How did corporations become the dominant institutions in our society, powerful behemoths with a hand in every almost every aspect of our lives?

The history of corporations in America is indeed a fascinating tale, the story of how a small legal construction designed to harness human ingenuity and entrepeneurship for the public good has been transformed into a largely unaccountable force that has, in some instances, grown larger than entire nations.

The modern corporation dates back to 1601, when Queen Elizabeth I created the East India Trading Company. At the time, the concept of a corporation was quite different than today. Corporations were small, quasi-government institutions chartered by the crown for a specific purpose. The idea was to bring together investors interested in financing large projects, such as exploration. (Many American colonies were originally governed by corporations, such as the Massachusetts Bay Company) Kings and queens kept a close watch on these corporations, and didn’t hesitate to revoke charters if they weren’t happy with the way things were being run. Investors were liable for any harm or loss caused by the company.

As the American colonies developed and won their independence, corporations remained in the background. Sure, there were a few notable anti-corporate protests, like the Boston Tea Party (the Sons of Liberty dumped 342 crates of British East India Company tea into the ocean), but the vast majority of Americans at the time lived and worked on small family farms. The real threat was the unilateral, unaccountable power of King George III, and the founders of a new nation, skeptical of that kind of power, formed a government of checks and balances to prevent any one branch from getting too powerful. Although corporations were not mentioned once in the Constitution or the Bill of Rights, Thomas Jefferson famously noted that representative government’s purpose was
"to curb the excesses of the monied interests."

The early America developed largely along the ideals of Jefferson’s yeoman farmer, with American industrialism lagging behind its European counterparts. Corporations remained small institutions, chartered at the state level for specific purposes, such as banking or seafaring. Corporations could only exist for a limited time, could not make any political contributions, and could not own stock in other companies. Their owners were responsible for criminal acts committed by the corporation and the doctrine of limited liability did not yet exist. Often corporate charters went to the wealthy or well-connected. But these small corporations did move America into the industrial era, encouraging entrepeneurism on a grander scale. Governments kept a close watch on how these corporations were being run, regularly revoking charters if corporations were not serving the public interest. For example, in 1832, President Andrew Jackson refused to extend the charter of the Second Bank of the United States and the State of Pennsylvania revoked 10 banks’ charters.

Slowly, though, corporations were gaining power. In 1819, the Supreme Court ruled in the case of Dartmouth College v. Woodward that states could not alter a contract granted by a previous legislature, leaving Dartmouth’s King George III-granted charter in tact and creating a framework of protection for corporations against government encroachment.

As industrialization began reshaping America, great fortunes began accumulating in the hands of canal owners and financiers, and later railroad and steel magnates. And as great fortunes accumulated, a new wealthy class began influencing policymaking, changing the rules governing the corporations they owned. Charters grew longer and less restrictive. The doctrine of limited liability – allowing corporate owners and managers to avoid responsibility for harm and losses caused by the corporation – began to appear in state corporate laws. Charter revocation became less frequent, and government functions shifted from keeping a close watch on corporations to encouraging their growth. For example, between 1861 and 1871, railroads received nearly $100 million in financial aid, and 200 million acres of land.

As corporations grew in size and influence, however, their accounting structure remained the same. For a small joint-stock company, it made sense to measure corporate performance by measuring financial profits and losses. But for a corporation with thousands of employees and millions of customers, a corporation that was receiving public subsidies and encroaching on communities, a more extensive reporting system that measured the impact of the corporation on people’s lives might have made sense. This never developed, however, and the profit-generating mentality remained the dominant driving force behind corporations.

The growing industrialization of America in the second half of the 19th century meant more citizens were leaving the countryside farms for work in the cities. A wave of immigration swelled the ranks of the urban workers, creating a new class that depended on factory jobs to earn a living and depended on factory products to survive. The era of self-sufficiency was ending and the era of corporate market dominance was beginning.

Meanwhile, corporations were expanding their power through both courts and legislatures, both of which were increasingly packed with sympathizers. In 1886, the Supreme Court ruled in Santa Clara v. Southern Pacific Railroad that corporations qualified as “persons” under the law and could use the 14th Amendment to protect their equal rights. This meant that corporations were now entitled to free speech, protection from searches and seizures, and could not be discriminated against. Suddenly, corporations (artificial persons) had the same rights of real people.

At the state level, checks on corporate power were quickly eroding. In 1889, New Jersey became the first state to permit corporations to own equity in one another, perhaps as an attempt to attract more business. A race to the bottom quickly followed, with states all over the country madly gutting their corporate laws to be the most business-friendly state. In 1896, New Jersey passed the revolutionary “General Revision Act,” permitting unlimited size and market share, removing all time limits on corporate charters, reducing shareholder powers, and allowing all kinds of mergers, acquisitions, and purchases. Not to be outdone, Delaware passed its “General Incorporation Law” in 1899, which set the standard by essentially allowed corporations to write all their own rules of governance. Today, nearly 60% of all Fortune 500 companies are incorporated in Delaware

Meanwhile, between 1895 and 1904, the first great merger wave consolidated 1,800 companies into 137 mega corporations or “trusts.” When all was said and done, the corporation was transformed from a quasi-public, state-controlled organization limited in size to a gigantic unlimited private organization with limited responsibility and limited accountability.

Corporations were now the dominant institutions of society, and as their excesses provoked public sentiment, the government set out to deal with the problem. But instead of revoking corporate charters, presidents like Teddy Roosevelt and Woodrow Wilson now turned to a regulatory system and applied anti-trust laws to corporations that were getting too big, keeping corporate power at bay. By the 1920s, however, a string of pro-business presidents (Harding, Coolidge, Hoover) gave up on cracking down on corporate power. Instead, Coolidge proclaimed in 1925: “The business of America is business.”

Meanwhile, as corporations grew larger and larger and more and more people began to own stock, a new problem emerged – the owners (now an increasingly diffuse network of individual investors) no longer controlled the corporation. Instead, managers were running the company at their whims, accountable to no one. In the days of the robber barons, magnates like J.P. Morgan and Cornelius Vanderbilt ran the companies they owned with pride, insisting that their benevolent leadership would benefit the public. Now, with ownership increasingly divorced from management, owners took little interest in how their company was being run and managers had few consequences for mismanagement. This meant that managers could more easily use the corporations to enrich themselves at the expense of workers or employees, as they increasingly did. A.A. Berle and Gardiner C. Means first noted this problem in their groundbreaking work The Modern Corporation and Private Property, published in 1932.

The Great Depression restored government as the dominant economic institution, strengthening the regulatory framework in response to some of the corporate excesses that led to the stock market crash of 1929. The New Deal and World War II infused America with a new public-minded spirit and made government the dominant player in the economic sector, subverting corporations through enhanced oversight. Government regulation remained in place for a few decades, though ever growing corporations continued to play an ever more central role in society, particularly as consumer goods become dominant in the 1950s.

By the 1970s, however, a new free market idealism was developing. In 1970, Nobel Prize-winning economist Milton Friedman wrote that “the one and only social responsibility of business” is to increase profits, signaling the birth of a new American myth. When Ronald Reagan became president in 1980, he put much of this into policy, kicking off two decades worth of deregulation, eliminating key public controls over corporations. He also cut taxes on corporations and the wealthy, draining the public coffers. Big business was now increasingly free to do as it wanted with minimal government oversight. Market populism prospered with mega-mergers everywhere and CEO pay skyrocketing. (By 2000, corporations were merging at the rate of more than 100 a day, approximately 5 times the rate in 1995. Meanwhile, CEO pay clocked in at 531 times average employee pay in 2000; in 1980, the ratio ws 42-to-1.)

Corporate political donations also grew rapidly; in 2000, business interests donated $1.2 billion to federally elected candidates, accounting for 75% of all political donations. With 20,000 lobbyists in Washington, corporations have become experts at getting their money’s worth in legislation and lax regulation in return for cash contributions.

And that’s where we are today. Corporations stand as the dominant institutions in our society. They provide the products and services upon which most of us have come to depend. Through advertising, public relations, and mass media, they shape our views of the world and our views of each other. They handle our finances and our health care, even our ability to communicate with each other. They provide most of our jobs. They wield more influence over the legislative process than any government branch was ever supposed to wield. They incresaingly provide many essential services, including water, electricty, and health care. Even public schools, universities, and churches have turned to corporations for funding, opening up once sacred spaces to commercialization. Meanwhile most natural countervailing force against corporate power, organized labor, has become increasingly powerless. Today, only 10% of the private workforce is organized, a 60-year low.

Yet, hopefully by examining and understanding the history of corporations in America, we can understand that it doesn’t have to be this way. Corporations were not always the dominant institutions in society. Corporations did not always enjoy constitutional rights, unlimited size, and unlimited lifetimes. Naturally, we cannot go back to the past, nor should we overly romanticize a prior era. But we should understand that there are other American traditions besides overwhelming corporate power, and we should be mindful of them as we take on corporations today.

Recommended reading (for more information):

Unequal Protection:The Rise of Corporate Dominance and the Theft of Human Rights, by Thom Hartmann
Corporation Nation, by Charles Derber
When Corporations Rule the World, by David Korten
Selling Out, by Mark Green
One Market Under God, by Thomas Frank
Wealth and Democracy, by Kevin Phillips
Taming the Giant Corporation, by Ralph Nader
The Big Business Reader, edited by Ralph Nader
The Modern Corporation and Private Property, by A.A. Berle and Gardiner
C. Means
History of the Great American Fortunes, by Gustavus Myers
Executive Excess (United For Economy’s Reports in CEO pay, 1997-2002),
http://www.faireconomy.org

Last Updated March 4, 2003