Monopolies and the Constitution: a history of crony capitalism.

Author:Calabresi, Steven G.
Position:III. Monopolies and State Constitutional Law through Conclusion, with footnotes, p. 1067-1097

Though the federal Constitution does not have an explicit antimonopoly provision, such provisions are included in nineteen state constitutions today. (516) Only two states had antimonopoly provisions at the Founding. (517) By 1868, five states included antimonopoly provisions, and several others included prohibitions on the granting of exclusive privileges or immunities. (518) Provisions were also added in state constitutions after 1868, including in the Progressive Era. (519) Some of the more recently added provisions appear to be primarily, or even exclusively, concerned with prohibiting private monopolies; (520) however, many states use similar language to that found in the provisions between the time of the Founding and 1868, when a ban on monopoly meant only a ban on a government grant of privilege. (521)

Some of the state constitutional provisions banning monopoly are broadly worded to prohibit any unequal grant of privileges or immunities to certain citizens or classes of citizens. (522) Others, however, are more narrowly worded and prohibit only the grant of monopolies or of exclusive privileges. We will focus here on the narrower state provisions, which expressly ban monopolies and exclusive privileges.

This Part discusses the roots of the state constitutional tradition of bans on monopolies, which derives in part from the Jacksonian aversion to monopolies and grants of special privilege discussed below. (523) We then discuss the adoption of state constitutional provisions in three distinct periods: (1) at the Founding, (524) (2) during the nineteenth century, (525) and (3) during the progressive era. (526) Next, we will discuss the interpretation of these state constitutional provisions in state courts during the twentieth century and the influence of federal constitutional law and treatment of economic liberty cases on state court decisions. (527) Finally, this section concludes by discussing potential reasons not all states have included provisions prohibiting monopolies and grants of special privilege today. (528)

  1. A Tradition Rooted in Jacksonian Democracy and Changes in Corporate Law

    State constitutional prohibitions on monopolies and the granting of exclusive privileges are closely tied to the States' traditional prohibition of partial and special laws which developed during the antebellum era, (529) as discussed in Part II.C above. During this period, state courts routinely struck down laws granting special benefits or imposed special burdens on persons or classes of people. (530) Prohibitions on partial or special laws in some form were included in nearly every state constitution during the first half of the nineteenth century. (531) This state constitutional tradition was closely tied to the Jacksonian conception of democracy.

    A central tenet of Jacksonian democracy was that the state should not establish monopolies or grant special privileges to particular individuals or classes of people. (532) President Jackson opposed the second Bank of the United States in part because it had monopoly powers. Jackson argued that "'great evils to our country and institutions ... might flow from such a concentration of power in the hands of a few men irresponsible to the people.'" (533) One of Jackson's journalists wrote that "'[a]ll Bank charters, all laws conferring special privileges, with all acts of incorporations [sic], for purposes of private gain, are monopolies, inasmuch as they are calculated to enhance the power of wealth, produce inequalities among the people, and subvert liberty."' (534) Another wrote, "'To have the land scattered over with incorporated companies, is to have a class of privileged, if not titled, nobility.'" (535)

    However, President Jackson's opposition to corporations in the 1820s and 1830s should not be viewed by modern readers as an opposition to corporations as they exist today. As a matter of corporate law history, it is important to note that it was not until the late nineteenth century that most states passed general incorporation laws. (536) Before that time, people were obligated to obtain a special grant from the legislature--or, in England, from the King--to establish a corporation. (537) The thirteen colonial charters from which the thirteen original States grew were all in essence simply special licenses from various English Kings. (538)

    Special grants of corporate status from a legislature were referred to as statutory charters and were not limited merely to being licenses for a corporation to exist. (539) Rather, statutory corporate charters were more like constitutions establishing a corporation's internal structure. (540) These grants by definition gave special privileges to the incorporators, as not everyone was able to obtain a charter from the legislature. (541) Common benefits of corporate status included limited liability from claims against the corporation, immunity from debts, and the ability to sue and be sued. (542) Early on, corporate charters primarily were issued to what today may be considered public utilities, including businesses involved in transportation, water supply, insurance, and banks. (543) As one New England politician and lawyer, Theodore Sedgwick, pointed out in 1835, "'Corporations can only obtain existence ... by a special grant from the legislature. Charters of incorporation are therefore grants of privilege, to be exclusively enjoyed by the corporators.... Every grant of exclusive privilege, strictly speaking, creates a monopoly."' (544)

    In his book on the history of corporations in the United States, James Willard Hurst points out that often the Jacksonian attack on corporations was much less an attack on the corporate status of such entities than it was a complaint about the special privileges or immunities some businesses enjoyed that were denied to other similar businesses and individuals. (545) Special privileges or immunities were commonplace for legislatively chartered corporations in the early nineteenth century. For example, these privileges or immunities included the ability to issue bank notes--a power generally limited to incorporated banks--and to exercise the power of eminent domain--a power which was given to some railroads. (546) For instance, The Society for Establishing Useful Manufactures, a New Jersey corporation: (1) was exempt from having to pay taxes on much of its property; (2) was given authority to conduct lotteries; (3) could exercise the power of eminent domain; and (4) enjoyed a subsidy that exempted its workmen from all taxes and military service. (547)

    It was not until the development of general incorporation laws, beginning in the mid-nineteenth century, that corporate law in the United States ceased to be a field of special grants of privilege to a few individuals. In fact, the development of general incorporation laws itself was closely tied to the Jacksonian abhorrence for monopolies and for what we would today call crony capitalism. (548) General incorporation acts within the States were developed to correspond to the various state constitutional bans on special privileges, including antimonopoly provisions and bans on exclusive privileges. (549) In fact, in his book on the American business corporation, Ronald Seavoy describes general incorporation statutes for business as a "major aspect of the social and political forces that democratized American society" during what Seavoy calls the "Age of Jackson, 1825-1855." (550) For example, when the 1846 New York Constitution was adopted, it provided that corporations were to be formed under general laws of incorporation and that special charters were banned except in certain limited instances. (551) Historian Gordon Wood notes that these laws

    [O]pened up the legal privileges to all who desired them ... [and w]ithin a few years most of them became very different from their monarchical predecessors: they were no longer exclusive monopolies and they were no longer public. They became private property and what Samuel Blodget in 1806 called "rivals for the common weal." (552) General incorporation laws were critical to preventing the States from granting special economic advantages to one group over another, and they democratized all the benefits of having corporations by allowing anyone to set up a corporation if he followed the right procedures. Limited liability for corporations might also be considered part of the democratization of corporate law because it lessened the risks associated with investment, thus making investments a possibility for people with fewer assets. General incorporation laws thus were answers to the "Jacksonian outcry against corporations ... that all should have reasonably equal access to the benefits of incorporation." (553) As Ronald Seavoy explains in The Origins of the American Business Corporation, general incorporation laws were at the core of laissez faire and of Jacksonian thought. (554) The goal was to remove the government from involvement in the formation of corporations by making the benefits of forming a corporation available to all. (555)

    As constitutional lawyer Timothy Sandefur describes this change in incorporation law during the nineteenth century, "[T]he corporation was shorn of its special monopolistic status and became instead what contemporaries called 'self-created societies' whose existence was merely certified or recognized by the state's ministerial act." (556) The privatization, so to speak, of corporations meant that the new corporations were not defined by government decree, but rather by the contractual obligations and rights established by investors or by the directors of the corporation. (557) Indeed, today it is incorrect to refer to corporations as "creatures of the state" because general incorporation statutes typically provide that corporations exist automatically once the necessary filings have been made. (558) The government need...

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