The interest and argument surrounding the Supreme Court's recent ruling on Corporate "free speech" rights has motivated me to begin working on a new book: "World, Incorporated: The History of the Supra-National Corporation and its Global Stranglehold on Freedom and Democracy". Here are the first two chapters and part of the third -- all I have finished so far. I plan to post the entire manuscript, piece by piece as it is written. I welcome any comments or criticisms. I apologize that this diary is so lengthy; subsequent ones will be one chapter at a time, and won't be so long.
The History of the Supra-National Corporation and its Global Stranglehold on Freedom and Democracy
by Lenny Flank
(c) copyright 2010 by Lenny Flank. All rights reserved.
One: At the Pleasure of the Crown
Two: The American Anti-Corporate Revolution
Three: The Robber Barons
Four: The Trust-Busters
Five: The Roaring Twenties
Six: Depression and New Deal
Seven: The Organization Men
Eight: “The Man”
Nine: The Multi-National Wars
Eleven: The Second Gilded Age
It has become a trivial truism in American politics that “corporations have too much power” and that “corporate money dominates our political system”. These cries intensified in 2010, after the Supreme Court ruled that corporations have the First Amendment “free speech” right to pour virtually unlimited amounts of their vast fortunes into the political process. In concluding that “money equals speech”, the Supreme Court neglected to consider that, in our electoral system, money also equals votes. Inevitably, the effect of the Court’s ruling will be increasing domination of our national life by the corporations.
Few people understand, however, that this is just a symptom of a much larger and much more ominous trend—the vast shift in global power that has already occurred from 1990 to 2010, when corporate domination of nations reached levels it had never been able to attain before, when corporate power superceded national power, and when global economic structures gained control over democratic governmental structures.
We no longer live in a world made up of “nation-states”. Today, power and control has passed to huge multi-national mega-corporations who have no country, owe loyalty or obedience to no government, and who answer to no nation. There is no longer any such thing as an “American” corporation, or a “Japanese” corporation, or a “Chinese”, or “German”, or “British”. A tiny handful of mega-conglomerates now have global reach and global power. They all own big chunks of each other, and have become so intertwined and interlocking that it is no longer possible to differentiate them. They are larger, richer, and more powerful than “nations”. National sovereignty and national borders are irrelevant to them; national governments, even the largest, are unable to challenge or control them.
They have become supra-national.
The supra-national corporations exercise economic control through a global network of international agreements and enforcement bodies, like the World Bank and the World Trade Organization, which are unelected, undemocratic, and have more power than any national government. These organizations have control over the budgets, trade policies and financing of every nation; they have veto power over national laws; they decide where jobs shall go and where they shall not. We are all utterly dependent upon them. Everything necessary for our lives—our food, our clothing, our consumer goods, our energy sources, our jobs, our financing, everything—now comes from somewhere else on the planet, and we depend completely on the supra-nationals to bring them here for us, cheaply and reliably. Today, the supra-national corporations can manufacture an item in China using materials that come from Brazil and South Africa, and sell that item in a store in New York or London, more cheaply than a factory could if it was located right next door. And even the credit card we use to pay for that item, comes through financing obtained from banks in Iceland or Saudi Arabia. Without this vast interconnecting global economic structure, 21st century life would be impossible. It is this supra-national network, and the handful of corporations which run and profit from it, that determine the very shape of our lives.
No nation is, or can be, an island anymore—we are, all of us, everywhere, part of the global economic network. Supra-national corporations like Citicorp, British Petroleum, Samsung, Royal Dutch Shell, Toshiba, or Daimler-Benz, determine the lives of people in India and Guatemala and Nigeria just as much as they do people in America or Britain or Japan. The very idea of a “sovereign nation-state” is now dead, a quaint relic from an outdated 20th century worldview. We now live in a global corporate planet—World, Incorporated. “Nations” are merely wholly-owned subsidiaries.
That change has been profound—and has gone almost entirely unnoticed and virtually unchallenged.
The purpose of this book, then, is to illustrate this history, to show how the corporations steadily grew from small local tightly-controlled public-works, to powerful independent economic and political entities which dominated democratic national governments, to quasi-governmental multi-national behemoths which, today, have literally the right of veto power over democratic national governments.
This is the story of the supra-national corporation.
One: At the Pleasure of the Crown
Corporations have always been a tool of the rich and powerful. For most of their history, though, corporations were the tools, not of wealthy businessmen, but of despotic feudal monarchies.
Prior to the 1600’s, corporations were enabled solely by Royal Charter, which granted a group of men the right to form a “body”, a corporation, for some specific public purpose. Corporations might be formed at the King’s request to build and run a hospital or university, for instance. As one of the earliest books on corporate law in England defined it, a corporation was “a collection of many individuals united into one body, under a special denomination, having perpetual succession under an artificial form, and vested, by policy of the law, with the capacity of acting, in several respects, as an individual, particularly of taking and granting property, of contracting obligations, and of suing and being sued, of enjoying privileges and immunities in common, and of exercising a variety of political rights, more or less extensive, according to the design of its institution, or the powers conferred upon it, either at the time of its creation, or at any subsequent period of its existence.”
As a creation of the King, the corporation was sharply curtailed in its powers. The Charter which granted it its right to exist was, typically, limited in duration (often for a period of several years). At the end of that duration, if the Charter was not renewed by the King, then the corporation ceased to exist. A corporation’s Charter could also be revoked at will by the King if the corporation exceeded its authority, if it engaged in activities that it was not chartered for, or if it caused public harm or violated any law or decree. Corporations could not own any share or equity in any other corporation, and all of the shareholders in the corporation were personally responsible for the acts of the corporation.
The economic system in Europe at this time was feudalism, in which power and economic wealth were the result of land ownership. The fief was the basic social and economic unit of the feudalist system. These were areas of land which had been set aside for the exclusive use of a particular feudal lord. The political administration of this system was carried out by an individual king, who was one of the large landowners, or by a state bureaucracy run by a consortium of the major landowning families. The barons and other nobility received their fiefs from this political apparatus, usually in reward for some service rendered or for exemplary loyalty. Within their realms, the word of the nobility was literally law. The feudal lord had complete authority to decree laws, mint coins and impose taxes.
The feudal economy was almost exclusively based upon agriculture, and the population was divided into two basic economic groups. The apex of the social system was the feudal nobility who controlled fiefs. The large majority of people were serfs or peasant laborers. They owned no land and controlled no fiefs; instead, they produced their means of living by working the land held by the feudal landlords. In exchange for their right to work this land, serfs were obligated to turn over some portion of their output to the feudal lord.
It is easy to see the economic basis of the feudal system. The serfs, working in the fields, produce nearly all of the economy’s wealth. The feudal lord, by contrast, performs no work and produces no wealth, but, by virtue of his control over the land, he can compel his serfs to produce more than they themselves will consume. This surplus production is then taken by the feudal lord in the form of taxes.
By the 17th century, this system, which had lasted in Europe for over a thousand years, was beginning to feel internal pressures. Large territories, bonded usually by common language and customs, were now united into “nations” which were ruled by a single monarch, a King. Agriculture production, however, which formed the basis of the feudal economic system, was facing a new challenge, as the merchant class began to grow in size and power. Kings constantly fought each other for control of territory, and as the need to defend the monarchy from the predations of other feudal rulers grew, so did the king’s need for cash—and the merchants were the only source of cash in the kingdom. The merchants, for their part, were in constant need of new sources of exotic commodities for trade.
The monarchies and the merchants found their interests to be mutual, and the result was the commercial system known as “mercantilism”, which became the dominant ideology of Europe. The monarchs of Europe commissioned overseas expeditions of exploration and conquest which resulted in overseas colonies that were kept under the economic and political control of the monarchy. These colonies served as sources of wealth which the Kings could then use to finance their never-ending wars and their growing need for large navies to protect the trade routes which were now vital to the nation’s interests. The first two nations to jump wholeheartedly into the mercantilist system were Spain and Portugal, who fought numerous naval wars with each other over control of colonies and trade routes.
It was the English, under Queen Elizabeth I, however, who turned mercantilism into the most successful integrated economic and military system.
By the beginning of the 16th century, Parliament had won a considerable amount of political power and had claimed for itself the authority to set taxes and prepare a budget. In an effort to evade this, British Kings searched for new sources of money that did not come from Parliament. One method was the simple sale of Royal lands, but this was a limited resource. Another method was the sale of “searching and sealing patents”, which granted certain groups of merchants the sole authority to provide the seals which guaranteed the quality of a particular product. In 1623, Parliament passed the Statute of Monopolies which tried to regulate the sale of sealing patents, but the Crown still managed to get around the restrictions, and continued to bring in some 100,000 pounds a year by selling patents.
Centuries before, several European monarchs had already begun the practice of granting Royal Charters to corporations who had the purpose, not of merely non-profit public works, but of for-profit commercial ventures—usually granting the Crown a share of the profits. One of the oldest commercial corporations we know about was the Stora Kopperberg Mining Company in Sweden. In England, King Henry II had chartered the Merchant Adventurers Company, and Queen Mary had formed the Russia Company. Queen Elizabeth chartered a number of corporations, including the Spanish Company, the Turkey Company, the Eastland Company and the Morocco Company. These small corporations were a very minor part of the European economy, however, and remained tightly controlled by the King. Thomas Hobbes dismissively wrote of them, “Corporations . . . are many lesser commonwealths in the bowels of a greater, like worms in the entrails of a natural man.”
In 1600, however, the role of the commercial corporation was to grow drastically, and play a central part in Queen Elizabeth’s decision to turn Britain into a naval power and challenge Spain for global economic dominance. The result was global warfare, as the Spanish, and then the Dutch and French, jumped into the mercantile game and built huge navies to fight each other for control of colonies and trade routes. And at the center of these fights were three commercial corporations, the British East India Company, the Dutch East India Company, and the Hudson Bay Company.
British East India Company
England entered the commercial wars first.
One of the major difficulties facing overseas traders was the inherent risk of the ocean voyages. The vast majority of trading ships that traveled to China or the Indies did not return—the victims of storms, accidents or pirates. The merchants who undertook the voyage, most often formed a small company for each voyage, and then either struck it rich or, more often, lost everything. This pattern of business—high risk with a small chance of a fabulous return—enticed the merchants to seek ways of spreading their risk over multiple voyages. They therefore began to form larger companies with enough resources to undertake a number of voyages, and to get themselves through the failures until they struck it rich with a success.
Realizing that their risk would be considerably lessened if they had exclusive rights to all the trade from any specific geographic location, these companies began lobbying the Queen for a charter to grant their corporation complete monopoly of trade over particular areas.
In concert with her Trade and Navigation Acts, which strengthened the Royal Navy, Queen Elizabeth therefore granted a Royal Charter on December 31, 1600, to the British East India Company, granting it a 15-year monopoly on the lucrative commercial trade in spices, silk, and luxury goods flowing from the East Indies. Officially known as the “Company of Merchants of London Trading Into the East Indies”, it soon became known as simply The Company. Not only was it the first significant corporation in history; it quickly became the largest, richest and most powerful group of men on the planet, reaching heights of wealth, power and influence that even the 21st century supra-nationals have not yet matched.
Dutch traders had already established themselves in the East Indies by this time, and the British initially found themselves at a disadvantage. But a Company trading post that dealt mostly with pepper was set up in Java and became a commercial success.
At first, the East India Company raised only sufficient capital to finance one voyage at a time and, when this proved unsuitable, then raised enough capital for several voyages over a few years. But by 1613, the Company began issuing permanent shares of stock, with periodic payments to be made from profits to the shareholders, the “dividend”.
As the Company expanded into Asia and especially India, its profits grew. In 1615, with diplomatic help from the British Crown, the East India Company was granted some territorial and commercial rights by the Mughal Emperor of India. By 1611, its shareholders were receiving more than 150% returns on their investments. The Company’s first offering of stock for public sale, in 1616, brought in 418,000 pounds, and another stock offering in 1617 raised 1.6 million.
When the English monarchy was temporarily overthrown in the English Civil War, the government under Oliver Cromwell nevertheless renewed the Company’s Charter in 1657. In 1670, after the monarchy was restored, King Charles II granted the Company the right to mint its own money, to raise its own private army and navy, and to directly govern the territories it had control over. Within its domain, the Company suppressed the development of local competitors and banned any independent local industry. By 1720, some 15% of all Britain’s imports were coming from the Company’s India monopoly.
By this time, the British East India Company had become more powerful than the British Government. In 1709, Parliament finally did move to control the royal company by replacing its entire management; the company simply refused to comply, and placed all the “new” management under its control. By 1850, the British East India Company had sole governing authority over one-fifth of the world’s population, expanding its reach into all of India, as well as parts of China, and enforced its rule with a private army of over a quarter of a million men—twice as large as the British Army. Parliament, which had once attempted to control the Company, was now controlled by it—fully one-third of the Members of Parliament owned East India Company stock. The King, meanwhile, became more and more dependent upon “loans” from the Company, in exchange for increased power and privileges.
The Company soon began to overreach itself. Its heavy-handed methods in India led to such widespread revolts that, in 1858, the British Government revoked the Company’s authority in India and assumed direct colonial rule. Even then, the East India Company still acted as if it owned the place. In one instance, when a competitor was found to be illegally invading the Company’s monopoly, a Company official asked the local government representative to take action, and was told that the offender would be punished according to British law, whereupon the Company official shot back: “His orders were to be his rules, and not the laws of England, which were a heap of nonsense, compiled by a few ignorant country gentlemen, who hardly knew how to make laws for the good of their own private families, much less for the regulating of companies, and foreign commerce.”
The Company also monopolized the trade in opium to China, and twice in the 19th Century, when the Chinese government took steps to end the opium trade, the East India Company used military force to restore its monopoly. The Opium Wars, combined with the rebellion in India, convinced the British Government that the East India Company was becoming more trouble than it was worth, and, when the Company’s economic power began to decline, Parliament dissolved it in January 1874.
By this time, the other royal-chartered Corporations had also begun to die out. As more and more privately-owned trading companies appeared, the royal Corporations began to lose their primary advantage—their trade monopoly. A good example can be found in the Royal African Company. The primary commodity of the RAC was slaves from Africa, each of which was branded with the company’s emblem and transported to North or South America to be sold. But the RAC was unable to compete with the huge number of private slave ships from America, and it declined steadily until it was finally dissolved in 1750.
The British East India Company had its most far-reaching effect on world history, however, in North America. With the defeat of the French in 1763 in the Seven Years War (also fought in North America, where it was known as the French and Indian War) the East India Company was granted a monopoly on the tea trade to the British colonies in America. To help the British Government pay the expenses of the war, it was decided to place a tax on tea sold in the colonies. The colonists responded with a boycott, and in December 1773, in the “Boston Tea Party” protestors boarded British East India Company ships and dumped 342 chests of tea into Boston Harbor, an act which led directly to the American Revolution two years later.
Dutch East India Company
In 1602, in answer to the British East India Company, the government of the Netherlands granted a 21-year charter to the Dutch East India Company (known in Dutch as the Vereenigde Oost-Indische Compagnie or VOC, granting it exclusive monopoly over trade in Asia. Like the British East India Company, the VOC had the right to mint its own money, form its own army, make treaties with governments, and make laws in its territories. The VOC was also the first corporation to offer “stock”, in which shares in the company (entitling the holder to a portion of the profits) were allowed to be freely bought and sold. The Dutch East India Company is therefore considered by some to be the first modern corporation.
Relations between the VOC and the British East India Company were at first entirely hostile, as each had laid claim to the same territory. In 1623, the Dutch company captured ten employees of the British company and brazenly tortured and executed them. Within a few years, though, the British and Dutch companies worked out an agreement over spice trading in the East Indies, allowing the Dutch to control trade in Java, while the British moved instead into China and India. Over the next two centuries, the Dutch East India Company expanded to rule all of Indonesia, and also had trading interests in China, Ceylon, and Japan. By 1669, it was the richest corporation in the world, with 50,000 employees and a fleet of 200 merchant and warships.
After a series of wars between the British and Dutch, however, the fortunes of the VOC began to decline. Now referred to derisively as the Vergaan Onder Corruptie (“Dead Under Corruption”), the Company was nationalized in 1796, and dissolved in 1800.
Hudson Bay Company
The Hudson Bay Company was a latecomer to the mercantile scene, not being chartered until 1670 by the English King Charles II. It was given monopoly over the fur trade in the Hudson Bay area of North America, and at the height of its power, it was the de facto government over much of what is now Canada.
The Hudson Bay Company traded largely in pelts and furs for the European market, which it obtained through a series of trading posts that offered the Native American tribes blankets, firearms, and metal utensils in exchange for trapped furs. By 1820, the Company had over 1500 employees in North America. Continuous conflict with French traders helped lead to the French and Indian War in 1756, which set off the larger conflict between Britain and France known in Europe as the Seven Years War. The effects of the French and Indian War ultimately led to the American Revolution in 1775.
The Hudson Bay Company still survives today, a mere shadow of its former greatness, as a Canadian clothing company.
British Colonial Charters
After Columbus reached the New World in 1492, the Spanish focused their attention on extracting gold and silver from South America, and North America was largely forgotten. The Spanish made some half-hearted attempts to establish colonies at what are now Georgia and Virginia, and the French unsuccessfully tried to establish settlements in present-day South Carolina, Maine and Texas. But it was the British who would most successfully focus their attention on North America, and it was through chartered corporations that they exercised their dominance.
The American venture was the work of the London Company, a joint stock corporation formed by a charter from King James I of England and King James VI of Scotland. The London Company’s charter granted it rights to the southern half of the American coast, while the Plymouth Company was granted a charter for the northern half of the coast.
The first successful British settlement in North America was Jamestown in 1607. This venture was run by a division of the London Company called the Virginia Company, in England. Virginia Company shares sold for 12 pounds each. William Shakespeare was a stockholder.
While the Virginia Company was a for-profit venture hoping to strike gold and other riches, it was also a social program utilized by the King to rid England of “excess population”. In the move from feudalism to modern capitalism, the English aristocracy had removed huge numbers of peasant serfs from the countryside by converting tracts of land from agrarian use into rental properties, and grew rich by renting this land to the sheepherders who were needed to feed England’s huge wool-cloth industry. The former serfs, now landless and moneyless, crowded into the urban areas. Some of these desperately poor people found employment as workers in England’s growing factory system, but a large number still remained, unemployed and hopeless, living in the streets as beggars, prostitutes and thieves. Various efforts to remove them—by imprisoning them for vagrancy, by impressing them into the Royal Navy, or by locking them up in poorhouses—all failed. The growing number of poor and landless led to political unrest; the Midlands Revolt in 1607, and the rebellions of the Levelers and the Diggers were all based on the demands of dispossessed peasant serfs for land.
In 1609, the Virginia Company offered a way for the Crown to “ease the city and suburbs of a swarme of unnecessary inmates” by removing them all and sending them to the Company’s new American colony in Jamestown, Virginia. In 1618, Parliament passed an act allowing the Virginia Company to round up the city’s “vagabonds”, with the Company promising to “sweep your streets and wash your dores from idele persons, and the children of idele persons, and imploy them”. People as young as eight years were now rounded up and shipped off to Virginia as “employees” of the Company.
The Virginia Company painted a glowing portrait of its American colony to stockholders and potential colonists. America, they declared, was a land of plenty, which had “all things in abundance, as in the first creation, without toile or labour . . . In all the worlde a like abundance is not to be found.”
The Company, of course, knew better. The Jamestown colony, founded in 1607, was a death trap from the very beginning. The colonists, who had no idea how to survive in the American wilderness, died at horrific rates. In the first winter alone, known as “The Starving Times”, only 70 of the original 215 colonists survived. As large numbers of voluntary colonists and involuntary “vagabonds” began being shipped from England, the death toll rose steadily. In 1619, 165 children, age 8 to 16, arrived in Jamestown from the slums of London; by 1625, all but 12 were dead. One stockholder in London, poring over Company records, calculated that the Virginia Company had sent a total of 6000 people to Jamestown. Of these, only 1200 were still alive.
Not all of these had died of starvation. The Company officials, particularly those who managed the colony’s fabulously-profitable tobacco plantations, treated the colonists as virtual slaves. Abuse and beatings were routine, and forced over-work took its toll, particularly among the children—ninety percent of whom died within three years of arrival. Colonists were often whipped to death, with as many as 300 lashes. One colonist who criticized the Company was punished by having an awl forced through his tongue and allowing him to starve to death. Many colonists ran away to join the local Indian tribes; when found, they were hung or beaten to death.
The desertion rate soon became so high that the Company was forced to make conciliatory measures. In 1619, the Company allowed a group of 22 representatives to be elected by the land-owning colonists—they formed a House of Burgesses that shared power with the Company-appointed Governor. America’s first democratically-elected representative assembly, then, was a desperate effort by a tyrannical Corporation to prevent its own people from fleeing.
In 1624, the British government, horrified by the stories it was hearing from the colonists, revoked the Virginia Company’s charter and placed the colony under direct government authority. The House of Burgesses became the Crown’s intermediary, and by 1700 all the other English colonies in America had adopted similar elected Assemblies to exercise local self-rule.
A total of 13 British colonies were established by Royal Charter in American territory. Some of these, such as Pennsylvania, were granted as sole proprietorships to a single owner (the Pennsylvania colony was chartered as the personal property of William Penn). Others were founded by charters granted to joint stock companies (the Massachusetts Bay Company and the Virginia Company being examples). Like all Royal Charters, the colonies were tightly controlled by the British King. Under the mercantile system, colonies were viewed as simply ways of siphoning wealth from foreign territories and sending it back to the homeland. Many of the colonial charters spelled out how trade was to be conducted in the colonies, with England having special privileges (including, in some cases, the right that all colonial trade had to be with, or at least go through, England). A series of laws known as the Navigation Acts formalized these restrictions, limiting the amount of manufacturing that the colonists could do (forbidding them outright from making their own iron cooking pots, for example), and essentially turning the colonies, in accordance with the aims of mercantilism, into a source of raw materials for British industry and a captive market for the finished products.
TWO: The American Anti-Corporate Revolution
In 1754, the Hudson Bay Company’s conflicts with French traders in Canada led to diplomatic tensions between England and France, and armed clashes in North America (known as the French and Indian Wars) led to war in Europe and India between France and Britain (including the private military forces of the British East India Company).
Since the war had begun in North America and had been fought largely to protect the North American colonies, the British government assumed that the colonies should assume most of the burden of paying for the expenses of the war and the increased military resources it required. King George III therefore imposed a series of taxes on the colonists, including a Stamp Act and a tea tax. By 1770, American resentment was so fierce that all the taxes had been repealed except one, the tea tax. The American tea trade was, legally, a monopoly of the British East India Company, but, in protest of the tea tax, the American colonists were smuggling in virtually all of their tea from Dutch sources.
By this time, the British East India Company was facing difficulties. Like other royally-chartered corporations, it faced increased competition from independent traders and smugglers who were able to break the Company’s monopoly. Between 1769 and 1770, bad weather in India led to widespread famine and shortages, which reduced the Company’s income—this after the shareholders had voted twice to increase their dividends. In 1772, Europe faced an economic downturn, and tea sales plummeted. To get out of this difficulty, the Company decided to sell its surplus stocks of tea to the American colonists at a sharply reduced price, beating the Dutch smugglers in the market and recapturing their monopoly. To aid the ailing company, the British Crown agreed to suspend the collection of the royal tax on the Company’s exported tea from England—but decided to continue collecting the tax that the colonists paid on this same tea when it was sold in America. Further, the tea would be sold only through selected outlets in America, which the Company would control.
The American colonists exploded in anger. Consumers, angered at having to pay the tea tax, joined forces with American merchants, angered at being excluded from the trade by the Company’s monopoly. One pamphleteer thundered: “The East India Company, if once they get Footing in this (once) happy country, will leave no Stone unturned to become your Masters. They are an opulent Body, and Money or Credit is not wanting amongst them. They have a designing, depraved, and despotic Ministry to assist and support them. They themselves are well-versed in TYRANNY, PLUNDER, OPPRESSION and BLOODSHED. Whole Provinces labouring under the Distress of Oppression, Slavery, Famine, and the Sword, are familiar to them. Thus they have become the most powerful Trading Company in the Universe.”
When the ships carrying the East India Company tea arrived in Boston, local rebels prevented it from being unloaded and forced the ship’s captain to agree to return it to England. Before he could set sail, however, a group of Americans, thinly disguised as Mohawk Indians, boarded the ships, broke open the tea chests, and dumped 60 tons of tea—around ten percent of total American yearly consumption—into Boston Harbor. The Boston Tea Party was the opening act of the American Revolution, which removed the British Empire from North America and left the United States in its place.
For The Public Good
The newly-independent United States was suspicious of the seemingly unlimited power that joint-stock corporations like the East India Company had gained under Royal Charter, and were very cautious in allowing such organizations in the new nation.
When the Founding Fathers met to write a Constitution for the United States, then, one of the topics that came up was the regulation of joint-stock corporations. James Madison introduced the proposal that corporations be brought under the control of the Federal Government, which would issue charters only “where the public good may require them”. Other delegates opposed this, arguing that coupling corporate power with the power of a central government would lead to something like an American East India Company, and therefore the power of issuing corporate charters should only be held at the local level and used for local purposes. As the argument dragged on, Benjamin Franklin proposed a compromise, in which the Federal Government would only have the authority to charter corporations for the purposes of a postal service and interstate transportation. This compromise was also rejected and, unable to reach any agreement, the Framers left any mention of “corporations” out of the constitution, thereby, by default, leaving the matter to the individual state governments.
The leading economists of the time were equally suspicious of corporations. In France, the Physiocrats, an influential group of laissez-faire economists, attacked corporations as harmful to free trade and a leftover of royal privilege. Franklin, who had spent a considerable time in France, was particularly influenced by the Physiocrats. Adam Smith, the prophet of free market capitalism, also attacked corporations as conspiracies against free trade: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or some contrivance to raise prices.” Smith also noted that the separation of ownership, in the form of stockholders, from management, in the form of hired directors, led to fraud and waste: “The directors of such companies being the managers of other people’s money than their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private guild frequently watch over them.”
In 1787, only 6 corporations existed in the United States. By the 1800’s, only 335 corporate charters had been granted, most of them for the purposes of building public works like canals, turnpike roads, or bridges. On asking for a corporate charter, Robert Fulton, a friend of Franklin’s who developed the steamboat and designed a number of canals, pointed out that he was working for the public good, and was not like the East India Company who, as he put it, “blindly extirpate one half of the human race to enrich the other.” The first major American commercial corporation made up of private stockholders, the Boston Manufacturing Company, did not appear until 1813, and a handful of others followed.
They were tightly controlled. Some states banned members of one corporation from joining another. Others required that small shareholders have the same voting power as large shareholders. In some instances, the state government itself became a stockholder so it could monitor the corporation’s actions. Several states, including Pennsylvania and Maryland, limited by law the length of time for a corporate charter, and required the legislature to renew charters periodically. State courts upheld the right of the government to take over or dissolve corporations if they were “detrimental to, or not promotive of, the public good”.
Banks were particularly targets of regulation. Privately owned banking corporations were outlawed entirely in many states. Others required state permission for a bank to increase their capital, or to merge or buy another bank. Bank charters were often limited to ten years or less, requiring re-approval. The United States government specifically rejected the European laws which removed individual corporate officers from personal liability for actions taken by the corporation, and affirmed that, if corporations acted against the public good, they could be forcibly dissolved by the state.
In 1819, however, the US Supreme Court issued a ruling in the Dartmouth College v Woodward case, that corporate charters could not, under the law, be withdrawn or dissolved by a state unless the original charter contained such a clause allowing it.
It was the first time that a US court had defended the rights of a corporation against those of the state, and over the next few years, a wave of outrage followed. Massachusetts Congressman David Henshaw wrote, “Sure I am that, if the American people acquiesce in the principles laid down in this case, the Supreme Court will have effected what the whole power of the British empire, after eight years of bloody conflict, failed to achieve against our fathers.” The Pennsylvania Legislature declared, “A corporation in law is just what the incorporating act makes it. It is the creature of the law and may be moulded to any shape or for any purpose that the Legislature may deem most conducive for the general good.” A newspaper editorial in New Jersey concluded that if the corporations were not controlled, people would become “mere hewers of wood and drawers of water to jobbers, banks and stockbrokers”. Most states passed laws specifically declaring that the Legislature had the right to revoke corporate charters whenever it served the public interest, and Pennsylvania, as if to prove the point, soon revoked the charters of ten banks.
The issue of corporate immunity became a political issue, with Maine, for instance, changing its corporate liability laws nine times in 24 years, bouncing between full individual liability for stockholders and no liability at all, depending on which political party had won the last election. But in 1855, the US Supreme Court itself seemed to settle the matter when it ruled, in Dodge v Woolsey, that states had the inherent right to regulate “artificial bodies”:
“Combinations of classes in society . . . united by the bond of a corporate spirit . . . unquestionably desire limitations upon the sovereignty of the people . . But the framers of the Constitution were imbued with no desire to call into existence such Combinations.”
The world’s leading economic power of the time, Britain, had already given in to the growing economic power of the corporation—the Joint Stock Companies Act of 1844 allowed private companies to incorporate without the necessity of a Royal Charter, and the Limited Liability Act of 1855 released stockholders and corporate officers from any personal liability for the actions of the corporation.
In the United States during the 1840’s, such questions were largely academic anyway. The US was still a nation of small farmers with barely any manufacturing and only a handful of chartered corporations, none of them very large. On those occasions when a commercial corporation attempted to gain an advantage, they were quickly slapped down—in 1801, for instance, a consortium of wealthy New Yorkers had tried to obtain a charter granting them monopoly over the city’s bread trade, and was promptly opposed by the numerous small bakers.
That situation changed, however, with the Civil War. The huge armies involved in the war required a massive amount of weapons, clothing, supplies and other manufactured goods, and spurred a rapid growth in American manufacturing capacity. Overnight, small corporations who won military contracts were propelled to economic power, becoming large and rich enough to wield influence over politicians and military quartermasters. Bribery became open, and fraudulent profits based on shoddy substandard goods lined the pockets of northern businessmen. “As a result of the war,” noted Lincoln, “corporations have been enthroned and an aura of corruption in high places will follow and the money power will endeavor to prolong its reign . . . until wealth is aggregated in a few hands and the Republic is destroyed. God grant that my suspicions be groundless.”
Lincoln’s suspicions were not groundless. Even before the war, American industry, while still tiny, had begun growing at an astounding pace. During the 1840’s, manufacturing output grew by 153 percent; it grew by 60 percent in the 1850’s. By 1860, American per capita manufacturing output was larger than France’s, and was second only to Britain’s. After the war, ever-larger companies began appearing in key industries such as iron, railroads, and coal. Of these, the railroads quickly grew to a dominating position of power, largely due to one man—Thomas Scott.
In the 1850’s, Scott was the brains behind the Pennsylvania Railroad. Recognizing that the railroads had become crucial to a wide variety of people, from farmers to merchants, as a way of moving products and people around the country, Scott resolved to use this economic advantage to gain political influence. The target he set was to entice the Pennsylvania legislature to repeal the “tonnage tax” paid by railroad companies on freight. Although such a repeal was wildly unpopular with the public, Scott won support from legislators by proposing to build railroads to the isolated areas of their congressional district, opening them up to the wider world. The tonnage tax was revoked by a close vote.
The public was outraged. All but one of the supporting legislators lost re-election, and an immediate effort was begun to repeal the measure—only to have it discovered that the agreement had been written into the form of a contract between the state and the railroad, and couldn’t be withdrawn without the permission of both parties. Investigations were begun to determine whether illegal bribery had been involved. Using his political influence, Scott was able to name a majority of the very people who were to investigate him, and at one point, when he was trying to avoid being served with a subpoena, the Lincoln Administration itself helped Scott by sending him out of reach on a trip, on official business for the War Department.
When the Civil War began, Scott was appointed Assistant Secretary of War, and took over the task of organizing the railroads to move Union troops and supplies. His skillful use of rail transportation played an important part in winning the war.
Scott’s experience as wartime railroad manager convinced him that a nationwide rail network, connecting the entire continent together, was a vital national interest. And, as a manager of the Pennsylvania Railroad Company, he was determined to control as much of it as possible. His initial plans called for a span of railroad tracks running down the East Coast and then across the South to the West Coast. As a Federal officer who had helped win the war, however, Scott’s name was hated in the South, and he knew he could never openly buy any railroad companies in the former Confederacy.
Scott’s solution to this problem was simple; he lobbied the Pennsylvania state legislature to allow his company to do what no other corporation in the country was allowed to do under the law—buy and own stock in another corporation. Using this weapon, Scott set up a “holding company” whose sole purpose was to buy a controlling share of stock in smaller railroad companies across the country, allowing Scott to build railroad lines all over the South. In one stroke, Scott had pioneered the tools that would allow the future growth of the supra-national mega-corporation.
THREE: The Robber Barons
The decades after the Civil War were a period of profound and rapid change. In just 35 years, the US went from a backward agrarian nation of small farmers, to an industrial urban nation capable of making itself keenly felt on the world stage.
The most notable change in the United States was the rapid growth of the country, both in terms of population and in terms of land area.
The military conquest of the Native American tribes, which had largely concluded by 1890, opened up huge new resources for the country. Land was cheap and easily available. The 1862 Homestead Act granted families 160 acres of free prairie land, on condition that they settle and farm it. Settlers swarmed into the West. By 1912, all the territories were Americanized and had been formally incorporated into the US as the 48 continental states.
The increase in land area was matched by a rapid increase in population. Between 1860 and 1910, the US population tripled, from 31 million to 92 million. Much of this growth was from immigration; 25 million people, most from Europe, entered the US during this time. They were attracted by the vast expanses of available land, and also by the remarkable economic growth in the US. Between 1860 and 1900, the size of the US economy quadrupled, interrupted only briefly by the Financial Panic of 1873.
Increasingly, Americans were migrating to the cities. In 1860, city-dwellers made up 20% of the population; by 1900 this had doubled. For most, the lure of the city was the opportunity to get a factory job in the rapidly-growing American manufacturing sector.
The American factory had been pioneered almost 100 years earlier. In 1793, Samuel Slater had opened the first water-powered textile mill in the US, in Rhode Island. He hired entire families, including children, to work in his factory; the workers lived in company-owned housing, went to company-owned churches and schools, and were paid in company scrip which they could only spend at the company-owned stores.
In 1793, the US was still an agrarian nation. By 1880, however, the US was becoming an industrial power. Between 1869 and 1900, manufacturing output, fueled by rich mining resources in the American West, grew from $3 billion to $13 billion, and in 1890 the value of industrial output passed that of agrarian output. The number of factory workers, mostly immigrants, went from 13 million to 19 million. The number of women in the work force went from 2.6 million to 8.6 million; about 18% of the workforce consisted of children age 8-15. By 1910, fully 25% of all children in the US were employed in factories.
Technological progress was amazing. Almost half a million patents for new inventions were issued between 1860 and 1900. The names of inventors like Thomas Edison and Alexander Graham Bell became household words. The use of electricity, in particular, led to far-reaching changes in society—at home and at work. Technical changes also revolutionized the family farm. Where families used to work long hours with hand tools, the invention of machinery, like the McCormick Reaper, allowed farmers to hire workers to run them. In 1800, producing an acre of wheat had taken 56 man-hours; in 1900, mechanized farms could do it with only 15 man-hours.
The most immediate beneficiaries of the post-Civil War economic boom were the railroad companies. Transcontinental railroads had been planned as early as the California Gold Rush in 1849, and in 1863, the Central Pacific Railroad started laying track from Sacramento. Work was continued when the Civil War ended, and the Union Pacific tracks going westward from Omaha met the Central Pacific tracks at Promontory, Utah, in 1869. As the West was conquered and the Homesteaders began flooding in, the railroad net grew rapidly, reaching 163,000 miles in 1890 and 242,000 in 1900. The tracks were vital for transporting people and economic products across the country, and the railroad companies quickly became the largest and richest corporations in the US. At the beginning of the Civil War, there had been only 400 millionaires in the US; by 1892, there were 4047—and over half of them were either railroaders or railroad financiers.
With wealth, came power. Some of that power was benevolent; in 1883, the railroads agreed on a plan to divide the US into four “time zones”, to allow cross-continental train schedules to be standardized. We still use their time-zone system today.
Much of the power of the railroad companies, however, served greed, not benevolence. Railroad barons used their wealth to influence local politicians to give land grants and government funding; by 1871, the railroad companies had received $100 million in government grants and subsidies, along with 200 million acres of free land.
When Thomas Scott’s Pennsylvania Railroad began building its Southern Route, he was not shy about throwing his influence around. He bought dozens of local newspapers and ordered the editors to run stories favorable to the railroads—and refuse to run stories by detractors. When the state legislature in Virginia began a series of hearings into bribery by railroad officials, the railroad-owned Richmond newspapers didn’t run a single story.
In the South, Scott was able to obtain convict labor at no cost from the state prisons for building tunnels and bridges for his tracks, and when local politicians and the Ku Klux Klan objected to his using African-American laborers, they were all bought off with management jobs in one of the railroad subsidiaries.
The height of the railroad company’s power came in 1876, in the Presidential election between Democratic candidate Samuel Tilden and Republican candidate Rutherford B Hayes. Tilden won the popular vote by a margin of over 250,000, but in the Electoral College, where it really counted, neither candidate had a clear win. A group of five Supreme Court Justices and ten Congressional delegates was selected to reach a solution; they were bombarded by a wave of horse-trading, influence-peddling and outright bribery, most of it from the railroad magnates. In the end, the railroaders won—Rutherford B Hayes was riding in Thomas Scott’s own private luxury railcar when he received the telegram informing him that he had “won” the “election”.
The corporations knew, of course, that they could not, in the long term, depend on graft and bribery to maintain their positions. Permanent corporate dominance of the economy would require deep changes in how American law viewed the joint-stock companies.
Those changes began in 1886.
Santa Clara County v Southern Pacific Railroad
The Supreme Court ruling that first sanctioned a significant expansion of corporate power in the United States was, in fact, never actually ruled on at all.
The whole convoluted story begins with the 14th Amendment to the US Constitution. Written after the Civil War to guarantee equal rights to the newly-liberated slaves, the 14th Amendment reads, “No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws.”
At first glance, this amendment may seem to have nothing to do with the regulation of corporations. That it does, is because of Supreme Court Justice Stephen Field, Chief Justice Morrison Waite, and Court Reporter JC Bancroft Davis. Waite was a former railroad lawyer; Field was a friend of several railroad magnates, who secretly passed on Court memos to them.
For years, the railroad lawyers had been searching for a way to get around the legal restrictions that hemmed in the corporations. One attempt centered on the Comity Clause of the Constitution, in Article 4, which says, “The Citizens of each State shall be entitled to all Privileges and Immunities of Citizens in the several states.” In 1839, the Bank of Augusta argued before the Supreme Court that corporations were “citizens” under the law, and therefore their property and business could not be regulated by the government. The Supreme Court rejected that argument.
After passage of the 14th Amendment, however, the railroad lawyers were ready to make another try.
In 1877, the Supreme Court decided the case of Munn v Illinois. The railroad companies had challenged the right of the state government to regulate the freight rates that they charged. In a 7-2 opinion, the Court upheld the regulations. But Justice Field dissented, writing “If this be sound law, if there be no protection, either in the principles upon which our republican government is founded, or in the prohibitions of the Constitution against such invasion of private rights, all property and all business in the State are held at the mercy of a majority of its legislature.” The railroad companies had found a friend.
The next step was to insure a larger number of friendly Justices, and the opportunity was right in front of them. Several of the Justices were near retirement, and it was assumed that the next President would have the opportunity to appoint perhaps as many as three replacements. During the 1880 Presidential campaign, a representative of railroad baron Jay Gould wrote to candidate James Garfield, offering a large “donation” in exchange for a favor: “I believe that you sympathize with the general view of the law taken by Judge Field . . . If they could be satisfied on this point, I know we could make a big demonstration at once, and probably settle things beyond a peradventure.” After some hesitation, Garfield declared, “Under no circumstances would I entrust the high functions of a Justice of the Supreme Court to any person I did not believe to be entirely sound on those questions. I should insist upon evidence which would be satisfactory to you as well as me.” Gould dutifully donated $150,000; after his election, Garfield dutifully appointed Stanley Matthews, who once worked as a lawyer for Jay Gould’s company, to the Supreme Court. Unfortunately for Gould, Garfield was assassinated before he could supply any more Supreme Court votes.
In 1882, the corporations were one step closer to getting what they wanted. The San Mateo County v Southern Pacific Railroad case reached the Ninth Circuit Court. At that time, Circuit Court cases were heard by Supreme Court Justices, and the San Mateo case fell to Justice Field and Justice Sawyer. In their ruling, which concerned the right of an elected body to determine the value of railroad company land for tax purposes, both Field and Sawyer concluded that the company’s due process rights as a “person” under the 14th Amendment had been violated.
Four years later, the case of Santa Clara County v Southern Pacific Railroad, another tax case, reached the Supreme Court. Part of the argument made by the railroad lawyers in their pretrial motions was, “Corporations are persons within the meaning of the Fourteenth Amendment to the Constitution of the United States.” On the opening day of argument, however, Chief Justice Waite told the railroad lawyers, “The court does not wish to hear argument on the question whether the provision in the Fourteenth Amendment applies to these corporations. We are all of the opinion that it does.” As it turned out, the Supreme Court decided the case in favor of the company on purely technical grounds, and the issue of corporate “personhood” was not mentioned anywhere in the written opinions.
Then a curious thing happened. When Court Reporter Davis went to record the decision, he wrote a note to Chief Justice Waite: “I have a memorandum in the California Cases Santa Clara County v. Southern Pacific &c &c as follows: In opening the Court stated that it did not wish to hear argument on the question whether the Fourteenth Amendment applies to such corporations as are parties in these suits. All the Judges were of opinion that it does. Please let me know whether I correctly caught your words and oblige.” Waite responded: “I think your mem. in the California Railroad tax cases expresses with sufficient accuracy what was said before the argument began. I leave it with you to determine whether anything need be said about it in the report inasmuch as we avoided meeting the constitutional question in the decision.”
There then occurred one of the strangest things in American legal history. Despite the fact that the Santa Clara case had not been decided on the 14th Amendment and that the question was not even mentioned in any of the written opinions, Court Reporter Davis, for reasons which are still a mystery, placed Chief Justice’s pre-testimony statement about “personhood” in the written Statement of Facts, and then began the written Headnotes or Summary of the case with the statement, “The defendant Corporations are persons within the intent of the clause of section 1 of the Fourteenth Amendment to the Constitution of the United States, which forbids a State to deny any person within its jurisdiction the equal protection of the laws.”
Within half a year, Supreme Court Justices began citing the Santa Clara case as a precedent establishing the legal personhood of corporations, despite the fact that no such ruling had ever been made.
So where did the Supreme Court get the idea that the 14th Amendment had intended to include corporations as “persons”? Because, in yet another oddity, one of the committee members who actually wrote the Amendment, argued to them that it did.
Senator Roscoe Conkling had been a member of the joint House/Senate committee that wrote the 14th Amendment. After losing a re-election bid (in those days Senators were elected by state legislatures, not by popular vote), he retired to a nice cushy job as a lawyer for the Southern Pacific Railroad, and, when the San Mateo case went from the Ninth Circuit Court to the Supreme Court in 1882, Conklin was the lawyer who argued the railroad’s case. And in his arguments, Conklin not only declared that it had been the committee’s intention all along to include corporations as “persons”, but he dramatically produced his own “secret notes” of the committee’s “secret deliberations” to prove it. It was a never-before-seen notebook, declaring a never-before-heard committee deliberation, in support of a never-before-argued interpretation of an Amendment that had already been in effect for years.
The San Mateo case, as it turned out, was withdrawn before any ruling was issued, and therefore no one ever pronounced judgment on Conklin’s rather dubious assertions. But four years later, when the Santa Clara case was heard, it is easy to assume that the Justices indeed did not need to hear any arguments about whether the 14th Amendment’s “person” applied to the corporations, because all of them already believed that it did. After all, one of the men who wrote the Amendment had already personally told them so.
However convoluted the matter may be, the fact remains that the railroads had finally gotten what they wanted, and they were quick to take advantage of the weapon they had been handed. The Amendment that had been written to protect powerless former slaves, now served to protect the growing power of the wealthiest men in the country. Of the 307 14th Amendment cases heard by the Supreme Court between 1890 and 1910, only 19 dealt with the rights of former slaves. All the rest centered around the rights of corporations as “persons”.
The floodgates now opened. After the Santa Clara “ruling”, corporations won one new right after another, as laws were changed wholesale to their benefit. Where once the laws of the United States had tightly controlled the corporations, now they were allowed to virtually run amok.
The most rapid changes came as various states, eager to attract the jobs and tax revenues that the corporations provided, raced each other to the bottom in an effort to make their corporate laws as lax as possible. New Jersey was first. In 1896, New Jersey passed a General Revision Act which loosened corporate regulation, allowing joint-stock companies within the state to buy each other and merge, removing time limits on corporate charters, and dropping restrictions on corporate size or monopoly. Three years later, New Jersey allowed its corporations the right to buy stock in corporations in other states, thereby legalizing Thomas Scott’s “holding company” strategy. Within the year, almost three-fourths of the nation’s corporations had relocated their headquarters to New Jersey.
In 1913, when Governor Woodrow Wilson began once again tightening the state’s corporate laws, there was a mass exodus to Delaware, which remains today the state of choice for large corporations.
By 1900, nearly every state had capitulated to the corporations. Stockholders were granted full immunity from liability for the company’s actions or finances. Corporate charters were now freely available for the asking, and lasted in perpetuity. Companies no longer had to specify a purpose for the corporation, and were free to remake their entire business whenever they wanted. Stockholder control over a corporation’s managers was weakened.
Limitations that were previously in place concerning the amount of capital that a corporation could hold were removed, allowing companies to grow to an unlimited size and leading to a wave of mergers and buyouts. In 1897 there were 69 corporate mergers; in 1898 there were 303; in 1899 there were 1208. In less than ten years, over 2600 corporations disappeared, bought up by larger competitors; by 1904, some 135 huge corporations dominated the American economy, and some 25 large companies gained at least 80% control in their respective industry (International Harvester controlled 85% of the agricultural machine market, the American Can Company made 90% of all the tin cans in the US). The concentration of industries led to a hugely lopsided distribution of wealth—the richest 1% of Americans owned 26 percent of the nation’s total wealth; the richest 10% owned 72 percent.
The Gilded Age had begun.