Sometimes it’s helpful to take a step back in order to figure out how a certain strange contemporary situation developed. How, for example, could the Supreme Court of the United States- a collection of presumed sane and wise judges- have ever decided, against all logic and common sense, that corporations are deserving of equal rights granted to actual breathing human beings? How could these presumed enlightened scholars have ever put their hoary heads together and come up with this?
The majority of historians cite the British East Indian Company as the first modern corporation.
Writer Stephen D. Foster explains:
The East India Company was the largest corporation of its day and its dominance of trade angered the colonists so much, that they dumped the tea products it had on a ship into Boston Harbor which today is universally known as the Boston Tea Party. At the time, in Britain, large corporations funded elections generously and its stock was owned by nearly everyone in parliament. The founding fathers did not think much of these corporations that had great wealth and great influence in government. And that is precisely why they put restrictions upon them after the government was organized under the Constitution.
Trade-dominance by the East India Company aroused the greatest passions of America’s Founders – every schoolboy knows how they dumped the Company’s tea into Boston harbour. At the time in Britain virtually all members of parliament were stockholders, a tenth had made their fortunes through the Company, and the Company funded parliamentary elections generously.
In any case, let’s move past that and hover our time machine over America of the mid to late 1800s..
Pangs of Corporate Birth
The rise of the corporation from its early forms into what it has now become is important for our understanding of our own time. First of all, it is important to note that corporations were once private, or semi-private entities, specific and carefully regulated enterprises. As one source tells us:
After the nation’s founding, corporations were granted charters by the state as they are today. Unlike today, however, corporations were only permitted to exist 20 or 30 years and could only deal in one commodity, could not hold stock in other companies, and their property holdings were limited to what they needed to accomplish their business goals. And perhaps the most important facet of all this is that most states in the early days of the nation had laws on the books that made any political contribution by corporations a criminal offense.
The corporation.. has not always been a private institution. Corporations were originally chartered by governments to accomplish public tasks, to build roads, construct canals, explore and settle new lands, conduct banking and other tasks governments felt could not or should not be conducted privately. Contrary to the notion that corporations autonomously developed because they competed more efficiently or effectively in the market, governments created the corporation form to do things that rational businessmen would not do because they were too risky, too expensive, too unprofitable or too public, that is, to perform tasks that would not have gotten done if left to the efficient operations of markets. Corporations were developed to undertake jobs that were not rational or not appropriate from the perspective of the individual businessman.
The charter of the corporation was given by state legislatures and state legislators were the only figures in government actually elected by the people. That’s where they placed the chartering of corporations and those charters were very specific in their content. The purpose of the corporation was made clear: a corporation could not suddenly start doing something outside of that purpose. They were liable for harms done; their records had to be open to the public at any time; they were subject to trial by jury; they could not own stock in other corporations; they were limited to a certain size and they could be brought before a legislature or state courts and have their charter revoked when they violated this publicly granted agreement.
..From a perspective of the early nineteenth century, private ownership and control of corporations were not viewed as inevitable. The nation’s largest bank was federal. Most infrastructure was mixed ownership… Only the late entrant, the railroad, which waited until the 1830s to begin, became privately owned.
Until the second quarter of the 19th century, state charters of incorporation were passed singly by the legislature. After a time, a movement began to enact a general incorporation statute which required only an administrative application and payment of a modest fee.
By 1840, the model of the public tightly- restricted corporation was quickly becoming obsolete. And by 1850, the past form was gone altogether, replaced by an aggressive new form of corporation in which government played the role of tax-collector and legislative facilitator.
As industrialization began reshaping America, great fortunes began accumulating in the hands of canal owners and financiers and later railroad and steel magnates. And as great fortunes accumulated, a new wealthy class began influencing policy-making, changing the rules governing the corporations they owned. Charters grew longer and less restrictive. The doctrine of limited liability – allowing corporate owners and managers to avoid responsibility for harm and losses caused by the corporation– began to appear in state corporate laws. Charter revocation became less frequent, and government functions shifted from keeping a close watch on corporations to encouraging their growth. For example,between 1861 and 1871, railroads received nearly $100 million in financial aid, and 200 million acres of land.
As corporations grew in size and influence, however, their accounting structure remained the same. For a small corporation driven by investors, it made sense to measure corporate performance by measuring financial profits and losses. But for a corporation with thousands of employees and millions of customers, a corporation that was receiving public subsidies and encroaching on communities, a more extensive reporting system that measured the impact of the corporation on people’s lives might have made sense.
Eventually the bottom line became the most important factor. And that meant immediate profits to give investors a bankable return and this remained the dominant driving force behind corporations.
|Laying of the Transcontinental Railway|
The First Great Corporation
As the lands beyond the Mississippi opened up, revealing new sources of wealth in the frontier, railroads became a dominant corporate power. As Roy notes:
No economic sector was as important to the rise of the large American business corporations as the railroads. Indeed, until the end of the nineteenth century, railroad companies and large corporations were synonymous. For example nearly all corporate securities traded on the stock market were railroad securities. Corporate law was primarily railroad law.
Westward construction proceeded very quickly over the open terrain of the Great Plains. Soon, however, they entered Indian-held lands. The Native Americans saw the railroad as a violation of their treaties with the United States. War parties began to raid the labor camps along the line. Union Pacific responded by increasing security and by hiring marksmen to kill Bison (commonly known as American buffalo) which were both a physical threat to trains and the primary food source for the Plains Indians….
And the misgivings of the Native Americans were proven absolutely accurate.
The rail line gave the hunters convenient access to markets, and soon there was a widening gap in the bison herd as the hunt progressed outward from the rails. Estimates put the population of bison at the beginning of the 19th century at 30 to 100 million over all of North America. By the mid 1880’s the population was down to a few hundred.
Even as late as May 10, 1869, the First Transcontinental Railroad, which connected both continental coasts, could not have been done without government assistance. The corporation responsible for the construction, The Union Pacific Railroad, was incorporated on July 1, 1862 under an act of congress and approved by President Abraham Lincoln– initially as a part of the war effort.
The construction and operation of the line was authorized by the Pacific Railroad Acts of 1862 and 1864 during the American Civil War. Congress supported it with 30-year U.S. government bonds and extensive land grants of government-owned land. Completion of the railroad was the culmination of a decades-long movement to build such a line. It was one of the crowning achievements in the crossing of plains and high mountains westward by the Union Pacific and eastward by the Central Pacific.In addition to labor and materials, the railroads obviously needed large amounts of capital. Since the federal and state governments saw the railroads as a boon to national and local economic prospects, they were willing to underwrite much of the cost by distributing to the railroads the one commodity which they held in abundance: land. Across the vast open spaces in the West were millions of acres of arable land. That resource, however, could not be converted into profitable farming land without some means for the farmers to get their produce to market.
|Thomas Clark Durant|
However, the chief stockholder in that railroad corporation, “Dr.” Thomas Clark Durant, was to set a pattern of ruthlessness and illegality that would be the legacy of so many corporations to come.
All of his dirty dealings would end in tears with the scandal of Credit Mobilier, exposed in 1872. The corruption involved very high government officials, complicated corporate structures to hide ownership and illegal conflicts of interest. According to Wikipedia, “Durant covered his tracks by having various politicians, including future President James Garfield, as limited stockholders.”
In the next post, I will be exploring how this new type of corporation- unregulated and ambitious, would use its power for the sake of profit, and tear a nation apart.