Revolutionary Experience,” in the same volume, pp. 62–97. 95. The Fourteenth Amendment was not pertinent in these cases. (As we discuss below, the Court did not overturn state laws restricting First Amendment rights until the 1920s.) In Watson v. Jones, 80 U.S. 679 (1872), a diversity case involving an intra-church dispute in which one of the parties was a corporation, the Court based its decision on contractual grounds without explicitly mentioning the First Amendment, but stressed, at p. 728, “the full, entire, and practical freedom for all forms of religious belief and practice which lies at the foundation of our political principles.” The other key case prior to 1900, Church of the Holy Trinity v. United States, 143 U.S. 457 (1892), in which a church corporation was exempted from a federal immigration statute that interfered with the hiring of a minister, explicitly invoked the First Amendment. 96. Hale v. Henkel, 201 U.S. 43 (1906). This decision, unlike Northwestern National Life Insurance, elicited two concurring opinions and one dissenting opinion with which a second justice concurred. 97. Id. at 74–75. 98. Id. at 76. 99. The majority of the Court accepted Brown’s distinction between corporations and natural persons, but two concurring justices, Harlan and McKenna, took the more extreme position that neither the Fourth nor the Fift h Amendment applied to corporations. According to Harlan, “a corporation—‘an artificial being, invisible, intangible and existing only in contemplation of law’—cannot claim the immunity given by the Fourth Amendment; for, it is not a part of the ‘People,’ within the meaning of that Amendment.” McKenna argued that the

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same logic should apply to both amendments. “[I]f corporations cannot plead the immunity of the Fift h Amendment, they cannot plead the immunity of the Fourth Amendment.” The two dissenting justices, David J. Brewer and Fuller, pushed for the opposite view. Brewer, who wrote the dissent, asserted that both amendments applied to corporations as well as to natural persons, citing as precedent Waite’s statement at the start of oral arguments in Santa Clara, Field’s decision in Pembina, and a number of the subsequent cases noted above. Missing all the nuances and parsings we have discussed above, he asserted that “if the word ‘person’ in that Amendment include[d] corporations, it also include[d] corporations when used in the Fourth and Fift h Amendments.” Id. at 82 and 85. 100. G. M. Leasing Corp. v. United States, 429 U.S. 338 (1977). For other examples of the ongoing vitality of Brown’s distinction, see Wilson v. United States, 221 U.S. 361 (1911); Baltimore and Ohio Railroad Co. v. ICC, 221 U.S. 612 (1911); United States v. Bausch & Lomb Optical Co., 321 U.S. 707 (1944); Oklahoma Press Publishing Co. v. Walling, 327 U.S. 186 (1946); and Bell v. Maryland, 378 U.S. 226 (1964). 101. Pollock v. Farmers’ Loan and Trust Co., 157 U.S. 429 (1895); and Pollock v. Farmers’ Loan and Trust Co., 158 U.S. 601 (1895). Even though the case was brought by a shareholder of a corporation, these decisions did not hinge on the issue of corporate rights. 102. Flint v. Stone Tracy Co., 220 U.S. 107 (1911). For more on these events, see the essay by Steven A. Bank and Ajay K. Mehrotra in this volume (Chapter 5). 103. Flint, 220 U.S. at 161–162. After the ratification of the Sixteenth Amendment, the Court faced many cases in which it had to decide whether par ticu lar taxes levied on corporations but not on other businesses were discriminatory. Sometimes it found the taxes discriminatory, sometimes it did not. For an example of the former, see Quaker City Cab Co. v. Pennsylvania, 277 U.S. 389 (1928). For an example of the latter, see New Jersey Bell Telephone Co. v. New Jersey, 280 U.S. 338 (1930). 104. The law as amended in 1910 opened the returns to inspection “only upon the order of the President under rules and regulations to be prescribed by the Secretary of the Treasury.” Quoted in Flint, 220 U.S. at 175. 105. Flint, 220 U.S. at 175–177. 106. Quoted in Hubbard v. Mellon, 5 F.2d 764 (1925) at 765. 107. The 1926 law still mandated the Commissioner of Internal Revenue to make a list of taxpayers available for public inspection, but the list no longer included the amount of tax paid. Compare § 257 of the Revenue Act of 1926 with the same section of the Revenue Act of 1924. 108. “In the Gold Fish Bowl,” Chicago Daily Tribune, June 4, 1924, 8. See especially the roundup of commentary from newspapers around the country in “How Income Tax Publicity is Viewed by the Editors,” Washington Post, October 26, 1924, 2. We have not found any writing from this period attacking the publicity requirement as an infringement on the constitutional rights of

Notes to Pages 307–308

corporations, as opposed to individuals, perhaps because those seeking repeal of the law felt that such a statement would not be politically wise. To the contrary, opponents of the law attempted to turn anticorporate feeling to their advantage. Secretary of the Treasury Andrew Mellon asserted that the publication requirement would benefit “the powerful corporation,” which would “be able to crush its smaller competitors if it has ready access to the complete financial status and costs of its rivals.” Quoted in “Publicity on Taxes Assailed by Mellon,” Baltimore Sun, May 18, 1924, 2. Similarly, a Baltimore banker argued that “publication is not going to affect the banks and other financial institutions or other corporations, for their books are open to the inspection of all stockholders and are practically public. The man who is going to be hurt is the most useful man in the community and the one who can least afford it.” William J. Casey, Vice President of Continental Trust Co., quoted in “Bankers Here Assail Income Tax Publicity,” Baltimore Sun, May 24, 1924, 22. 109. Hubbard, 5 F.2d at 766. 110. United States v. Morton Salt Co., 338 U.S. 632 (1950) at 652. As Elizabeth Pollman has noted, the “no equality” statement does not necessarily mean that corporations had no privacy rights, but, as she also acknowledges, the statement has been interpreted that way in subsequent opinions. See Pollman, “A Corporate Right to Privacy,” Minnesota Law Review 99 (November 2014): 27–88 at 34–37. 111. California Bankers Assn. v. Shultz, 416 U.S. 21 (1974). 112. One sees the same reluctance to extend constitutional rights to corporations in the treatment of the Sixth Amendment. As late as the 1990s, corporations did not have a clear right to trial by jury in criminal cases. See Alan L. Adlestein, “A Corporation’s Right to a Jury Trial under the Sixth Amendment,” University of California, Davis, Law Review 27 (Winter 1994): 375–458. 113. See Adam Winkler, “ ‘Other People’s Money’: Corporations, Agency Costs, and Campaign Finance Law,” Georgetown Law Journal 92 (June 2004): 871–940. See also his essay in this volume (Chapter 10). 114. United States v. United States Brewers’ Ass’n, 239 F. 163 (1916) at 168–169. 115. T. Richard Mager, “Past and Present Attempts by Congress and the Courts to Regulate Corporate and Union Campaign Contributions and Expenditures in the Election of Federal Officials,” Southern Illinois University Law Journal 1 (issue 2, 1976): 338–399. There was one challenge on the very different grounds that Congress did not have the authority to regulate the selection of presidential electors, which was the responsibility of state legislatures. See United States v. Burroughs, 65 F.2d 796 (1933). For the post 1947 history, see Winkler’s essay in this volume. 116. On this point, see also the essay by Blair and Pollman in this volume. 117. The major examples during the Lochner era are: Helm v. Zarecor, 222 U.S. 32 (1911) (a diversity case decided on behalf of the unincorporated national church and against the local church corporation in which the Court stated, at 37, that the issue “transcends” the “rights inhering in the corporation itself. It embraces

473

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Notes to Pages 309–311

the fundamental question of the rights of these religious associations”); Shepard v. Barkley, 247 U.S. 1 (1918) (a diversity case, also favoring the national church body, in which there is no mention of corporate status); Gonzalez v. Roman Catholic Archbishop of Manila, 280 U.S. 1 (1929) (a territorial case involving a church corporation, based largely on Watson, 80 U.S. 679, upholding the decision-making authority of the ecclesiastical hierarchy). 118. Berea College v. Kentucky, 211 U.S. 45 (1908). 119. Id. at 53. 120. Id. at 65–69. 121. Id. at 54. 122. Pierce, 268 U.S. 510. 123. See William D. Guthrie and Bernard Hershkopf, “Brief on Behalf of Appellee,” fi led March 2, 1925. 124. Pierce, 268 U.S. at 535. 125. Many states’ policies regarding recognition of nonprofit corporations were more restrictive than their policies for for-profit corporations, even in the case of nonprofit corporations chartered under the states’ own general laws. See Ruth H. Bloch and Naomi R. Lamoreaux, “Voluntary Associations, Corporate Rights, and the State: Legal Constraints on the Development of American Civil Society, 1750–1900,” NBER Working Paper 21153 (May 2015); and Norman I. Silber, A Corporate Form of Freedom: The Emergence of the Nonprofit Sector (Boulder, CO: Westview Press, 2001). 126. For a more complete account of this episode, including the Klan’s ultimate victory at the polls, see Charles William Sloan Jr., “Kansas Battles the Invisible Empire: The Legal Ouster of the KKK from Kansas, 1922–1927,” Kansas Historical Quarterly 40 (Fall 1974): 393–409. See also State v. Knights of the Ku Klux Klan, 117 Kan. 564 (1925); and Knights of the Ku Klux Klan v. Kansas, 273 U.S. 664 (1927). 127. The next year the justices sustained another state action targeting the Klan. This case did not involve powers over corporations per se, but rather the Klan’s challenge to the constitutionality of a New York statute mandating that any association whose members had to swear an oath must fi le certain documents with the secretary of state. The Court based its decision upholding the constitutionality of the statute “on the par ticu lar character of the Klan’s activities, involving acts of unlawful intimidation and violence.” See New York ex rel. Bryant v. Zimmerman, 278 U.S. 63 (1928). The quotation is from the Supreme Court’s later exposition of the case in National Association for the Advancement of Colored People v. Alabama, 357 U.S. 449 (1958) at 465. For a case involving a fine rather than ouster, see Knights of the Ku Klux Klan v. Commonwealth, 138 Va. 500 (1924). 128. Hague, 307 U.S. 496. 129. Id. at 514. 130. Id. at 527. Although the unions were not incorporated, they were also not “natural persons” and so were treated like corporations in the case.

Notes to Pages 311–314

131. American League v. Eastmead, 116 N.J. Eq. 487 (1934). 132. Finnish Workers Federation, 42 F. Supp. at 412. 133. Joint Anti-Fascist Refugee Committee, 177 F. 2d at 83. The Joint Anti-Fascist Committee was an unincorporated voluntary association, but like the unions in Hague v. CIO it was treated like a corporation because it was an organization and not a natural person. 134. Connecticut General Life, 303 U.S. 77. Black’s dissent, in the words of one commentator, marked “the first time in many years” that a Supreme Court justice had made such a contention. See “Recent Cases,” University of Pennsylvania Law Review and American Law Register 86 (March 1938), 543. Another commentator described it as a “stinging and solitary challenge to a proposition considered so fundamental that it had gone unquestioned by courts for more than half a century.” Robert P. Griffin, “Constitutional Law: Corporations: Artificial ‘Persons’ and the Fourteenth Amendment,” Michigan Law Review 48 (May 1950): 983–993, at 984. 135. Connecticut General Life, 303 U.S. at 85. 136. Id. at 87–88. As Howard Jay Graham has pointed out, however, the first sentence was added on the floor of the Senate after the rest of the section had been introduced in Congress, so one cannot infer from that sentence the intentions of the drafters. See Graham, Everyman’s Constitution: Historical Essays on the Fourteenth Amendment, the “Conspiracy Theory,” and American Constitutionalism (Madison: State Historical Society of Wisconsin, 1968), 387. 137. Connecticut General Life, 303 U.S. at 86. At the same time as he blasted the early decisions that treated corporations as persons under the Fourteenth Amendment, he cited Paul v. Virginia and Pembina Consolidated Mining to make his case that California’s tax was constitutional. See pp. 83–84 of his dissent. 138. Wheeling, 337 U.S. 562. 139. Id. at 579. 140. Id. at 574–575. Stone had in fact authored the majority opinion in the Connecticut General Life Insurance case. 141. Id. at 575–576. 142. Schechter Poultry Corp. v. United States, 295 U.S. 495 (1935); and United States v. Butler, 297 U.S. 1 (1936). 143. Scholars have debated whether this change was really as sudden as it seemed. Contrast, for example, William E. Leuchtenburg, The Supreme Court Reborn: The Constitutional Revolution in the Age of Roosevelt (New York: Oxford University Press, 1995); and Barry Cushman, Rethinking the New Deal Court: The Structure of a Constitutional Revolution (New York: Oxford University Press, 1998). For our purposes, however, the direction of change is more impor tant than whether it occurred suddenly or more gradually. For a survey of this literature, see Laura Kalman, “The Constitution, the Supreme Court, and the New Deal,” American Historical Review 110 (October 2005): 1052–1080.

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Notes to Pages 314–317

144. National Labor Relations Board v. Jones & Laughlin Corp., 301 U.S. 1 (1937) at 41. 145. Wicard v. Filburn, 317 U.S. 111 (1942) at 131. For a discussion of this case and, more generally, the change in the Court’s interpretation of the commerce clause, see Cushman, “Formalism and Realism.” 146. West Coast Hotel Co. v. Parrish, 300 U.S. 379 (1937). 147. Id. at 391–393, 397, and 399. 148. U.S. Constitution, amendment I. 149. See Adam Winkler, “Free Speech Federalism,” Michigan Law Review 108 (November 2009): 153–188. 150. The most impor tant early First Amendment cases involving political radicals (the first three of which upheld the state laws) were Schenck v. United States, 249 U.S. 47 (1919); Gitlow v. New York, 268 U.S. 652 (1925); Whitney v. California, 274 U.S. 357 (1927); and De Jonge v. Oregon, 299 U.S. 353 (1937). Key examples of the early religion cases that overturned local laws against proselytizing were: Lovell v. Griffen, 303 U.S. 444 (1938); Cantwell v. Connecticut, 310 U.S. 296 (1940); Jamison v. Texas, 318 U.S. 413 (1943); Martin v. Struthers, 319 U.S. 141 (1943); and Follett v. Town of McCormick, 321 U.S. 573 (1944). The only impor tant case of the 1940s that restricted religious exercise rights upheld the constitutionality of a child labor law: Prince v. Massachusetts, 321 U.S. 158 (1944). 151. Grosjean v. American Press Company, 297 U.S. 233 (1936). 152. Id. at 250. 153. Id. at 244. 154. Mabee v. White Plains Pub. Co., 327 U.S. 178 (1946); Oklahoma Press, 327 U.S. 186. 155. Joseph Burstyn, Inc. v. Wilson, 343 U.S. 495 (1952); Kingsley Int’l Pictures Corp. v. Regents of Univ. of N.Y., 360 U.S. 684 (1959). In a subsequent Chicago censorship case (as in many cases involving obscenity laws), the Court upheld the law as reasonable. See Times Film Corp. v. Chicago, 365 U.S. 43 (1961). Most citations to Grosjean during this period did not refer to the statement about corporate rights but rather were intermixed with citations to cases concerning individuals’ First Amendment rights. For a few of the many examples, see Schneider v. State, 308 U.S. 147 (1939) at 161; Thomas v. Collins, 323 U.S. 516 (1945) at 550; Beauharnais v. Illinois, 343 U.S. 250 (1952) at 268; Sherbert v. Verner, 374 U.S. 398 (1963) at 402. The only apparent exception is a dissent by Douglas that uses Grosjean to argue for denying corporate rights to a restaurant corporation in a civil rights case. See Bell, 378 U.S. at 263. 156. New York Times Co. v. Sullivan, 376 U.S. 254 (1964), at 270; Time, Inc. v. Hill, 385 U.S. 374 (1967), at 389. 157. For examples of state actions against civil rights organ izations, see Race Relations Law Reporter 1 (1956): 405–410, 571–577, 707–709; and Southern School News, November 1956, 8; December 1956, 15; and January 1957, 1–2, 12.

Notes to Pages 317–321

158. NAACP, 357 U.S. at 460. Harlan repeated this statement in NAACP v. Alabama, 377 U.S. 288 (1964) at 307. See Silber, Corporate Form of Freedom, 99–107. 159. NAACP, 357 U.S. at 466. These statements were reiterated in NAACP, 377 U.S. at 308–309. 160. Harlan wrote in his 1964 opinion, “There is no occasion in this case for us to consider how much survives of the principle that a State can impose such conditions as it chooses on the right of a foreign corporation to do business within the State, or can exclude it from the State altogether.” Just by making that statement, however, he implied that the precedent had been greatly limited. NAACP, 377 U.S. at 309. 161. NAACP v. Button, 371 U.S. 415 (1963). 162. Id. at 428. 163. CORE v. Douglas, 318 F.2d 95 (1963) at 102. 164. Id. 165. Id. at 105. He also quoted Roberts on the inapplicability to corporations of the privileges and immunities clause. 166. Burt v. Congress of Racial Equality, 375 U.S. 829 (1963). 167. D. D. B. Realty Corp. v. Merrill, 232 F. Supp. 629 (1964) at 637. For a similar expression of uncertainty, see B. G. M. Enterprises, 482 F. Supp. 1073. 168. Western Turf Association, 204 U.S. at 363. 169. First National Bank of Boston, 435 U.S. 765. 170. Id. at 775–776. 171. Id. at 777. 172. Id. at 780, n.15. 173. Southeast Kansas Community Action Program v. Lyng, 758 F. Supp. 1430 (1991) at 1432. See also Fraass Survival Systems v. Absentee Shawnee Economic Development Authority, 817 F. Supp. 7 (1993); Kansas East Conference of the United Methodist Church v. Bethany Medical Center, 266 Kan. 366 (1998); Associated Press v. Montana Department of Revenue, 300 Mont. 233 (2000); RK Ventures v. City of Seattle, 307 F.3d 1045 (2002); City of Wooster v. Entertainment One, 158 Ohio App. 3d 161 (2004); Addiction Specialists v. Township of Hampton, 411 F.3d 399 (2005); Primera Iglesia Bautista Hispana of Boca Raton v. Broward County, 450 F.3d 1295 (2006); Keweenaw Bay Indian Community v. Rising, 569 F.3d 589 (2009); Connecticut Natural Gas Corp. v. Connecticut Department of Public Utility Control, 51 Conn. Supp. 307 (2009); Cross Continent Development v. Akron, 742 F. Supp. 2d 1182 (2010). 174. First National Bank of Boston, 435 U.S. at 822. 175. Id. 176. Id. 177. Id. at 823, 825–826. See also Dartmouth College, 17 U.S. at 636. 178. Corp. of the Presiding Bishop of the Church of Jesus Christ of Latter-Day Saints v. Amos, 483 U.S. 327 (1987).

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Notes to Pages 322–330

179. It was by this time well established that First Amendment rights applied to churches as well as individuals, and it made no difference whether the church was incorporated or not. For the early Fourteenth Amendment cases involving churches rather than individuals, see Kedroff v. Saint Nicholas Cathedral, 344 U.S. 94 (1952); Presbyterian Church v. Mary Elizabeth Blue Hull Memorial Presbyterian Church, 393 U.S. 440 (1969); Maryland and Virginia Eldership of the Churches of God v. Church of God, 396 U.S. 367 (1970); Serbian Eastern Orthodox Diocese v. Milivojevich, 426 U.S. 696 (1976). 180. Corp. of the Presiding Bishop, 483 U.S. at 344. 181. Corp. of the Presiding Bishop, 483 U.S. at 344–345. 182. NAACP, 357 U.S. at 459–460, as quoted in Church of Scientology v. Cazares, 638 F.2d 1272 (1981) at 1277. 183. For the history of PACs, see Adam Winkler’s essay in this volume. 184. Federal Election Commission v. Massachusetts Citizens for Life, 479 U.S. 238 (1986). 185. Id. at 263–264. 186. Citizens United, 558 U.S. 310. 187. Quoted by Justice Stevens in Citizens United, 558 U.S. at 406. 188. Citizens United, 558 U.S. at 406. 189. Id. at 340, 342. 190. Id. at 342. 191. Hobby Lobby Stores, 134 S. Ct. 2751. 192. Id. at 2769. 193. Id. at 2768. 194. See, for example, Linda Greenhouse, “Over the Cliff,” New York Times, August 24, 2011, http://opinionator.blogs.nytimes.com/2011/08/24/over-the -cliff/?module = Search&mabReward=relbias%3Ar%2C{%222%22%3A%22RI %3A14%22}, accessed July 22, 2014; and William Greider, “Thanks to the Roberts Court, Corporations Have More Constitutional Rights than Actual People,” The Nation, May 20, 2014, http://www.thenation.com/blog/179932 /thanks-roberts-court-corporations-have-more-constitutional-rights-actual -people#, accessed July 22, 2014.

9. Two Cheers for Vertical Integration The author would like to thank the contributors to this volume, with special thanks to Bill Novak, for their insightful contributions to the chapter. 1. See corporate web pages for Wal-Mart and Apple, http://corporate.walmart .com/and http://www.apple.com. 2. “Garment Factory Fires: A ‘Distinctly South Asian’ Tragedy,” The Economist, December 6, 2012. 3. “Worker Safety in Bangladesh and Beyond,” Sunday Review, New York Times, May 5, 2013, 10.

Notes to Pages 331–334

4. In this volume, see, in par ticu lar, Daniel Crane, “The Dissociation of Incorporation and Regulation in the Progressive Era and the New Deal” (Chapter 3); Margaret Blair and Elizabeth Pollman, “The Supreme Court’s View of Corporate Rights” (Chapter 7); and William Novak, “The Public Utility Idea and the Origins of Modern Business Regulation” (Chapter 4). 5. Scholars of labor, both at home and abroad, have been among the first to recognize the disconnect between Wagner-era labor law and the structure of contemporary corporations and supply chains. See, Craig Becker, “Labor Law Outside the Employment Relation,” Texas Law Review 74 (June 1996): 1527–1562; Kate Andrias, “The New Labor Law,” forthcoming in Yale Law Journal; and Richard Appelbaum and Nelson Lichtenstein, eds., Achieving Workers’ Rights in the Global Economy (Ithaca, NY: Cornell University Press, 2016), which considers the failures of “corporate social responsibility” in twenty-first-century international supply chains. 6. David Weil, The Fissured Workplace: Why Work Became So Bad for So Many and What Can Be Done to Improve It (Cambridge, MA: Harvard University Press, 2014). 7. Richard S. Tedlow, New and Improved: The Story of Mass Marketing in America (New York: Basic Books, 1990), for studies of Sears and A & P; and Frank Ernest Hill and Allan Nevins, Ford: Expansion and Challenge, 1915–1933 (New York: Charles Schribner’s Sons, 1957). 8. Ronald Coase, “The Nature of the Firm,” Economica, November 1937, 338; Peter Drucker, Concept of the Corporation (New York: John Day, 1946). And see also R. H. Coase, “The Acquisition of Fisher Body by General Motors,” Journal of Law and Economics 43 (April 2000): 15–31. GM’s 1926 purchase of car body supplier Fisher Body is the paradigmatic example of vertical integration, much debated among economists. 9. For a collection of papers on the influence of Ronald Coase, see Oliver Williamson and Sidney Winter, The Nature of the Firm: Origins, Evolution, and Development (New York: Oxford University Press, 1991); and see Alfred Chandler, The Visible Hand: The Managerial Revolution in American Business (Cambridge, MA: Harvard University Press, 1977). 10. Ellis W. Hawley, The New Deal and the Problem of Monopoly (Princeton, NJ: Princeton University Press, 1966); Robert Wiebe, The Search for Order, 1877–1920 (New York: Hill and Wang, 1966); Martin Sklar, The Corporate Reconstruction of American Capitalism, 1890–1916 (New York: Cambridge University Press, 1988); Thomas McCraw, Prophets of Regulation: Charles Francis Adams; Louis D. Brandeis; James M. Landis; Alfred E. Kahn (Cambridge, MA: Harvard University Press, 1986); Alan Brinkley, The End of Reform: New Deal Liberalism in Recession and War (New York: Alfred A. Knopf, 1995); Morton Keller, Regulating a New Economy: Public Policy and Economic Change in America, 1900–1933 (Cambridge, MA: Harvard University Press, 1998); Barbara Fried, The Progressive Assault on Laissez Faire: Robert Hale and the First Law and Economics Movement (Cambridge, MA:

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Notes to Pages 334–337

Harvard University Press, 2001); and K. Sabeel Rahman, Democracy against Domination (New York: Oxford University Press, 2016). 11. Many of the insights in this section of the essay are drawn from Thomas K. McCraw, “In Retrospect: Berle and Means,” Reviews in American History 18 (1990): 578–596. The quotes above are from page 582. In The Great Merger Movement in American Business, 1895– 1904 (New York: Cambridge University Press, 1988), Naomi Lamoreaux offers the most comprehensive analy sis of the wave of corporate consolidation that would for a long generation become such an object of regulatory ideas and praxis. 12. As quoted in Jordan Schwarz, Liberal: Adolf A. Berle and the Vision of an American Era (New York: Free Press, 1987), 60. 13. Howard Brick, Transcending Capitalism: Visions of a New Society in Modern American Thought (Ithaca, NY: Cornell University Press, 2006), 65, 74; and see Brian Cheffins and Steven Bank, “Is Berle and Means Really a Myth?,” Business History Review 83 (Autumn 2009): 443–474. 14. McCraw, “In Retrospect,” 590. 15. Roland Marchand, “Where Lie the Boundaries of the Corporation? Explorations in ‘Corporate Responsibility’ in the 1930s,” Business and Economic History 26 (Fall 1997): 80, 83. 16. Julia Ott, When Wall Street Met Main Street: The Quest for Investors’ Democracy (Cambridge, MA: Harvard University Press, 2011). 17. Meg Jacobs, Pocketbook Politics: Economic Citizenship in Twentieth-Century America (Princeton, NJ: Princeton University Press, 2005), 95–135; Lizabeth Cohen, A Consumers’ Republic: The Politics of Mass Consumption in Postwar America (New York: Alfred A. Knopf, 2003), 18–61; Steve Fraser, Labor Will Rule: Sidney Hillman and the Rise of American Labor (New York: Free Press, 1991), 282–288; Theda Skocpol and Kenneth Finegold, “State Capacity and Economic Intervention in the Early New Deal,” Political Science Quarterly 97 (Summer 1982): 255–278. 18. I discuss much of this at greater length in State of the Union: A Century of American Labor (Princeton, NJ: Princeton University Press, 2013), 98–140. See also Timothy Noah, The Great Divergence: America’s Growing Inequality Crisis and What We Can Do about It (New York: Bloomsbury Press, 2012), 10–27. 19. See Adam Winkler, “Citizens United, Personhood, and the Corporation in Politics” (Chapter 10). 20. Benjamin Waterhouse, Lobbying America: The Politics of Business from Nixon to NAFTA (Princeton, NJ: Princeton University Press, 2014), 28–29. 21. William Lazonick, “Innovative Business Models and Varieties of Capitalism: Financialization of the U.S. Corporation,” Business History Review 84 (Winter 2010): 675–702. 22. Adolf A. Berle and Gardiner C. Means, The Modern Corporation and Private Property (New York: Commerce Clearing House, Inc., 1932), 356.

Notes to Pages 337–340

23. Peter Drucker, Post-Capitalist Society (New York: HarperCollins, 1993), 43. Although this quote is taken from one of Drucker’s later books, his views on the managerial transition to postcapitalism have been consistent since he wrote Concept of the Corporation in 1945. 24. Mark Mizruchi, “Berle and Means Revisited: The Governance and Power of Large U.S. Corporations,” Theory and Society 33 (2004): 583; and also Mark Mizruchi and Daniel Hirschman, “The Modern Corporation as Social Construction,” Seattle University Law Review 33, no. 4 (2010): 1065–1108; C. A. Harwell Swells, “The Cycles of Corporate Social Responsibility: An Historical Retrospective for the Twenty-First Century,” Kansas Law Review 51 (November 2002). 25. Milton Friedman, “The Social Responsibility of Business Is to Increase Its Profits,” New York Times Magazine, September 13, 1970. 26. Angus Burgin, The Great Persuasion: Reinventing Free Markets since the Depression (Cambridge, MA: Harvard University Press, 2012), 186–213. 27. Donald Woutat, “GM Chairman Stempel Resigns Under Pressure,” Los Angeles Times, October 27, 1992, A1. 28. Mizruchi, “Berle and Means Revisited,” 599. 29. As quoted in Dalia Tsuk, “From Pluralism to Individualism: Berle and Means and Twentieth- Century American Legal Thought,” Law & Social Inquiry 30 (Winter 2005): 215. And see also Kenneth Lipartito and Yumiko Morii, “Rethinking the Separation of Ownership from Management in American History,” Seattle University Law Review 33, no. 4 (2010): 1025–1063. In their conclusion, Lipartito and Morii write, “The original message of The Modern Corporation was lost when commentators shifted their reading of the book to principal-agent conflict and reduced corporate responsibility to just one issue—maximizing shareholder value,” 1057. 30. Naomi Lamoreaux, Daniel Raff, and Peter Temin, “Beyond Markets and Hierarchies: Toward a New Synthesis of American Business History,” American Historical Review, April 2003, 420. 31. As quoted in Tom Frank, One Market under God: Extreme Capitalism, Market Populism, and the End of Economic Democracy (New York: Anchor Books, 2000), 211. 32. Josh Eidelson, “Labor Board Alleges Repeated Retaliation at Walmart’s Top US Warehouse,” The Nation, March 20, 2013. 33. David Weil, “Examining the Underpinnings of Labor Standards Compliance in Low Wage Industries,” Report to the Russell Sage Foundation, May 31, 2012, 15. 34. Richard Langlois, “The Vanishing Hand: The Changing Dynamics of Industrial Capitalism,” Industrial and Corporate Change, 12 (2003): 373. And see also Nitin Nohria, Davis Dyer, and Frederick Dalzell, Changing Fortunes: Remaking the Industrial Corporation (New York: John Wiley & Sons, 2002). 35. Gerald F. Davis, “After the Corporation,” Politics and Society 41 (June 2013): 283–308.

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Notes to Pages 340–347

36. Tian Luo, Amar Mann, and Richard Holden, “The Expanding Role of Temporary Help Ser vices from 1990 to 2008,” Monthly Labor Review, August 2010, 3–16. 37. The Statistics Portal: Statistics and Studies from More than 18,000 Sources (online). 38. U.S. Census, “Census Bureau’s First Release of Comprehensive Franchise Data Shows Franchises Make Up More than 10 Percent of Employer Businesses,” September 14, 2010, at www.census.gov/newsroom /releases /archives. 39. Nelson Lichtenstein, The Retail Revolution: How Wal-Mart Created a Brave New World of Business (New York: Picador, 2010), 211. 40. Erin Hatton, The Temp Economy: From Kelly Girls to Permatemps in Postwar America (Philadelphia: Temple University Press, 2011), 27. 41. George Gonos, “The Contest over ‘Employer’ Status in the Postwar United States: The Case of Temporary Help Firms,” Law & Society Review 31 (1997): 90. 42. Ibid., 102. 43. As quoted in Hatton, The Temp Economy, 74. 44. Gonos, “The Contest over ‘Employer’ Status,” 86–87. 45. Ibid., 105. 46. Josh Eidelson, “Finally Paying for Wal-Mart’s Sins: Wage Theft Settlement Yields Millions,” Salon, December 16, 2013. 47. Weil, The Fissured Workplace, 66. 48. Lydia DePillis, “Why Franchises are Such a Huge Obstacle to Higher Wages,” Washington Post, December 6, 2013. 49. “Mid-70s Marketing Changes Put Wal-Mart on the Road to Success,” Arkansas Gazette, March 6, 1983. 50. John P. Walsh, Supermarkets Transformed: Understanding Organizational and Technological Innovations (New Brunswick, NJ: Rutgers University Press, 1993), 94–95. 51. “Wal-Mart Tests UPC,” Discount Store News, June 15, 1992, 83; author’s conversation with Wal-Mart cashier, Newport, AR, June 6, 2006. 52. Bob Martin, “From Vision to Reality,” in Twenty-Five Years Behind Bars, ed. Alan Haberman (Cambridge, MA: Harvard University Press, 2001), 39. 53. David Smith, “Satellite Scans Wal-Mart Empire,” Arkansas Democrat, December 3, 1989, 1G; Christopher Sullivan, “Wal-Mart’s Folksy Smile Belies Electronic Brain,” Morning News, September 27, 1993, 3A. 54. Stephen A. Brown, Revolution at the Checkout Counter (Cambridge, MA: Harvard University Press, 1997), 15–17. 55. “P&G Rewrites the Marketing Rules,” Fortune, November 6, 1989. 56. Emily Nelson, “Retailing: Why Wal-Mart Sings, ‘Yes, We Have Bananas!’ ” Wall Street Journal, October 6, 1998, B1. 57. Constance Hays, “What They Know About You,” New York Times, November 14, 2004, 1.

Notes to Pages 347–350

58. Sarah Ellison, Ann Zimmerman, and Charles Forelle, “Sales Team—P&G’s Gillette Edge: The Playbook It Honed at Wal-Mart,” Wall Street Journal, January 31, 2005. 59. Richard Langlois, “The Vanishing Hand: the Changing Dynamics of Industrial Capitalism,” Economics Working Papers, University of Connecticut, November 1, 2002; and Gary Gereffi, John Humphrey, and Timothy Sturgeon, “The Governance of Global Value Chains,” Review of International Political Economy 12 (February 2005): 79–82. 60. Immanuel Wallerstein, “The Rise and Future Demise of the World-Capitalist System: Concepts for Comparative Analysis,” Comparative Studies in Society and History 16, no. 4 (1974): 387–415; the quote is taken from Terence K. Hopkins and Immanuel Wallerstein, “Commodity Chains in the WorldEconomy Prior to 1800,” Review 10, no. 1 (Summer 1986): 159. 61. For an overview of this literature see Jennifer Bair, “Global Capitalism and Commodity Chains: Looking Back, Going Forward,” Competition and Change 9, no. 2 (June 2006): 129–156; Frederick H. Abernathy et al., A Stitch in Time: Lean Retailing and the Transformation of Manufacturing—Lessons from the Apparel and Textile Industries (New York: Oxford University Press, 1999); Gary Gereffi and Miguel Korzeniewicz, eds., Commodity Chains and Global Capitalism (Westport, CT: Praeger, 1994), 95–122. Misha Petrovic and Gary G. Hamilton, “Making Global Markets: Wal-Mart and Its Suppliers,” in Wal-Mart: the Face of Twenty-First Century Capitalism, ed. Nelson Lichtenstein (New York: New Press, 2006), 107–142; author’s telephone interview with former Bain and Company consultant, November 15, 2005. 62. Gary Gereffi, John Humphrey, and Timothy Sturgeon, “The Governance of Global Value Chains,” Review of International Political Economy 12 (February 2005): 79–82; and Nelson Lichtenstein, “The Return of Merchant Capitalism,” International Labor and Working-Class History 81 (Spring 2012): 8–27. 63. Brishen Rogers, “Law and the Global Sweatshop Problem,” in Appelbaum and Lichtenstein, Achieving Workers’ Rights, 137–151. 64. Marcelo Bucheli, “United Fruit Company in Latin America,” in Banana Wars: Power, Production, and History in the Americas, eds. Steve Striffler and Mark Moberg (Durham, NC: Duke University Press, 2003), 80–100; Bucheli quoted on page 97. 65. Author’s interview with Brent Berry, Rogers, AR, May 30, 2007. 66. Sam Hornblower, “Wal-Mart in China: A Joint Venture,” on Frontline website, “Is Wal-Mart Good for America?” http://www.pbs.org/wgbh/pages/frontline /shows/walmart/. 67. Bill Bowden, “PREL CEO Says Wal-Mart’s Policy is No Sweat,” Northwest Arkansas Business Journal, June 25, 2001. 68. Ibid. 69. Gereffi et al., “The Governance of Global Value Chains,” 81, 94–95.

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Notes to Pages 351–354

70. Jennifer Bair, “Global Commodity Chains: Genealogy and Review,” in Frontiers of Commodity Chain Research, ed. Jennifer Bair (Stanford, CA: Stanford University Press, 2009), 9–14. 71. Hong Xue, “Outsourcing in China: Wal-Mart and Chinese Manufacturers,” in Wal-Mart in China, ed. Anita Chan (Ithaca, NY: Cornell University Press, 2011). 72. James A. Schmiechen, Sweated Industries and Sweated Labor: The London Clothing Trades, 1860–1914 (Urbana: University of Illinois Press, 1984); Sheila Blackburn, “ ‘Between the Devil of Cheap Labour Competition and the Deep Sea of Family Poverty?’ Sweated Labour in Time and Place, 1840–1914,” Labour History Review 71, no. 2 (August 2006): 99–121. 73. Jonathan Watts, “Strikes in China Signal End to Era of Low- Cost Labour and Cheap Exports,” The Guardian, June 17, 2010; Tini Tran, “China Takes Hands-Off Approach to Labor Strikes,” Associated Press, June 25, 2010, as posted on www.msnbc.com; Walden Bello, “Capital’s New Crushes: As Authoritarian China Loses Luster, TNCs Flirt with Democratic Indonesia and Brazil,” Inquirer.net, June 25, 2011; Chris King-Chi Chan and Pun Ngai, “The Making of a New Working Class? A Study of Collective Actions of Migrant Workers in South China,” China Quarterly 198 (June 2009): 287–303. 74. Anita Chan, “Introduction,” in Chan, Wal-Mart in China; Jane Slaughter, “Next Low-Wage Haven: USA,” Labor Notes, August 2011, 1. 75. Proponents of such an analysis can be found on the left, the center, and the right. Sociologist Richard Appelbaum and American Studies theorist Andrew Ross see such a future as men of the left. Thomas Friedman and Niall Ferguson, in the center, agree albeit with some alarm; and on the right it is the near universal view that China’s stratified economic enterprises will soon eat our lunch. Andrew Ross, Fast Boat to China: Corporate Flight and the Consequences of Free Trade; Lessons from Shanghai (New York: Pantheon, 2006); and for an indication that the Chinese government is looking for ways to raise labor standards and push production up the supply chains, see Appelbaum et. al., “China’s New Labor Contract Law,” 485–490. 76. Sam Gustin, “Apple, HP, and Sony Open Probes into Latest Foxconn Suicides,” at www.dailyfinance.com, May 28, 2010; Wu Tsen-His, “Foxconn Suicide Scandal: Deeper in the Fox Hole,” at www.theepochtimes.com, June 4, 2010; Jenny Chan and Pun Ngai, “Suicide as Protest for the New Generation of Chinese Migrant Workers: Foxconn, Global Capital, and the State,” Asia-Pacific Journal, accessed at www.japanfocus.org/-Jenny-Chan/3408. 77. Jeff Hermanson, “Workers of the World, Unite!: The Strategy of the International Union League for Brand Responsibility,” in Appelbaum and Lichtenstein, Achieving Workers’ Rights, 259–274. 78. Pun Ngai and Yu Xiaomin, “Wal-Martinization, Corporate Social Responsibility and the Labor Standards of Toy Factories in South China,” in Chan, Wal-Mart in China. 79. Allie Robbins, “The Future of the Student Antisweatshop Movement: Providing Access to U.S. Courts for Garment Workers Worldwide,” American University Labor & Employment Law Forum 3 (2013): 128.

Notes to Pages 354–358

80. Christopher Yates, “Adidas Agrees to Pay Severance to Workers,” Cornell Daily Sun, April 25, 2013. The money was not an issue since Adidas had voluntarily agreed to provide various kinds of food and living expense support. The real issue was that of legal financial obligation, which the company sought strenuously to avoid. 81. See: http://www.americanapparel.net/contact/vertical.html. 82. Fraser, Labor Will Rule, 26. 83. Emil Schlesinger, The Outside System of Production in the Women’s Garment Industry in the New York Market (New York: ILGWU, 1951), 5–6. 84. “Garment Jobbers Lay All to Unions: Deny They are Employers,” New York Times, May 30, 1924, E14. 85. Louis Stark, “Garment Industry Nears Agreement,” New York Times, July 22, 1933, 20. 86. Jennifer Bair, “The Limits to Embeddedness: Triangular Bargaining and the Institutional Foundations of Organizational Networks,” Institute of Behavioral Science Working Paper, University of Colorado, August 2012, 8. 87. Ibid., 10. 88. Richard Appelbaum, “Achieving Workers’ Rights in the Global Economy,” paper offered at the American Sociological Association Meeting, August 12, 2013; Mark Anner, Jennifer Bair, and Jeremy Blasi, “Towards Joint Liability in Global Supply Chains: Addressing the Root Causes of Labor Violations in International Subcontracting Networks,” unpublished paper in author’s possession. 89. Robbins, “The Future of the Student Antisweatshop Movement,” 131–136. 90. Anner, Bair, and Blasi, “Toward Joint Liability in Global Supply Chains.” 91. Steven Green house, “U.S. Retailers See Big Risk in Safety Plan for Factories in Bangladesh,” New York Times, May 22, 2013. 92. In a July 2014 announcement, the General Counsel of the National Labor Relations Board held that employees of McDonald’s franchisees could make formal complaints against McDonald’s USA, the powerful and profitable franchisor. The rationale for this preliminary ruling is that, “under the totality of the circumstances,” a joint employer status exists when two employers both exert sufficient control over the terms and conditions of employment for the same group of employees. John Alden, Rupert Barkoff, and Carl Salisbury, “NLRB General Counsel Allows Complaints against Franchisees to Proceed against Franchisor under Joint-Employer Theory,” Lexology (online), August 5, 2014. And see also, Andrias, “The New Labor Law,” which discusses the 2016 NLRB decision in Browning-Ferris, holding a company and its subcontractor “joint employers.”

10. Citizens United, Personhood, and the Corporation in Politics The author thanks all participants in the Tobin Project for their comments and suggestions, with special mention to Naomi Lamoreaux, Ciara TorresSpelliscy, and Bill Novak.

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Notes to Pages 359–364

1. See Adam Liptak, “Supreme Court Gets a Rare Rebuke, in Front of a Nation,” New York Times, January 28, 2010. 2. Citizens United v. Federal Election Commission, 558 U.S. 310 (2010). 3. Id. at 319. 4. “The Court’s Blow to Democracy,” New York Times, January 21, 2010, http://www.nytimes.com/2010/01/22/opinion/22fri1.html?ref = opinion. 5. See John Bonifaz and Ryan O’Donnell, “Citizens United: States’ Responses Show Election Reform Is Needed,” San Jose Mercury News, December 31, 2013, http://www.mercurynews.com/opinion/ci _ 24818126/citizens-united -states-responses-show-election-reform-is. 6. This data is collected at https://movetoamend.org/resolutions-map. 7. Dan Eggen, “Poll: Large Majority Opposes Supreme Court’s Decision on Campaign Financing,” Washington Post, February 17, 2013, http://www .washingtonpost.com/wp-dyn/content/article/2010/02/17/AR2010021701151 .html. 8. See McConnell v. FEC, 540 U.S. 93 (2003). 9. Jeff rey Toobin, “Money Unlimited: How Chief Justice John Roberts Orchestrated the Citizens United Decision,” New Yorker, May 21, 2012, http://www .newyorker.com/reporting/2012/05/21/120521fa _fact _toobin. 10. See New York Times, “The Court’s Blow to Democracy.” 11. See Justin Berton, “Corporation Not a Person in Carpool Lanes,” San Francisco Gate, January 8, 2013, http://www.sfgate.com/bayarea/article/Corporation-not -person-in-carpool-lanes-4173366.php. 12. See John Nichols, “America’s Most Dynamic (Yet Under-Covered) Movement: Overturning Citizens United,” The Nation, July 5, 2013, http://www.thenation .com/blog/175129/americas-most-dynamic-yet-under-covered-movement -overturning-citizens-united#. 13. See “Congressman McGovern Introduced the People’s Rights Amendment,” FreeSpeechForPeople.Org, http://freespeechforpeople.org/congressman -mcgovern-introduces-the-peoples-rights-amendment/. 14. See Elizabeth Pollman, “The Constitutional Rights of Corporations: Framing Corporate Personhood and Categorizing Rights,” http://www.scribd.com/doc /113533245/Elizabeth-Pollman-The-Constitutional-Rights-of-Corporations -Framing-Corporate-Personhood-and-Categorizing-Rights. 15. See Margaret Blair and Elizabeth Pollman, “The Supreme Court’s View of Corporate Rights” (Chapter 7); and Ruth Bloch and Naomi Lamoreaux, “Corporations and the Fourteenth Amendment” (Chapter 8). 16. On the history of the Citizens United litigation, see Toobin, “Money Unlimited”; Marcia Coyle, The Roberts Court: The Strug gle for the Constitution (New York: Simon & Schuster, 2013), 199 et seq. 17. The BCRA is available at http://www.law.cornell.edu/background/campaign _ finance/bcra _txt.pdf. 18. On Drew Days’s argument in Lopez, see Adam Winkler, “Gotcha,” Scotusblog, August 5, 2011, http://www.scotusblog.com/2011/08/gotcha/.

Notes to Pages 365–369

19. FEC v. Wisconsin Right to Life, Inc., 551 U.S. 449 (2007). 20. See Steve Bank and Ajay Mehrotra, “Corporate Taxation and the Regulation of Early Twentieth-Century American Business” (Chapter 5); Daniel Crane, “The Dissociation of Incorporation and Regulation in the Progressive Era and the New Deal” (Chapter 3); and William Novak, “The Public Utility Idea and the Origins of Modern Business Regulation” (Chapter 4). On the early campaign finance laws, see Anthony Corrado, “Money and Politics: A History of Campaign Finance Law,” in Campaign Finance Reform: A Sourcebook, eds. Anthony Corrado et al. (Washington: Brookings Institution Press, 1997), 27; Robert E. Mutch, “The First Federal Campaign Finance Bills,” in Money and Politics, ed. Paula Baker (University Park: Pennsylvania State University Press, 2002), 30; Robert E. Mutch, Campaigns, Congress, and the Courts: The Making of Federal Campaign Finance Law (New York: Praeger Publishers, 1988). 21. On the scandal that gave rise to the Tillman Act, see Adam Winkler, “ ‘Other People’s Money’: Corporations, Agency Costs, and Campaign Finance Law,” Georgetown Law Journal 92 (2004): 871–940; Patricia Beard, After the Ball: Gilded Age Secrets, Boardroom Betrayals, and the Party That Ignited the Great Wall Street Scandal of 1905 (New York: HarperCollins Publishers, 2003). 22. See Winkler, “Other People’s Money,” 893–900. 23. Mark Wahlgren Summers, “ ‘To Make the Wheels Revolve We Must Have Grease’: Barrel Politics in the Gilded Age,” in Baker, Money and Politics, 49, 68. 24. See Adam Winkler, “Voters’ Rights and Parties’ Wrongs: Early Political Party Regulation in the State Courts, 1886–1915,” Columbia Law Review 100 (2000): 873–899, 877. 25. On the rise of commercial, mass electioneering, see Margaret Finnegan, Selling Suff rage: Consumer Culture and Votes for Women (New York: Columbia University Press, 1999). 26. See Summers, “To Make the Wheels Revolve.” 27. On business financing of turn-of-the-century elections, see Perry Belmont, “Publicity of Election Expenditures,” North American Review 180 (1905): 166–185; George Thayer, Who Shakes the Money Tree?: American Campaign Finance Practices from 1789 to the Present (New York: Simon & Schuster, 1973), 49–50. 28. See Mutch, Campaigns, Congress, and the Courts, 7; Edwin Epstein, Corporations, Contributions, and Political Campaigns (Berkeley: Institute of Governmental Studies, University of California 1968), 12. Progressive era hostility to big business often disguised the many ways in which reformers of the era “accommodated, rather than tried to escape, large-scale business organizations.” Richard L. McCormick, “The Discovery that Business Corrupts Politics: A Reappraisal of the Origins of Progressivism,” American Historical Review 86 (1982): 247–274. 29. See Winkler, “Other People’s Money.” 30. For the classic statement, see Adolph Berle and Gardiner Means, The Modern Corporation and Private Property (New York: Commerce Clearing House,

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Notes to Pages 369–372

1932). In this volume, see Bank and Mehrotra, “Corporate Taxation”; and Nelson Lichtenstein, “Two Cheers for Vertical Integration: Corporate Governance in a World of Global Supply Chains” (Chapter 9). 31. See Winkler, “Other People’s Money,” 901–905. 32. On the rise of professional management, see Alfred D. Chandler Jr., The Visible Hand: The Managerial Revolution in American Business (Cambridge, MA: Belknap Press, 1977). 33. As historian Morton Keller explains, “[S]tock ownership did not determine the nature of the pre-Armstrong insurance companies—the mutual had the same corporate characteristics as the stock firms.” Keller, The Life Insurance Enterprise, 1885–1910: A Study in the Limits of Corporate Power (Cambridge, MA: Belknap Press, 1963), 271. On the conceptual link between insurance companies and other business corporations, see Winkler, “Other People’s Money,” 911–912. 34. Francis C. Lowell, “Mutual Life Insurance,” Atlantic Monthly 99 (1907): 51, 57. 35. See “W. A. Rogers: The Cartoonist of Civic Integrity,” Arena 35 (1906): 372–378. See also, Winkler, “Other People’s Money,” at 895. 36. 40 Congressional Record 96 (1905). 37. Perry Belmont, “Progress of Campaign-Fund Publicity,” North American Review 35 (1909): 35–42. 38. James K. Pollock Jr., Party Campaign Funds (New York: Alfred A. Knopf, 1926), 127–128. 39. Keller, The Life Insurance Enterprise, 258. 40. See Joseph E. Kallenbach, “The Taft-Hartley Act and Union Political Contributions and Expenditures,” Minnesota Law Review 33 (1948): 1–26. 41. On the relationship between unions and corporations in the development of campaign finance law, see David J. Sousa, “ ‘No Balance in the Equities’: Union Power in the Making and Unmaking of the Campaign Finance Regime,” Studies in American Political Development 13 (1999): 374–401. 42. See Sousa, “ ‘No Balance in the Equities,’ ” 376–382. 43. See Mutch, Campaigns, Congress, and the Courts, 157; John R. Bolton, “Constitutional Limitations on Restricting Corporate and Union Political Speech,” Arizona Law Review 22 (1980): 373–426, 385. 44. See Norman L. Cantor, “Uses and Abuses of the Agency Shop,” Notre Dame Law Review 59 (1983): 61–109, 74. 45. 93 Congressional Record 6440 (1947). 46. On Murray’s challenge, see Reuel E. Schiller, “From Group Rights to Individual Liberties: Post-War Labor Law, Liberalism, and the Waning of Union Strength,” Berkeley Journal of Employment and Labor Law 1 (1999): 1–73, 34. 47. United States v. Cong. of Indus. Orgs., 335 U.S. 106 (1948). 48. Cong. of Indus. Orgs., 335 U.S. at 123. 49. United States v. Int’l Union of United Auto., Aircraft & Agr. Implement Workers of Am., 352 U.S. 567 (1957).

Notes to Pages 372–377

50. Pipefitters Local 562 v. U.S., 407 U.S. 385 (1972). 51. See Robert E. Mutch, Buying the Vote: A History of Campaign Finance Reform (New York: Oxford University Press, 2014), 137–138. 52. Mutch, Buying the Vote, 138. 53. Pipefitters, 407 U.S. at 409. 54. See Edwin M. Epstein, “The PAC Phenomenon: An Overview,” Arizona Law Review 22 (1980): 355–372, 357. 55. See William H. White, The Organization Man (Philadelphia: University of Pennsylvania Press, 1956). 56. On Watergate’s impact on campaign fi nance law, see Mutch, Campaigns, Congress, and the Courts, 48 et seq.; Melvin I. Urofsky, Money and Free Speech: Campaign Finance Reform and the Courts (Lawrence: University Press of Kansas, 2005), 44 et seq. 57. 117 Congressional Record 43379 (remarks of Rep. Hansen). 58. On the rising campaign costs of the 1970s, see Mark A. Smith, American Business and Political Power: Public Opinion, Elections, and Democracy (Chicago: University of Chicago Press, 2000), 128–129 (describing the “firestorm of escalating campaign costs”). 59. See Dan Clawson et al., Dollars and Votes: How Business Campaign Contributions Subvert Democracy (Philadelphia: Temple University Press, 1988), 14. 60. See Epstein, “The PAC Phenomenon,” 356. 61. See the data on the 2000 election cycle at http://www.opensecrets.org /bigpicture/blio.php?cycle =2000. 62. On the Progressives and the rise of twentieth century speech freedoms, see David M. Rabban, “Free Speech in Progressive Social Thought,” Texas Law Review (1995): 951–1038; Jack M. Balkin, “Some Realism about Pluralism: Legal Realists Approaches to the First Amendment,” Duke Law Journal (1990): 375–430. 63. For background on Huey Long and the constitutional cases he made, see Richard C. Cortner, The Kingfish and the Constitution: Huey Long, the First Amendment, and the Emergence of Modern Press Freedom in America (Westport, CT: Greenwood Press, 1996). 64. Grosjean v. American Press Co., 297 U.S. 233 (1936). 65. Pembina Consol. Silver Mining & Milling Co. v. Pennsylvania, 125 U.S. 181 (1888). 66. Santa Clara Cty. v. S. Pac. R. Co., 118 U.S. 394 (1886). 67. See Hale v. Henkel, 201 U.S. 43 (1906). 68. New York Times Co. v. Sullivan, 376 U.S. 254 (1964). 69. NAACP v. Alabama ex rel. Patterson, 357 U.S. 449 (1958). 70. NAACP v. Button, 371 U.S. 415 (1963). 71. See the essay by Bloch and Lamoreaux in this volume. 72. Virginia State Bd. of Pharmacy v. Virginia Citizens Consumer Council, Inc., 425 U.S. 748 (1976). 73. See Valentine v. Chrestensen, 316 U.S. 52 (1942).

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Notes to Pages 377–381

74. First Nat’l Bank of Boston v. Bellotti, 435 U.S. 765 (1978). 75. On the Powell Memorandum’s political influence, see Kim Phillips-Fein, Invisible Hands: The Making of the Conservative Movement from the New Deal to Reagan (New York: W. W. Norton & Co., 2009), 162–164. The memorandum itself can be viewed at http:// law.wlu .edu /powellarchives /page.asp?pageid =1251. 76. James Q. Wilson, “The Corporation as a Political Actor,” in The American Corporation Today, ed. Carl Kaysen (New York: Oxford University Press, 1996), 413, 416. On the political mobilization of business, see Jerome L. Himmelstein, To the Right: The Transformation of American Conservatism (Berkeley: University of California Press, 1989); David Vogel, Fluctuating Fortunes: The Political Power of Business in America (New York: Basic Books, 1989). 77. On Bellotti as a manifestation of Powell’s advice, see Mutch, Buying the Vote, 175 et seq. 78. FEC v. Nat’l Right to Work Comm., 459 U.S. 197 (1982). 79. FEC v. Massachusetts Citizens for Life, Inc., 479 U.S. 238 (1986). 80. FEC v. Beaumont, 539 U.S. 146 (2003). 81. McConnell v. FEC, 540 U.S. 93 (2003). 82. Nat’l Right to Work Comm., 459 U.S. at 210, note 7. See also Austin v. Michigan Chamber of Commerce, 494 U.S. 652 (1990) at 659. 83. The nexus of contracts theory was first articulated in Michael C. Jensen and William H. Meckling, “The Theory of the Firm: Managerial Behav ior, Agency Costs, and Ownership Structure,” Journal of Financial Economics 3 (1976): 305–360, building on Ronald Coase, “The Nature of the Firm,” Economica 4 (1937): 386–405. See also, Jonathan R. Macey, “An Economic Analysis of the Various Rationales for Making Shareholders the Exclusive Beneficiaries of Corporate Fiduciary Duties,” Stetson Law Review 21 (1991): 23–44, 27. 84. See, e.g., Stephen M. Bainbridge, “In Defense of the Wealth Maximization Norm: A Reply to Professor Green,” Washington and Lee Law Review 50 (1993): 1423–1448; Macey, “An Economic Analysis,” 27. 85. William W. Bratton Jr., “The New Economic Theory of the Firm: Critical Perspectives from History,” Stanford Law Review 41 (1989): 1471–1528. See also Lichtenstein, “Two Cheers.” 86. See Joan Biskupic, American Original: The Life and Constitution of Supreme Court Justice Antonin Scalia (New York: Sarah Crichton Books, 2009), 65–73. 87. Quoted in Michael Useem, Executive Defense: Shareholder Power and Corporate Reorganization (Cambridge, MA: Harvard University Press, 1993), 21. 88. Peter Drucker, The Pension Fund Revolution (New Brunswick, NJ: Transaction Publishers, 1995). 89. Useem, Executive Defense, 33. 90. Stephen M. Bainbridge, “Participatory Management within a Theory of the Firm,” Journal of Corporation Law 21 (1996): 657–730, 717.

Notes to Pages 381–385

91. See, e.g., Randall v. Sorrell, 548 U.S. 230 (2006) (voiding Vermont’s contribution limits); Wisconsin Right to Life v. FEC, 551 U.S. 449 (2007) (loosening the rules on issue ads); Davis v. FEC, 554 U.S. 724 (2008) (overturning “millionaire amendment” provision of public financing); Arizona Free Enterprise Club’s Freedom Fund PAC v. Bennett, 564 U.S 721 (2011) (invalidating public financing matching provision). 92. McConnell v. FEC, 540 U.S. 93, 204 (2003) (quoting FEC v. Beaumont, 539 U.S. at 162, and Austin v. Michigan Chamber of Commerce, 494 U.S. 652 (1990), 658). 93. McConnell, 540 U.S. at 205 (quoting FEC v. Beaumont, 539 U.S. at 155, and quoting FEC v. National Right to Work Committee, 459 U.S. at 201–210). 94. See Trevor Potter, “Was the Court Conned in Citizens United?,” Bloomberg News, May 23, 2011, http://www.bloomberg.com/news/2011- 05-23/was-the -court-conned-in-citizens-united-.html. 95. SpeechNow.org v. FEC, 599 F.3d 686 (D.C. Cir. 2010). 96. On Chevron, see Dan Eggen, “Chevron Donates $2.5 Million to GOP Super PAC,” Washington Post, October 26, 2012, http://www.washingtonpost.com /blogs/post-politics/wp/2012/10/26/chevron-donates-2-5-million-to-gop -super-pac/. On business contributions to Super PACs, see Adam Lioz and Blair Bowie, “Election Spending 2012: Post-Election Analysis of Federal Election Commission Data,” Demos, November 9, 2013, http://www.demos .org/publication/election-spending-2012-post-election-analysis-federal -election-commission-data. 97. See Wendy Hansen et al., “The Effects of Citizens United on Corporate Contributions in the Presidential Election” (unpublished manuscript, 2013), http://papers.ssrn.com/sol3/papers.cfm?abstract _id=2300930. 98. Sunlight Foundation Reporting Group, “Following the Unlimited Money: Super PACs,” at http://reporting.sunlightfoundation.com/outside-spending -2012/super-pacs/. 99. See Hansen et al., “The Effects of Citizens United”; Chris Good, “Meet the Companies Behind the Super PACs,” ABC News, February 2, 2012, http:// abcnews.go.com/blogs/politics/2012/02/meet-the-companies-behind-the -super-pacs/. 100. Anna Palmer and Abby Phillip, “Corporations Don’t Pony Up for Super PACs,” Politico, March 8, 2012, http://www.politico.com/news/stories/0312 /73804.html. 101. See Liz Bartolomeo, “The Political Spending of 501(c)(4) Nonprofits in the 2012 Election,” Sunlight Foundation, May 21, 2013, http://sunlightfoundation .com/blog/2013/05/21/the-political-spending-of-501c4-nonprofits-in-the-2012 -election/. 102. See Nicholas Confessore, “Qualcomm Reveals Its Donations to Tax-Exempt Groups,” New York Times, February 22, 2013, http://cityroom.blogs.nytimes .com/2013/02/22/qualcomm-agrees-to-reveal-donations-to-tax-exempt -groups/?_r = 0.

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Notes to Pages 385–386

103. “Big Sky, Big Money: How Has the Supreme Court’s Citizens United Decision Changed Campaigns in America?,” Frontline, October 30, 2012, http://www .pbs.org/wgbh/pages/frontline/big-sky-big-money/. 104. See Scot Kersgaard, “Colorado GOP Donors Fly below the Radar with Maze of 527 Committees,” Colorado Independent, April 23, 2012, http://www .coloradoindependent.com/117249/colorado-gop-donors-fly-below-the-radar -with-maze-of-527-committees. 105. See Reity O’Brien and Andrea Fuller, “Citizens United Ruling Opened Door to $933 Million in New Election Spending,” NBC News, January 16, 2013, http://investigations.nbcnews.com/_news/2013/01/16/16530772-citizen -united-ruling-opened-door-to-933-million-in-new-election-spending?lite. 106. See William McQuillen, “Unions Gain under Citizens United Decision They Seek to Overturn,” Bloomberg News, July 17, 2012, http://www.bloomberg .com/news/2012-07-18/unions-gain-under-citizens-united-decision-they-seek -to-overturn.html. 107. See Alan Suderman et al., “Analysis: Unions Took Advantage of Citizens United Decision,” San Gabriel Valley Tribune, Nov. 14, 2013, http://www .sgvtribune.com/government-and-politics/20131114/analysis-unions-took -advantage-of-citizens-united-decision. 108. See Robert Barnes, “Roberts Court Rulings on Campaign Finance Reveal Shift ing Makeup, Forceful Role,” Washington Post, Nov. 1, 2010, http://www .washingtonpost.com/wp-dyn/content/article/2010/10/29/AR2010102903915 .html?sid= ST2010111903579. 109. On corporations maintaining previous practices even after Citizens United, see Hansen et al., “The Effects of Citizens United.” 110. See Open Secrets, “Top 20 PAC Contributors to Candidates, 2011–2012,” http://www.opensecrets.org/pacs/toppacs.php?cycle =2012&Type = C.

Acknowledgments

This book, the product of a five-year collaborative effort to understand the corporation as an institution of American democracy, owes its existence to the insights, talents, resources, and energies of many individuals. Here we recognize those whose contributions helped to shape the collective inquiry. Within their chapters, the authors acknowledge the many others who have supported their individual research. We would first like to thank the Honorable Patti B. Saris, who sparked this inquiry by noting the views of the history of the corporation put forth by the Supreme Court justices in Citizens United v. Federal Election Commission. We are also thankful to the Tobin Project’s founder and president, David Moss, who grasped the importance of Judge Saris’s observation and the urgency of providing judges and policy makers with a rigorous and up-to-date history of the corporation’s role in American democracy. Over the course of the three workshops at which contributors shared and developed their work, a number of people—fellow scholars, policy makers, and prac titioners—provided invaluable input. We gratefully acknowledge Angus Burgin, David Ciepley, Lawrence Hamermesh, John Majewski, Gregory Mark, Sabeel Rahman, Mark Roe, Arthur Segel, James Sparrow, and Ciara TorresSpelliscy for their engagement, suggestions, and questions. We are also grateful for the contributions of Jonathan Massey, who, in addition to offering feedback on our chapters, worked with many of the contributors to weave this research into an amicus curiae brief for the Supreme Court case Burwell v. Hobby Lobby Stores, Inc. We also thank the public officials who provided their insights and support for this project, including the Honorable Leo E. Strine, Jr., Chief Justice of the Delaware Supreme Court, FEC Commissioner Ellen Weintraub, and Senator Elizabeth Warren. We are fortunate to have the opportunity to work with Harvard University Press to bring this volume to fruition. Our editor, Thomas LeBien, has been an exceptional intellectual partner in this endeavor. We also thank Westchester 493

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Acknowledgments

Publishing Ser vices for providing detailed and thoughtful editorial feedback and are especially grateful to Brian Ostrander for his attentiveness and guidance. Additionally, we are grateful to the two anonymous reviewers of the manuscript, who devoted significant time to working carefully through the draft chapters and whose advice guided all of our revisions. We would also like to acknowledge the continuing institutional support of the History and Economics Departments at Yale University and the Law School at the University of Michigan.

Portions of Chapter  4 were first published in Administrative Law from the Inside Out: Essays on Themes in the Work of Jerry Mashaw, edited by Nicholas R. Parrillo, Cambridge University Press, 2017, and are reprinted here by permission. We would also like to thank the staff of the Tobin Project, who have shepherded this volume from start to finish, providing essential intellectual and administrative support. In particular, we thank John Cisternino, the Tobin Project’s Director of Research, who has worked closely with us on this project since its inception; Paul Gutierrez and Yousef Gharbieh, who helped to convene the meetings out of which the ideas in this volume grew; Rebecca Chan, who led the outreach to policy makers and stewarded the group through much of the writing process; Nathaniel Donahue, who guided the volume through the editing and publication processes; and Jess Davis, who is working hard to ensure that this volume reaches its intended audiences of scholars, policy makers, students, and citizens. In many and varied ways others at the Tobin Project contributed to this work, and we are grateful to Elizabeth Abraham, Katherine Aoki, Alexander Berlin, Rachel Craft, Sam Dunham, Grace Judge, Tim Lambert, Rachel Lipson, Katherine Nihill, and Melanie Wachtell Stinnett. Finally, we are thankful for the sustained generosity of the foundations and individuals who support the Tobin Project and for the guidance of Tobin’s Board of Directors and Advisory Board, without whom this volume would not have been possible.

Contributors

STEVEN A. BANK is the Paul Hastings Professor of Business Law, UCLA School of Law. MARGARET M. BLAIR is the Milton R. Underwood Chair in Free Enterprise, Vanderbilt Law School. RUTH H. BLOCH is Professor Emerita of History, University of California, Los

Angeles. DANIEL A. CRANE is the Frederick Paul Furth Sr. Professor of Law, University of Michigan School of Law. JESSICA L. HENNESSEY is Associate Professor of Economics, Furman University. ERIC HILT is Associate Professor of Economics, Wellesley College. NAOMI R. LAMOREAUX is the Stanley B. Resor Professor of Economics and History at Yale University, Chair of the History Department, and a Research Associate at the National Bureau of Economic Research. JONATHAN LEVY is Professor of US History, Fundamentals, and the College, University of Chicago. NELSON LICHTENSTEIN is Distinguished Professor of History and directs the Center for the Study of Work, Labor, and Democracy at the University of California, Santa Barbara. AJAY K. MEHROTRA is Executive Director and Research Professor, American Bar Foundation and Professor of Law, Northwestern University Pritzker School of Law. WILLIAM J. NOVAK is a legal scholar and historian at the University of Michigan

Law School. ELIZABETH POLLMAN is Professor of Law, Loyola Law School, Los Angeles. JOHN JOSEPH WALLIS is Professor of Economics, University of Maryland and Research Associate, National Bureau of Economic Research. ADAM WINKLER is Professor of Law, University of California, Los Angeles School

of Law. 495

Index

AARP (American Association of Retired Persons), 238 Abernathy, Frederick, 348 Accidents, 329–330, 332, 354, 356 Accord on Fire and Building Safety, 332, 354, 356–357 Accounting Theory (Paton), 222–223 ACLU (American Civil Liberties Union), 29, 310–311, 315 Adair v. United States, 302 Adams, Charles Francis, 161, 162, 163–164 Adams, Henry Car ter, 140 Adams, Thomas S., 193, 195, 196 Addyston Pipe, 416n26 Adkins v. Children’s Hospital, 302, 303, 308 Administration, and public utilities, 156, 157 Advertisements, political, 363, 365, 382, 383 Advertising, 277 Affordable Care Act, 243, 364. See also Hobby Lobby AFL (American Federation of Labor), 370 AFL-CIO, 385 Alabama, 88, 317 Albany Regency, 11, 63, 64, 65, 409n90 Alito, Samuel, 27, 30, 31, 243, 324–325, 359, 364, 365, 381, 382 Allgeyer v. Louisiana, 299, 300, 301, 303 Almond, Gabriel, 214 American Association of Retired Persons (AARP), 238 American Capitalism (Galbraith), 1

American Civil Liberties Union (ACLU), 29, 310–311, 315 American Federation of Labor (AFL), 370 American League of the Friends of the New Germany of Hudson County, 311 American Revolution, 7, 46, 80 American Sugar, 187 American Tobacco, 304 Andros, Edmund, 7 Angell, Joseph, 147 Antibusiness legislation, 378 Anti-Federalists, 111 Antitrust enforcement, 125, 128 Antitrust legislation, 119, 127–128, 130; constitutionality of, 296–297; crimetort model, 131; Sherman Antitrust Act, 14, 15, 18, 20, 115, 121, 122, 123, 124, 126, 154, 267, 274, 416n26, 418n77; used against labor, 115 Antitrust litigation, 112–113, 120, 134, 304; United States v. E. C. Knight, 296, 314 Armstrong Committee, 367, 369 Arnold, Thurman, 128 Assembly, right of, 29 Association, expressive, 242 Association, freedom of, 215, 231, 232, 234, 241–242, 284, 317 Associational approach, 28, 266, 269, 272, 274, 282, 361, 362, 368–369, 382, 383 Atlantic Monthly, 369 Austin v. Michigan Chamber of Commerce, 27, 378, 379–380, 383, 462n216 Authority, corporate, 5

497

498

Index Bagley, Nicholas, 159 Bailey, Joseph W., 183 Bailey-Cummins bill, 183 Bailyn, Bernard, 80 Bair, Jennifer, 356 Ballantine, Arthur, 197, 221–222 Bangladesh, 332, 356, 357 Bank, Steven, 18, 19, 20, 22, 25, 214, 221, 367 Bank crises, 11, 61, 64, 65, 66, 68, 182 Banking, Canadian, 407n72 Bank of America, 62 Bank of Augusta v. Earle, 251–252, 259, 260 Bank of England, 6 Bank of New York, 11, 41, 43, 44, 45, 61–62, 402n30 Bank of North America, 8, 40–41 Bank of the Manhattan Company, 62 Bank of the United States, 41, 62, 111, 118, 259, 415n4 Bank of the United States v. Deveaux, 248–249, 251, 259–260 Banks, 8, 59–70; bank charters, 61–67, 81; Bank of the United States, 41, 62, 111, 118, 259, 415n4; banned, 67–68, 407n75; controversy over, 11–12, 60; free banking, 11, 60, 66–70, 71, 410n112; and general incorporation, 39, 60, 66–70, 71, 400n9, 404n50; and general regulating acts, 404n49; limited partnership measure, 66; limiting entry, 60; monopoly state banks, 67, 68; in New York, 11, 41, 43, 44, 45, 61–67, 71, 402n30, 407nn76,78, 408n83; opposition to, 61; Panic of 1826, 64, 65; Panic of 1837, 66; Panic of 1857, 68; Panic of 1907, 182; and politics, 11–12, 65–66, 67; profitability of, 60; regulation for, 60; Safety Fund Act, 65; states’ involvement in, 80–81; threats to democracy from, 181 Bank Secrecy Act of 1970, 307 Bar codes, 344–347 Barron, Mary, 175 Baseball analogy, 84

BCRA (Bipartisan Campaign Reform Act), 363, 365, 366, 379, 381, 382 Beale, Joseph Henry, 141, 147, 151, 157 Becker, Gary, 23 Beekman v. Saratoga and Schenectady Railroad Co., 149 Bellotti, 27, 29, 278–281, 288, 319–321, 323, 324, 325, 377–378, 379, 449n128 Belmont, Perry, 369 Bentham, Jeremy, 157 Berea College v. Kentucky, 309 Berle, Adolf, 1, 18, 21, 24, 40, 200, 204, 224, 225, 230, 334, 335, 337, 338, 339, 357, 481n29 Bill of Rights, 303, 304–305 Binney, Charles Chauncey, 88, 92 Bipartisan Campaign Reform Act (BCRA), 363, 365, 366, 379, 381, 382 Black, Hugo, 311–313 Blackstone, William, 145, 157 Blair, Margaret, 27, 28, 29, 132, 219 Blake v. McClung, 297–298 Bloch, Ruth, 15, 28, 29, 132, 219, 224, 243 Boards of directors, 268 Books, banning, 364–365 Borah, William, 125–126, 201 Borah-Mahoney Bill, 18, 110, 111, 126–128, 201 The Bottlenecks of Business (Arnold), 128 Boy Scouts of America v. Dale, 241, 242 Bradley, Joseph P., 300, 301 Bradwell v. State, 413n18, 469n78 Brandeis, Louis, 123, 181, 199–200, 334; Other People’s Money, 1, 17–18, 140 Brands, 265–266 Brennan, William J., 241, 280, 318, 321, 322, 373 Brewer, David, 134, 294 Breyer, Stephen G., 168, 282, 366 Brick, Howard, 335 Brinkley, Alan, 22, 24 Brown, Henry B., 304–305 Bryan, William Jennings, 119 Bubble Act, 6, 7, 257 Bucheli, Marcelo, 349 Buckley v. Valeo, 278

Index Buehler, Alfred G., 205 Bunting, David, 269 Bureaucracies, 270, 272 Bureau of Corporations, 120, 124, 125, 188 Burgin, Angus, 23 Burr, Aaron, 11, 45, 62 Burwell v. Hobby Lobby, 1, 5, 25, 26–27, 30, 217, 243, 245, 283, 285, 324–325 Business, social control of, 173 Butchers’ Union Company v. Crescent City Company, 300–301 Butters, J. Keith, 206 Buying agencies, 349 Buying power, 346–347 Callanan, Lawrence L., 372 Campaign finance laws, 3, 28, 281–282, 307–308; Bellotti, 29, 278–281, 288, 319–321, 323, 324, 325, 449n128; cases about, 360; constitutional challenges to, 308; and disclosure of corporate financing, 383–384; and distinction between types of corporations, 322–323; FECA, 241, 374; and First Amendment, 278, 308; and Fourteenth Amendment, 288; and industrialization of elections, 367–368; PACs, 281, 282, 323, 337, 362, 372, 373–375, 381, 382, 384, 385–386; post-Bellotti cases, 378–379; and Roberts Court, 381; Smith-Connolly Act, 370; Taft-Hartley Act, 371–372, 373; Tillman Act, 28, 275–276, 307, 308, 367, 368, 369–370; and unions, 336–337, 370–373. See also Citizens United v. Federal Election Commission; Political spending Campaign finance reform, call for, 369 Campaigns, transformation in, 368 Campbell, John, 252 Cannon, Charles, 202 Capital, industrial, 221, 234 Capitalism, and freedom, 23 Capitalism, corporate, 180 Carnegie, Andrew, 219, 264 Carnegie Foundation, 233 Carter Coal, 127

Cato’s Letters (Trenchard and Gordon), 80 CDC (Community Development Corporation), 233 Celler-Kefauver Act, 130 Central Hudson Gas & Electric Corporation v. Public Ser vices Commission of New York, 277 Chandler, Alfred, 154, 259, 267, 268, 333 Change, institutional, 76, 77, 90. See also General incorporation; State constitutions Charitable corporations, 10 Charles River Bridge v. Warren Bridge, 8, 9, 17, 151, 251, 259, 260 Chartering, federal: and corporate rights, 132–133; lack of, 128; proposals for, 109–110, 111. See also Incorporation, federal Charters, 2, 256; in colonies, 7; in early America, 8–9; legislatures stripped of power to enact, 9; relation with regulation, 111. See also Privileges Charters, bank. See Banks Charters, state, 37–38, 78, 149–150, 257–258; access to, 39, 45, 70–71; competition for, 14, 93, 109, 116, 394n54 (see also Race to the bottom); and control of corporations, 40; as monopolies, 42; and politics, 40, 48; and privileges, 403n35; and public utilities, 150–151; and regulation, 52–54, 144; standardization of, 53. See also Corporations, early Charters of incorporation, 147. See also Chartering, federal; Charters, state Cheadle, John, 159 Chester, Colby, 335 Chicago school of economics, 24, 25 China, 94, 352–353 Churches, 5, 8–9, 10, 308, 322, 473–474n117, 478n179 Church of Scientology, 322 CIO (Congress of Industrial Organizations), 370, 371; Hague v. Committee for Industrial Organization, 310–311, 315, 318

499

500

Index Citizen, corporation as, 248, 249, 251, 252 Citizens United v. Federal Election Commission, 1, 5, 19, 25, 26–27, 30, 31, 39, 110, 136, 138, 216, 243, 245, 281–282, 323–324, 337; and associational approach, 382, 383; background, 362–363; criticism of, 360; and disclosure of corporate financing, 386–387; dissent, 37, 282–283, 366–367; effects of, 75, 324, 385–386, 387; and First Amendment, 288, 365–366, 386, 387; focus of, 246; historical claims of, 72–73, 325; as legal precedent, 384; and listeners’ rights, 382–383; majority opinion, 359, 382; options to respond to, 386–387; and personhood, 360, 382, 386, 387; and precedent, 288–290; reaction to, 37, 359–360; reargument, 365–366; turning point in, 364–365; and unions, 385. See also Campaign finance laws; Speech, corporate The Civic Culture (Almond and Verba), 214 Civil Aeronautics Board, 25 Civil Rights Act (1964), 321 Civil Rights Cases, 172 Civil Rights Movement, 232, 313–319 Civil society, 213–214 Civil War, 186–187, 262 Classicism, 112 Clayton Act, 111, 124, 271 Clemens, Elisabeth, 228 Clinton, Bill, 237 Clinton, George, 45 Clinton, Hillary, 363 Coase, Ronald, 24, 143, 333, 340, 357 Colonies, view of corporations in, 7 Comity, 252 Commentaries (Blackstone), 145 Commerce, distinguished from manufacturing, 296 The Commercial and Financial Chronicle, 193 Commercial speech doctrine, 276–278 Commissioner of Corporations, 121 Commissioner of Internal Revenue, 185, 306

Commission movement, 162 Committee on Banking and Currency, 201 Commodity chain, 347–348, 351 Common carriers, 146–147, 273, 423n14. See also Railroads Commons, John, 140; Legal Foundations of Capitalism, 1 Commonwealth v. Alger, 148, 170 Community Development Corporation (CDC), 233 Competition, 24, 264; and democracy, 83–84; interstate, 137; from nonprofit corporations, 227–228; replaced by oligarchy, 334 Competition, foreign, 338 “Competition and Democracy” (Becker), 23 Concept of the Corporation (Drucker), 213, 225 Concession theory, 293–294 Congress of Industrial Organizations (CIO), 370, 371; Hague v. Committee for Industrial Organization, 310–311, 315, 318 Congress of Racial Equality (CORE), 316–317, 318–319 Conklin, Paul, 204 Connecticut General Life Insurance Co. v. Johnson, 312 Constitutional Convention (1787), 118 Constitutional revolution, 136 Constitutions, state. See State constitutions Consumer protection, 131 Contingent workers, 340 Contract, freedom of, 305, 315, 325, 469n78 Contracting, independent, 343 Contract manufacturers, 340 Contracts, 250, 252 Contracts, nexus of, 380 Cooley, Thomas, 114, 302 Cooper, Thomas, 42 CORE (Congress of Racial Equality), 316–317, 318–319 Corporate benefits, 79

Index Corporate form: access to, 112. See also Corporations Corporate privileges, 79, 81, 82. See also Privileges Corporate Social Responsibility, 356 The Corporation and Modern Society (Latham), 229–230 The Corporation in Modern Society (Mason), 225 Corporations: ambivalence toward, 32; as artificial entities, 248, 251–252, 273; changes in, 256–268; criticism of, 245, 401n18; distinguished from owners, 188; as entity apart from shareholders, 223, 224; growth of, 260–263; history of, 256–260; image of, 272; lack of understanding of, 1; linked with unions, in Court rulings, 373; as natural entity, 188; nature of, 246, 247; as nexus of contracts, 380; number of, 4–5; separation of ownership and control, 369; transactional theories of, 240; transformation of, 266–268; variety of, 27, 28, 30, 213, 246, 271–272, 285 Corporations, early, 7–9, 37–38; academic studies of, 39–40; ambivalence toward, 2–3; changes in regulations, 51–54; control over, 40; controversy over, 40–41, 72; defined with respect to sovereignty, 217; distrust of, 2–3; diversity of, 4; efforts to undermine status of, 47; and historical claims of Citizens United, 72–73; and monopolies, 41, 47; in New York, 44–46; opposition to, 41–42, 45–46; and politics, 40–54; power to dissolve, 53; privileges of, 41–42; and public interest, 40. See also Charters, state Corporations, foreign, 310, 317, 405n61 Corporations, global, 329 Corporations, large, 266; backlash against, 367; concerns about, 270; development of, 74; and liberal general incorporation, 95; opinions about, 271; threats to democracy, 177 Corporations, modern, 269–272

Corporations, multinational, 235 Corruption, 3, 5, 7, 79–80, 181, 367; and access to incorporation, 39; by early corporations, 42, 70; by economics, 80; systematic corruption, 80, 85, 86, 399n6; use of term, 411n5; venal corruption, 79, 399n6 Cost of living, 181–182 Cox, Eugene, 233 Crane, Daniel, 14, 18, 19, 76, 201, 367 “Creature of the state” rhetoric, 134, 135 Credit, expansion of, 64 Cummins, Albert, 124, 183, 185 Curtis, William, 117 Dahrendorf, Ralph, 337–338 Darby, 127 Dark money, 384–385 Dartmouth College, 250 Dartmouth College, 3, 5, 9, 17, 151, 250, 252, 257, 259, 260, 280, 286 Davis, J. C. Bancroft, 289 Davis, Kenneth Culp, 141 Day, William R., 305 Days, Drew III, 364 Delaware, 14, 93, 94 DeMille, Cecil B., 371 Democracy: and competition, 83–84; and corporations, 31–33, 74, 77; economy prioritized over, 24; meaning of in America, 74–75; nature of, 96; and open entry, 97; prioritized over economy, 22, 23; threats to, 42, 81–82, 177, 181 Democracy, shareholder, 180, 279–280, 335 Democracy in America (Tocqueville), 213 Democratic Party, 61 Democratic-Republican Party, 41, 44, 62–63 Democratization, 46 Demsetz, Harold, 143 De Portibus Maris (Hale), 146, 170 Deveaux, 248–249, 251, 259–260 Dewey, John, 155, 157, 223 Dey, Ben, 203 Dictionary Act, 324–325 Dill, James, 116

501

502

Index Director elections, 279–280 “The Discovery That Business Corrupts Politics” (McCormick), 75 Dissent, political, 376 Dissociation, consequences of, 130–138 Distribution centers, 344 Diversity jurisdiction, 248–249, 250 Divorce law, 86 Dodge, Cleveland, 193 Dodge v. Woolsey, 252 Donnell v. Herring-Hall Marvin Safe Co., 224 Donors, identity of, 384–385 Douglas, William O., 312–313 Drucker, Peter, 213, 225, 333, 337, 338, 380 Drug prices, 277 Due process, 273, 280, 292, 298, 303 Due Process Clause, 29 Duguit, Leon, 155–156 Dunlop, John, 348 E. I. du Pont de Nemours and Company, 265 Du Pont formula, 222 East India Company, 6, 7 The Economic Basis of Public Interest (Tugwell), 158, 174–175 Economic Opportunity Act, 233 Economics, corruption of politics by, 80 Economy: democracy prioritized over, 22, 23; governmental regulation of, 171; influence on politics, 97; manipulation of, 94; prioritized over democracy, 24 Economy, planned, 126–127 Electioneering communication, 363, 364, 366, 379 Elkins Act, 115, 273 Ely, Richard T., 140 Employment, fissured, 331–332, 342 Employment agencies, 341–342 Employment relations, 341–343 The End of Reform (Brinkley), 22 England: corporate taxation in, 186; corporations in, 6–7, 257; public callings, 145–146 English Civil War, 6

Entity benefits, 78–79, 81, 83, 84 Entry, open, 94, 95–96, 97 Equality, 86–90, 91, 96 Equal protection clause, 253–256, 280, 291, 296, 298–299. See also Fourteenth Amendment Equitable Life Insurance Company, 367 Erie Canal, 46 Evans, George Heberton, 262 Experts, government by, 123 Factories, 329–330, 332, 348, 350, 351–352, 354, 355, 356 FCC (Federal Communications Commission), 130 FEC (Federal Election Commission), 363, 383 FECA (Federal Election Campaign Act), 241, 374 FEC v. Beaumont, 378–379 FEC v. Massachusetts Citizens for Life, 378 FEC v. National Right to Work Committee, 378, 379 Federal Communications Commission (FCC), 130 Federal Election Campaign Act (FECA), 241, 374 Federal Election Commission (FEC), 363, 383 Federal Election Commission v. Washington Right to Life, 365 Federalism, 135; Field’s version of, 292 Federalism revolution, 364 Federalist Party, 11, 41, 44, 46, 47, 111 Federal Power Commission, 18 Federal Reserve, 18 Federal Reserve Act, 124 Federal Trade Commission (FTC), 18, 20, 111, 124, 131, 154, 201 Federal Trade Commission Act, 15, 124 Field, Stephen, 28, 253, 254, 266, 290–293, 294–296, 297, 300, 305, 319 Fift h Amendment, 117, 134, 274, 304, 305, 453n54, 471–472n99 FIRE (financial, insurance, and real estate), 234–235

Index First Amendment, 29, 30, 232, 245, 276, 277, 281, 282, 284, 318, 320, 325, 362; and campaign finance laws, 278, 308; and churches, 478n179; and Citizens United, 288, 365–366, 386, 387; and commercial speech, 276–278, 377; extended to corporations, 28, 279, 280, 324, 360; and Fourteenth Amendment, 315–316; and media corporations, 316; and rights of corporations outside politics, 375; role of, 378; and TaftHartley Act, 371. See also Press, freedom of; Speech, freedom of First National Bank v. Bellotti, 29, 278–281, 288, 319–321, 323, 324, 325, 377–378, 379, 449n128 Fiscal triangle, 214–215, 220–231, 234, 236, 238, 239, 242, 244 501(c) classifications, 242 Flint v. Stone Tracy Company, 305–306, 307 Food and Drug Administration, 130 Ford, 332 Ford, Henry II, 234 Ford Foundation, 229, 233, 234, 238 Fortune, 346 Foundations, 229, 233, 234, 238 Fourteenth Amendment, 3–4, 5, 29, 171, 219, 232, 252–256, 275, 278, 280, 286–325; Beards on, 463n2; and Bellotti, 320; and campaign finance laws, 288; and concept of civil liberties, 286; and constitutionality of antitrust laws, 296–297; corporation as person in, 375; Court’s parsing of, 287; efforts to strip corporations of protections, 311–313; extended to corporations, 287; Field’s goal of expanding, 292; and First Amendment, 315–316, 317; and lack of reflection on nature of corporate personhood, 308; and nonprofit corporations, 308–311; person in, 312, 452n52; property vs. liberty rights in, 298–301; and Slaughter-House Cases, 292; and state regulation of corporations, 293–298; and types of corporations, 287. See also Due process; Equal

protection clause; Liberty rights; Santa Clara County v. Southern Pacific Railroad Company Fourth Amendment, 274, 284, 304, 305, 306, 471–472n99 Foxconn, 352–353 Franchisees, 340, 343, 485n92 Franchise values, 407n72 Frank furter, Felix, 139, 141, 142, 154, 155, 157, 159, 172, 173–174, 176 Fraser, Steve, 354 Free banking, 11, 60, 66–70, 71, 410n112 Freedom, and capitalism, 23 Freedom and the Economic System (Hayek), 23 Freight, 166–170 Freund, Ernst, 16–17, 149, 150, 155, 156, 158, 188 Friedman, Milton, 24, 338 FTC (Federal Trade Commission), 18, 20, 111, 124, 131, 154, 201 Fuller, Melville, 295 Galambos, Louis, 265, 270, 271 Galbraith, John Kenneth, 1, 23 Gardner, John W., 233, 234, 334 Garfield, James Rudolph, 116 Garment industry, 354–357 Garner, John Nance, 202 General Electric, 337 General incorporation, 2–3, 53–54, 71, 75, 76, 112, 261, 262, 400n13; applied to organizations other than corporations, 86–90; for banks, 60, 66–70, 71; early, 57; and exclusion of nonwhites, 406n70; liberal general incorporation, 91, 93, 94, 95; and loss of regulatory control, 153; for manufacturing, 12; Membership Corporation Law, 219, 232; movement to, 83–85; New York’s general incorporation statute, 55–57, 59; and nonprofit corporations, 218; proliferation of, 58–59; regulatory provisions in, 4; shift to, 10, 54–59; as solution to systematic corruption, 86; state laws, 17 Generality, 158

503

504

Index General laws, 86–90, 91, 96 General Motors, 225, 235, 333 General regulating acts, 53, 55, 404nn48,49, 405n55 Gereffi, Gary, 350 Gilded Age, 161 Ginsburg, Ruth Bader, 243, 282, 283, 366 Goodnow, Frank, 143, 156, 159 Google Inc., 235, 241 Gordon, Robert, 230 Gordon, Thomas, 80 Governance, corporate, 330, 336 Grandy, Christopher, 93 Granger Cases, 170, 253, 254 Granger laws, 140 Great Depression, 125; corporate taxation during, 179–180, 199–206, 208. See also New Deal Great merger movement, 17, 21, 93, 115, 180, 222, 266, 267, 269, 416n26 Great Society, 232, 234 Grosjean v. American Press Company, 316, 319, 321, 324, 325, 375–376, 476n155 Hague v. Committee for Industrial Organization, 310–311, 315, 318 Hale, Edwin F., 304–305 Hale, Matthew, 146, 152, 170, 171 Hale v. Henkel, 134–135, 273–274, 304–305, 307 Hamilton, Alexander, 11, 45, 62 Hamilton, Walton, 24 Hammer v. Dagenhart, 127 Hammond, Bray, 47 Handlin, Mary Flug, 39 Handlin, Oscar, 39 Hanna, Mark, 368 Hannah, Les, 90, 265 Hansmann, Henry, 240 Harding, Warren G., 195 Harlan, John Marshall, 172, 255, 297–300, 301, 302, 308, 309, 320 Harlan, John Marshall II, 317 Hart, Henry, 174 Hart-Scott-Rodino Act, 131

Hartz, Louis, 52 Harvard College, 9 Hayek, Friedrich, 23 Hays, William H., 197 Hennessey, Jessica, 10, 12, 13, 16, 114, 150, 215 Hepburn, William, 121 Hepburn Act, 115 Hepburn Bill, 18, 110–111, 121–122 Higher Education for Business (Gordon and Howell), 230 Hilferding, Rudolf, 335 “Hillary: The Movie” (fi lm), 363, 364 Hillman, Sidney, 337, 355 Hilt, Eric, 10, 11, 16, 75, 78, 84, 91, 112, 150, 215, 258, 259, 262, 263 Hobby Lobby, 1, 5, 25, 26–27, 30, 217, 243, 245, 283, 285, 324–325 Hobby Lobby Stores, Inc., 324–325 Hofstadter, Richard, 25, 84 Holden v. Hardy, 173 Holding companies, 4 Holding Company Act, 116 Holmes, Oliver Wendell Jr., 32–33, 224, 236, 297 Holt, John, 146 Home rule, 91–92, 94, 414n32 Hoover, Herbert, 199 Horwitz, Morton, 265 Houston, David, 194, 197 Howell, James, 230 Huber, Peter, 339 Hughes, Charles Evans, 196, 315, 367, 368 Human rights abuses, 349 Hume, David, 157 Hurst, J. Willard, 16, 39, 140 Hyde, James Hazen, 367 ICC (Interstate Commerce Commission), 20, 25, 114, 152, 154, 164, 165 The Idea of a Party System (Hofstadter), 84 ILGWU (International Ladies’ Garment Workers’ Union), 355–356, 357 Illinois, constitution of, 83, 89 Illinois Railroad and Warehouse Commission, 164–166, 171, 172

Index Income tax, 179, 182, 184, 187, 188, 214, 220, 306. See also Taxation, corporate Incorporation: access to, 39, 54, 71, 405n53; control over, 38; dissociation from regulation, 110–111, 130–138; proposals for associating with regulation, 109–110; states’ responsibility for, 129. See also Charters, state; General incorporation Incorporation, federal, 18–19; arguments against, 117–119; arguments for, 115–117, 136; and planned economy, 127; proposals for, 125–128, 419n109; proposals for, failure of, 119–124. See also Chartering, federal Independent Sector, 234 Industrial capital, 221, 234 Industrial Commission, 125 Inequality, 446n78; economic inequality, 181–182, 189; fear of, 12–13; income inequality, 336; reflected in corporations, 231 Inflation, 181 Infrastructure, 40, 80–82, 258 Innkeepers, 146 Institutionalists, 24 Insurance companies, 63–64, 68, 181, 275, 298–299, 307, 367, 368, 369 Integration, 330 Integration, vertical: of big-box retailers, 344–347; disaggregation of, 339–340, 350; employment relations in, 342; erosion of, 331; in first half of twentieth century, 332–336; reintegration, 358; and responsibility, 331, 340 Internal Revenue Ser vice, 4 International Harvester, 297 International Ladies’ Garment Workers’ Union (ILGWU), 355–356, 357 Interstate Commerce Act, 15, 18, 115 Interstate Commerce Commission (ICC), 20, 25, 114, 152, 154, 164, 165 Interstate corporate commerce, 17, 95; demands for federal control over, 115; expanded definition of, 314; states’ interference with, 295; Supreme

Court’s view of, 127. See also Race to the bottom Iowa, ban on banks in, 68 Ireland, Robert M., 88 Jackson, Andrew, 86, 111, 118 Jackson, Rachel, 86 Jackson, Robert, 128, 307, 312 Jacksonian period, 2, 111–112 James II, 7 Jay, John, 45 Jefferson, Thomas, 37 Jensen, Michael, 380 Jobbers agreements, 332, 354–356, 357 Johnson, Lyndon B., 229, 233, 234 Joint Anti-Fascist Refugee Committee, 311 Joint-stock companies, 258; in England, 6; purpose of, 218, 219 Jones & Laughlin Steel, 127 Juris publici, 146 Kagan, Elena, 366 Kaysen, Carl, 225 Keller, Morton, 32 Kelley, Florence, 175 Kelly Girl, 341, 342 Kennedy, Anthony, 27, 30, 323, 324, 359, 365, 366, 382, 383 Kennedy, Robert F., 233 Kentucky, constitution of, 88 Keynes, John Maynard, 338 King, Rufus, 45 King, Willford J., 189 Kitchin, Claude, 190, 193 Klein v. Board of Tax Supervisors of Jefferson County, 224 E. C. Knight, 296, 314 Knox, Philander, 119 Ku Klux Klan, 310, 474n127 Labor: antitrust suits used against, 115; and campaign finance laws, 336–337, 370–373; in global supply chain, 351–352; Hague v. Committee for Industrial Organization, 310–311, 315,

505

506

Index Labor (continued) 318; and Hepburn Bill, 122; International Ladies’ Garment Workers’ Union, 355–356, 357; National Labor Relations Act, 127, 314; and PACs, 372; Pipefitters v. the United States, 372–373; rise of, 336; Sherman Act used against, 122; and Super PACs, 385; United States v. Autoworkers, 372; view of Borah-Mahoney Bill, 126 Labor law, 26 Laissez-faire, triumph of in law, 172 Lamoreaux, Naomi, 15, 28, 29, 132, 219, 224, 243, 267, 339 Landis, James, 139 Langlois, Richard, 340 Laski, Harold, 224 Latham, Earl, 229–230 Law, administrative, 125, 156, 157, 159 Law, corporate, 39, 116, 137 Law, labor, 26 Law in the Modern State (Duguit), 155–156 Laws, private, 10, 12–13. See also Charters, state Lawson, Thomas, 270 Legal Foundations of Capitalism (Commons), 1, 140 Lerner, Max, 172 Levy, Jonathan, 22, 24, 25 Lewis, John L., 337 Liability, of corporations, 272–273, 357 Liberal general incorporation, 91, 93, 94, 95 Liberalization, 114 Liberty: and corporations, 303; definition of, 300; human-centered understanding of, 301 Liberty of contract, 302–303, 305, 315, 325, 469n78 Liberty rights, 301, 317; of corporations, 280, 299, 312–316, 325, 375–376; corporations prevented from claiming, 303; of individuals, 302; of natural vs. artificial persons, 298–301, 312; vs. property rights, 243, 293, 298–301, 308, 309, 319, 320

Lichtenstein, Nelson, 22, 24, 26 LIHC (Low-Income Housing Credit), 237–238 Lintner, John, 206 Listeners’ rights, 377, 382–383, 387 Lloyd, Henry Demarest, 264 Loan companies, 64 Lochner era, 117, 293, 303, 325 Lochner v. New York, 33, 299–300, 302, 315 Locofoco faction, 61, 407n74 Loewe v. Lawlor, 122 Logistics operations, 344 Lombard companies, 64 Long, Huey, 375 Louisville, Cincinnati, and Charleston Railroad Company v. Letson, 249 Low-Income Housing Credit (LIHC), 237–238 Lumbard v. Stearns, 151 Macdonald, Dwight, 229 Machines, political, 368. See also Albany Regency Management / managers, 259, 263, 268, 270, 333–334, 380; control of corporations by, 334–335; discipline of, 383; fiduciary duties to policyholders, 369; and lack of responsibility for labor, 348–349; and responsibility, 331–332; separation of share ownership from, 337; and supply chain, 348 Management Review, 342 Managerial power, 224–226 Manhattan Bank, 11 Manne, Henry, 24 Manpower Inc., 341 Manufacturing, 12, 13, 235; distinction with commerce, 117, 296; and general incorporation, 12, 39, 54–59; stimulation of, 54–55, 57 Marchand, Roland, 335 Markets, national, 265 Marshall, John, 9, 17, 151, 249, 280, 286, 287, 293, 321, 325 Marshall v. Baltimore & Ohio Railroad, 249

Index Mashaw, Jerry, 152 Mason, Edward, 225 Massachusetts, 7 Massachusetts Bank, 8 Massachusetts Board of Railroad Commissioners, 162–164 Massachusetts Citizens for Life, Inc. (MCFL), 323 McAdoo, William G., 191 McConnell v. Federal Election Commission, 360, 363, 379, 382 McCormick, Richard L., 75 McCraw, Thomas, 21 McCulloch v. Maryland, 111, 118 McCurdy, Charles, 261, 296 MCFL, 323, 378 MCFL (Massachusetts Citizens for Life, Inc.), 323 McGovern, Jim, 360 McKenna, Joseph, 296, 297 McReynolds, James C., 303, 309 Means, Gardiner, 1, 18, 24, 40, 200, 224, 225, 230, 337, 338, 339, 358, 481n29 Mechanics Bank, 62 Mehrotra, Ajay, 18, 19, 20, 22, 25, 214, 221, 367 Mellon, Andrew W., 197, 198 Membership Corporation Law, 232 Mercantile Insurance Corporation of New York City, 63, 64 Merchandizing, 346 Merchants’ Bank, 62 Merger movement, 17, 21, 93, 115, 180, 222, 266, 267, 269, 416n26 Michigan: free banking in, 68; state constitution, 92 Mills, C. Wright, 23 Mills, John Stuart, 169 Minneapolis & St. Louis Railroad Co. v. Beckwith, 255 Minnesota, constitution of, 82–83, 88 Missouri, home rule legislation in, 92 The Modern Corporation and Private Property (Berle and Means), 1, 18, 40, 200, 224, 230, 334, 336, 481n29 Moley, Raymond, 200

Moline Properties v. Commissioner of Internal Revenue, 224 Monopolies: charters as, 42; and early corporations, 41, 47; in England, 6; and privileges, 401n17; and public utilities, 158–159; and taxation, 190 Mont Pelerin Society, 24 Morgan, J. P., 134 Morgenthau, Henry, 201 Muckraking, 161, 181 Mueller Pasta Company, 228 Municipal incorporation, 87, 89–90, 91–92, 94 Municipalities, outsourcing by, 340 Munn v. Illinois, 19, 140, 146, 161, 166, 170–175, 253, 254 Murray, Philip, 371 NAACP (National Association for the Advancement of Colored People), 4, 29, 30, 232, 284, 316–318, 321, 322, 324, 376 NAACP v. Alabama, 4, 232, 317, 376 NAACP v. Button, 317–318, 321, 324, 376 Nace, Ted, 266 Nader, Ralph, 377, 382–383, 387, 419n109 National Association for the Advancement of Colored People (NAACP), 4, 29, 30, 232, 284, 316–318, 321, 322, 324, 376 National Association of Manufacturers, 195 National Association of Railroad Commissioners, 141 National Banking Act, 11 National Industrial Recovery Act, 125–126, 314 Nationalization, 117, 119 National Labor Relations Act, 127, 314 National Labor Relations Board, 485n92 National Recovery Administration, 20, 355 National Retail Federation, 357 Natural law theory, 134 Natural rights tradition, 303 “The Nature of the Firm” (Coase), 333 Nebbia v. New York, 19, 143, 172 New Colonial Ice Co. Inc. v. Helvering, Commissioner of Internal Revenue, 224

507

508

Index New Deal, 18, 20–22, 23, 31, 231, 334; and corporate taxation, 21, 200–206, 208; and delivery of welfare, 232; National Recovery Administration, 355; and proposals for associating incorporation and regulation, 109; proposals for federal incorporation, 111, 125–128; reform in, 336; and Supreme Court, 314; Tennessee Valley Authority, 175 New England, adoption of general incorporation laws in, 58–59 New Freedom, 144 New Jersey, 456–457n125; corporation laws in, 94; general incorporation laws in, 13–14; Holding Company Act, 113–114, 116; liberal general incorporation in, 93 New Nationalism, 144 New Republic, 203 New York, 11; Albany Regency, 11, 63, 64, 65, 409n90; banks in, 11, 41, 43, 44, 45, 61–67, 71, 402n30, 407nn76,78; change in process of creating corporations in, 49; constitution (1777), 43, 401n23; constitution (1821), 46, 402n34, 409n94; constitutional convention, 275; early corporations in, 39; economy of, 46–47; elite in, 43, 45, 46; expansion of corporations in, 47–48; free banking in, 66–67; general incorporation statute, 55–57, 59; incorporations in, 47–51, 403nn38,39; life insurance scandal, 275; mayor of New York City, 402n25; Membership Corporation Law, 219, 232; ownership of corporations in, 49–51 New York Central & Hudson River Railroad Company v. United States, 273 The New Yorker, 360 New-York Manufacturing Society, 43, 44 The New York Times, 205, 330, 359, 360, 376 New York Times v. Sullivan, 376 New York University, 228 Non-governmental organizations (NGOs), 353–354, 357

Nonprofit corporations, 5, 213–244; access to incorporation, 231–232; Berea College v. Kentucky, 309; change in character of, 216; commercial activities of, 227–228; and competition, 227–228, 237; contracted by states, 232; corporate income tax exemption, 226–227; Cox hearings, 233; distinction with for-profits, 216, 217, 235, 243; donations to, 226; exclusion by, 241–242; and fiscal triangle, 220–231, 234, 236, 238, 239, 242, 244; foundations, 229, 233, 234, 238; and Fourteenth Amendment, 308–311; Hansmann’s definition of, 240; history of, 217–220; inequalities reflected in, 231; open access to, 215; as pass through corporations, 216, 217, 236, 243, 244; Pierce v. Society of Sisters, 134, 303, 309; and political influence, 229; politicization of, 234; in postWorld War II era, 213–214, 228–229; profits of, 226–227; proliferation of, 215; provision of public goods by, 237–238; purpose of, 219; revenues of, 216, 226, 228; rights of, 322; state cooptation of, 236–237; transformation of, 230–234; transition from membership to management, 242; universities, 229–230, 231, 233; and welfare tasks, 228, 232–233 Nonprofit sector, ideological invocations of, 215 Norris, Frank, 17 North, Douglass C., 94 Northern Securities cases, 120, 134 Northwestern National Life Insurance Company v. Riggs, 298–299, 301, 303, 309, 311 Novak, William, 18, 19, 217, 219, 367 Obama, Barack, 359, 360 O’Connor, Sandra Day, 364, 381–382 The Octopus (Norris), 17 Ohio, constitution of, 85, 91 Olcott v. Supervisors of Fond Du Lac County, 261

Index Olson, Ted, 363–364, 365 O’Mahoney, Joseph C., 126 Open entry, 94, 95–96, 97 Organizations: ability to influence politics, 75; variety of, 96 Other People’s Money (Brandeis), 1, 17–18, 140 The Outlook, 192 Outsourcing, 329, 340 Pacific Resources Export Limited (PREL), 350 PACs (political action committees), 281, 282, 323, 337, 362, 372, 373–375, 381, 382, 384, 385–386 Panic of 1826, 64, 65 Panic of 1837, 66 Panic of 1857, 68 Panic of 1907, 182 Parrillo, Nicholas, 152 Parsons, John E., 118 Parsons, Talcott, 225 Paton, William, 222–223 Paul, Randolph, 206 Paul v. Virginia, 15, 252, 294–295, 296, 304, 317 Peckham, Rufus, 300, 305 Pecora, Ferdinand, 201 Pecora Hearings, 21, 201, 437n98 Peltzman, Sam, 143 Pembina Consolidated Silver Mining v. Pennsylvania, 15, 255, 295, 296, 375, 472n99 Pennsylvania Railroad, 95, 218 Permatemps, 342 Person: corporations as, 246, 253–255, 375; in Fourteenth Amendment, 312, 452n52. See also Fourteenth Amendment Personhood: and Citizens United, 360, 382, 386, 387; denied to corporations, 3–4, 27–28, 134; extended to corporations, 30, 246; and Fourteenth Amendment, 297–298; and Grosjean, 375–376; lack of reflection on nature of, 308; as legal fiction, 282; natural theory

of, 223–224; in Santa Clara, 287; and taxation, 188. See also Fourteenth Amendment Philanthropy, mass, 228 Pierce v. Society of Sisters, 134, 303, 309 Pipefitters v. the United States, 372–373 Police power, 16–17, 19, 143, 144, 147–149, 150–151, 153, 156–157, 165, 253 Policyholders, of insurance companies, 369 Political action committees (PACs), 281, 282, 323, 337, 362, 372, 373–375, 381, 382, 384, 385–386 Political activities, restrictions on, 137–138 Political contributions, corporate, 275–276. See also Campaign finance laws; Citizens United v. Federal Election Commission Political spending, 275–276, 285; as abuse of people within corporations, 369; and commercial speech doctrine, 276–278; by unions, 370. See also Campaign finance laws; Citizens United v. Federal Election Commission Politics: and access to incorporation, 40, 41, 45, 53, 59; and banks, 11–12, 61–66, 67; and corruption, 3, 7, 40, 79–80; and early corporations, 40–54; and economy, 97; and manipulation of economy, 94 Polity, public duties of, 155 Pollman, Elizabeth, 27, 28, 29, 132, 219 Pollock v. Farmers’ Loan and Trust Company, 305 Posner, Richard, 144 Post-Capitalist Society (Drucker), 337 Post notes, 408n89 Powell, Lewis F., 29, 30, 278, 288, 319, 320, 323, 324, 378 PREL (Pacific Resources Export Limited), 350 Prentice, E. Parmalee, 118 Press, freedom of, 29, 30, 280, 316, 376 Privacy rights, of individuals vs. corporations, 307

509

510

Index Privileges, 79, 81, 217; in charters, 8; creation of, 78; of early corporations, 41–42; equated with monopoly, 401n17; exclusive, 403n35; fear of, 12–13; states’ desire to eliminate, 82 Privileges and immunities clause, 252–253, 294, 295, 297, 310, 312 Procter & Gamble Co., 347 Production process, 350–351. See also Supply chains Profit making, 234–235 Profits: as goal of business, 338–339; of nonprofit corporations, 226–227; ROI, 222, 230, 235 Progressivism, 18; and corporate taxation, 181, 198, 203–204, 207; hostility to big business, 368; and public utilities, 173–175, 176; and regulation, 15–22, 109, 115–124; view of taxation, 185 Property rights, 253–256; vs. liberty rights, 243, 293, 298–301, 308, 309, 319, 320 Public accountability, 4 Public callings, 144, 145–147 Public care, 4 Public Citizen, 377 Public goods: delivered by for-profit corporations, 216; provision of by nonprofit corporations, 237–238 Public health, 253 Public interest, 157; and early corporations, 40; idea of, 139. See also Public utilities Public responsibility, 4 Public ser vice corporations: legal invention of, 139; Wyman on, 141–142. See also Public utilities Public utilities, 19, 423n14; and administration, 156, 157; antecedents, 144–152; centrality of to economic regulation, 140; centralization of, 153–154; critiques of, 143–144; expansion of concept, 141–142; legal invention of, 139; and legal system, 140–141; modern concept of, 154–160; and monopolies, 158–159; Munn v. Illinois, 170–175; and

police power, 143, 153, 156–157; Progressives’ view of, 173–175; Public Utility Holding Company Act, 21–22; railroads as, 141, 154, 161–171; receding significance of, 142–144; and regulation, 156; restructuring of industry, 22; and setting rates and prices, 163; and state charters, 150–151; success of concept, 143 Public utility era, origins of, 152–160 Public Utility Holding Company Act, 21–22, 204 Pulitzer, Joseph, 367 Purcell, Edward, 23 Quo warranto writ, 112, 113, 115, 116 Race to the bottom, 13–15, 17, 76, 77, 109, 113–114, 116, 129, 137, 153 Radin, Max, 223 Railroads: Beekman v. Saratoga and Schenectady Railroad Co., 149; and corporate taxation, 198, 203; effect on economy, 154; expansion of, 259; Field as tool of, 291; freight, 166–170; growth of, 261, 262; Illinois Railroad and Warehouse Commission, 164–166, 171, 172; Louisville, Cincinnati, and Charleston Railroad Company v. Letson, 249; Marshall v. Baltimore & Ohio Railroad, 249; Massachusetts Board of Railroad Commissioners, 162–164; Minneapolis & St. Louis Railroad Co. v. Beckwith, 255; and modern public utility idea, 154; National Association of Railroad Commissioners, 141; New York Central & Hudson River Railroad Company v. United States, 273; Pennsylvania Railroad, 95, 218; professional management of, 263; Railroad Tax Cases, 291; rates, 149, 163–164, 165, 166–170, 171, 264; regulation of, 161–171; Santa Clara County v. Southern Pacific Railroad Company, 3, 5, 15, 17, 27, 188, 219, 253–255, 266, 278, 287, 288,

Index 289–293, 297, 298, 299, 311–313, 319, 320, 375, 467n57, 468n62, 472n99; state commissions, 162–166, 170–171, 172; struggle for democratic control of, 160; Thorpe v. Rutland and Burlington Railroad Company, 17, 150–151, 170; use of public funding for, 261–262. See also Common carriers Railroad Tax Cases, 291 Rana Plaza, 329, 332, 354, 356 Rate of return on capital invested (ROI), 222, 230, 235 Rate of return on equity (ROE), 235 “Rate Regulation” (Frank furter and Hart), 174 Raymond, Daniel, 41–42 Reagan administration, 236–237 Redfield, Isaac, 17, 147, 150–151, 170 Reed, Stanley, 372 Reform, 109; end of, 25; and labor movement, 336; late nineteenthcentury efforts, 111–115; in New Deal, 336; social democratic, 337; socioeconomic mode of, 335; targeting specific evils, 110; and vertical integration, 335. See also Regulation Regan v. Taxation with Representation, 240, 241 Regulation, 3, 4, 76; avoiding, 113; for banks, 60; ceding of to federal government, 297; and charters, 52–54, 111, 144; Congress’ powers of, 135–136; constitutional challenges to, 110, 117; and definition of interstate commerce, 314; dissociation from incorporation, 110–111, 130–138; and early corporations, 10, 51–54; of employment agencies, 341; evasion of, 5, 331; and Fourteenth Amendment, 293–298; fragmented nature of, 129–132; political demand for, 112; preoccupation with, 16; Progressivism and, 15–22, 109, 115–124; proposals for associating with incorporation, 109–110; protested before Revolution, 7; and public utilities, 156; state

differences in, 13; and vertical integration, 335. See also Race to the bottom Regulation, federal, 15, 18–19, 109, 115–124, 130, 297 Rehnquist, William H., 30, 242, 277, 280, 307, 320–321, 381 Religion, freedom of, 30, 245, 285. See also Burwell v. Hobby Lobby Religious Freedom Restoration Act (RFRA), 30, 243, 283, 324 Religious organizations, 321 Republican Party, 47, 48, 64, 381 Responsibility, 338, 356, 357; lack of, 330, 344, 348–349; and management, 331–332; and vertical integration, 331, 340 Responsibility, public, 4 Responsibility, social, 226, 338, 348, 353 Retailers, big-box, 343–347 Revenue Act of 1913, 220 Revenue Act of 1916, 190 Revenue Act of 1917, 191 Revenue Act of 1924, 306 Revenue Act of 1928, 199 Revenue Act of 1934, 201, 203 Revenue Act of 1935, 21 Revenue Act of 1936, 205 RFRA (Religious Freedom Restoration Act), 30, 243, 283, 324 Richmond James River Company, 8 Ridgely, Edwin R., 119 Rights, as pre-political, 134 Rights, constitutional, 247; extended to corporations, 29, 246, 272; of natural vs. artificial persons, 298–308. See also Personhood; Rights, corporate; individual amendments Rights, corporate, 134–135, 283–285; assertion of, 5; and changes in nature of corporations, 247; and civil rights, 313–319, 376; confusion regarding, 319, 321; Court on, 132; Court’s failure to distinguish between types of corporations, 321–322; Court’s lack of consistent rationale for expanding,

511

512

Index Rights, corporate (continued) 247; Court’s theorizing about, 361; expansion of, 276, 281, 284; and federal chartering, 132–133; individual rights, 362; invention of liberty rights, 325; and nature of Constitution, 361–362; and nature of corporations, 361; in nineteenth century, 247; nineteenthcentury Supreme Court cases, 248–256; and nonprofit corporations, 322; patterns of, 360–361; potential limits on, 132; and rights of shareholders, 304–305. See also Citizens United v. Federal Election Commission; Personhood; Speech, corporate; individual amendments Rights, public, 146, 148 Roberts, John, 365, 366, 381 Roberts, Owen J., 310 Roberts v. Jaycees, 216, 241, 449n135 Robinson-Patman Act, 127, 130 Rockefel ler, John D. III, 234 Rockefel ler, John D. Sr., 219, 264 ROE (rate of return on equity), 235 ROI (rate of return on capital invested), 222, 230, 235 Romney, Mitt, 236 Roosevelt, Franklin D., 18, 22, 128, 179, 200, 203, 204–205, 208, 314, 370 Roosevelt, Isaac, 45 Roosevelt, Theodore, 119, 120–121, 123, 144, 275, 276, 369 Root, Elihu, 185, 275 Rostow, Eugene, 24 Rule of reason, 297 Russell Athletic, 354 Russia, 94 Safety, industrial, 330, 332, 354 Safety Fund Act, 65 San Mateo, 254 Santa Clara County v. Southern Pacific Railroad Company, 3, 5, 15, 17, 27, 188, 219, 253–255, 266, 278, 287, 288, 289–293, 295, 297, 298, 299, 304, 314, 319, 320, 375, 452n52, 467n57, 468n62,

472n99; efforts to overturn, 311–313; Field’s agenda in, 290 Satellite communications, 346 Scalia, Antonin, 27, 37, 39, 72, 365, 366, 379–380, 383 Schechter Poultry, 127 Scheiber, Harry, 146, 172 Schiff, Jacob, 193 Schmidinger v. Chicago, 173 Schneider Logistics, 342–343 S corporations, 236 SEC (Securities and Exchange Commission), 18, 20, 22, 128, 130 Second Revenue Act of 1940, 206 Secret ballot, 368 Securities Act, 21, 126, 127 Securities and Exchange Act, 21 Securities and Exchange Commission (SEC), 18, 20, 22, 128, 130 Securities reform, 131 Self-incrimination, 274 Seligman, Edwin R. A., 183, 192 Selvin, Molly, 146 Seubert, Edward G., 204 Shareholder democracy, 180, 279–280, 335 Shareholder primacy, 24, 381 Shareholder protection, 131, 370, 380, 383 Shareholders, 259; and corporate politics, 374; discipline of management, 383; disenfranchised by managers, 334–335; distinguished from corporations, 265; rights of, 304–305, 307–308; as source of tax revenue, 184; voting rights, 403–404n41 Shareholder value, 338–339 Shaw, Lemuel, 148, 151, 170, 171 Shenker, Morris, 372 Sherman Antitrust Act, 14, 15, 18, 20, 115, 121, 122, 123, 124, 126, 154, 267, 274, 416n26, 418n77 Sixteenth Amendment, 179, 187, 305, 306 Sklar, Martin, 122 Skocpol, Theda, 242 Slaughter-House Cases, 172, 252–253, 292, 300, 466n29 Smith, Adam, 245

Index Smith-Connolly Act, 370 A. P. Smith Manufacturing Company v. Barlow, 226 Smoot, Reed, 195 Socialism, 117, 119, 124 Social responsibility, 226 Social Security Act, 232 Social ser vice, consumer choice in, 237 Social Statics (Spencer), 140 Society for the Establishment of Useful Manufactures, 8, 41 Sommer, Joseph, 259 Sotomayor, Sonia, 282, 366 Sousa, David, 371 South (region), general incorporation laws in, 58–59, 406n70 Spanish-American War, 186 Spaulding, Harrison B., 186 Special incorporation, 78. See also Charters, state The Special Law Governing Public Ser vice Corporations (Wyman), 141 Speech, commercial, 285, 377 Speech, corporate, 110, 136. See also Citizens United v. Federal Election Commission Speech, freedom of, 29, 232, 245, 317; commercial speech doctrine, 276–278, 285; core meaning of, 376; and identity of speaker, 376, 377. See also Citizens United v. Federal Election Commission; First Amendment Speech, political, 30, 241. See also Campaign finance laws SpeechNow.org v. FEC, 384 Spencer, Herbert, 140 Standard Oil, 15, 187, 264, 297 Standard Oil, 123 Standards of American Litigation (Freund), 149 Stanford, Leland, 254, 266 State, democratic, 155 State constitutions: and adoption of general laws, 88; Alabama, 88; changes in, 76; and general incorporation, 83, 84, 87; home rule, 91–92; Illinois, 83,

89; Kentucky, 88; Michigan, 92; Minnesota, 82–83, 88; and municipal incorporation, 87, 89–90; New York, 275; Ohio, 85, 91; using to track institutional changes, 76 Statecraft, positive conception of, 155 State default crisis, 81, 82 State lines, operating across, 93. See also Interstate corporate commerce States: competition for charters, 14, 93, 109, 116, 394n54 (see also Race to the bottom); desire to eliminate corporate privileges, 82; and general incorporation, 83–85; involvement in infrastructure investments, 80–82; limited administrative capacity of, 52; power over corporations, 14–15, 293–298; recognition of corporations, 74; responsibility for corporation, 129 Statute of Monopolies, 6 Stempel, Robert, 338 Stevens, John Paul, 37, 39, 72, 282–283, 323, 366, 367 Stewart, Malcolm, 364–365, 366 Stigler, George, 143 Stockholders, in New York corporations, 49–51 Stone, Harlan Fiske, 310, 318 Story, Joseph, 251 Strong, William, 261 Subcontracting, 329 Suff rage, in New York, 46 Summers, Mark Wahlgren, 368 Sunstein, Cass, 25 Supermarkets, 345 Super PACs, 384 Supply chains, 329–330, 340, 343, 347–351; Accord on Fire and Building Safety, 356–357; power relations within, 340; reformers, 353–354; transformation in, 352; working conditions in, 353 Supreme Court: accused of activism, 360; Adair v. United States, 302; Addyston Pipe, 416n26; Adkins v. Children’s Hospital, 302, 303, 308; Allgeyer v.

513

514

Index Supreme Court (continued) Louisiana, 299, 300, 301, 303; antitrust efforts, 15; associational approach, 28, 266, 269, 272, 274, 282, 361, 362, 368–369; Austin v. Michigan Chamber of Commerce, 27, 378, 379–380, 383, 462n216; Bank of Augusta v. Earle, 251–252, 259, 260; Bank of the United States v. Deveaux, 248–249, 251, 259–260; Bellotti, 27, 29, 278–281, 288, 319–321, 323, 324, 325, 377–378, 379, 449n128; Berea College v. Kentucky, 309; Blake v. McClung, 297–298; Boy Scouts of America v. Dale, 241, 242; Bradwell v. State, 469n78; Buckley v. Valeo, 278; Butchers’ Union Company v. Crescent City Company, 300–301; Carter Coal, 127; Central Hudson Gas & Electric Corporation v. Public Ser vices Commission of New York, 277; and challenges to regulation, 117; Charles River Bridge v. Warren Bridge, 8, 9, 17, 151, 251, 259, 260; Civil Rights Cases, 172; Connecticut General Life Insurance Co. v. Johnson, 312; Darby, 127; Dartmouth College, 3, 5, 9, 17, 151, 250, 252, 257, 259, 260, 280, 286; Dodge v. Woolsey, 252; Donnell v. HerringHall Marvin Safe Co., 224; early jurisprudence on corporate rights, 132; failure to distinguish between types of corporations, 272, 284, 285; FEC v. Beaumont, 378–379; FEC v. National Right to Work Committee, 378, 379; Federal Election Commission v. Washington Right to Life, 365; Flint v. Stone Tracy Company, 305–306, 307; Granger Cases, 170, 253, 254; Grosjean v. American Press Company, 316, 319, 321, 324, 325, 375–376, 476n155; Hague v. Committee for Industrial Organization, 310–311, 315, 318; Hale v. Henkel, 134–135, 273–274, 304–305, 307; Hammer v. Dagenhart, 127; Hobby Lobby, 1, 5, 25, 26–27, 30, 217, 243, 245, 283, 285, 324–325; Holden v. Hardy,

173; and income tax, 182; Jones & Laughlin Steel, 127; Klein v. Board of Tax Supervisors of Jefferson County, 224; Lochner v. New York, 33, 299–300, 302, 315; Loewe v. Lawlor, 122; Louisville, Cincinnati, and Charleston Railroad Company v. Letson, 249; Marshall v. Baltimore & Ohio Railroad, 249; McConnell v. Federal Election Commission, 360, 363, 379, 382; McCulloch v. Maryland, 111, 118; MCFL, 323, 378; Minneapolis & St. Louis Railroad Co. v. Beckwith, 255; Moline Properties v. Commissioner of Internal Revenue, 224; Munn v. Illinois, 19, 140, 146, 161, 166, 170–175, 253, 254; NAACP v. Alabama, 4, 232, 317, 376; NAACP v. Button, 317–318, 321, 324, 376; on nature of corporations, 246; Nebbia v. New York, 19, 143, 172; New Colonial Ice Co. Inc. v. Helvering, Commissioner of Internal Revenue, 224; and New Deal, 314; New York Central & Hudson River Railroad Company v. United States, 273; New York Times v. Sullivan, 376; Northern Securities cases, 120, 134; Northwestern National Life Insurance Company v. Riggs, 298–299, 301, 303, 309, 311; Olcott v. Supervisors of Fond Du Lac County, 261; Paul v. Virginia, 15, 252, 294–295, 296, 304, 317; Pembina Consolidated Silver Mining v. Pennsylvania, 15, 255, 295, 296, 375, 472n99; Pierce v. Society of Sisters, 134, 303, 309; Pipefitters v. the United States, 372–373; Pollock v. Farmers’ Loan and Trust Company, 305; rationale for expanding corporate rights, 247, 272; Regan v. Taxation with Representation, 240, 241; response to rise of modern corporations, 268–283; Roberts Court, 381; Roberts v. Jaycees, 216, 241, 449n135; San Mateo, 254; Schechter Poultry, 127; Schmidinger v. Chicago, 173; Slaughter-House Cases, 172,

Index 252–253, 292, 300, 466n29; Standard Oil, 123; treatment of corporations, 27–31; United States v. Autoworkers, 372; United States v. CIO, 371–372; United States v. E. C. Knight, 296, 314; United States v. Morton Salt Company, 307; view of corporations, 248, 251; view of federal commerce power, 136; view of interstate commerce, 127; Virginia State Pharmacy Board v. Virginia Citizens Consumer Council, 277, 278, 377; Waters-Pierce Company v. Texas, 15, 296; West Coast Hotel Co. v. Parrish, 127, 315; Western Turf Association v. Greenberg, 173, 301, 302, 309, 311, 312; Wheeling Steel v. Glander, 312–313; Wickard v. Fillburn, 127. See also Citizens United v. Federal Election Commission; Santa Clara County v. Southern Pacific Railroad Company Sutherland, George, 302, 375, 376 Sylla, Richard, 258, 261, 262 Taco Bell, 343 Taft, Robert, 371 Taft, William Howard, 20, 122–123, 184–185, 207 Taft-Hartley Act, 308, 371–372, 373 Taney, Roger, 9, 17, 151, 171, 251–252 Tariff Act of 1909, 185–189 Tariffs, 181–182, 185–189, 220 Taxation, corporate, 4, 19, 20, 177–209, 214, 221–223; after World War I, 179; ambivalence toward, 177–178; as antimonopoly tool, 190; BaileyCummins bill, 183; beginning of, 179; corporate excise tax (1909), 178–179, 184–189, 220, 305; debate over methods, 182–183; early development of, 180–183; and economic inequality, 189; in England, 186; goals of, 189; in Great Depression, 21, 179–180, 199–206, 208; as means of control, 20, 177, 181, 184–185, 193, 198, 201, 203; as means of influencing business, 180; Mellon Plan, 198; motives in, 178, 180,

187, 207, 208; national, 178; and nonprofit corporations, 226–227; payers of, 183, 221; and personhood, 188; and for-profit / nonprofit distinction, 217; profits tax, 190, 191–193, 195, 206, 207, 221, 235, 439n136; progressive rates, 187–188; publicity provisions, 185, 186, 199, 306, 437n98, 472–473n108; and railroads, 203; Revenue Act of 1913, 220; Revenue Act of 1916, 190; Revenue Act of 1917, 191; Revenue Act of 1928, 199; Revenue Act of 1934, 201, 203; Revenue Act of 1935, 21; Revenue Act of 1936, 205; Roosevelt’s policies, 203, 204–205, 208; S corporations, 236; Second Revenue Act of 1940, 206; shift to pro-business stance, 194–198; UBIT, 228, 238; and World War I, 189–194, 207, 439n136; and World War II, 205–206, 208 Taxation with Representation, 240 Taxes: and donations to nonprofits, 215; popu lar aversion to, 8; protested before Revolution, 7; and purpose of corporations, 220; during World War I, 179. See also Income tax; Taxation, corporate Tax Reform Act, 237–238 Tazreen garment factory, 329–330 Tea Act, 7 Temporary help ser vices, 340–342 Temporary National Economic Committee, 20 Tennessee Valley Authority, 175 Thacher, Thomas, 118, 119, 124, 133 Theory of the firm, 24 Thomas, Clarence, 365, 366 Thompson, Dorothy, 31 Thorpe v. Rutland and Burlington Railroad Company, 17, 150–151, 170 Thurlow, Edward, 245 Tiedeman, Christopher, 114 Tillman Act, 28, 275–276, 307, 308, 367, 368, 369–370 Title 36 corporations, 137–138 Tobacco, 274

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Index Tocqueville, Alexis de, 213 Toobin, Jeff rey, 360 Transcending Capitalism (Brick), 335 Transparency, 185 Transportation infrastructure, 40, 258. See also Railroads Trenchard, John, 80 Trinidad v. Sagrada Orden de Predicadores, 227 Trustees of Dartmouth College v. Woodward, 3, 5, 9, 17, 151, 250, 252, 257, 259, 260, 280, 286 Trusts, 4; and federal control, 115–116, 119 (see also Incorporation, federal); and race to the bottom, 116; Roosevelt and, 120; Taft and, 123; Wilson and, 123–124. See also Antitrust enforcement; Antitrust legislation; Antitrust litigation Tsuk, Dalia, 339 Tugwell, Rexford, 21, 126–127, 158, 159, 174–175, 176 UBIT (Unrelated Business Income Tax), 228, 238 Unions: and campaign finance laws, 336–337, 370–373; and Citizens United, 385. See also Labor United Automobile Workers, 372 United Fruit Company, 349 United States v. Autoworkers, 372 United States v. CIO, 371–372 United States v. E. C. Knight, 296, 314 United States v. Morton Salt Company, 307 Universal Product Codes, 344–347 Universities, 229–230, 231, 233; and charters, 8–9; Dartmouth College, 3, 5, 9, 17, 151, 250, 252, 257, 259, 260, 280, 286 Unrelated Business Income Tax (UBIT), 228, 238 Utica Insurance Company, 63 Van Buren, Martin, 11, 50, 62–63, 71 Varick, Richard, 45 Veblen, Thorstein, 24, 335

Vendors, 341 Verba, Sidney, 214 Virginia State Pharmacy Board v. Virginia Citizens Consumer Council, 277, 278, 377 The Visible Hand (Chandler), 333 Vogel, David, 25 Voluntary association, 213, 214 Von Halle, Ernst, 114 Wages, 336, 356 Waite, Morrison R., 170, 171, 172, 255, 289, 290, 291, 293, 295, 319 Wallerstein, Emmanuel, 347–348 Wallis, John, 10, 12, 13, 16, 80, 94, 114, 150, 215, 261 Wall Street Journal, 199, 347 Wal-Mart, 330, 340, 342–343, 344, 349–350, 351, 352 Walton, Sam, 344, 349 War on Poverty, 233 War profiteering, 192, 205 Warshow, H. T., 270 Washington Right to Life, 365 Watergate scandal, 374 Waters-Pierce Company v. Texas, 15, 296 Weber, Max, 270 Weil, David, 331 Weingast, Barry R., 94, 261 Welfare, 228, 232–233 West Coast Hotel Co. v. Parrish, 127, 315 Western Tradition Partnership, 385 Western Turf Association v. Greenberg, 173, 301, 302, 309, 311, 312 Wheeling Steel v. Glander, 312–313 Whig Party, 11, 66, 79–80 White, Edward, 123, 134, 280 Whyte, William H., 374 Wickard v. Fillburn, 127 Wilgus, H. L., 116 Williamson, Oliver, 225 Wilson, James Q., 378 Wilson, Woodrow, 14, 123–124, 144 Wilson-Garman Tariff Act, 220 Winkler, Adam, 24, 27, 28, 29, 110, 307, 336

Index Women, 469n78 Worker militancy, 351–352 Working class, 336 Working conditions, 353, 355, 356 World Bank, 25 World War I, and taxation, 179, 189–194, 207

World War II era, 22–23, 110, 128, 205–206, 208 Wright, Robert E., 258, 261, 262 Wyman, Bruce, 139, 141–142, 146, 156, 157, 158, 159, 175 Young, Owen D., 335

517