Corporations in the Early United States, Part I: An Introduction

For the next several weeks, of perhaps even months, I'm going to be trying something a little different. I do hope that you’ll bear with me.

Not long ago I had a conversation with a friend of mine who, bless him, reads this very blog. In the course of our discussion he speculated as to what the Founding Fathers’ general opinions might have been on the topic of corporations. This, I agreed, was a very topical line of inquiry, and it very quickly set me to thinking. Corporations, as I explained to my friend at the time, served a different purpose in the late 18^th and early 19^th centuries than they do here at the dawn of the 21^st. The multi-national conglomerate entities which we now associate with the word “corporation” would have been almost completely beyond the experience and understanding of the Founders. That being said, at least one type of corporate entity very common in the present day did exist in substantially the same form in the 18^th and 19^th centuries, and was well known to many among the Founding Generation. I refer, of course, to banks.

Though they have greatly increased in complexity, and in the number and kinds of financial operations they carry out on a day-to-day basis, banks have existed in their modern form since at least the 14^th century. Originally a product of the Italian Renaissance, banks spread throughout Europe in the centuries that followed. Over time, with the establishment of state banks and the permanent issue of paper currency, places like Amsterdam and London became regional banking centres whose influence reached, in some cases, across the globe. More to the point, however, banks and banking have figured heavily in the history of the United States about as long as that entity has existed. In order to achieve their independence from one of the wealthiest empires in human history the American revolutionaries required plenty of capital, only a modicum of which could be collected in taxes. State banks, and later the federally-chartered Bank of North America, provided much of the credit required by the war effort. Since its very inception, therefore, the prospects and prosperity of the United States have been inextricably linked to a particular species of corporation. This fact, however, has not always been met without controversy.

Indeed, banking has been at the core of any number of national controversies that have enveloped the United States over the course of its two and a half centuries. Within the first fifty or sixty of those years debates over the philosophical and social acceptability and financial necessity of banks were particularly intense. Passionate as they were about concepts like natural rights, public service and republicanism, the Founders could be similarly fervent on the subject of debts, interest rates, and loans. At times practicality seemed to win out, as when the First Bank of the United States was chartered in 1791 in an effort to stabilize the nation’s rather delicate financial state, and in other instances higher principles ruled the day, as when the United States government almost went bankrupt trying to fund its half of the War of 1812 without the use of a national bank. Charting these shifting cultural and institutional opinions on banks and banking over the course of the first half-century of American history provides a fascinating window into the growth and evolution of the United States from a philosophical experiment into a modern nation state. This was not always a linear process, however. Backlashes against the principle and purpose of banking were not infrequent, and at times originated in the highest echelons of power.

Bearing that in mind, I propose to survey the changing attitudes towards banks in the early United States by examining the words of some of the Founders on the subject. These will include works by Alexander Hamilton, Thomas Jefferson, James Madison and John Marshall, among those I’ve discussed previously, as well as several by newcomer Andrew Jackson. Granted, though Jackson is not traditionally included among the group commonly labelled the “Founding Fathers,” I think there’s an argument to be made that he did as much to shape what we've come to recognize as the modern United States as any of those august personages just mentioned. The timeline of this feature series, or whatever you want to call it, will thus stretch from about 1790 until the late 1830s. In another break with the usual format I plan on devoting only one or two entries to each document, provided liberal context throughout. As per usual, however, I will include relevant links to the original document(s) at the bottom of the final entry on that topic.

Before I close this inaugural entry I’d like to take a moment to clarify a few things. Specifically, I’d like to discuss how the Founders understood the term “corporation,” and what they regarded the purpose of such entities to be.

Finding its origins in Ancient Rome, the role of the corporation as it evolved in the European tradition was as a legal entity with accompanying properties, rights and privileges that existed independently of its owners or officers. Corporations could thus sue and be sued, own buildings or other resources, and continue to function regardless of the death of their founders or other fluctuations in their ownership. Aside from banks, some of the most prominent early modern corporations in Western Europe took the form of joint-stock companies. These entities were granted a charter of incorporation by the relevant legal authority (the Crown of England, or the States General of the Netherlands, for instance) that effectively ceded a portion of that authority’s power for a strictly stated purpose. Shares in these companies were sold to the public in order to raise money for, say, trading ventures in Asia and Africa, and in exchange the corporations paid out healthy dividends. The British and Dutch East India companies were arguably the most famous of these types of corporations, and functioned as effective extensions of state power that made use of private capital. The London Company and the Plymouth Company, who between them attempted to settle most of the Eastern seaboard of North America, were also joint-stock companies, chartered by James I in the 17^th century in order to settle and exploit the natural resources of what would become Virginia and Massachusetts. In spite of their private means of finance, however, these corporations enjoyed extensive support from the governments that had chartered them. In addition to military aid, which the East India Companies in particular required in order to function in at-times hostile trading environments, they often requested and received monetary assistance during occasions of economic hardship. Because many of these corporations succeeded in attracting large numbers of shareholders, many of them wealthy members of the merchant elite, a declaration of bankruptcy would have had a potentially disastrous economic effect. Corporation in this era were therefore generally understood to be neither wholly public nor entirely private institutions, but rather blended elements of each.  

In addition to these large, in some cases globe-spanning financial and mercantile entities, there existed a much more prosaic class of corporation in the European tradition that served to provide a variety of construction, maintenance, educational and infrastructural services. During the colonial era it was not unheard of for the legislatures of, for instance, Massachusetts or New York, to grant a charter of incorporation to a private business as a form of government contract. The business in question, tasked with maintaining roads, building bridges, or cleaning the streets, would be permitted to exercise certain functions otherwise exclusive to the government for a set period of time and at a set rate of pay. Institutes of higher education, often operated by the established churches, received charters as well. These documents granted the schools, like Harvard or the College of New Jersey (now Princeton), legal rights, the ability to own property, and access to public funding while also clearly delineating their civic obligations. In either case it was understood that the purpose of incorporation was to make use of private money, expertise and resources in order to achieve an end determined necessary to the public good. The colonies themselves were another type of corporation, all of them having either received their charters from the Crown or having enjoyed Crown approval of an existing charter. Within the context of the 17^th-and-18^th-century British Empire these charters where highly prized and closely guarded because of the strict limits they placed on outside interference by the Crown or Parliament. Opinions in America concerning the purpose and necessity of corporations changed greatly, however, in the years following the Revolution.

Political independence and self-government in the newly declared United States brought with it a kind of egalitarian fervor that greatly disdained the institutionalization of certain kinds of economic or social classes. While legal restrictions on people’s ability to vote or stand for office remained in place, and slavery in many states was still stubbornly supported, efforts were made by many of the Revolutionary elite to place legal and social conditions in their respective states on a somewhat more equal footing than had previously been the case. Corporations were among those existing elements that reformers set their sight on. It was their opinion that because charters of incorporation granted to a select body a set of advantages not enjoyed by the majority of the population that they were at odds with basic republican principles. Accordingly, many of the state constitutions that were written in the 1770s and 1780s contained provisions that either severely limited or outright prohibited the ability of future governments to charter new corporations. The Constitution of Massachusetts (1780), for example, stated explicitly that, “No man, nor corporation, or association of men, have any other title to obtain advantages, or particular and exclusive privileges, distinct from those of the community, than what arises from the consideration of services rendered to the public.” In spite of these legal restrictions, however, state governments became aware all too quickly that they simply did not possess the resources to see to every one of the responsibilities they claimed. Because legislatures in the 1780s were generally loath to raise taxes, states never seemed able to pay for the initiatives their political leaders devised. Corporations, the public utilization of private wealth, were the obvious solution.

This practical concession now made, the philosophical objections to government-sponsored privilege were met with a re-evaluation of the purpose of incorporation and its traditionally exclusive nature. Rather than try to restrict or abolish the granting of charters, which simply wasn't feasible, incorporations began to be distributed far more widely in the 1780s and 1790s than in the entirety of the colonial era. This expansion of the number and variety of corporations existing in the United States was facilitated by the fact that many state representatives were involved in the businesses that were being chartered. Accompanied by the high turnover present in the legislatures, it became common for special interests not previously eligible for incorporation to be granted such a privilege when one of their members was himself elected to the state assembly. In spite of these outwardly selfish motivations, concern for public welfare played a role in the growing number of incorporations as well. Anxious to discourage the formation of monopolies, states began to charter multiple corporations of the same type as a means of spurring competition and, theoretically at least, keeping prices low. Multiple ferry companies or banks were believed to ensure that no one corporation would be able to abuse its privileges to the detriment of the public, foster innovation, and guarantee that valuable goods and services were available to as many people as possible.

As an increasing number of charters were granted to more and more diverse interests and organizations in America, many states began to re-evaluate the process by which corporations had traditionally been formed. Rather than grant incorporation as a direct act of the legislature, as had been the case previously, many states began to move towards general incorporation laws. These statutes laid down a set of standard requirements that had to be met in order for a given organization to meet the status of corporation but otherwise required no direct or specific approval on the part of lawmakers. These kinds of flexible regulations extended corporate status to not only religious establishments, institutes of higher learning, and banks, but to any number of manufacturers and entrepreneurs to whom the term corporation would not have previously applied. As a result, the power of the various state governments became progressively dispersed beginning in the 1780s as privately-funded organizations began to assume a much greater share of public authority in areas like transportation, communication, infrastructure and commerce. This evolution of the practical role that corporations could fulfil in the United States also brought about a corresponding, albeit more gradual, alteration in their legal status.

When the Supreme Court was forced to examine and ultimately describe the nature and purpose of corporations in the United States as a part of its 1804 ruling in Head v. Providence Insurance Company, Chief Justice Marshall still clung to the traditional definition. Corporations, he maintained, were public entities; formed by acts of state assemblies, they could likewise be altered by the same. In spite of the rapidly changing social and economic conditions of the era, during which American society was becoming more fluid, egalitarian and democratic, no less a  figure of authority than the Chief Justice of the Supreme Court clung to a legal definition of corporations that was very much rooted in convention and precedent. Eleven years later however, as part of its 1815 ruling in Terrett v. Taylor, the Court changed its tune. No longer, Associate Justice Story decreed in the majority opinion, could corporations be considered strictly public in nature; in reality some were public institutions while others were wholly private. The former included counties, towns, cities, and other similar legal entities that functioned as administrative units of government. The latter, and much larger, category included all businesses, colleges and universities. While this ruling didn't explicitly delineate all of the differences between the two types of corporations it planted the conception of certain corporate entities as private property firmly in the American social consciousness. This conception was subsequently tested and clarified in 1819 as a part of the Marshall Court’s ruling in Dartmouth College v. Woodward. Attempting to resolve a conflict between the trustees of Dartmouth College and a disgruntled former president of that institution, Marshall ruled that the Dartmouth charter, which had been revoked by the New Hampshire General Court, was in fact the private property of the trustees and thus immune from seizure or alteration without proper compensation. This effectively recast the private corporate charter as a kind of contract by which both signatories (in this case the legislature of New Hampshire and the Dartmouth trustees) were equally bound. Horrifying as this turn of events was to certain members of the Founding Generation, Thomas Jefferson chief among them, the newfound freedom and legal protection that corporations enjoyed thanks to the rulings of the Marshall Court would have a dramatic effect on the nature of American commerce, law, and self-identity in the decades to come.

I hasten again to point out that, although the narrative I just described of the evolution of the role of the corporation in the early United States might appear to be rather straightforward, significant resistance existed at various levels of American society throughout this era to the increased power and independence that corporate entities came to wield. It is perhaps a testament to this fact that it took until 1819, almost thirty years after the chartering of the Bank of the United States, for American jurisprudence to both recognize and define the difference between public and private corporations. In that time, between 1790 and the beginning of the 1820s, the United States witnessed the establishment of a robust federal government, a failed tax rebellion, a quasi-war with Revolutionary France, an economically disastrous blockade and an actual war with one of history’s great empires. Each of these events prompted, in some way or another, a re-examination of the purpose and definition of the American corporation, and specifically that of the chartered bank.