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…And What They Did About It

How the framers of the American system restrained corporate power (1787–1850)

I hope we shall crush in its birth the aristocracy of our monied corporations which dare already to challenge our government to a trial of strength, and bid defiance to the laws of our country. Thomas Jefferson, 1816

When I first read this quote by Thomas Jefferson about crushing “the aristocracy of our monied corporations” in the cradle, I assumed that Jefferson was engaging in a mere flight of rhetoric, not literally proposing that corporations be eliminated. Indeed, by 1816 getting rid of the corporation was no longer a viable political option, but it is worth noting that a man of Jefferson’s political longevity could actually recall a time when such institutional infanticide would in fact have been quite possible. Immediately following the Revolutionary War, the corporate presence in America had fallen virtually to nil. At the time of the Constitutional Convention in 1787, only six business corporations other than banks existed in the United States: one for organizing a fishery in New York, one for conducting trade in Pennsylvania, one for conducting trade in Connecticut, one for operating a wharf in Connecticut, one for providing fire insurance in Pennsylvania, and one for operating a pier in Boston.

Although these circumstances provided the opportunity to abolish the corporation entirely, that was not what the elite American leadership had in mind. Their idea was to transform the corporate form, not get rid of it. Their vision was to subordinate corporations to democratic oversight, then make use of this tamed institution as a tool for meeting the pent-up need for infrastructure such as roads and bridges.

Such a notion of “good” corporations derived directly from the experience of Washington and Franklin, among others. Both men had been involved in corporations that used indentured workers to prepare frontier land for settlement by clearing farmsteads and building roads. Canals in particular were viewed favorably by Franklin, who later encouraged canal developer and steamboat pioneer Robert Fulton. Fulton himself differentiated his efforts from those of the “India or Guinea Company … who blindly extirpate one half of the human race to enrich the other.”

The question, therefore, was not whether there would be corporations in the new nation, but how to authorize corporate activity while preventing any single corporation from getting too large and gaining too much political influence.

At the Constitutional Convention, James Madison twice proposed putting the federal government in charge of corporations “in cases where the public good may require them and the authority of a single state may be incompetent.” But among the delegates, a significant contingent had been instructed by their home states to oppose any federal involvement in authorizing corporations, under the belief that granting such powers to a central government created the risk that an American version of the East India Company might come into being. The best preventative against such a development, it was felt, was to keep the power to charter corporations as close to the local level as possible.

Into this standoff, Benjamin Franklin attempted to interject a compromise, a scaled-back version of Madison’s idea. Under Franklin’s scheme, the federal government would have incorporating powers, but those powers would be limited to authorizing postal roads and interstate canals. The delegates rejected this milder proposal as well: Pennsylvania, Virginia, and Georgia voted aye, New Hampshire, Massachusetts, Connecticut, New Jersey, Delaware, Maryland, North Carolina, and South Carolina voted no. In the end, the final text of the Constitution contained no mention of corporations whatsoever.

During the next two years, as the states considered whether to ratify the Constitution, five recommended adding an amendment expressly prohibiting the federal government from granting charters that would grant any “exclusive advantages of commerce.”

For the most part, the states got their wish. Only in the twentieth century did the federal government attempt to issue charters, and even then only for certain quasi-public entities, such as Amtrak. The lone exception prior to the twentieth century was the Bank of the United States, a political tug-of-war that went back and forth four times: chartered in 1791, charter revoked in 1811, chartered again in 1816, second charter expired in 1832 and not renewed.

The Birth of the Charter System

After the Constitutional Convention, the system that emerged for chartering corporations flipped the English system upside down. Instead of the monarch using corporate charters to grant special monopoly privileges to men of wealth, the American system placed the chartering function in the hands of the various state legislatures and placed an emphasis on restrictions and accountability measures, rather than on privileges. State constitutions and statutes reinforced the restrictive stance toward corporations.

Under this system, charters tended to be granted sparingly, in keeping with the widespread belief that the potential for corporations to accumulate power rendered them inherently dangerous to democracy.

In 1809, an opinion of the Virginia Supreme Court stated that a charter should not be granted if the applicant’s “object is merely private or selfish; if it is detrimental to, or not promotive of, the public good….” In effect, this meant that most corporate charters were reserved for quasi-public projects like toll roads, bridges, canals, banks, and other sorts of infrastructure. Charters were not issued in situations where non-chartered businesses already operated. Nor were state legislators inclined to grant a corporate charter unless they were convinced that such a measure was necessary. For example, in Pennsylvania in 1833 the legislature split over whether to issue a charter to a coal company. The opposition argued that the coal industry had become sufficiently established to attract private financing without the need for a charter.

According to historian Louis Hartz, public wariness toward corporate entities in the first decades of the nineteenth century was “one of the most powerful, repetitious, and exaggerated themes in popular literature.” Note that this anti-corporate sentiment should not be confused with anti-business sentiment. In the public mind, the use of the corporate form was associated with monopoly privileges of one sort of another. In 1835, a representative of the National Trades Union, wrote:

We entirely disapprove of the incorporation of Companies, for carrying on manual mechanical business, inasmuch as we believe their tendency is to eventuate in and produce monopolies, thereby crippling the energies of individual enterprise, and invading the rights of smaller capitalists.

Typical of that sort of “invading” was an attempt in 1801 by several of New York’s wealthy merchants (including a brother-in-law of Alexander Hamilton named John Church) to get a charter that would allow them the exclusive right to provide bread to the city, hiring previously independent bakers to perform the work. When they caught wind of this bald attempt to drive them out of business, the bakers employed the full force of Jeffersonian rhetoric, arguing that if the legislature granted such a charter “the independent spirit, so distinguished at present in our mechanics, and so useful in republics, will be entirely annihilated.”

During the 1820s and 1830s, conflicts over corporate charters became a common occurrence. Beginning in 1827, political parties calling themselves the Workingmen’s Parties and comprising independent artisans began to rally around the anti-corporate theme, only to decline after the mid-1830s as Andrew Jackson’s Democrats adopted their ideas. Typical of Democrat Party rhetoric is the following speech by Democratic legislator and journalist Gideon Wells in 1835:

The unobtrusive work-shop of the Mechanic, the residence of freedom, is beginning to be abandoned, because he cannot compete with incorporated wealth…. What encouragement do our laws hold out to the poor but industrious artisan, who enters upon the threshold of manhood with no fortune but his trade, and no resources but his own hands? … [Such legislation] paralyzes industry, is unaccompanied by wealth; and it is destroying that equality of condition, which is the parent of independence. Competition on the part of individuals is hopeless, when they find capital entering the field, under privileged laws, and private enterprise is compelled to yield to the unjust influence which partial legislation establishes.

A New Jersey editorialist of the 1830s wrote: “Legislatures ought cautiously to refrain from creating the irresponsible power of any existing corporations or chartering new ones. . . .” Otherwise the citizenry would become “mere hewers of wood and drawers of water to jobbers, banks, and stockbrokers.”

Legal writers echoed the same themes, as reflected by the words of attorney Theodore Sedgwick in his 1835 book, What Is Monopoly:

Every corporate grant is directly in the teeth of the doctrine of equal rights, for it gives to one set of men the exercise of privileges which the main body can never enjoy…. Every such grant is equally adverse to the fundamental maxim of free trade for it carries on its face that no one but the corporators are free to carry on the trade in question, with the advantages which the charter confers.

The prevalence of such attitudes made it politically feasible to organize opposition to the issuing of new charters, as happened in 1838 when fifty-one journeymen carriage makers petitioned the Massachusetts legislature in opposition to a proposed charter for the Amherst Carriage Company:

We being journeymen at the Coach chaise and harness manufacturing business, do look forward with anticipation to a time when we shall be able to conduct the business upon our own responsibility and receive the profits of our labor, which we now relinquish to others, and we believe that incorporated bodies tend to crush all feable enterprise and compel us to worke out our dayes in the Service of others.

As shown in Table 5.1, charters controlled corporations along all conceivable dimensions. Of particular note were limits on lifespan, rejection of liability shields, measures that limited corporate expansion, and enforcement mechanisms.


The charter system took direct aim at the tendency of the corporation to accumulate wealth and power over time by placing restrictions on the term of each charter. Terms of twenty to thirty years were typical for most corporations, after which time the directors would have to seek a new charter. Banks, which were considered the form most subject to abuse, were kept on a tight leash with terms as short as three years.


The doctrine of “limited liability”the notion that investors can’t be held responsible for debts or settlements against a companyis often mentioned as an essential part of the very definition of the corporation, it should be noted that limited liability has not always been part of the repertoire of corporate attributes, either in England or America.

In England, limited liability was not a consistent feature of corporate law until the late eighteenth centuryand wasn’t universally available until 1855it did appear from time to time. For example, Parliament passed a law in 1662 granting limited liability to “noblemen, gentlemen and persons of quality” in relation to the East India Company, the Guiney Company, or the Royal Fishing Trade.

Prior to the Civil War, state legislatures in the United States explicitly rejected limited liability. For example, in 1822, Massachusetts passed a law that read, “Every person who shall become a member of any manufacturing company … shall be liable, in his individual capacity, for all debts contracted during the time of his continuing a member of such corporation.”

Instead of such “unlimited liability” requirements, most states used a “double liability” formula, which made shareholders liable for twice the value of their investment in the company. Until the end of the 1870s, seven state constitutions applied the principle of double liability to all shareholders in banks. In addition, some states required that shareholders in manufacturing and utilities companies be specifically liable for employee wages.

Restrictions on Expansion

Perhaps the most significant restrictions were those that restricted corporations from expanding without specific permission by a state legislature. These worked in various ways:

Corporations were prohibited from engaging in any activities not specified in its charter. Under the legal principle known as ultra vires, any contract that dealt with activities beyond a corporation’s charter would not be enforced by the courts. For example, the Illinois Supreme Court ordered the Pullman Palace Car Company to divest itself of its company-owned town, Pullman, Illinois, based on the fact that owning a town was not specified among the activities permitted in the corporation’s charter.

  • Corporation could not own stock in other corporations.
  • Most states placed limitations on the amount of capital a corporation could raise.
  • Most corporations were not allowed to operate outside their home state, and in some cases outside of their home county.
  • Corporations were typically forbidden to own property not directly needed for their authorized activities.

The Corporate Death Penalty

Anti-corporate sentiment also made it possible for state attorneys general to wield the stick of charter revocation, the equivalent of a death penalty for scofflaw corporations or for corporations that did not live up to the performance requirements in their charters. For example, in Massachusetts or New York a turnpike corporation could suffer revocation merely for “not keeping their roads in repair.” From 1839 to 1849 the Ohio legislature dissolved several corporations, including turnpikes, banks, and insurance corporations. In one year alone, 1832, Pennsylvania revoked the charters of ten banks. Charter revocation actions brought by state attorneys general were a commonplace in the nineteenth century, and even as late as 1940 they occurred in many states.

The Charter System Collapses

The charter system reflected an utterly different political consciousness toward corporations than exists todayless cowed, more assertive. Implicit in this approach to dealing with corporations was a different way of drawing the line between public and private and than we are now accustomed to. The charter system was an assertion that for democracy to thrive, democratic power must trump corporate power. In other words, democracy should not apply just to public spacesto spaces not claimed by private interests. If only the sidewalks and not the skyscrapers are considered to lie within the purview of democracy, then democracy is weak indeed.

While much of the rhetoric surrounding charter fights may create the impression that public attitudes were anti-business, it would be more accurate to say that because of the quasi-public nature of the corporation the public believed corporations should be reserved mainly to facilitate the building of crucial infrastructure such as canals, wharves, water works, toll roads, banksand, beginning in the 1840s, railroads. By 1800, there were 335 business corporations in the country. Of these, 76 percent were toll roads, canals, docks, bridges, water supply companies, or other public services; 20 percent were banks or insurance companies. Expansion continued. Pennsylvania alone chartered 2,333 business corporations between 1790 and 1860.

Meanwhile manufacturing and retailing companies, which tended to organize under non-corporate formats, mainly partnerships, demonstrated dramatic growth. The volume of manufactured goods grew by an average of 59 percent per decade from 1809 to 1839, then by 153 percent in the 1840s and 60 percent in the 1850s. By 1860, America’s manufacturing industry had achieved the second highest per capita manufacturing output (after Great Britain) in the world. Clearly, the absence of corporate ownership in manufacturing did not inhibit growth.

For a time, it seemed that America had found a working balance where the corporation was allowed to perform certain functions for which it was well suited, but where corporate political power was kept firmly under the thumb of democracy. Yet as attractive as this finely balanced combination might be, it was not to last. Beginning in the 1850s, and particularly after the Civil War, legislators sympathetic to the wishes of the rapidly growing railroad corporations effectively dismantled the restrictive features of the charter system, replacing it with a non-restrictive system of automatic chartering known as “general incorporation.” By the 1880s the old system was in near collapse, and by 1900 it had effectively vanished. A revolution had occurred, a dismantling of a key institutional framework. In its place, a new system was created, a revolutionary reinventing of the corporation. Even today, the impact of this quiet revolution is little appreciated, and the specifics of how it took place are even less understood. Perhaps the reason we fail to appreciate the depth of the revolution is that the role of its leaders is somewhat obscured. Without revolutionaries, we can’t see revolution. And the robber baronsthose spoilsmen in black coats and top hatshardly look like revolutionaries. If they are remembered by history, it is mainly for their energy and unscrupulousness, not as genetic engineers creating a far more virulent strain of an old institution. The following chapter looks at one such man, and the role he played in the corporate revolution.

Typical Controls in Corporate Charters Prior to the Civil War


Each corporation was limited to performing a specific function, such as operating a school or a bridge.


Typically, charters of incorporation were issued for terms ranging from 20 to 50 years, after which they would have to be renewed. Banks were subject to especially tight restriction, with some states limiting terms to 3 to 10 years.

Property ownership

Most states limited corporations to owning only property that was directly needed for the authorized activity.


Charters directly limited on the amount of capital that an individual corporation could control. Some charter provisions also had an indirect effect on size, including restrictions on property ownership, the requirement for unanimous shareholder consent in major decisions, geographic restrictions, and limits on permitted activities.


Most corporations were not allowed to operate beyond the borders of the state in which they were incorporated. Sometimes a corporation was even restricted to a single county.

Inter-company ownership

As a rule, corporations were not allowed to own stock in other corporations.

Performance criteria

In addition to stating what sort of activities were allowed, charters also frequently specified project completion dates and output requirements. Sometimes the two were combined; e.g. an iron company being required to reach a certain tonnage of production within three years.


Charters sometimes limited the profit a corporation could earn. In addition, many charters required that profits from a company be used to buy back stock, so that eventually all stockholders would be eliminated and the company would in effect become a public entity under the supervision of the state legislature. Under the Turnpike Corporation Act of 1805, Massachusetts authorized the legislature to dissolve turnpike corporations once their receipts equaled the cost of construction plus 12 percent.

Public privilege

Charters for turnpikes typically exempted farmers, worshippers, and poor people from paying tolls.

Shareholder restrictions and protections for minority owners

In some cases incorporators had to be citizens of the state. Some charters prevented a single powerful individual from controlling the corporation; some required a minimum number of shareholders. Some charters required that the corporation use a voting formula that increased the leverage of small investors. Most required unanimous consent for key decisions, such as issuing new stock or selling the company.

Special restrictions on banking

Bank charters were limited to three to ten years. Banks had to get special approval to merge. In some states banks were required to direct their loans to local industries. Banks were also required to lend money to the state government if requested. Maximum interest rates were designated. Both Illinois and Indiana actually banned private banking corporations in their state constitutions. Wisconsin and four other states amended their constitutions to require that all bank charters be approved by popular vote.

Shareholder liability

Limited liabilitythe principle that shareholders can’t be held responsible for judgments against a corporation or for unpaid corporate debtswasn’t a widespread feature of the corporation until after the Civil War. Some charters required full shareholder liability. Others capped liability at twice the value of a person’s stockholdings.

Ultra vires

In addition to other restrictions, corporations were subject to the general ban on activities not expressly permitted in their charter. This doctrine of limited authorization, known as ultra vires, translates as “beyond the powers.” Courts would not enforce any contract outside the scope of a corporation’s charter.

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