CORPORATIONS

The American colonies were familiar with corporations well before independence in 1776. Although they were banned in Britain in 1720, after the financial disaster caused by exuberant speculation in the South Sea Company's shares, corporations created prior to the restriction continued to exist in the colonies. Nor were the colonies subject to the same level of restrictions as in metropolitan Britain.

Colonies that were created as corporations themselves, such as the Bay Colony of Massachusetts (1629), were prohibited from creating corporations of their own. Royal assent was required before a charter became legal, and colonial legislatures refrained from seeking such approval until the middle of the eighteenth century. Most of these early charters did not create business enterprises but instead delimited jurisdictional boundaries by incorporating towns and counties, creating religious associations and parishes, and founding schools or charitable organizations.

The advantages conferred by an early corporate charter were fairly standard: it allowed a group to make a binding set of rules for its self-governance, to function as an individual "corporate" legal entity that could sue and be sued in a court, to exist "in perpetuity" beyond the lifetime of its members, and to limit its legal liabilities. These benefits allowed corporations to protect their aggregated property and survive from one generation to the next, something that was essential for a church, school, charity, town, or business.

independence

The Revolution, hostile to relics of monarchy and stoked by rhetoric decrying privilege, placed corporations in tenuous circumstances. It resurrected old British and French anticorporate arguments, buttressing them with suggestions by the economist Adam Smith and the philosopher David Hume that corporations were economically inefficient and monopolistic creations used by aristocrats to gain unfair advantages over common entrepreneurs who did not enjoy the same kind of royal favoritism.

This concern was raised in post-Revolutionary debates about reincorporating cities whose charters were nullified at the moment of independence, and incorporating towns that had previously been denied charters by the Crown. The governments of Philadelphia, Boston, and New York City were all on legally unfamiliar footing after 1776: Philadelphia's 1701 charter had expired, Boston was seeking its first charter (it had been denied one before independence because Massachusetts was itself a corporation and lacked the power to incorporate on its own), and New York was still relying on its 1731 Montgomerie Charter to function as a wartime government in a city under British occupation.

Proposals to reincorporate cities were met with hostility by some who claimed that corporations had become incompatible with Revolutionary principles of popular sovereignty and republicanism. Corporations, these anticharter pamphleteers and legislators charged, created governments-within-governments, imperia in imperio, thereby guaranteeing a permanent state of conflict between corporate governments and state legislatures. Incorporated cities limited the pool of eligible electors by applying property eligibility requirements and granting certain land-owning citizens representation that was denied to landless laborers. In New York, for example, property requirements meant that a far smaller group of voters could vote in elections for the city's common council than could vote in state elections for governor and legislature. Not only did this diminish the value of work, anticharter critics charged, it echoed the political inequities that caused the Revolution in the first place.

states and corporations

Despite the often persuasive arguments of corporations' detractors, some state legislatures began exercising their right to incorporate soon after independence and the adoption of their own constitutions. Massachusetts created more than a hundred new corporations in the 1780s and twice as many in the 1790s.

States incorporated banks, insurance companies, bridges, canals, waterworks, turnpikes, manufacturing enterprises, mills, and harbor improvement projects, in addition to towns, schools, and charities. In some states these new types of corporations comprised nearly a quarter of all charters, performing functions that benefited the public but drew on private talent, knowledge, and wealth to accomplish their goals. During this time, the Massachusetts Medical Society (1781) was created to examine the qualifications of physicians and surgeons in the state, while the Beverly (Mass.) Cotton Manufactory (1789) was chartered to promote industrial enterprise. In New Jersey the Society for Useful Manufactures (1791) was created at the behest of U.S. Treasury Secretary Alexander Hamilton to advance American technology and industry, giving its members privileges such as exemptions from military service; its charter was so broad that the society was given the authority to found the city of Paterson.

States discovered that corporations were useful instruments to entice combinations of individuals to accomplish tasks that they could not achieve on their own or with their disaggregated wealth. Some states did not see an immediate need to create large numbers of corporations; Virginia relied on landowners to improve and manage the landscape longer than did New England or Middle Atlantic states. However, once the ambitions of internal improvement projects exceeded the wealth of such landowners, the state created corporations to fulfill those functions.

corporations and the law

That corporations were profitable did not typically dampen the enthusiasm of legislators, who might have seen them as conflicting with state government endeavors, for their creation. This was because corporations were intended to serve the public welfare. As corporate advocates noted, charters laid out the rules under which corporations were legally bound to operate. Thus, properly designed charters created mini-republics of voting shareholders who, instead of being in conflict with state governments and constitutions, reflected the ideals of republicanism and federalism. Regular elections, a separation of powers, and secured liberties could all be enshrined in a bill of incorporation. This outlook embraced anticharter views concerning the necessity of reconciling the corporate form to Revolutionary ideology, drawing on a fascination with constitution making that pervaded the U.S. Congress and stretched to state legislatures and corporate boards of directors.

Because Congress lacked the power to grant charters of incorporation under the Constitution (1787), the power rested with states. Over time, legislatures developed standardized legislative language for charters, ensuring that corporations behaved appropriately and could not become rogue governments-within-governments. The corporate form ensured that corporations were owned by shareholders who were eligible, on a regular basis, to elect directors to a board that acted as an executive committee. The board kept minutes of its meetings, correspondence, and expenditures, which it shared with its shareholders and the public.

The public nature of the corporation persisted throughout the period of the early Republic. Corporate law did not yet distinguish between public and private corporations, and even the most significant Supreme Court case of the period dealing with corporations, Dartmouth College v. Woodward (1819), did not absolve corporations from public duties, even if they were nominally "private" because their assets were derived from "private" sources.

See alsoBank of the United States; Dartmouth College v. Woodward; Economic Development; Economic Theory .

bibliography

Davis, Joseph Stancliffe. Essays in the Earlier History of American Corporations. 2 vols. Cambridge, Mass.: Harvard University Press, 1917.

Hartog, Hendrik. Public Property and Private Power: The Corporation of the City of New York in American Law, 1730–1870. Chapel Hill: University of North Carolina Press, 1983; Ithaca, N.Y.: Cornell University Press, 1989.

Hartz, Louis. Economic Policy and Democratic Thought: Pennsylvania, 1776–1860. Cambridge, Mass.: Harvard University Press, 1948.

Maier, Pauline. "The Revolutionary Origins of the American Corporation." William and Mary Quarterly, 3rd ser., 50, no. 1 (Jan. 1993): 51–84.

Seavoy, Ronald E. The Origins of the American Business Corporation, 1784–1855: Broadening the Concept of Public Service during Industrialization. Westport, Conn.: Greenwood Press, 1982.

Brian Phillips Murphy