Common Law and Economic Development

Antebellum judges dethroned the English common law by Americanizing it. In the process, they added certainty to the ambiguity that had shrouded much colonial law. Corporation, labor, property, contract, and tort law emerged by 1861 as significantly different from what they had been in 1787. State courts played a dominant role in this transformation of American law, but federal courts and judges also contributed, giving truly national scope to legal development. The ethical yardstick employed by colonial courts was replaced by a new measure that asked judges to consider how legal rules encouraged economic growth, individual risk taking, and the accumulation of capital.

Judicial decisions require cases and controversies. "The characteristic of judicial power is that it can act only when called upon or in legal language, when it is seized of the matter." Tocqueville concluded, "[t]here is nothing naturally active about judicial power; to act, it must be set in motion." ¹³ Issues of economic development set the judiciary "in motion."

Capital and Labor

Corporations

The corporation was the form of business organization that carried the nation into the new economic age. State legislatures "arm[ed] associations of private individuals with a portion of its sovereign power so that they could accomplish collectively what they wanted but could not do privately." ¹⁴ Antebellum judges contributed to this creative legal process in three areas: the doctrine of ultra vires, the concept of limited stockholder liability, and the protection of corporate charter rights under the Constitution's contract clause.

The doctrine of ultra vires ("beyond the powers") was the most notable judicial manifestation of hostility toward the corporate form. And there was more than a little hostility. Judge Spencer Roane of the Virginia Court of Appeals in 1809 expressed the fears of conservative agrarian interests. In "Currie's Administrators v. The Mutual Assurance Society", Roane wrote that "no . . . set of men, are entitled to exclusive or separate emoluments or privileges from the community" when they were "merely" engaged in "private or selfish acts." ¹⁵ Subsequently, Jacksonian Democrats attacked

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corporations as "having no souls or consciences" and possessed of a powerful "accumulating character." ¹⁶

State courts invoked ultra vires to limit the exercise of corporate power by declaring certain acts as void and incapable of ratification. Contrary to the general role played by courts in the economy, this doctrine contributed an element of uncertainty to business dealings, because it meant that a person who entered into a contract with a corporation did so at some risk. If the contract were declared ultra vires, it could not be enforced and damages could not be collected. The highest courts of Pennsylvania and Maryland during the 1850s, for example, declared the acts of corporations ultra vires, because they exceeded the powers granted in their charters by the state legislature. After the Civil War, as the corporation became indispensable, the doctrine withered away.

On balance, however, antebellum state courts encouraged the development of the corporate form, especially by recognizing the principle of limited shareholder liability. The experience of Massachusetts was typical. In the 1809 case of Andover and Medford Turnpike Corporation v. Gould, the Supreme Judicial Court held that a person who had voluntarily become a member of a business corporation could not be sued for unpaid corporate assessments unless he had expressly promised to pay them. The court's decision diminished some of the risk of shareholders joining a corporation, because they could abandon the enterprise if the assessments became onerous.

A decade later the same court pushed this disposition to favor investment in corporate activity even further. In the cases of Spear v. Grant ( 1819) and Vose v. Grant ( 1819), the judges were asked to rule on whether the shareholders of a bank that had been dissolved were still liable for the debts owed by the bank. Judge Isaac Parker held that they were liable only if the charter explicitly provided so. ¹⁷ If the charter contained no such provision, the shareholders were absolved of the burden of the corporation's debt. The court took the same tack with regard to shareholders of manufacturing corporations, and the state legislature, anxious to attract investors to the state, had by 1830 enacted comprehensive legislation that established the modern rule of limited liability. Thereafter, the "people were free to join [corporations] largely to further their own economic well-being." ¹⁸

Establishing the scope of corporate charter powers was a crucial function of antebellum courts. While state judges generally held that corporate charters should be narrowly construed, the federal Supreme Court embraced a more expansive doctrine in the landmark case of Dartmouth College v. Woodward ( 1819).

The case involved the issue of whether the New Hampshire legislature could alter the terms of a charter originally granted to the college by King George III in 1769. The college claimed that the contract clause of the federal Constitution prohibited the legislature from impairing the terms of the charter. A charter was merely a contract, and the corporation could lay claim to the same property rights as private individuals. Much was at stake. Although Dartmouth College was a philanthropic institution, the case was widely perceived as having profound implications for the extent to which the states could interfere with the conduct of private business. The case arose at a time when the corporate form of organization was gaining favor with private investors.

Marshall's opinion further encouraged them. He held that a charter granted by a legislature was a contract protected under the terms of the Constitution's contract clause. The states, while sovereign, were also held to the same standard in contractual relationships as were private individuals. Marshall reached this conclusion with the

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policy implications of his actions clearly in mind. "The objects for which a corporation is created," Marshall wrote, "are universally such as the government wishes to promote. They are deemed beneficial to the country; and this benefit . . . would . . . perhaps [be] unattainable without the aid of a corporate charter."¹⁹ Marshall's opinion invoked federal constitutional authority to promote voluntary risk taking by creating a stable legal environment for the formation of private corporations.

Justice Joseph Story's concurring opinion reinforced Marshall's commitment to stable corporate arrangements and advanced the distinction between a private and a public corporation. Story reiterated what Marshall had also made clear: legislatures retained control over private corporations. "A corporation cannot be controlled or destroyed by any subsequent statute," Story wrote, "unless a power for that purpose be reserved to the legislature in the act of incorporation."²⁰ A legislature merely had to reserve the right to alter the terms of the charter--the contract--in order to take future action. In following years legislatures began to write such clauses into corporate charters, and in some states an article was included in their constitutions giving legislatures this power. As well, the Supreme Court in the 1830s modified Dartmouth, holding that charters of incorporation were to be interpreted in favor of the state.

Story's concurrence also established the legal basis for distinguishing a public from a private corporation. Critics of corporations argued that, because they were chartered by the state and fulfilled a responsibility that reached into society, they were inherently public. The notion of a wholly private corporation contradicted the commonwealth ideal that corporations existed to fulfill a public need. As a North Carolina judge put the matter, "it seems difficult to conceive of a corporation established for merely private purposes." ²¹ If that view had prevailed, the door would have been opened to extensive legislative interference with corporate activity.

Story slammed the door shut. Instead of defining corporations based on their function, he defined them based on the nature of their endowments. A private corporation, he ruled, was one whose capital stock was privately subscribed. Story's doctrine was "a practical response to a major aspect of corporate development"--the rise of the private business corporation. ²² In Story's own New England, the Dartmouth College decision placed a secure legal floor under would-be entrepreneurs, and the corporation became a major force in the transformation of manufacturing in that region.

Antebellum judges contributed to the long-term transformation of the corporation. Judges, like legislators, assumed that the public good was most readily achieved when private individuals were encouraged to pursue their own economic endeavors. This assumption conformed with the antebellum reality of small corporations engaged in often keen competition in a developing national market economy. In the late nineteenth century, however, as corporations became giant businesses, Story's distinction between private and public corporate activity lost its meaning. The antebellum fascination with stimulating growth was replaced by the problem of how to restrain powerful industrial businesses.

Labor

The same state courts that approved the development of the corporate form of organization for investors rejected for most of the years before the Civil War efforts by workers to protect their earning power through collective organization. The pattern in a developing economy is for the savings necessary for capital formation to be accumulated at

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the expense of labor by forcing low wages and the social costs of development on the work force. In the antebellum legal struggle between capital and labor, capital usually prevailed.

Industrialization and the creation of a wage-earning class occurred gradually. Like the corporation, the full economic and legal development of the labor organization was incomplete by the time of the Civil War. The numbers tell the story. In 1800, only about 10 percent of the white labor force was categorized as an "employee"; most "laborers" were self-employed, predominantly in agriculture. That number had risen to about 20 percent by 1860, but even in urban areas, such as New York City and Philadelphia, workers there did not begin to regard their position as wage earners as permanent until the 1850s. Furthermore, on the eve of the Civil War, manufacturing, which was the largest employer of wage earners, accounted for only about one-third of the output of the entire economy. The legal rules affecting labor touched only a small portion of a still basically agricultural and rural population. Furthermore, early labor organizations were little more than primitive price-fixing combinations that reflected the semientrepreneurial status of the skilled artisans who organized them.

The English common law doctrine of criminal conspiracy shaped the early American law of labor organization. Conspiracy is an agreement between two or more individuals to effect some unlawful purpose, and the mere act of agreeing is enough to bring an indictment. The labor conspiracy doctrine held that collective as opposed to individual bargaining would interfere with the natural operation of the marketplace, raise wages to artificially high levels, and destroy economic competitiveness. The prevailing wage fund theory held that there was only a fixed part of the national income available for wages. If labor organized, this economic theory provided, it robbed unorganized workers of what was due to them naturally.

The labor conspiracy doctrine was carried to North America largely intact, and it was first applied in Philadelphia in the 1806 case of Commonwealth v. Pullis, also known as the Philadelphia Cordwainers' Case. (The name Cordwainer was taken from the Cordovan leather that shoemakers worked.) The case involved the explosive issue of whether labor unions were illegal under the common law. Federalists in Philadelphia argued that they were; Jeffersonian Republicans took the opposite position. The case raised other issues: the extent to which the English common law would be accepted by Americans, the liberty of individuals to contract for their own economic arrangements, and the economic future of Philadelphia.

Philadelphia shoemakers in 1794 organized the Federal Society of Journeymen Cordwainers for the purpose of improving their economic lot. They demanded that the master craftsmen hire only association members. The journeymen, in essence, attempted to create a closed shop. The master craftsmen retaliated, not only by forming their own association, but when the association's members struck for higher wages in the fall of 1805, they persuaded the city government to prosecute the journeymen for engaging in a criminal labor conspiracy.

The trial lasted three days before a jury composed of nine merchants and three master craftsmen, hardly a balanced panel. The prosecution argued that the association represented a "state within a state" and that its operation threatened the liberties of all persons, denying those workers who did not wish to join the association the opportunity to sell their labor freely. "If any one of the defendants," the prosecutor explained, could "charge $100 for making a pair of boots, nobody would interfere, if he could get his employer to give it." Once that same individual organized in order "to

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regulate the price of the labour of others as well as [his] own," then the labor conspiracy doctrine applied. ²³ The prosecutor also conjured up a vision of the economic decline of Philadelphia, with investors fleeing to other cities where the legal climate supported competition and low wages. Liberty and the public interest, all put in the context of Adam Smith's free-market economics, demanded conviction. The judge in the case made certain that the jury understood as much. His blatantly one-sided charge gave the already biased panel little reason to reconsider their assumptions.

Between 1806 and 1842 the conspiracy doctrine was applied in at least a half- dozen cases. Most of the time, prosecutors and judges cloaked economic necessity in terms of individual liberty. Justice John Savage of the New York Court for the Correction of Errors explained in People v. Fisher ( 1835) that workers' "extravagant demands for wages" would interfere with the beneficent, natural operation of the free market. "It is important," Savage observed, "to the best interests of society that the price of labor be left to regulate itself, or rather, be limited by the demand for it."²⁴ The reporter of the Pittsburgh Cordwainers' Case of 1815 offered a more straightforward analysis. "The [guilty] verdict of the jury," he said, "is most important to the manufacturing interests of the community for it puts an end to these associations which have been so prejudicial to the successful enterprise of the capitalist."²⁵

By the 1840s U.S. courts began to retreat from the labor conspiracy doctrine. Chief Justice Lemuel Shaw, of Massachusetts, a central figure in adjusting the law to the changing economy, led the way in the case of Commonwealth v. Hunt ( 1842). Shaw sought to strike a balance between the interests of labor and capital, seeking to promote community interests as a whole by reducing social strife.

In 1840 Jeremiah Horne, a disgruntled employee, persuaded District Attorney Samuel D. Parker of Boston to bring suit against the Boston Journeymen Bootmakers' Society. The union had fined Horne for having done some extra work without pay, but the fine was removed when Horne's employer paid it. Horne was shortly fined again for another infraction, and despite the urging of his employer to pay, Horne refused. The union then expelled him, providing that he could gain reinstatement by paying the fine and signing a pledge to obey the union rules. When Horne refused, the union demanded that he be fired, and the employer complied. At that point, Horne turned to Parker, who successfully argued his case before Judge Peter O. Thacher in the Boston Municipal Court. Thacher informed the jury in his charge that coercion by the union of a fellow worker would, if widespread, "tend directly to array [laborer and employer, and the rich as well as the poor] against each other, and to convulse the social system to its centre. A frightful despotism would soon be erected on the ruins of this free and happy commonwealth." ²⁶ The jury required only twenty minutes to convict, and the defendants (seven journeyman shoemakers) then appealed to the Supreme Judicial Court of Massachusetts.

Shaw's opinion, written for a court composed of Federalists and Whigs, significantly modified the labor conspiracy doctrine in overturning the lower court conviction. Shaw had a "hard-headed insight into the workings of a competitive economy." ²⁷ The best interests of the commonwealth would be furthered through competition, and unions were one means of stimulating just such competition. Shaw did not rule that all labor combinations were legal, but he did find that as long as the means used by unions were legal they were free to make demands on employers. He held that a closed shop was not itself illegal, nor was the act of achieving it through a boycott.

Shaw founded his decision on the commonwealth idea. He believed that benefits

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to the public might accrue from the contest between unions and employers. The same notion of the rights of the public also influenced the development of judicial attitudes toward property.

Date: 2015-01-29; view: 769