Empire of Liberty: A History of the Early Republic, 1789-1815 (79 page)

Since these corporate charters tended to be exclusive monopolies given to a favored few, most of the American Revolutionary leaders in 1776 had viewed them with suspicion. In a republic, they believed, no person should be allowed to exploit the public’s authority for private gain. Consequently, several of the states had written into their Revolutionary constitutions prohibitions against any man or group of men receiving special privileges from the community. The Massachusetts constitution of 1780, for example, had stated that “no man, nor corporation, or association of men, have any other title to obtain advantages, or particular and exclusive privileges, distinct from the those of the community, than what arises from the consideration of services rendered to the public.”

Although the new Revolutionary states had expected to involve themselves directly in economic life and education, they soon discovered that what they wanted to do was more than they could handle, both administratively and fiscally. Because the new democratically elected legislatures were often unwilling to raise taxes to pay for all that the governmental leaders desired to do, the states were forced to fall back on the traditional pre-modern practice of enlisting private wealth to carry out public ends. Instead of doing the tasks themselves, as many devout republicans had expected, the states ended up doing what the crown and all pre-modern governments had done—granting charters of incorporation to private associations and groups to carry out a wide variety of endeavors presumably beneficial to the public, in banking, transportation, insurance, education, and other enterprises. The states did not intend to abandon their republican responsibility to promote the public good; they simply lacked the money to do it directly.
And of course there were many private interests that were only too eager to acquire these presumably exclusive corporate privileges.

Yet because of a republican aversion to chartered monopolies, the creation of corporations in the years following the Revolution provoked strenuous opposition and heated debate. In these decades attempts by the states to grant such corporate privileges to select individuals and groups immediately raised storms of protest.
⁷⁸
Critics charged that such grants, even when their public purpose seemed obvious, such as those for the College of Philadelphia or the Bank of North America or the city of Philadelphia, were repugnant to the spirit of American republicanism, “which does not admit of granting peculiar privileges to any body of men.” Such franchises and privileged grants may have made sense in monarchies as devices serving “to circumscribe and limit absolute power.” Certainly the colonists had seen their various crown and corporate charters in just this defensive way. But now that only the people ruled, these grants of corporate privileges seemed pernicious, for, as Justice John Hobart of New York declared, “all incorporations imply a privilege given to one order of citizens which others do not enjoy, and are so far destructive of the principle of equal liberty which should subsist in every community.”
⁷⁹

As a consequence of this kind of opposition, these corporations were radically transformed. As American society, in the North at least, spawned a variety of interests and became more democratic, it became increasingly difficult for the state legislatures to resist appeals to bestow these corporate privileges ever more widely, especially since many of their members were themselves involved in the businesses they were incorporating. With a huge proportion of the representatives in the state legislatures turning over annually, each special interest in society began clamoring for its own cluster of legal privileges. Eventually the corporate charter became, as James Sullivan of Massachusetts complained in 1792, merely “an indulgence to a few men in the state, who happened to ask the legislature to grant it to them.”
⁸⁰
What one community or group of
entrepreneurs had, others wanted as well, and so the corporate charters multiplied in ever increasing numbers.

Only about a half-dozen business corporations had been chartered in the entire colonial period. Now such corporate grants for businesses virtually turned into popular entitlements. The legislatures incorporated not just banks but insurance companies and manufacturing concerns, and they licensed entrepreneurs to operate bridges, roads, and canals. The states issued 11 charters of incorporation between 1781 and 1785, 22 more between 1786 and 1790, and 114 between 1791 and 1795. Between 1800 and 1817 they granted nearly 1, 800 corporate charters. Massachusetts alone had thirty times more business corporations than the half dozen or so that existed in all of Europe. New York, the fastest-growing state, issued 220 corporate charters between 1800 and 1810.

It seemed clear as early as 1805, as a committee of New York City justifying multiple ferry leases put it, that “the only effectual method of accommodating the public is by the creation of rival establishments.” “Thus,” as one American noted in 1806, “if two baking companies are thereby permitted, where there was but one, bread may be cheaper in consequence; or if there are two banks thus instituted, and neither of them taxed, more of the people will be favoured by loans, than where there is but one bank; and a further increase will reduce even
the rate of interest
.” Competition among corporations, including literary and scientific bodies, now seemed the best way of promoting the welfare of the whole community. In other words, the thinking behind the Charles River Bridge decision of the Supreme Court in 1837—that competition among corporations was good for the public—was already present a generation earlier.
⁸¹

Eventually the pressure to dispense these corporate charters among special interests became so great that some states sought to ease the entire process by establishing general incorporation laws. Instead of requiring special acts of the legislature for each charter specifying the persons, location, and capitalization involved, the legislatures opened up the legal privileges to all who desired them. Beginning first with religious associations in the 1780s, the states, led by New York in 1811, extended the privileges of corporation to manufacturers, and later to banks and other entrepreneurial activities. With this multiplication not only was the traditional exclusivity of the corporate charters destroyed, but the public power
of the state governments was dispersed. As early as 1802, James Sullivan, the perennial Massachusetts attorney general, warned that “the creation of a great variety of corporate interests . . . must have a direct tendency to weaken the powers of government.” But the numbers only increased to the point where the governor of Massachusetts expressed the fear that so many corporate grants were being created “unsparingly and with an unguarded hand” that there was a real danger of the state government’s ending up with “only the very shadow of sovereignty.”
⁸²

Since many states were bewildered by the nature of these multiplying corporations—Were they public, were they private? Could the charters be revoked after they were granted? Were they vested rights?—the Supreme Court sooner or later had to try to sort the matter out.

In 1804 the Marshall Court grappled with the nature of a corporation for the first time. In
Head v. Providence Insurance Company
, Marshall stressed the traditional view of a corporation, that it was a public entity that presumably could be changed by the legislature that originally chartered it. By a corporation the Court meant all entities chartered for public purposes—towns, turnpikes, canals, insurance companies, and colleges.

This stress on the need for a “public purpose” behind the state’s activity, however, eventually forced the Supreme Court in
Terrett v. Taylor
(1815) to separate corporations into two kinds, public and private, a distinction new to American law. Legislatures could modify charters of public corporations, declared Justice Joseph Story, who wrote the decision; but such public corporations included only counties, towns, and cities. The charters of all the other corporations, including businesses and colleges, were private property. In overturning a Virginia statute in
Terrett
, Story’s decision concluded by saying that “we think ourselves standing upon the principles of natural justice, upon the fundamental laws of every free government, upon the spirit and letter of the constitution of the United States, and upon the decisions of most respectable judicial tribunals.” Story, however, never specified what “letter” of the Constitution he was referring to.
⁸³

If corporations such as banks and other businesses were indeed private, and not public, then it could be intelligibly argued that their charters
were actually kinds of private property protected from subsequent violation or regulation by state authority. No one doubted the capacity of the legislature to take private property for public purposes with compensation, that is, using the power of eminent domain, but this power, it was now argued, could not be extended so far as to abridge rights expressly vested prior to the legislature’s assertion of its power—at least not without some sort of compensation for such abridgements.
⁸⁴
“In granting charters,” declared William Robinson in the Pennsylvania assembly in 1786 in defense of the charter of the Bank of North America, “the legislature acts in a ministerial capacity”; that is, it acted as the crown had acted in mobilizing private resources for public purposes. This bestowing of charters, said Robinson, “is totally distinct from the power of making laws, and it is a novel doctrine in Pennsylvania that they can abrogate those charters so solemnly granted.” There was a difference between laws and charters. Laws were general rules for the whole community; charters, argued Robinson, “bestow particular privileges upon a certain number of people. . . . Charters are a species of property. When they are obtained, they are of value. Their forfeiture belongs solely to the courts of justice.”
⁸⁵
It was a strained, premature argument, and it did not immediately take hold; but it pointed the way to the future.

By 1802 Hamilton was contending that legislatures could not violate charters once granted. “The proposition, that a power to do, includes virtually, a power to undo, as applied to a legislative body,” he wrote, “is generally but not universally true. All
vested rights
form an exception to the rule.”
⁸⁶
When state legislatures in North Carolina, Virginia, Massachusetts, and New Hampshire tried to change the charters of colleges they had once granted, the boards of trustees contended that their charters were vested rights that could no longer be tampered with. Yet many believed that institutions chartered to fulfill a public purpose had to be responsible to the public. “It seems
difficult to conceive of a corporation established for merely private purposes,” declared a North Carolina judge in 1805. “In every institution of that kind the ground of the establishment is some public good or purpose to be promoted.”
⁸⁷
With so many contrary legal arguments flying about, the issue had to be resolved at the highest judicial level.

The stage was set for the famous case
Dartmouth College v. Woodward
, decided by the Supreme Court in 1819. Dartmouth College had been incorporated by a royal charter in 1769. In 1815 the trustees of the college, who were Congregationalists and Federalists, removed John Wheelock, who was a Presbyterian and Republican, from the presidency of the college. Wheelock appealed to the legislature of New Hampshire, which revoked the old charter of 1769 and created a new corporation, Dartmouth University, with a new set of trustees who reinstated Wheelock to the presidency. The old Federalist trustees sued, arguing that the state legislature had violated their vested rights. The state supreme court rejected their argument, declaring in traditional fashion that Dartmouth was a public corporation subject to state control and regulation in the public interest. This decision was appealed to the Supreme Court of the United States.

In his creative decision Marshall contended that Dartmouth was a private corporation as defined by Story in
Terrett v. Taylor
. He then went on to declare (he said “it can require no argument”) that the college’s original charter was a contract under Article I, Section 10 of the United States Constitution and was thus immune to any state violation.
⁸⁸
Although Marshall’s reference to the text of the Constitution had often been peculiar to him and not generally shared by his colleagues on the Court, the idea that a charter was a kind of contract had been part of Federalist thinking for several decades. In 1802 New York senator Gouverneur Morris had used the presumed similarity of a charter and a contract to oppose the Jeffersonian Republicans’ elimination of the circuit court positions created by the Federalists in the Judiciary Act of 1801. When you give an individual the right to make a toll road or bridge, said Morris, “can you, by a subsequent law, take it away? No; when you make a compact, you are bound by it.”
⁸⁹

Although Marshall and his Court could scarcely have grasped the momentous implications for American business of their Dartmouth College decision, the decision did result in placing all private corporations under the protection of the United States Constitution. All private corporations, not just the four dozen or so educational institutions existing in 1819, but the hundreds of business corporations that had been created since the Revolution, had become different from their monarchical predecessors: most were no longer exclusive monopolies, and most were no longer public. They became private property belonging to individuals, not the state.

When Jefferson learned as early as 1816 of the argument the Federalist attorneys, including Daniel Webster, were making—that corporations created vested rights immune to subsequent legislative changes—he was furious. He could not believe that such an idea had any standing whatsoever. The notion that charters once publicly granted were beyond legislative tampering “may be a salutary provision against the abuses of a monarch,” he told Governor William Plumer of New Hampshire, “but is most absurd against the nation itself.” Such a doctrine, inculcated by “our lawyers and priests,” he said, supposed “that preceding generations held the earth more freely than we do; had a right to impose laws on us, unalterable by ourselves, and that we, in like manner, can make laws and impose burdens on future generations, which they will have no right to alter; in fine, that the earth belongs to the dead and not the living.”
⁹⁰