Corporations in the Early United States, Part VI: War, Panic, and the Laws of Mr. Marshall, contd.

The Second Bank of the United States met the Panic of 1819 with a series of austerity measures that ultimately saved the institution while possibly deepening the recession and raising the levels of resentment felt towards the Bank to new heights. This resentment found perhaps its most significant contemporary expression in the 1819 Supreme Court case McCulloch v. Maryland, wherein the role of the 2^nd BUS as an appendage of the federal government was put to a definitive test. While the precedents that said case established were mainly constitutional in nature, the implications for the relationship between the United States government and nationally-chartered corporations was nonetheless profound.

Among the first victims of the Panic was William Jones, who resigned his post as President of the Second Bank in response to accusations of mismanagement. His replacement, former Speaker of the House Langdon Cheves, proceeded to drastically curtail the lending practices that many blamed for precipitating the recession in order to create an institution that was more economically conservative. These efforts at self-correction also had the effect of staving off possible federal intervention in the proceedings of the Second Bank. This pleased the corporation’s directors, who greatly valued their autonomy and would have been loath to sacrifice it. Thanks to Cheves’ stern hand at the tiller, the Banks managed to shed a sizeable portion of its debt – to the tune of $6 million – as well as increase its specie reserves from $2.5 million in 1819 to $8 million by 1821 and reduce the quantity of BUS notes in circulation by $23 million in 1820. Unfortunately for the majority of Americans, however, the contraction of credit that resulted from Cheves’ efforts to save the central bank essentially magnified the effects of the recession. Predictably, the causes that had brought on the crisis worsened; crop prices and land values plummeted, foreclosures were rampant, and credit dried up further. The process of Westward expansion came to a grinding halt as people simply ran out money with which to purchase property, and indebted landholders took to trying to return their acquisitions to the federal government in return for having their debts cancelled. Without ready access to loans the economy stagnated and inflation was widespread. In some states banks attempted to counter the contraction by suspending specie payments yet again and issuing large quantities of bills that were only theoretically tied to hard currency reserves. Banks in other states took a more conservative approach and put in place regulations that required a fixed ratio of capital to credit.

The response of the federal government, meanwhile, was decidedly non-interventionist. This was made possible at least in part by the fact that an economic recession on the scale of that which occurred in 1819 was an entirely new phenomenon in the history of the United States. Previous financial crises had affected only certain regions or commodity markets, or had been caused by easily discernible factors like war, bad harvests or adverse weather. The idea that complex economic systems sometimes undergo natural cycles of expansion and contraction was an entirely foreign concept. Failing to understand the cause, then, the American people were unsure of who to blame. The Monroe Administration and the Republican-controlled 15^th Congress were thus able to avoid widespread public criticism or expectations of a drastic response. Rather than enforce new banking regulations in an attempt to prevent future overextension of credit, as might be expected today, they instead limited themselves to passing some debt relief legislation, agreeing to allow the suspension of specie payments, and ceasing the sale of federal land on credit. The 2^nd BUS instead took on the greatest share of liability for the Panic, in part due to the vast overextension of credit overseen by William Jones, but also because of prominent examples of mismanagement at many branch offices and even criminal behaviour on the part of certain of its employees.

The Maryland branch of the Second Bank was particularly notorious on this count. In addition to badly mishandling their local response to the Panic, employees of the branch office in Baltimore embezzled something on the order of $1.5 million (roughly $20 million today). The government of Maryland responded by levying a sizeable tax in the branch office which they subsequently refused to pay. More specifically the tax was directed against any bank that was not incorporated within the State of Maryland, and which did not make use of specially stamped paper for its banknotes that was to be provided by the office of the state treasurer. The punishment, or the price of exemption, was $15,000, with an additional $500 for every specific offence and $100 from every officer of the bank responsible for aiding said offences. While the directors of the Baltimore office of the 2^nd BUS admitted that they were not specifically authorized to operate in Maryland, tax-except status had been guaranteed to tributaries of the Second Bank in its congressionally-granted charter. As Maryland had ratified the United States Constitution it was thus bound by the laws approved by Congress, in keeping with the so-called Supremacy Clause (Article VI). The Maryland state legislature countered by filing a lawsuit against one of the accused embezzlers, branch cashier James McCulloch. After the Baltimore County court ruled against McCulloch the suit was subsequently appealed to and upheld by the Maryland Court of Appeals. Upon further appeal the case found its way before the United States Supreme Court and the awaiting judgement by the venerable Chief Justice John Marshall.  

Sixteen years on the job and still acting to maintain a strong Federalist influence on the United States government, Marshall was called upon in 1819 to render his opinion in McCulloch v. Maryland because one of the principles was a state (in which case original jurisdiction was rendered to the Supreme Court). The particular circumstance McCulloch v. Maryland lay before Marshall were complicated, or perhaps enhanced, by the fact that the Maryland Court of Appeals had decreed that because the Constitution did not make explicit mention of banks or corporations of any kind the chartering of the Second Bank of the United States was fundamentally unconstitutional. It thus fell to Marshall to reach beyond the particulars of the case itself and once again address the meaning of the nation’s foundational document. This he did with his usual aplomb. At this point I’ll decline to go into the specifics of the constitutional arguments he employed, impressively delivered though they may be, simply because they don’t apply directly to the topic now under discussion. Suffice to say Marshall found in favour of McCulloch, and ruled that because the Constitution declared federal statutes to be the supreme law of the land, and because the Necessary and Proper Clause left it to the discretion of Congress to determine which means were required accomplish a given constitutional responsibility, the 2^nd BUS was constitutional and Maryland’s taxing of one of its branches was not.

What does bear closer examination are some of the comments that Marshall made during his constitutional ruminations. Specifically the Chief Justice put forth numerous statements that testify to his conception of the purpose of a national bank and of corporations more generally. Granted, these statements were made in order to lay the groundwork for a larger argument pertaining to the nature of American federalism. Nevertheless, because they originated from the chief judicial authority in the United States, and a man whose decisions in that capacity influenced subsequent American history in ways difficult to calculate, I feel they ought to be taken into account.

As to the constitutionality of corporations, Marshall freely admitted in the text of his McCulloch v. Maryland decision that the United States Constitution made no mention of either the words “bank” or “incorporation.” That same document did proclaim, however, that it was responsibility of the United States Government to lay and collect taxes, borrow money and regulate commerce. The creation of a corporation, in this case a national bank, could have facilitated the exercise of all of these responsibilities, on which the, “happiness and prosperity of the Nation so vitally depends.” Though such a prerogative was not, once again, specifically granted by the Constitution, Marshall argued that it could not have been the intention of the Framers to, “clog and embarrass [the federal government’s] execution by withholding the most appropriate means.” A national bank was thus not an end in itself, but merely a means to accomplish a stated objective(s) that was itself of national importance. Speaking to these objectives Marshall wrote that,

The exigencies of the Nation may require that the treasure raised in the north should be transported to the south, that raised in the east conveyed to the west, or that this order should be reversed. Is that construction of the Constitution to be preferred which would render these operations difficult, hazardous, and expensive?

These words are significant to the present discussion because they demonstrate Marshall framing the chartering of a corporation in terms of responding to national priorities. The Bank of the United States was thus to the Chief Justice not chiefly a mechanism for generating profit, but first and foremost a tool deployed by a government to meet the “exigencies of the Nation.” As Alexander Hamilton had argued in 1790 so Marshall repeated nearly thirty years later; the Constitution did not prohibit the creation of a corporation if, “the existence of such a being be essential […] to the beneficial exercise,” of the powers said Constitution conferred upon the federal government. By using words like “essential” and “beneficial,” Marshall seemed to frame the existence of corporations in America as responding to and supplying national needs before all else.

In the paragraph that followed these passages in the text of his decision Marshall delved into what he believed to be the essential sticking point that prevented the State of Maryland from simply accepting the existence of a national bank on the basis of utility. The foundation on which one of the main arguments of opposing counsel rested, he claimed, was that the creation of a corporation was a essentially a grant of sovereignty, an act not explicitly accorded to Congress by the Constitution. This, he admitted, was true; corporations existed as partial extensions of the sovereignty of the state that created them. Since all legislation implied a similar exercise of sovereignty, however, Marshall wondered how it would have been possible for the federal government to accomplish anything at all if such a strict interpretation of its powers were to be applied. Putting aside the question, the fact that the State of Maryland and the Chief Justice of the Supreme Court both agreed that incorporation involved a transfer of sovereign authority is highly significant to understanding how Americans in the early 19^th century conceived of corporations.

Though,as mentioned in a previous post, general incorporation laws had begun to appear in the United States beginning in the late-18^th century (in North Carolina in 1795, followed by Massachusetts in 1799 and New York in 1811), it was still not considered the norm in 1819 for corporations in America to come into existence without some kind of act of government. Today, states effectively compete with one another in offering the most favourable incorporations laws as a means of attracting corporations and soaking up the resulting tax revenues (Delaware being by far the most successful). Questions of public utility are answered, in theory, by the fact that the funds levied by states from corporations go to pay for any number of public programs, initiatives or projects. The services that said corporations provide are largely incidental, and thus there is a tacit understanding that they’re chiefly money-making institutions which are shaped more by the needs of their customers than of governments. For Chief Justice Marshall, however, and indeed for many Americans who lived and worked in the early-19^th century, corporations had to much more directly justify their existence as fulfilling some kind of public need. Though it may not have been the case in North Carolina, Massachusetts or New York, most states in 1819 (as well as the federal government) required incorporation to proceed via an act of legislation. This meant that many Americans of the era were still accustomed to seeing corporations as the creations of government, and as a result possessed a more direct understanding of the transfer of sovereignty Marshall described in his McCulloch v. Maryland decision. 

“Delegation” might be another way to describe the act that the Chief Justice perceived as having taken place when the United States Congress granted a charter of incorporation to the 2^nd Bank of the United States. Certain powers inherent in the sovereignty of the United States of America were delegated to the directors and shareholders of the 2^nd BUS in order so that it might pursue some of the responsibilities granted to the federal government by the Constitution. Within this framework it was the dividends collected by the shareholders that were incidental, rather than the services that the bank provided. As Marshall saw it, corporations are, “never the end for which others powers are exercised, but a means by which other objects are accomplished.” Considered alongside Marshall’s other major decision in 1819, Dartmouth College v. Woodward, it would appear that although the Chief Justice was willing to argue that corporate charters were a form of contract and thus the private property of their holders, he also believed that the creation of corporations was still a process ruled by considerations of public need. Dartmouth College may have been a private entity, wholly-owned by its trustees and incapable of being materially altered or confiscated by the state without proper compensation. Nevertheless, as Marshall stated in his McCulloch v. Maryland decision, “no seminary of learning is instituted in order to incorporated, but the corporate character is conferred to serve the purposes of education.”

Reading over these last few paragraphs, I realize that it may seem like I’m repeating myself; I probably am. I apologize for any unnecessary tedium, though I hope that the point I’m trying to make has gotten across. Corporate law was in its infancy in the United States in the early-19^th century. While the tide was certainly turning in the direction of general incorporation and the proliferation of corporations that it entailed, there were still many Americans as late as 1819 that clung to the idea that corporate entities were still chiefly tools of state policy. The decision made by the Supreme Court in McCulloch v. Maryland made this fact quite clear. Chief Justice John Marshall, as influential a figure as they come in the history of American jurisprudence, considered incorporation, “a means, to be employed only for the purpose of carrying into execution the given powers,” of a government. Though he certainly agreed that the shareholders of corporations possessed certain rights inherent in their status as owners of property, the existence of said corporations were rightly based on an assessment of their being, “an appropriate mode of executing the powers of Government,” and in the case of a national bank, “a convenient, a useful, and essential instrument in the prosecution of its fiscal operations.” At the time that Marshall’s decision was handed down the Monroe administration seemed to more or less agree with the Chief Justice’s assessment. Dissenters in Congress and the states aside, the Republicans had come to appreciate the need for the economic oversight that a central bank provided.  The decades that followed would prove to be somewhat more complicated, however, as the outward political consensus that dominated the post-War of 1812 era well and truly fractured, and the American political mainstream entered a period of radical, reactionary, democratic transformation.

As per usual, the Court’s Opinion in the matter of McCulloch v. Maryland: http://en.wikisource.org/wiki/McCulloch_v._Maryland/Opinion_of_the_Court