America, Inc.

ED: This is BackStory. I’m Ed Ayers. “There is one, and only one social responsibility of business,” wrote economist Milton Friedman in 1970. “To engage in activities designed to increase its profits.”

RAKESH KHURANA: When that idea first came out, it was seen as really crazy. It was marginal.

ED: Why crazy? Because for decades the leaders of some of America’s biggest corporations had seen their shareholders as just one subset of the people they were serving.

So today on the show we’re exploring the ups and downs of this idea of corporate citizenship. And we’re pulling back the curtain on how corporations became citizens in the first place.

JACK BEATTY: It may be the only case in Supreme Court history of, not judge made law, but reporter made law.

ED: The history of corporations in America, from the British East India Company, to Coca Cola, to Comcast.

PETER: Major funding for BackStory is provided by an anonymous donor, the University of Virginia, the National Endowment for the Humanities, and the Joseph and Robert Cornell Memorial Foundation.

ED: From the Virginia Foundation for the Humanities, this is BackStory. We’re the American Backstory hosts.

BRIAN: Welcome to the show. I’m Brian Balogh.

PETER: I’m Peter Onuf.

ED: And I’m Ed Ayers. We’re going to begin today in New York City, all the way back in the 1790s. The nation has only been around for a few years. But already cracks have begun emerging in the new government. There’s a growing sense that George Washington, and his Treasury Secretary, Alexander Hamilton, known as Federalists, are moving the country in the wrong direction– moving it in the direction of monarchy.

PETER: The figurehead head of this opposition is none other than Thomas Jefferson. And his support was strongest in the South. These Democratic Republicans, as they’re known, did have some support in the cities of the North. But these Northerners were divided by their own factional disputes. And, any way, most of them knew better than to make their political leanings known at all.

BRIAN MURPHY: If you’re a Democratic Republican, right? If you’re in the opposition in New York City in the 1790s, your big problem is that if you’re at all interested in being in business, or being in commerce, or getting involved in trade, the only people you can really borrow money from are all Federalists.

PETER: This is Brian Murphy, historian at Baruch College.

BRIAN MURPHY: So either you have to make sure that you’ve got a good enough status that it doesn’t really matter where your political leanings are. Or you have to make nice with these people, and maybe even pretend to be a Federalist.

PETER: There was a third option. And that was for the Democratic Republicans to charter their own bank.

ED: This is where a man named Aaron Burr enters the picture. You may recognize his name as the guy who killed Alexander Hamilton in a duel. But that was much later. At this point, Burr is just of New York legislator who’s committed to creating a long-lasting, unified, and well-funded opposition party.

BRIAN MURPHY: You can’t just come out and say, “I want my team to have a bank,” right? Because, first of all, he’ll never get a charter. And you need to get a charter from the state legislature. That’s the only way you start a bank in this period. They’ll never give him one if he comes out and says that. And they’ll never give him one anyway, because there are two banks in the state. That’s The Bank of the United States, which has a branch in New York. And there’s the Bank of New York. And the people who run those institutions think that’s just fine.

PETER: Why did Burr need the permission of the legislature? Well, because banks were corporations. And in this period only states could create new corporations. The idea was that these corporations would in one way or another be contributing to the public good.

BRIAN: And what he ends up doing is hijacking another proposal to create another corporation the City of New York that’s a water company.

PETER: A water company? Hold it. A water company has liquid assets, I guess, huh?

BRIAN MURPHY: Yes it– [LAUGHS] Yes it does. It has got a lot of liquidity. The money flows.

PETER: Long story short, the City of New York had been suffering from yellow fever epidemics. People knew it had something to do with the difficulty of getting clean water. And so, in 1799, Aaron Burr makes a pitch to a group of concerned local leaders. “What the city really needs is a brand new source of potable water. ”

BRIAN MURPHY: And so this delegation of elite New Yorkers, which includes Aaron Burr and Alexander Hamilton, his big Federalist. They go to the state legislature and make an application for this water company, which is going to be called the Manhattan Company. And Burr says, when it gets to the state legislature– “hosts, I’ll take it from here.” Right? “I’m a good legislator. Trust me on this.”

PETER: Yeah, trust me.

BRIAN MURPHY: And that’s where he goes to work.

BRIAN: What Burr does is this. He inserts a clause into the charter that allows the directors of the new company to use any extra money lying around however they see fit. Say, to lend out to people in need of a loan. He also enlarges the board of directors and promptly fills these new slots with Democratic Republican allies. In effect, he has created a bank.

Now it doesn’t take long for the Federalists to figure out that they’ve been hoodwinked. But when they do, it’s too late.

PETER: Thanks to the bank– I mean, water company, supporters of the opposition not only have a new funding mechanism in place. They have a new party framework in place, one that unites their various factions under the aegis of a common corporate structure.

The following year, in what’s sometimes called the Revolution of 1800 and the Decline and Fall of the Federalist Monarchists, Thomas Jefferson is elected President of the United States, with Aaron Burr as his vice president. It’s clear that they couldn’t have done it without Burr’s brilliant leadership of the unified Democratic Republican Party in New York.

So what about the water? Did the [INAUDIBLE] company end up delivering good water? After all, the New York water supply today is supposed to be terrific, right?

BRIAN MURPHY: That’s right. That’s why the bagels are so good. [LAUGHING] They do. They end up building and infrastructure. It’s not as ambitious as the one they had planned. But they do have subscriptions. And they are required by law to run a water company. And even until the beginning of the 20th century, the Bank of the Manhattan Company still was required to have some kind of water function.

And there’s this little New York Times piece– I think it’s from, like, 1911 or so– where they just mention offhand that this is the day of the year when the Manhattan Company is required to perform its function is a water company. And they open up– they have, like, a well in their basement. Or some kind of water holding tank. And that’s the date that they’re required to do this, to fulfill the legal requirements of their charter.

PETER: That’s historian Brian Murphy. You can read his account of the Manhattan Company at backstoryradio.org.

ED: We hear a lot these days about the influence of corporations on American politics. And much of that conversation stems from the 2010 Supreme Court ruling in the Citizens United case. That decision ruled that campaign spending by corporations should be treated the same way as individual giving.

Critics have rallied around a proposal for a constitutional amendment that would overturn that ruling. A proposal that made it all the way to the US Senate this month. And later this month, the court will rule on another high profile case– the Hobby Lobby case. This one centering on whether corporations can claim the same exemptions for religious liberty that individuals can.

BRIAN: One of the things we found so fascinating about that story of Aaron Burr’s Manhattan Company is that it flips a familiar storyline on its head. Whereas today people worry about corporations pulling the strings of politicians, 200 years ago it was actually the politicians that used the corporate form to build their political parties. They realized that if you really wanted to effectively wield power, and to lock in that power, you’d be hard pressed to find a better way of doing that then claiming the rights and privileges afforded to corporations.

PETER: Today on the show we’re delving into the long history of corporations in America. If the nation was founded in part to protect the rights of individuals in opposition to a corporate behemoth like the British East India Company, with its monopoly on tea sales in America– you remember the first tea part– why is it that corporations have continued to play such a central role in American life? Later in the show, we’ll look more closely at the origins of the corporate personhood debate. And we’ll consider the unlikely story of one corporation that decided, when it came to maximizing profits, bigger was not better. But first, we’re going to spend a few more minutes reflecting on the story of the Manhattan Company, and what it tells us about the corporate form in America.

ED: So Peter, I’m confused. You’re our expert on early America. Corporations, we know what those are. The big board tables, the fancy cars, and the suits, and all that. But I could have sworn that you and Brian Murphy were talking about corporations as if they existed back then.

PETER: Yeah, they sure did, Ed. I think the important point is that all corporations are not created equal. We tend to think of business corporations as private people who are getting together to make money at our expense, to get rich– plutocrats. But, take the American colonies. Take the rights, and privileges, and liberties under charters–

ED: Wait they’re corporations?

PETER: They are absolutely corporations. They have the same charter form as the East India Company, the Bank of England, or any other of the great corporations. Which are often trading companies, sometimes with political functions.

ED: So a corporation, is what I hear you saying, is any group of people who can get a charter from the King, to conduct business as a single entity.

PETER: That’s right– from the King. Or in the United States, of course, from the legislature. Under that charter there are specifications of what they can do. And that corporation has perpetual life. And the American Revolution, a short version of it, is that the Americans rise up in defense of their corporations– that is, their colonies– in defense of their charter privileges. That is, the privileges that they got from the King originally. And they think of them as constitutions. Think of charters and constitutions as being very similar. In fact, a charter for a modern corporation is something like a constitution for the governance of a particular group of people doing a particular function.

Now, here’s the thing. The corporation can be bad if it seems to be some kind of corrupt, privileged monopoly, insider operation, where they get the legislature or the King to grant them a charter that gives them a privilege that nobody else has. It’s exclusive, right?

ED: And they’re not fulfilling the public good, then.

PETER: That’s right.

ED: They’re fullfilling a private good.

PETER: That’s a partial good. Whereas, for the Americans, if a corporation– if is the operative word. If a corporation is chartered in a way that secures the public interest, like good drinking water– I’m really interested in good drinking water. It’s great! So how can you get that public good when the government itself doesn’t have the capacity, doesn’t have the financial resources.

But if a private corporation, under the sanction of a charter, then performs this public function, it’s a win-win-win. The charges they can make for their water are strictly limited. Their operations are circumscribed by the oversight in the original charter. So, this is a wonderful way to expand the capacity of government. But we don’t want it to become exclusive, a monopoly that endangers liberty.

ED: So Peter then I understand the story of the Manhattan Company, there in New York in 1800, sounds like it’s both the good kind of corporation that’s bringing people drinking water. But the bad kind of corporation that is sort of giving somebody an unfair advantage. And the irony is we’re our own country, now. There’s no king making us do this.

BRIAN: Ah, but Ed, we may be our own country, but factionalism has raised its ugly head. Let’s think about why Burr feels he needs to start a corporation. It’s because the existing charter has been kind of taken over by these Federalists. And they’re not lending money to the Democratic Republicans.

PETER: That’s exactly right.

ED: So do people say, well, this suggests that the corporate form is corrupt, and we should get rid of it, and what a bad inheritance from the English?

PETER: Ed, I think it works both ways. We can see now what good things corporations– the corporate form– can do. Everything from the water supply, to local government, to churches, to charitable organizations, to universities. It’s a wonderful vehicle for achieving social goods. Yet it’s a protean vehicle. It could be used for different things. And your judgment of whether a public good is being served or not is, well, what it exposes is there’s no uniformity of opinion on this.

ED: Well, you know, I’m no fortune teller, but I’m guessing this polarity, this ambiguity, is going to cause problems across the course of American history. What do you think?

PETER: I think that’s absolutely right.

ED: It’s time for a quick break. When we get back, a friend of the railroads makes the case that, in the eyes of the law, corporations are people.

PETER: You’re listening to BackStory. We will be back in a minute.

BRIAN: We’re back with BackStory. I’m Brian Balogh.

PETER: I’m Peter Onuf.

ED: And I’m Ed Ayers. We’re talking today about the history of corporations in America. And about the conflicted feelings that Americans have had about them throughout our history. We’re going to turn now to what is probably the most important legal case having to do with the rights of corporations in early America. Now, we’ve already talked about the way that corporations were not just about business back then. And sure enough, this case centers on a corporation called Dartmouth College.

PETER: Dartmouth was created by royal charter in 1769, when George III was still king on the side of the Atlantic. Its charter specified that it was a private university. But in the 1810s the new sovereign, which would be the state of New Hampshire, attempted to modify that charter, so that lawmakers could have more say in matters of school governance. They argue that this would assure that the corporation would continue to operate in the public good. But the school’s trustees said– “Hold it! Our charter amounts to a contract. And just because you’re the government doesn’t mean that you can alter the contract.”

The case made its way to the Supreme Court, which ultimately ruled in favor of the trustees.

CHUCK MCCURDY: The Dartmouth case said that if you got a deal, a sweet deal from the state legislature, the next state legislature couldn’t interfere with that sweet deal.

PETER: This is Chuck McCurdy a legal historian at the University of Virginia.

CHUCK MCCURDY: It was a principle that said– “If it’s a private corporation, it’s immune from governmental intermeddling in the future.” That’s a big principle!

ED: As we heard at the beginning of today’s show, states granted corporate charters on a case by case basis in the early years of America. McCurdy says that, after Dartmouth, would-be corporations were emboldened to try to get the most favorable terms and conditions from lawmakers that they could, knowing that they would be set forever once they did.

CHUCK MCCURDY: Every promoter or organizer of a body politic in corporate form, and especially of banks, and, by the 1830s, railroad companies, show up to negotiate with state legislatures saying that they demand all kinds of special franchises which are not available to ordinary people in the marketplace who lack access to a corporate form. So they want tax exemptions, the right of route monopolies for railroads and turnpike roads, and so on.

ED: And that happens quickly? After–

CHUCK MCCURDY: It happens by the 1820s. James Cant, who writes the first treatise of American law generally, talked about a mighty current of corporations being generated by the several state legislatures. Their session laws each year being dominated by the creation of these entities. And, for the most part, they were privileged entities. And the legislative process was largely an annex to the marketplace.

ED: Can you give us any sense about the strong current of these corporations emerging. Any sense of scale?

CHUCK MCCURDY: Well in terms of numbers, in 1800 we know there were 310 for-profit corporations the United States. By 1819, there were 2000. By 1870, there were 100,000.

ED: So that’s a dramatic change? I’m guessing that everybody thought it was great.

CHUCK MCCURDY: Well there was one whole political party– the Democratic Party created larger by Martin Van Buren, combining the plain farmers of the North with the planters of the South– that became dedicated to an anti-monopoly and anti-charter doctrine in the late 1820s. And really continuing until they won the battle, by the mid-1840s.

ED: I noticed that you said that they are opposed to monopoly, not to corporations. Why would those two words be conflated so quickly?

CHUCK MCCURDY: Because so many monopolies were indeed created by legislative act, which could not subsequently be undone without violating the doctrine laid down by the Supreme Court of the United States in the Dartmouth College case.

ED: Can you give me an example. I mean, Dartmouth College doesn’t seem a very threatening monopoly.

CHUCK MCCURDY: Sure, the Boston & Worcester railroad was one of the very first chartered by the Massachusetts legislature. I think it was 1830. And that first charter, of the Boston and Worcester railroad, provided that it should have a monopoly of the route of travel for 30 years between Boston and Worcester. So another railroad was charted the went from Boston to someplace near Worcester. It wasn’t even the same county. But it was held that it violated the route monopoly of the Boston & Worcester.

So you can see now there was tension between economic development, which everybody was in favor of, by providing security to investors, on the one hand, and economic development being limited by the claims of monopolists.

ED: And obviously those monopolists would be people who had access to political power. I mean you have to be an insider in order to get a charter passed, I would imagine.

CHUCK MCCURDY: Absolutely.

ED: So what did the people who opposed these monopolies propose instead, Chuck?

CHUCK MCCURDY: Well, they proposed that no corporation be created except by general law. In other words, that rather than chartering corporations one at a time, by a special act of the legislature, that the state government simply enact a general law providing under what circumstances anybody with the capital to invest, to open a bank or create an insurance company– that they could go ahead and proceed. And these general laws would not authorize the state to confer upon these corporators any privileges or immunities that were not available on similar terms, or identical terms, to any other potential corporator or investor.

ED: So it would seem to me, Chuck, that they’re fighting the corporate fire with more fire. That if corporations are dangerous, their idea– “well, what you really need is to make it possible for anybody to create corporations.” So, ironically, the anti-monopoly movement actually encourages even more corporation. Is that right?

CHUCK MCCURDY: Well I don’t know that I would say ironically, because that was the intention. In other words, most of the leaders of the anti-monopoly movement subscribe to something they called the Equal Rights Creed. They had no problem with market operations, and accumulations of capital arising from market operations. What they despised were people using their political clout in order to enhance their power and authority, and ability to benefit from market operations. And those are two very different things.

ED: So, at this juncture then, the creation of corporations seemed a great democratic reform. And the more corporations, the better.

CHUCK MCCURDY: That was one way to look at it. And, in the constitutional conventions in every state in the 1840s and 1850s, Democrats pushed for mandatory general incorporation laws. And in most instances they succeeded.

ED: Chuck McCurdy is a historian at the University of Virginia.

We’ve heard a lot of debate these past few years about whether or not corporations should be granted the same legal rights as people. And while it certainly seems to generate a lot of heat today, the debate actually dates all the way back to the middle of the 19th century. It was then that the Supreme Court established that corporations are covered by the 14th Amendment. Now that amendment says the states cannot “deprive any person of life, liberty and property without due process of the law.”

Now, the 14th Amendment was created after the Civil War to protect the rights of newly freed slaves. So how is it that this new amendment to protect slaves came to be applied to corporations? Well, it actually happened fairly quickly. In 1873, five years after the 14th Amendment was ratified, a case made its way to the Supreme Court. And that case involved a group of incorporated butchers in New Orleans. The State of Louisiana wanted to relocate the butchers farther down the Mississippi River so that the blood and guts from their slaughter houses didn’t contaminate the city’s water supply.

BRIAN: But the lawyer on the other side invoked the 14th Amendment. He said that amendment clearly protect to the butchers from state interference. Four justices agreed. And they signed their name to a minority opinion stating as much. But their argument did not carry the day.

JACK BEATTY: The justice in the majority opinion, Justice Miller, said– “This has no foundation in the lineaments of the intent of the people that wrote the 14th Amendment. This is cockeyed!”

BRIAN: You might recognize that voice. Jack Beatty is the news analyst for NPR’s On Point, who’s also written extensively about money in American politics. In one of his books, he writes about how this new reading of the 14th Amendment went from minority opinion to the majority opinion.

The turning point came in 1885, with a Supreme Court case called Santa Clara vs. The Southern Pacific Railroads. That case dealt with a pretty mundane tax issue on the surface. But the precedent it established was huge. The decision extended the protection of the 14th Amendment to corporations. And yet, Beatty told me, that was never actually stated in the decision itself.

JACK BEATTY: It may be the only case in Supreme Court history or, not judge made law– we have a lot of that– but reporter made law.

BRIAN: Reporter made law? What do you mean by that?

JACK BEATTY: Well, in those days the court had a jurist, a lawyer, who reported on what happened in the cases, and who compiled the cases and published them for the benefit of the legal profession. And it was a highly prestigious job.

And the reporter, then, in this 1885 case, was a man named John Bancroft Davis, who was a former railroad president. And one of the things that the reporter did was he summarized the case. Before you read the case, you get a sort of summary of it in his head notes. Well, in his head note, Bancroft Davis flat and out says the corporation is considered a person under the 14th Amendment.

The note reads, “before argument, Mr. Justice White said, the court does not want to hear argument on the question whether the 14th Amendment forbids a state to deny any person within its jurisdiction equal protection of laws. Whether this applies to these corporations, we are all of the opinion that is does. These corporations being railroads.” That headnote– that defines the opinion.

BRIAN: Now Jack. Jack, are you saying that the reporter made this up? Or do you think the reporter genuinely was reporting what the justices were schmoozing about before they got into the opinion.

JACK BEATTY: This is a great debate. We don’t know. You know, what we have is some correspondence between the reporter, Bancroft Davis, and Chief Justice Waite, to whom Bancroft Davis sent that line saying– yes, we’ve agreed on this. And Waite wrote back– “I think your memorandum in the California railroad tax cases expresses with sufficient accuracy what was said before the argument began.” But he goes on to say, “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.”

BRIAN: All right, so this is fascinating. But one of the great things about history is we can see how all of this was received in retrospect. Couldn’t we really assess whether the Supreme Court was serious about treating corporations as persons by looking at whether subsequent Supreme Court decisions cite this and really start to assume that corporations are people? Is that what happened?

JACK BEATTY: That is what happened. Sure enough, this was, within a couple years, 1888, in a case called Pembina Mining, this was referred to as a precedent. The judge there writing the majority opinion says, “under the designation of person there is no doubt that a private corporation is included.”

That’s the first time that Santa Clara is cited as a precedent. And the judge who did that, Stephen J. Field, was all but a paid agent of the Southern Pacific Railroad. He was a California jurist. He was a friend of the principles of the railroad. He was a dogged defender of corporate privilege. And he was a man of lax judicial ethics. That is to say, his opinions, and there’s a lot of scholarship on this, show an almost willful effort to shape the law to accord with his policy preferences, his political preferences.

BRIAN: Now, now Jack. Jack, I know that the Supreme Court was not always the size it is today. But surely it consisted of more than one person.

JACK BEATTY: Oh yes.

BRIAN: So whatever Field’s predispositions may have been, and whatever his leanings, he did have to convince a majority of justices, didn’t he?

JACK BEATTY: Oh he did. He did. There’s no question about it. But those justices and their education really go to the nature of this Gilded Age. They were educated in the catechism of, you know– “state action is wrong. The state can do nothing right.”

BRIAN: OK, Jack, so it’s not just about railroad corruption. Field seems to have a real, well, a real sense of conviction here. But what’s behind this hatred of the state, as you call it. What’s behind Field’s conviction that corporations need this autonomy.

JACK BEATTY: I think he had in his mind the right of property. And as he looked across America, and first of all saw the revolution of the Civil War, which was, as a former Black Union soldier put it when he saw his former master, he said– “Masser, bottom rail top now!” This was right after the war, when people could believe that African Americans were bottom rail top.

And meanwhile, the other people at the bottom, labor, were stirring all over the country. And there were strikes. And there were– I mean, it was the age of, really, labor violence in America. And this terrified Field, partly out of personal reasons. His friends were these property owners. And the property they held, the railroad– Southern Pacific– was extraordinarily unpopular in California, where people were able to vote in anti-corporate legislators who wanted to go after them, and get their taxes from them, and regulate them. And, by God, Stephen Field called in the 14th Amendment to protect these bulwarks of order against these rabble-rousing assemblies.

BRIAN: Jack Beatty is the senior news analyst for NPR’s On Point. He writes about the beginning of corporate personhood in The Age of Betrayal: The Triumph of Money in America, 1865-1900.

It’s time for another break. But don’t go away. When we get back– why one of the biggest corporations in the world decided that smaller is better. You’re listening to BackStory. We’ll be back in a moment.

We’re back, with BackStory. I’m Brian Balogh.

ED: I’m Ed Ayers.

PETER: And I’m Peter Onuf. Today on the show we’re reflecting on the roll that corporations have played throughout our history. Before the break, we were hearing about the 19th century legal drama that resulted in corporations getting the constitutional protections they enjoy today.

And we’re going to turn now to a case study of one corporation that came into being right around the same time, when all those big railroad companies were flexing their corporate muscle. But this company took a pretty different approach to consolidating its power.

BRIAN: Bart Elmore is a historian at the University of Alabama. He says that at same time other big companies were pursuing the model of vertical integration– that’s where they set out to own each of the links in their production and distribution chains– the Coca-Cola Company was making a point of owning as little as possible. Elmore calls this approach Coca-Cola capitalism. And he told me that it’s perhaps best illustrated by contrasting Coke with another turn of the century purveyor of sweet things– the Hershey corporation.

BART ELMORE: They– in the nineteen-teens and early 1900s– they decided that the smart thing to do would be to buy up plantations– sugar plantations in Cuba– to source their own sugar. Be our own supplier, control our own price, kind of ideology. Coke did not. Coke ended up trying to source their sugar from any possible source they could get it from. Their goal was to try and diversify their buying contracts as much as they could. If Cuban sugar, for example, became too pricey– “well, we’ll get our sugar from Brazil.”

BRIAN: Which model wins out?

BART ELMORE: Well, in this story it’s very interesting. The sugar market crashes. Global sugar prices plummet in 1920. And Hershey’s sitting here holding all these sugar plantations, unable to sell its sugar for a profit. And they end up losing a ton of money. In fact they go into receivership. Meanwhile, Coca Cola, well, they’re able to thrive ultimately. Because they can source their sugar from wherever they want. And hey, if high fructose corn syrup comes along, a new sweetener that’s even cheaper than sugar by the end of the 20th century– well, we don’t own any plantations. So why not make the switch?

BRIAN: So what else did Coke offload, or outsource, that most big corporations at the time would have tried to own. What about water? Coke’s mainly water, as far as I can tell.

BART ELMORE: Coke depended on public water supplies in order to hydrate its beverages. And it didn’t own bottling plants in the United States or anywhere else around the world. It basically depended on local businessmen to build bottling plants that tapped into public water supplies all around the globe. And, again, there’s a way in which they embedded themselves not only in private capital and private businesses, but also in public infrastructure as well.

BRIAN: So they outsourced their main ingredient.

BART ELMORE: Absolutely. And their heaviest ingredient– and that was the whole point. You don’t want to ship these heavy, water dense goods all around the country. Get other people to do that. The key was not getting tied down in any specific locale with factories or plants, remaining nimble, lean. A company that would channel natural resources through its corporate system, and make money off the transaction between producers and distributors, but actually never really make stuff, or really hold onto it for very long.

BRIAN: What made Coke do things differently? Vertical integration was all the rage. The whole idea of corporations in many ways was to control as much as possible.

BART ELMORE: Well you got to remember the context of when Coca-Cola comes out. It’s coming out in Atlanta in Reconstruction, a city that has just suffered many years of war and rebuilding. And its founder, John Pemberton, is actually a struggling guy. He doesn’t have a lot of money. In the 1870s he actually goes bankrupt, in part because his businesses had been burned down.

But he was also physically suffering. He had suffered a series of wounds during the Civil War. While defending the city of Columbus– he was a Confederate– he ended up becoming addicted to morphine. And interestingly that’s kind of how Coke came about. He was trying to find a drug that would get him off morphine. And while we might find this a little surprising, he chose cocaine as his elixir that would get him off of this addiction to morphine.

BRIAN: It was his methadone.

BART ELMORE: It was his methadone. And he actually tried to copy this drink that was very popular in France, called Vin Mariani– basically Bordeaux wine mixed with cocaine. Only problem was, prohibition was taking hold in Atlanta in the South in the 1880s. And he was forced to take out the wine. And now we have the carbonated water that we have today– 1886.

But he was down on his luck, so he decided that the best way to go about expanding his empire was to rely on others, to not own stuff. Because he simply couldn’t. He had to find ways to get local capital from local bottlers, local soda fountain operators– basically to tap into other people’s infrastructure to make money.

BRIAN: Would you say that, in this Coca-Cola capitalism model, Coke was forward looking? Did other companies eventually come to embrace this model?

BART ELMORE: I think so. And I should be clear, I don’t think that John Pemberton, or Asa Candler, who becomes president of Coca-Cola soon after Pemberton, ever envisioned that they were developing this unique model. They were just doing it kind of out of necessity.

I mean Asa Candler, for example, he didn’t want to have bottlers. He actually signed away the rights to bottle Coca-Cola, legend has it, for about $1. Saying to these guys, “sure, if you want to bottle it, go ahead. Who’s going to drink bottled Coca-Cola?” Because the whole idea at this time was Coke is fun to drink at soda fountains. It’s a social activity. It’s where you go to the bar. It’s where you hang out with people.

So I think in many ways it was luck that Coke ended up the way it did. But once they realized– wow, this is actually pretty smart– using this local capital, tapping into municipal water supply systems– hey, this saves us money. I think long term they begin to see the value of this. And I do. I think other businesses ultimately look at this and say– “wow, why make stuff when people are making stuff for cheap? And we can simply repackage this stuff, and sell it at mark-up, and make lots of money.”

BRIAN: What are some of the other companies that begin to emulate Coca-Cola capitalism. I know they didn’t call it that.

BART ELMORE: You know, some of the ones that I’ve been most struck by would include McDonald’s. A company that, when you look at it, at first you say– “Wow, this is a company that sells hamburgers.” But, you know, the executives at McDonald’s would totally disagree with you. They would say– “We don’t sell hamburgers. We collect rent.”

And in fact this is exactly the wording of one of the top executives in the 1950s. He says– “We are not essentially in the food business. We are in the real estate business.” And by that he meant– “Look, all we really do is we buy up cheap properties along highways–” Which, by the ’50s, we’re developing all these interstate highways thanks Eisenhower and others. “And we’ve got this land, and we’re just going to rent it out to franchisees. Lease this land.” And guess what? It’s the franchisee who has to pay for the laborers, who has to pay for building all the restaurants, and doing all this.

BRIAN: So you’ve talked about McDonald’s. Coke, McDonald’s, they seem to go together– like a Coke and a Big Mac. But what that outside the food industry?

BART ELMORE: Well when you look at the biggest winners, you could say, of the 21st century– the profit titans– a lot of them are software companies, which we don’t actually make the bulky machines and have to own all that stuff. Same thing with Google. A company that, if you looked at their SEC filings, would say– “We made most of our money off advertising.” Essentially making a kind of fee for promoting various wears on its websites. Again, making money off the transaction, not necessarily off making stuff.

BRIAN: I’m impressed by this Coca-Cola capitalism model. But I wonder about companies that seem to be following really the Standard Oil model of vertical integration. Comcast, for instance, seems to be buying up every part of its production and distribution system available for sale.

BART ELMORE: Well, we’re always on shaky ground as historians talking about the future. I would say that there are some lessons. You know, what we see is not that vertically integrated empires always fail. We saw US Steel do very well. We saw auto industries do very well. We’ve seen vertically integrated enterprise do well in the short term. The question is, how did they do in the long term?

And I think what you see with Coke is that it seems to just continually grow in terms of its profits, while US Steel fails, and other vertically integrated enterprises fail. It’s its nimbleness that allows it to perpetuate itself into new eras of economic realities, and ecological realities.

And the question for Comcast then is simply that. Will be able to? Once it buys up these things that are time specific, and place specific in many ways, will these things prove valuable investments 50 years from now?

BRIAN: Bart, thanks very much for joining us on BackStory today.

BART ELMORE: Thanks a lot, Brian.

BRIAN: Bart Elmore is a history professor at the University of Alabama. His forthcoming book is Citizen Coke: The Making of Coca-Cola Capitalism.

[MUSIC – “RUM & COCA-COLA”]

If you’re just joining us, this is BackStory. And we’re talking about the history of corporations in America. We’ll conclude today’s show, fittingly enough, with a representative of the nation’s oldest corporation– Harvard University, still operating on a charter issued in the year 1650. Rakesh Khurana is the newly named Dean of Harvard College. He’s coming over from Harvard’s Business School, where his work has focused on the study of business leadership.

Before we dive in with him, a little history of that business school. It was created in 1908. It was part of a wave of new business schools at universities around the country. This, after all, was the height of the progressive era, when fields like medicine and law were being transformed from do-it-yourself, anything those kinds of jobs, to the white-collar, professional careers we know them as today.

Business management was no exception. Over the previous few decades, leadership of American corporations had come to be epitomized by the image of the robber baron, the company owner that operated with little regard for his workers, or, for that matter, society at large. It was an era of enormous monopolies, of violent labor struggles, and of corrupt politicians.

Supporters of the Populist Party had spent years arguing that big business inherently corrupted, because of its ability to corrupt politics. But Rakesh Khurana says Progressives didn’t see it as a matter of size. They believed that corporations could be reformed from within, if only they could bring in a new generation of leaders that would apply scientific and ethical thinking to the running of their companies.

RAKESH KHURANA: Progressive individuals, people like Louis Brandeis, believe that, you know, we want to throw the baby out with the bath water. If we could run these corporations, not in the interest of capital, or not in the interest of labor alone in terms of unions, and not in the interest of the government, but rather the interest of the larger society, we could benefit from the scale and the technological innovation that corporations bring.

BRIAN: How were they going to make a profit if they were doing that?

RAKESH KHURANA: Well the idea was not about maximizing profits. It was about what was described by the founder of Harvard Business School as a decent way to make a profit decently. And that it was not about maximizing profits, it was actually about maximizing the welfare and the value that a corporation brings with respect to employment, better products and services, and providing social welfare to its employees.

BRIAN: So the idea was that, with professional managers in charge, they could really turn these corporations from preying on society to actually contributing broadly to society.

RAKESH KHURANA: That’s exactly right. What that really meant was thinking about corporations not as economic entities, but as long lasting institutions. Where surviving and stability was more important than the maximization of short term profits.

BRIAN: Well what about the argument that corporations are supposed to serve shareholders.

RAKESH KHURANA: Well that’s a relatively recent argument. Kind of the earlier version was done by Milton Friedman at the University of Chicago, when he was asked what was the social responsibility of corporations. And he said– “To earn a profit.”

BRIAN: That was when? Roughly the 1960s?

RAKESH KHURANA: It was 1972-1973.

BRIAN: Huh, that late, OK.

RAKESH KHURANA: Yeah, now when that idea first came out, it was seen as really crazy. It was marginal. Because what dominated at that time was this notion of a stakeholder model. That you have to pay attention to customers, and suppliers, and the government, and follow the rules. What happened in that 1970s decline of US competitiveness is that we had a renewal of this kind of neo-laissez-faire, anything goes kind of economy.

And beginning under the Carter administration, and then accelerating pretty dramatically under the Reagan administration, was the deregulation of many industries. Everything from transportation, to finance, to telecommunications. And that deregulation brought about this idea that corporations were not institutions. They were just sort of basically economic entities. And the sole purpose of management had to be not about maximizing their stability or their survivor-ship, which was often done through diversification, but rather, then, about maximizing shareholder value.

And because ownership had been changing during this period, as a consequence of the creation of 401Ks and other forms of retirement, we began to see large institutional investors basically pushing boards of directors to fire under-performing CEOs. As well as pushing incentive systems such as stock options. So managers, now, no longer paid on the basis of salary primarily. They were largely being paid on how high they were able to get their stocks. And that really created a wholesale change.

BRIAN: So that changed the incentive structure for managers. Is that what you’re saying?

RAKESH KHURANA: It changed the incentive structure of managers. But more importantly, it also changed the mindset. Managers began to increasingly– especially CEOs and those who were compensated through these schemes– began to see themselves as hired hands of the shareholder. And we had what began then as the external CEO labor market. So, you know, somebody would be brought in to pump up stock and deliver short term profits.

And as a result of that, the belief was that these outsider CEOs were less beholden to the old way of doing things. They felt very little loyalty toward the company. They felt very little loyalty toward the culture. They felt very little loyalty toward the existing employees. And so were willing to take actions that somebody who had grown up in the organization was unwilling to take.

BRIAN: You know, I see two ways to think about corporations under-performing in terms of short term profits in the 1970s. One is that managers kind of grew soft. They went native, as we’d call it in government. They became too sympathetic to the corporation itself. They weren’t independent. But the second possibility is that they were taking money from short term profits in order to invest in longer term productivity. Productivity through spending on research and development. Productivity through training the labor force, and spending money on labor that would retain the workers allegiance– long run.

RAKESH KHURANA: I think most of the profits at that time, when they were allocated, a significant amount was allocated toward labor. And a significant amount was allocated toward things like research and development. We forget, but many of the innovations that we enjoy today came out of the long term investment and are indeed– it was not uncommon to have scientists at IBM, and General Electric, and–

BRIAN: Or Bell Telephone.

RAKESH KHURANA: Or Bell Telephone– winning Nobel prizes for the work that they did on semiconductors, in terms of work they did in material science. You know, the notion was that the large corporation was a stabilizing force. Rather than being a source of instability in society, it was a stabilizing force. And we had things like implicit contracts of relatively long term employment. You had pension plans. The corporations rather than the state would provide health care. And that really became the spine and the backbone of the postwar economy.

BRIAN: Wouldn’t a lot of your colleagues at Harvard Business School say– “Well, you know, the United States was in an exceptional position after World War II. The economies of other countries were wiped out. We could afford to be a little more generous. Many of your colleagues would call it flabby. But, there was a lot of dead wood there. That’s why America kept building cars that were too big to compete once the oil crunch hit, for instance.”

RAKESH KHURANA: Well I think that’s part of the complexity and the tension we face always, is this notion of stability and this notion of change. And how the corporation fits in that balance is really critical. This is as an insight to Joseph Schumpeter had when he talked about creative destruction. And we tend to focus a lot about the creative part, which I think is really great. We don’t talk about the destruction part.

What are the consequences when companies close down for a community? What are the consequences for the trust that people placed in a community? The tax breaks? What are the consequences of recognizing that the limited liability of a corporation is actually a transfer payment that takes liability away from an individual, and is actually a gift to companies to advance the social welfare? I’m not saying that all companies don’t advance the social welfare. But I think if you look at where we’ve been in the last 25 years, the question I would ask is– Are our workers better off? Do we have a healthier and more vibrant democracy? Do we have a healthier and more vibrant economy that is benefiting the broad base of individuals rather than a smaller group? And I think on many measures we’re not where we have the possibility and the opportunity to be.

BRIAN: Well thanks for joining us today on BackStory.

RAKESH KHURANA: I’m really, really grateful to being invited.

BRIAN: Rakesh Khurana is a professor at the Harvard Business School, and brand new Dean of Harvard College. He’s the author of Searching For A Corporate Savior: The Irrational Quest for Charismatic CEOs.

PETER: That’s going to do it for us today. But the conversation continues online. Drop in at backstoryradio.org and tell us what you thought about today’s show. And while you’re there, take a minute to weigh in on one of our future show topics. We’ve got one show in the works about the history of American sports on the international stage. And another about the history of fashion. We’re also on Facebook, Twitter, Tumblr, SoundCloud. Whatever you do, don’t be a stranger.

ED: Today’s episode of BackStory was produced by Tony Field, Nina Earnest, Andrew Parsons, and Emily Charnock. Jamal Millner is our engineer. BackStory’s Executive Producer is Andrew Wyndham.

BRIAN: Major support for BackStory is provided by an anonymous donor, The University of Virginia, the National Endowment for the Humanities, and the Joseph and Robert Cornell Memorial Foundation. Additional funding is provided by Weinstein Properties, by the Tomato Fund, cultivating fresh ideas in the arts, the humanities, and the environment, and by History Channel– history, made every day.

FEMALE SPEAKER: Brian Balogh is professor of history at the University of Virginia. Peter Onuf is professor of History Emeritus a UVA, and senior research fellow at Monticello. Ed Ayers is president and professor of History at the University of Richmond. BackStory was created by Andrew Wyndham for the Virginia Foundation for the Humanities.