Regulation and Promotion

Regulatory legislation was one of the most important ways in which legislatures breathed life into the commonwealth idea. They enacted a veritable blizzard of economic regulations under the guise of enhancing the rights of the public. Most of this legislation involved low-level economic relationships, much as had been the case in the colonies. The Georgia legislature in 1791, for example, enacted a law that stipulated the proper packaging of tobacco in "hogsheads or casks"; the Massachusetts General Court (that state's legislature) in 1833 specified that "pure spermaceti oil" could only be sold under the names "sperm, spermaceti, lamp, summer, fall, winter and second winter oils." ²² In both states, failure to comply was punishable by a fine.

Every state had laws regulating the sale of food products, setting standards for the conduct of peddlers and vendors, and directing manufacturers to include the name and place of manufacture. These measures had two major purposes. First, they were mercantilist. That is, they guaranteed the quality of goods produced within the state, making that state's economy competitive with every other state in the national marketplace. Second, such measures also provided a modicum of protection to consumers against fraudulent commercial practices. Much nineteenth-century regulation, therefore, while driven by an economic purpose, also carried forward from the colonial era an ethical commitment to fair dealing.

State legislatures were much better at passing regulatory measures than they were at funding the expenses of enforcement. Ensuring compliance with regulation of low- level economic activities was left almost completely to private initiative, another example of the privatization of economic decision making. Ferry operators in New York during the years before the Civil War were required by statute to maintain a record of the tolls they charged and collected, but only when a private citizen complained were the records checked.

Where the scope of regulation involved higher level economic activities such as banking, railroads, and insurance companies, the legislature devised commissions. Ohio, for example, established a canal commission in 1831 to oversee the building and operations of the state's most expensive internal improvements. It had limited enforcement powers and its actions were, in every case, always subject to second-guessing by the General Assembly, which most often responded to constituent concerns about tolls and the location of new canals instead of abstract matters of economic efficiency. Legislative interference in Ohio and elsewhere was constant but almost always ad hoc and based on investigations that came after the fact.

These antebellum state commissions relied on persuasion to accomplish their duties, hardly a sufficient means to meet the challenges of expanding corporate enterprises, such as the railroads. Rhode Island in 1839 established the nation's first railroad commission, and legislatures in the New England states, where the commonwealth idea was particularly strong, embraced regulatory commissions more quickly than any other section of the nation. As with steamboats on the national level, concerns about safety motivated state legislatures. Connecticut, for example, established a commission that in the 1850s had the right to inspect the physical equipment of the railroads and to recommend needed repairs, although it had no power to fix rates or suspend service. Furthermore, the railroads (in a pattern that held through the remainder of the nineteenth century) were themselves influential, controlling both the commissions

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intended to regulate them and the state legislatures. In perhaps the most flagrant example, the railroads in New York bought off the commissioners, who in 1857, after only two years of existence, persuaded the legislature to abolish their offices.

Promotion was the most important mixed economic activity undertaken by state legislatures. They increased grants of aid to private enterprise, transforming government's primary responsibility from one of ensuring the maintenance of uniform standards of moral and economic behavior to one of allocating valuable resources among contending social interests. These initiatives came in all shapes and sizes. Vermont, for example, granted tax exemptions to local manufacturers between 1812 and 1830. New York in 1817 excluded textile workers from jury duty and militia service. Other states offered land grants and bounties, or they sponsored agricultural and industrial fairs.

The states fell along a spectrum in their promotional endeavors. The formation of public policy in some states, such as Wisconsin, was characterized by "drift and default." ²³ In Wisconsin and other "frontier" states during the antebellum years, government was "underdeveloped," lacking the resources, personnel, and expertise necessary to evaluate fully the proper direction of the public interest. There was a broad consensus that the market should be allowed to function through private decision making aimed at encouraging economic development. In other states, however, a public enterprise model prevailed. The legislatures of New York, Ohio, and Pennsylvania adopted comprehensive plans for public construction of transport facilities, and established the rudiments of bureaucratic administration, through commissions and boards, to oversee these programs. In still other states, especially in the South, these styles of "drift and default" and "public enterprise" blended together.

Within this "moving kaleidoscope" there were nonetheless trends in the development of positive law that channeled the distribution of the costs, benefits, and risks of economic development. ²⁴ The most important of these involved corporations, the power of eminent domain, and debtor-creditor relations.

Corporations

A corporation is an artificial person created under the laws of a state for either a public or a private purpose. All corporations are public in the sense that the authority of the state creates them, but some, such as the business corporation, exist to promote the private wealth of its members, while others, such as transportation companies, fulfill a public service. Depending on the terms of its charter, a corporation may exist for a specified number of years or in perpetuity, and it does so irrespective of changes in number or composition of its members. During the antebellum period the corporation assumed its modern form, although its greatest growth and legal development occurred in the late nineteenth and early twentieth centuries as industrial America matured.

The first American corporations were charities, municipalities, and even churches. Some early corporations were deemed public even when they were engaged in activities that we might consider private today. For example, the colony of New York in 1735 passed separate acts making the owners of wharves, water-powered mills, internal improvements, and community service enterprises public corporations. Although colonial governors enjoyed some authority, to charter corporations (as had the king in England), the practice developed in the new states after the Revolution that only state legislatures, as the repository of the will of the people, could create corporations.

Most of the corporations chartered from 1789 to 1861 engaged in improving public

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transportation, followed by banking, insurance, and manufacturing which comprised most of the rest; of these, only manufacturing concerns were treated as private. The others were known as franchise corporations. A franchise corporation was granted a special privilege--for example, in return for providing a valuable public service, collecting tolls or issuing circulating bank notes as a medium of exchange. These corporations were expected to follow provisions in their charters treating matters of public interest, such as the amount of tolls and the liability of shareholders. Franchise and benevolent corporations were viewed as having equal social utility. A turnpike and a church building "were both visible and useful public improvements and all communities needed them." ²⁵

State involvement with franchise corporations was often extensive. For example, when the Pennsylvania legislature chartered the First Bank of Pennsylvania in 1793, it subscribed one-third of the capital stock. The State Bank of South Carolina was designated the fiscal agent of the state, making loans to further economic development based on revenues paid into the state coffers.

The monopoly privileges granted by state legislatures to early national franchise corporations also had antidevelopmental consequences that stirred political controversy and fomented competing claims by business competitors. The successful application of new technology required that old grants of corporate monopoly had to give way. Yet the original incorporators, who had assumed a risk premised on future exclusive control, claimed that they had what amounted to a vested right. The doctrine of vested rights held that there existed certain rights (the guarantee to property and life, for example) that so completely accrued to a person that they could not be arbitrarily disturbed, either by another private person or by government.

The role of the Massachusetts General Court (that state's legislature) in encouraging bridge building over the Charles River illustrates the way in which corporate monopoly rights collided with the rights of the public to the benefits of improved technology. The General Court in 1785 granted a charter to the Charles River Bridge Company to operate a toll bridge between Charlestown and Boston. Then in 1827 the state legislature, amid demands for cheaper and easier means to cross the Charles River, granted another charter to the Warren Bridge Company with the proviso that as soon as the costs of construction were paid the bridge would become free. The Warren Bridge incorporated several new design and engineering techniques that facilitated the flow of traffic between the two cities. The proprietors of the Charles River Bridge claimed that the legislature lacked the authority to grant a charter to a rival bridge company that would reduce significantly the value of their investment. The U.S. Supreme Court in 1837 settled the controversy, finding that the right of the legislature to provide for a new bridge outweighed the claim of the original bridge incorporators.

The private corporation also emerged as a device by which to stimulate and organize economic activity. Throughout the antebellum period, however, the partnership, in which individuals contracted with one another to arrange their business affairs, was the preferred method of private entrepreneurial organization. The corporation was "not indispensable to the growth of market activity." ²⁶ Still, the corporate form gained some acceptance because it offered several distinct advantages: helping protect collective ownership of real property, facilitating the mobilization of capital, offering a means of limiting risks in speculative enterprises, and allowing easy access to courts.

Antebellum state legislatures evolved a substantive body of rules dealing with

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private corporations. The two in particular that were important were limited liability and general incorporation.

Until about 1820, charters for most private corporations were founded on the principle of unlimited liability. Each shareholder was responsible for all of the debts of the corporation should it go bankrupt. An ethical principle lay behind the rule. Persons who engaged in business activity for profit were morally responsible to compensate their creditors completely. Many state governments by the 1820s recognized that unlimited liability posed a daunting impediment to the accumulation of capital necessary to meet growing business demands. Legislators, therefore, began to enact corporate charters that specified limited liability, a rule that proved the single greatest lure to would-be investors. Shareholders were liable for the corporation's debt only in proportion to the amount of the stock they owned. Limited liability made the corporate form a device by which individuals could pursue profit far in excess of the amount of their investment without fear that, should the venture fail, they would be held responsible for all of its debts. State legislatures crafted a public policy that encouraged people to enhance their economic well-being--and that of the state as well--by offering them a known limited risk that could be measured against their own resources.

State legislators also made the formation of corporations easier. This entailed a movement from special to general charters. As long as the pace of business activity remained low, state legislatures could accept petitions and act on them in an orderly fashion. Under the special charter scheme each corporation had its own charter. The rapid growth in the market in the 1820s and 1830s made this system unwieldy. As economic rivalry among the states increased, the most competitive states were those that offered a cheap legal means of encouraging participation by their citizens in the growing market.

Special charters for private business corporations also stirred claims of legislative manipulation, favoritism, bribery, and corruption. People able to win special charters were viewed as the beneficiaries of political access to the legislature that the average person could not command. Just as Jacksonian Democrats blasted the Second Bank of the United States, so they claimed that state legislatures had engaged in similar monopolistic practices in granting special charters. "If corporate powers are necessary," the Racine [ Wisconsin] Advocate proclaimed in 1848, "let them be made as limited as possible in extent, and as available as possible to all. Let general incorporation laws alone be passed, even for villages and cities, so that . . . all may avail themselves of them." ²⁷

Every state adopted general incorporation laws. These acts made the advantages of incorporation available to all people. The New York legislature in 1811 passed the first general incorporation law for manufacturing businesses, and the practice spread with great rapidity during the 1830s and 1840s. These laws standardized the means of obtaining a charter and doing corporate business, and they added continuity and predictability to corporate affairs. The measures specified standard practices, such as proxy voting, the duration of corporate life, modes and times of meetings, and the extent of liability. In most states, either by legislative act or constitutional provision, the actual responsibility for distributing the charters was given to an executive officer, usually the secretary of state.

The adoption of general incorporation laws proceeded from several assumptions. First, they equalized the opportunity to secure the legal advantages of incorporation

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while encouraging economic growth through private dealings. Second, general incorporation laws democratized entrepreneurship during the early stages of industrial growth. Third, these laws "also equalized the opportunity for different sections of [a] state to undertake local improvement projects with their own resources without having to bargain politically for the privilege." ²⁸

General incorporation laws were evidence of the laissez-faire thread that ran through the antebellum economy. State legislatures were left with little direct control over the formation and conduct of private corporations, although they continued to regulate various aspects of franchise corporations through commissions and charter provisions.

State involvement was nonetheless important. Most charters of incorporation before the Civil War were special, not general. In theory, special charters were only to be used when the object of the corporation could not be realized under the general laws. In operation, many people in business went to the legislature with the hope of gaining through a special charter some advantage that the standardized working of the general incorporation statutes could not provide. Most of these special provisions reveal that there were few instances of sinister private gain at the expense of the public welfare. Rather, legislatures used them as bargaining chips, giving new corporations certain benefits but exacting from them limitations on corporate life, on landholdings of the corporations, and on its capital. Distrust of corporations was great, although it was certainly true as well that access to legislative authority was an undoubted benefit throughout the antebellum period, and most legislatures expended considerable energy and time dealing with the unending round of jockeying by various corporations.

Antebellum state legislatures relied on the corporate form to organize and discipline credit, transportation, and manufacturing businesses. Corporate statutes yielded great private and social profits by promoting the rapid expansion of regional markets and by forging the infrastructure of a truly national market. But political pressures democratized corporate business opportunities with only minimal provisions for regulation. The democratic model that evolved from 1830 to 1860 assumed a competitive marketplace. When business consolidation began after the Civil War, the old forms of corporate law and the narrow regulatory base created to oversee them simply were inadequate to the needs of an industrial economy experiencing rapid business consolidation.

Date: 2015-01-29; view: 788