We the Corporations Read online

  Hamilton faced a significant hurdle in setting up his bank: the text of the Constitution. Did Congress have the power to create a corporation under the Constitution? In the vigorous debate over Hamilton’s proposal for a bank in 1791, James Madison and Thomas Jefferson argued that Congress did not have that authority. No one would know better than Madison, one of the Constitution’s primary authors. During the Constitutional Convention, Madison had proposed to give Congress the authority to charter corporations, but his proposal was rejected. As a result, Madison said Congress could not charter Hamilton’s bank. Fortunately for Hamilton, the men who populated Congress at the time did not believe the only appropriate way to interpret the Constitution was by reference to the original intent of the Framers. With strong advocacy by northern commercial interests, which mobilized in favor of the Bank, Hamilton’s bill was passed. President George Washington signed the law over the objections of Jefferson, his secretary of state. The law, along with spurring the creation of two separate political parties where once there was none, also breathed life into a uniquely powerful and influential corporation. The Bank of the United States would live only a short life, but its impact on the nation, the economy, and the Constitution was prodigious.5

  In the early years, the Bank was quite conservative. It showed more interest in public service than in maximizing profit. Hamilton in his original proposal had advised, “Public utility is more truly the object of public banks than private profit.” The Bank adhered to this wisdom, forsaking opportunities to make money for stockholders in order to maintain the stability of the nation’s finances. “Arguments in favor of a Safe & Prudent Administration are paramount to all considerations of pecuniary interest,” the board of directors instructed branch managers. In that spirit, the Bank in the 1790s and early 1800s was cautious in extending loans and maintained a large cash reserve. The Bank was nonetheless quite profitable, earning stockholders 8–10 percent annually.6

  Still the Bank stoked passions. To Jefferson, the Bank was not just a financial institution; it was a threat to his vision of America. A populist who believed in the cause of the common man over the privileged interests of capital and wealth, Jefferson aspired for America to be a decentralized, agrarian society built upon a foundation of independent, yeoman farmers. The Bank, by contrast, represented the concentration of power in the hands of an unaccountable corporation based in the North, one that used its effective control over lending to pursue a nationalist agenda. Moreover, its lending policies favored loans to commercial interests, like manufacturing and infrastructure, which threatened to pull more people from the farm. Increasingly, the borrowers on the receiving end of the Bank’s loans were corporations—threatening to multiply the very entities Jefferson feared.7

  The Bank also offended Jeffersonians’ notion of states’ rights. Jefferson and his emergent opposition party, the Democratic-Republicans, thought states should have broad authority to regulate business within their borders to promote the public interest. Yet the Bank, the nation’s largest and most powerful corporation, was seemingly immune to state regulation because of the Constitution’s supremacy clause. The Bank was created by Congress, and under Article VI of the Constitution, “the Laws of the United States . . . shall be the supreme law of the land.” That meant that state lawmakers, who were used to complete control over the businesses in their states, had no say over the operations of the Bank. Despite stabilizing the economy, the Bank became “the target of every possible derogatory charge, of every species of vituperation.” After Jefferson won the presidency in the bitterly disputed election of 1800, he promptly ordered the sale of all of the government’s shares of the company stock. Yet even Jefferson, the archenemy of the Bank, found he could not live without it; when he left the presidency, he was deeply in debt and went to the Bank for a personal loan.8

  Jefferson, however, was still in office wracking up those debts in 1805 when his allies in Georgia made a daring move against the Bank. Shortly after the Bank opened a new branch in Savannah, lawmakers, frustrated they could not prohibit the federal institution outright, instead imposed a tax on the Bank’s locally held capital and notes. If the Bank wanted to do business in Georgia, it would have to pay dearly for the privilege. And if the tax were not enough to persuade the Bank to close up and go home, Georgia could always impose additional taxes.9

  The usually conservative Bank responded with uncharacteristic brashness. Headquarters in Philadelphia instructed the Savannah branch officials to ignore the law and refuse to pay the tax. A century and a half before African American protestors sat in at lunch counters to force the nation to confront civil rights, the Bank of the United States similarly chose to engage in an act of civil disobedience to defend its rights. Not unlike the civil rights protestors, the Bank frankly admitted that it hoped the refusal to comply with the law would “bring the question before the Supreme Court of the United States.”10

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  ANGRY AT THE BANK’S failure to pay the taxes, Peter Deveaux, a Georgia tax collector, decided to force the issue. Deveaux was known for his confident assertiveness, which had served him well before. As a soldier in the Revolutionary War, Deveaux once happened upon a group of American soldiers vengefully preparing to hang two ragged-looking spies captured after an American defeat. Deveaux risked his own life to intervene—and saved the lives of the two men, who turned out to be two American soldiers. One of the two, John Milledge, went on to become a US senator, governor of Georgia, and founder of the University of Georgia. In April 1807, amidst the controversy over the Bank, Deveaux once again stuck his neck out for what he thought was right. With “force and arms,” the tax collector barged into the Savannah branch of the Bank and carted off two boxes of silver coins.11

  The Bank wanted to turn to the courts for help. Yet filing a lawsuit in Georgia state court to contest the Georgia tax and the actions of a Georgia tax collector was not an appealing option. State judges were widely perceived at the time to be biased in favor of their home states and local residents. For a controversial out-of-state corporation like the Bank, justice was not likely to be found in the Georgia courts. So the Bank filed suit instead in federal court. It was not so much that the Bank was opposed to biased judges; it just wanted ones more likely to lean in the Bank’s favor.

  The federal courts might do just that, at least if the case made it up to the Supreme Court. By 1807, the high court was beginning to reflect the strong nationalist imprint of Chief Justice John Marshall. Like Hamilton, Marshall was a Federalist and a supporter of the Bank. Under his leadership, the Supreme Court would become known for its rulings enhancing federal power and minimizing states’ rights. Georgia’s tax on the Bank was a reaction against federal power and a manifestation of the Jeffersonians’ robust view of states’ rights. The Bank, created by Congress and operating nationwide, could fairly expect that Marshall’s Supreme Court would naturally sympathize with it.

  One potential pitfall for the Bank, however, was the text of the Constitution. Under Article III, section 2, the jurisdiction of the federal courts is limited; they can hear only certain types of cases. One type of case they are authorized to hear is a lawsuit “between Citizens of different States.” The Founders had the same worry as the Bank about biased state court judges. If both parties to a lawsuit were from the same state, neither would be disadvantaged by a judge’s parochial allegiances and there was little need for a federal forum. If, however, the parties were from different states, the federal courts should be available to protect the “foreigner” from unfair treatment. This constitutional doctrine is known as diversity jurisdiction, and it effectively creates a right of access to the federal courts when disputes involve citizens that are diverse—that is, from distinct states. One of the first laws passed by Congress was the Judiciary Act of 1789, which established the lower federal courts and, borrowing the language of Article III, provided explicit statutory authority for federal courts to hear disputes between diverse citizens. Given that Deveaux was
a citizen of Georgia and the Bank was headquartered in Pennsylvania, the two parties to the Bank’s lawsuit were from different states and thus could be seen as diverse. The question facing the Bank was whether corporations counted as “Citizens” under the Judiciary Act and Article III of the Constitution—the exact same question Dred Scott posed a half-century later about African Americans.

  The Framers at the Constitutional Convention who drafted Article III never paused to consider whether corporations, like ordinary people, should be guaranteed any rights under the Constitution, much less whether they enjoyed a right to sue in federal court. This was due in part to the fact that, during the colonial era, England had significantly curtailed the formation of ordinary business corporations after the South Sea Bubble of 1720. Foreshadowing what would happen with the East India Company half a century later, stock prices for the South Sea Company, which held a monopoly on trade with South America, soared in a speculative buying binge, only to tumble precipitously. It was the first international stock market collapse and it led Parliament to adopt the Bubble Act, which prohibited any unincorporated entity from having transferable shares. Coupled with an uncompromising refusal by successive English monarchs to grant charters to any business that had stock, the new law prevented any significant growth in the population of ordinary business corporations. That tradition of hostility to the stock corporation is why the industrial revolution in England was led primarily by businesses organized as partnerships, not by corporations as in the United States.12

  In the years after the Constitution was ratified, the founding generation, liberated from English control, enthusiastically embraced the corporate form. Joseph Stancliffe Davis, the Stanford historian who discovered there were only a handful of corporations formed in the decade prior to the Constitutional Convention, found over three hundred business corporations chartered in the United States in the decade following ratification of the Constitution. It was a spurt of corporate growth without precedent. Americans formed corporations to produce silk, cotton, iron, and maps; to construct aqueducts, dig mines, and run waterworks; and to operate ferries, banks, and insurance companies. Most of all, corporations were created to build the scores of turnpikes, bridges, and canals that began to stitch together the independent colonies into one nation with a single, national economy. John Adams, the second president of the United States—and, as we will see, the father of one of the earliest advocates for constitutional rights for corporations—was led to ask, “Are there not more legal corporations,—literary, . . . mercantile, manufactural, marine insurance, fire, bridge, canal, turnpike, &c. &c. &c.,—than are to be found in any known country of the whole world?”13

  Hamilton’s faith in corporations was such that he was willing to rest the weight of the unsteady American financial system on the shoulders of one. Yet the Bank now faced a serious legal problem. It could not win in state court, yet how could it claim a right to sue in federal court in the absence of any evidence that the Framers intended to protect corporations? Moreover, the text of the Constitution seemed to go against the Bank too. Article III said that “Citizens” could sue in federal court, and citizens are generally thought to be natural people who belong by law to one country. They are members of a political community who owe their allegiance and support to a particular polity. If that was what the Constitution meant by the “Citizens” in Article III, then corporations like the Bank of the United States would not have any right to sue in federal court. And absent this fundamental right, the Bank would find itself, quite literally, regulated to death by Jeffersonians eager to shut it down.

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  THE IDEA THAT A CORPORATION could have legal rights similar to those of ordinary people might seem absurd. Corporations are fictional entities, created by people primarily for economic reasons. Nevertheless, the very reason the corporation was invented was to enable the establishment of a durable, legal entity that could exercise at least some legal rights. To understand why requires turning from the early United States to ancient Rome—and to the celebrated English scholar who first detailed the legal rights of corporations.

  The earliest version of the corporation was created in Rome three centuries before the birth of Christ. Called a societas publicoranum, this prototype was Rome’s answer to a pressing problem: how could a group of people hold property together and make contracts for their common enterprise? The Romans already had business partnerships, called societas, but they could be unreliable. The societas’s property, like that of a partnership today, was owned by the partners in the partners’ own names; there was no legal separation between the partnership and the partners. Moreover, Roman law required partnerships to be dissolved in any number of circumstances, such as when any one partner became insolvent or died. (Today, by contrast, partners can contractually agree to maintain the business in the event of one partner’s departure.) In a time when life spans were short, the Roman partnership was useful as a way of aggregating capital but also created an unwelcome yet constant state of chaos for the businesspeople who tried to use it.14

  The societas publicoranum offered much greater stability. It was authorized to own property and form contracts in its own name and did not have to be dissolved if a member died or went bankrupt. Because of these special privileges, the societas publicoranum had to be authorized by a decree of the Senate or the emperor. Individuals could form partnerships on their own, but only the sovereign had the authority to create a corporation. From the very beginning, sovereigns believed that corporations needed to be strictly controlled and limited.

  Nonetheless, the corporation became quite successful in Rome. Societas publicoranum were created for shipbuilding, mining, public works projects, temple construction, and tax collection. Even some of these earliest corporations had a global impact. A 1997 study of ice core samples from Greenland found “unequivocal evidence of early large-scale atmospheric pollution” caused by Roman silver and lead mining corporations operating in southern Spain between 366 BC and AD 36.15

  In the centuries to follow, the corporate form became popular for other sorts of organizations that also had the need to own property or form contracts in their own names, regardless of the shifting identity of their members. For example, beginning in the fourth century, the Catholic Church claimed to be a corporation so that it could receive gifts of land and hold that property in the Church’s own name for perpetuity. Oxford University, which was founded sometime in the eleventh century—the precise date has been lost to history—was a corporation, as were the English guilds and even the City of London.16

  IN HIS COMPREHENSIVE TREATISE ON THE LAW OF ENGLAND, SIR WILLIAM BLACKSTONE IDENTIFIED CORPORATIONS AS “ARTIFICIAL PERSONS” WITH LEGALLY RECOGNIZED RIGHTS.

  In 1758, an English lawyer and Oxford professor named William Blackstone sought to bring some order to English law and, in particular, the legal status of the corporation. Blackstone’s first love was not the law but architecture, and while still a teenager he wrote a much-praised treatise on “the art of building.” As a lawyer, however, his practice was notable mostly for its lack of distinction. A priggish, ill-tempered man, Blackstone could not keep clients. He may have just been a lousy lawyer; when he was appointed to the bench later in life, his rulings were reportedly overturned on appeal more than those of any other judge in London. Yet, as a scholar and chronicler of English law, Blackstone was without peer. His scholarly effort to detail, organize, and explain English law, published under the title Commentaries on the Law of England, would come to be hailed as the “most influential law book in Anglo-American history.”17

  That influence was immediate, and not just in England. Thousands of copies were sold in the American colonies before the Revolution. Thomas Jefferson called Blackstone’s Commentaries “the most elegant and best digested of our law catalogue.” Years later, Abraham Lincoln advised anyone who wanted to be a lawyer to start by reading the Commentaries. For decades, lawyers would include Blackstone’s volumes in the background of the
ir portraits. One historian said that “no other book—except the Bible—has played so great a role” in shaping American institutions. Even today, Blackstone’s Commentaries is cited about ten times a year by the Supreme Court of the United States.

  The corporation was one of the topics that Blackstone tackled in the Commentaries: how it was formed, how it operated, and what legal rights and duties it had. He began his explanation by describing the corporation as an “artificial person.” By this Blackstone meant two things. First, the corporation was an independent legal entity in the eyes of the law, separate and distinct from the people who formed it. Second, as an independent legal entity, it had certain legally enforceable rights similar to those of a natural person.

  An individual’s “personal rights die with the person,” Blackstone wrote. So “it has been found necessary, when it is for the advantage of the public to have any particular rights kept on foot and continued, to constitute artificial persons.” Called “bodies corporate, or corporations,” these artificial persons “may maintain a perpetual succession, and enjoy a kind of legal immortality.” There were, Blackstone noted, “a great variety” of corporations used for such things as “the advancement of religion, of learning, and of commerce.”18

  Blackstone analogized the corporation to a person because the individual human being was the paradigmatic legal actor in the minds of lawyers. Only people, not objects like tables or shrubs, had standing to make a claim in court seeking the law’s protections; only people had rights. Indeed, this remains a common frame of mind today. When proponents of animal rights go to court seeking legal protections for chimpanzees, for example, they claim the animals are “legal persons.” They do not necessarily mean that chimpanzees are exactly the same as human beings, or that they have all the same rights as people, including the right to free speech, freedom of religion, or the right to bear arms. They mean only that chimpanzees should have standing before the law, that they have some rights entitling them to the court’s attention.19