Corporations in the Early Republic

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.