Making Corporations Fit for Public Purpose

We must restore a legal order that encourages corporate activity to promote the common good

by Sohrab Ahmari

The American System of political economy was pioneered by Alexander Hamilton and advanced by the likes of Henry Clay, the early John C. Calhoun, Abraham Lincoln, Teddy Roosevelt, FDR, and Dwight Eisenhower. It emphasizes industrial development, robust public infrastructure, government-backed R&D, and a competent and dignified workforce, all aimed at securing national strength and shared prosperity.

The essays in this series have thoughtfully explored each of these core elements of the system, with an eye toward renewing the underlying principles for our time. Yet at its origins in the early republic, the American System also coincided with a specific legal form ordered to mobilizing economic activity for the common good. I’m speaking of the public-purpose business corporation, which explicitly tied private profiteering to national development.

Today, policymakers of both parties are rethinking the neoliberal dogmas that over the past two generations hollowed out U.S. manufacturing, impoverished the American worker, and empowered a hostile industrial superpower across the Pacific. In doing so, they might give fresh consideration to the proper role of the corporate form in upholding a fairer and more resilient political economy.

As is often the case, the American past bears usefully counterintuitive lessons on this count: above all, that the purely profiteering corporation is by no means historically inevitable or bound to remain with us in perpetuity; and at the same time, that those who would seek to revive something of the spirit of the public-purpose corporation must grapple with the reasons for its demise in the Jacksonian era, the more tightly to tether today’s and tomorrow’s corporations to the well-being of the nation.

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Asked to explain why we have corporations, most Americans nowadays would answer: to turn a profit. Getting a little more technical about it, they might say that corporations exist to allow shareholders to pool capital and maximize returns. Do-gooders, they might add, should launch a nonprofit. All this is accurate enough as a description of the prevailing corporate-law regime and how most of our corporations operate.

Yet this pinched account of corporate purpose is a relatively new turn. As the University of Michigan legal scholar David B. Guenther has written, for much of American history, both before and after the founding, corporations served “overtly public” aims, especially the “development of local transportation, finance, and other much-needed economic infrastructure.” And this wasn’t a matter of mere goodwill on shareholders’ part. Rather, corporations’ public purpose was enshrined in the charters that structured their relationship with the state.

The first such American-based charter was handed down in 1587 to 13 gentlemen-venturers from London to establish a colonial city in Virginia to be named Ralegh (the project failed when the would-be colonists disappeared). As organized life developed in the colonies, the corporate form, dependent on royal or parliamentary charter, was rarely used. Insofar as corporations were formed, it was mostly to advance religious, educational, charitable, and municipal aims; some, like the ill-fated Ralegh corporation, blended trade with municipal purposes.

By contrast, only a handful of business corporations were formed in the entire colonial period, and these were chartered in fulfillment of public infrastructure needs, most notably water supply. The linchpin of the colonial corporation, in other words, was its public purpose. Business corporations were an extremely rare subcategory of the form, and these were compelled to serve the public no less than the more prevalent corporations that created churches, cemeteries, towns, and schools.

This public-purpose requirement remained in place even as corporations proliferated in post-revolutionary America. The Hamiltonian order set about transforming a land of yeomen farmers into a commercial and industrial powerhouse, able to stand free from Europe and most notably a British imperium determined to reduce the newborn country into a resource pool and market for its own manufactures: the fate that would befall colonial India a few decades later.

American economic resistance rested on the triple pillars of import substitution, ample but disciplined credit, and “internal improvements”: tariff, canal, and bank, in short. The business corporation — expressly formed to serve the state and federal commonweal, even as it also profited its shareholders — played a crucial part in all three.

Start with industrial independence and the development of a competent industrial workforce. To bring these about, the Hamiltonian order didn’t rest content with tariffs on manufactured imports. It also granted the privileges of the corporate form to the nation’s burgeoning domestic manufacturing sector at the state level — in return for the factory owners promoting manufacturing self-sufficiency and employment.

This conditioning of corporate privilege on public service continued even as the New England and mid-Atlantic states began granting general charters for manufacturing firms in the early 19th century (more on the rise of the general-charter corporation, anon). Thus, for example, the Pennsylvania Society for the Encouragement of Manufacture was committed by its constitution to the “better employment of the industrious poor”; the Beverly Cotton Manufactory (of Massachusetts) was chartered in recognition of “the importance of employment” to the indigent; the New York Manufacturing Society was formed “for the purpose of establishing useful manufactures . . . and furnishing employment for the honest industrious poor”; and on and on.

The public-purpose corporation was equally essential to the infrastructure needed to engender a national market. Roads, canals, bridges, and (soon enough) railroads were prohibitively costly to a young nation that had just freed itself from under the yoke of a great European power. The public-purpose corporation filled the gap in return for the enrichment of its shareholders.

There was an explicit give-and-take in such cases: between the state and the corporation acting as an adjunct of the state. As a pair of legal commentators of the era pointed out, infrastructure-development corporations “have a concern with some of the expensive duties of the State, the trouble and charge of which are undertaken and defrayed by them in consideration of a certain emolument allowed to their members.” In such cases, the corporate charter bears “the most unquestionable features of a contract, and [is] manifestly a quid pro quo.”

Third and finally, the steady but responsible flow of credit depended upon state-chartered banks. While bank shareholders in the early republic clearly expected to profit by the money market —and profit handsomely they frequently did — the public purpose of the banking corporation wasn’t thereby lost. It was to facilitate the mercantile and industrial economies of the nation and the several states. And to serve the government itself, with banks required to offer “special rights to the state as a shareholder or borrower,” as Guenther notes.

The federally chartered Bank of the United States — especially in its second iteration, the Second Bank of the United States — was perhaps the emblematic public-purpose corporation of the early republic. Congressionally chartered, the BUS acted simultaneously as a depository for federal funds, a quasi-central bank, and a profiteering actor in the money market. For its visionary, Alexander Hamilton, the Bank was not just about binding the asset-rich to the fate of the new republic, but the provision of “sound and flexible credit and currency,” as the historian Robert Remini wrote.

Yet after the crash of 1819, the BUS became an object of special opprobrium among smallholders in the West and South, the urban working classes in the Northeast, and the enterprising petty bourgeoisie everywhere — that is to say, among the Jacksonian coalition. To its Jacksonian critics, not least Old Hickory himself, the Bank was a symbol of the corruption endemic to the Hamiltonian order, a populist suspicion that very much extended to grants of special corporate charters and privileges.

While general charters — measures allowing firms to self-incorporate — predated Andrew Jackson’s election in 1828, it was in the Jacksonian era that they exploded nationwide, eclipsing the notion of public purpose and leading to the purely profiteering business corporation as we know it today. For nearly 200 years, not only free-market ideologues, but also some progressive historians have celebrated this as one of the great democratizing achievements of the Jacksonians. The real story is more complicated.

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To sum up so far: The business corporation formed solely for private shareholder gain was unknown to colonial America, and equally unthinkable to the early republic’s leading statesmen and jurists. “It seems difficult to conceive of a corporation established for merely private purposes,” declared the Supreme Court of North Carolina in 1805. If the corporate shareholders’ aims be “merely private,” said the Virginia Supreme Court four years later, “they have no adequate claim upon the legislature for [corporate] privileges.”

Public purpose, however noble, didn’t always win over a yeoman republic to the cause of corporations whose activities were closely bound up with the state’s. The agricultural majority at this time lived hand to mouth, and market exchange was at most a marginal activity for most. They thus experienced the Hamiltonian order as an imposition, often an oppressive one. It taxed them to finance far-flung infrastructure projects whose immediate benefits redounded mainly to market elites: to New England merchants, mid-Atlantic manufacturers, and the South’s planter-capitalist class — those possessed of the “money power,” in the coinage of the arch-Jacksonian senator Thomas Hart Benton of Missouri.

Giving voice to this discontent, Jackson and his cohort reprised older Jeffersonian strict-constructionist themes that had mostly failed to retard the steady march of the Hamiltonian state. To these themes the Jacksonians added a ferocious democratic sensibility that took issue with anything resembling insider advantage and privilege.

The BUS epitomized these tendencies. Although it was a creature of the U.S. Congress, and although the federal government supplied a fifth of its capital and appointed a fifth of its 25 board members, the BUS appeared — and in some ways was — unanswerable to the people and their elected representatives. It was a “hydra-headed monster,” in Jackson’s evocative phrase, that corrupted politicians and “the morals of our people” and menaced “liberty.”

It didn’t help that the institution’s third and final president, Nicholas Biddle, though an able banker, was almost cartoonishly arrogant. Biddle didn’t scruple to use the BUS’s vast financial resources to aid its political friends, while icing out those viewed as enemies. When Biddle’s branch managers intervened against Jackson Democrats in Kentucky, New Hampshire, and New Orleans in this manner in the late 1820s, they raised the ire of an unforgiving man; and when Biddle dismissed the Jacksonians’ complaints, he all but signed the Bank’s death warrant.

The Bank’s heavy hand on the nation’s economy was felt especially by state bankers and their upstart clients, men who seethed at being shut out of the Eastern business establishment. The special charters of the state banks limited their range of operations inside the individual states in which they were incorporated. By contrast, the BUS’s federal charter granted it national range — an asymmetry skillfully exploited by Biddle to squeeze the former.

Biddle could vacuum the notes of the state banks, either when state notes were used by Americans to pay federal taxes and duties at the BUS, or by buying up state notes in the money market and then demanding specie for them. But the state banks had a much harder time returning the “favor” in the other direction. That’s because Biddle limited redemption at par, or face value, of all BUS notes above $5 either to the branch of issue or the mother branch at Chestnut Street in Philadelphia. He compounded the state banks’ redemption problem by ensuring that “very few [BUS] notes were found circulating in the neighborhood of the Branch at which they were issued,” as Roger Brooke Taney, Jackson’s Treasury secretary in the heat of the Bank War (and later chief justice of the U.S. Supreme Court), observed.

Thus, for example, most of the BUS notes circulating around New York or Baltimore were actually drawn against branches in, say, Fayetteville or Nashville, making it costly and arduous to try to redeem them for specie at par. In this way, the BUS would maximize circulation of its notes, while at the same time depressing the circulation of the state banks’ paper and, moreover, threatening the state banks with ruin, since these institutions almost always floated more notes than they held specie in reserve. Money brokers would soon learn to take advantage of this disparity, by selling remotely issued BUS notes at less than par: a special boon to merchants, who could pay their duties owed to the federal government at a discount.

This was all quite deliberate on Biddle’s part: a strategy for disciplining the flow of credit and, not incidentally, putting competitive pressure on the state banks that they couldn’t countervail. The Jacksonians, then, had a point when they complained of the BUS as an overbearing institution with anti-democratic characteristics, wielding a market power greater than the political power of the government whose agent it was supposed to be.

The problem confronting the Jacksonian legacy is that, as it happens, Biddle was actually pretty good at doing what a quasi-central bank was supposed to do in the Hamiltonian vision. This became fully evident in the wake of Jackson’s triumph in the Bank War, when he smashed the BUS and — having neglected, in typical populist fashion, to put in place an alternative — was forced to improvise by having select state banks act as federal depositories in what became known as the pet-banking “experiment.”

The result: a brief depression, a plague of wildcat banking and consequent inflation, and chronic banking instability that set the United States apart from comparable industrial nations with better-regulated and more centralized systems — a state of affairs that would persist for nearly a century until the establishment of the Federal Reserve. Moreover, as Taney was to learn to his great anguish as the Cabinet official charged with implementing the pet-banking scheme, it turned out that state and local institutions could be just as prone to corruption as the federally chartered giant; indeed, local cronyism could more easily remain hidden.[1]

The Bank War and its aftermath, to be clear, were distinct developments from the gradual demise of the special-charter business corporations. As mentioned earlier, some Northeastern states had already exempted manufacturing corporations from the special charter, beginning with Massachusetts in 1809, well before Jackson took office (though, again, the public-purpose requirement remained firmly implanted; what changed at this earlier stage was that firms no longer needed a special grant from the legislature to incorporate themselves).

Yet it was especially in the 1830s, in Jacksonian America, that more and more state legislatures enacted general-incorporation laws, basically allowing any group of shareholders to incorporate themselves for any legal purpose whatsoever. In addition to political ferment against what looked like special privilege or insider advantage, the rise of the general-charter, no-public-purpose corporation had structural causes. “The industrial revolution eroded the operation of charter-purpose provisions as legal constraints on corporate behavior,” as legal scholars Jill Fisch and Steven D. Solomon have written:

Increased demand for the corporate form to facilitate the aggregation of the substantial amounts of capital necessary for the growing scale of business activity led to growing acceptance of the corporate form for general commercial operations. This led states to shift from special charters to general charters that allowed corporations to define their purpose as engaging in any lawful purpose or business activity.

Yet the Jacksonians’ epic battle against the Second Bank of the United States was without question of a piece with this general tendency: eroding the connection, enforced by charter, between the corporate form and the needs of the commonweal; and in favor of a vision of the corporation as purely a vehicle for shareholder value.

It isn’t hard to see the compelling democratic logic driving this shift. The Bank — and, indeed, the whole Hamiltonian edifice — did privilege insiders and incumbent elites to a degree. It was thus eminently American to demand: Why shouldn’t this local banker or that upstart manufacturer have as much right to compete and potentially achieve incumbent status as the current, well-connected incumbent who enjoys his status on the basis of a some supposed “public purpose” inscribed on a document collecting dust somewhere? If there are truly public purposes, aren’t these better served by, well, the public government? And turning to conditions today, we might ask, isn’t a revival of the notion of public purpose even more nettlesome than it was in the 19th century, given our drastic cultural polarization and the fact that half of the public is bound to view any regulation around purpose as a means for injecting yet more progressive dogma into business life — “ESG” on steroids?

These objections are serious, but not insuperable for those rightly concerned that the purely profiteering corporation has harmed national security and development, especially in recent decades as Wall Street-driven returns maximization has brought about the hollowing out of American manufacturing might and of the real economy more broadly.

For starters, it’s worth restating the fundamental premise of corporation law in the colonial and early-republic periods: namely, that when it comes to corporations, a bright-line public-private distinction makes little sense. Given its size and capacity to pool capital and managerial talent — precisely what commended the corporate form to early lawmakers seeking to promote manufacturing, internal improvements, and a system of credit — the corporation will inevitably serve some public purpose. The only meaningful questions have to do with the nature of that purpose: whether it be rational, ordered to the good of the nation, and at least somewhat accountable to the will of the polity that grants the firm the immense privileges associated with the corporate form.

The threat of mounting insider or incumbent advantage, meanwhile, must be considered alongside several other factors. First, as even some Jacksonians learned to their chagrin in the course of the Bank War, upstarts and challengers are just as likely to seek undue advantage as large incumbents. Constraining this tendency should be a general imperative of good government as such, and it can and should coexist with a willingness to define and enforce corporate public purpose. Any regulatory regime, after all, is prone to capture by insiders, yet American policymakers and judges have long recognized that complex economies like ours demand complex regulation; and that one characteristic of a decent regulatory order is precisely the presence of checks against capture.

Second, incumbent advantage is a brute fact of economic organization in the age of the machine. The enormous industrial concentrations of the second half of the 19th century, it’s worth recalling, emerged under the general-incorporation regime — that is to say, in the absence of the public-purpose and special-charter requirements that defined corporate life in the colonial era and the early republic.

How to manage concentration — whether by raising up the countervailing power of actors on the other side of a given market dominated by oligopolies, or vigilant antitrust enforcement, or some combination of the two — is a separate problem from whether or not the grant of corporate form should be conditional on serving a public purpose. What matters for us is that incumbency, oligopoly, and insider advantage are inherent to industrial life as such, with or without public regulation of corporate purpose. Arguably, defining public purpose is one more useful mechanism for taming concentrated market power, by holding the corporation accountable to democratically defined parameters, however vaguely defined.

It was precisely on democratic regulation of the BUS, by the way, that the Jacksonians came up short. Jackson hadn’t contemplated, much less put into place, any alternatives to the Bank once he resolved to kill it in 1832. Yet as early as 1829, Sen. Felix Grundy of Tennessee had devised an alternative at Old Hickory’s behest. The Grundy plan would have created a national bank with its entire directorship elected by Congress, and thus under tighter democratic control, while its profits would be redistributed to the states for internal improvements. It was an eminently decent vision. Jackson had let it fall by the wayside, too rash to consider what it might mean to restructure the nation’s credit system on the fly.

Then, too, the resurrection of corporate purpose needn’t mean going back to special charters. In the 21st century, defining and enforcing public purpose will necessarily look different than in the age of the Ralegh corporation or the turnpikes and toll bridges of the early republic. For one thing, the requirement of public purpose should be limited to corporate actors in strategic industries, which are likely to be already characterized by great concentration and insurmountable incumbency: defense and aerospace, energy, transport, semiconductors, sensitive industrial components, communications, and the like. Meanwhile, the smalltime entrepreneur launching a corner café couldn’t and shouldn’t be held to a public-purpose requirement, much less compelled to obtain a special charter from the legislature.

Finally, as to polarization and the challenge of defining corporate purpose in a deeply divided United States, here, too, we might borrow a page from the early republic. Corporate purpose in those days was limited to a bare minimum of material needs and developmental aspirations related to infrastructure, transportation, credit flow, and the like. Those bare material needs and developmental aspirations haven’t gone away in our time. The demand, then as now, is nothing more or less than that corporate shareholders redouble to the national purpose on these fronts in exchange for the immense privilege of doing business in the United States of America.

This article is part of the American System series edited by David A. Cowan and supported by the Common Good Economics Grant Program. The contents of this publication are solely the responsibility of the authors.

Sohrab Ahmari is a founder and editor of Compact. His latest book Tyranny, Inc is published by Penguin Random House.

[1] As it happens, it was Taney who relayed to Old Hickory the idea for pet banking as an alternative to a national bank. The notion had originated with a Baltimore crony of Taney’s named Thomas Ellicott. Unbeknownst to Taney at the time, Ellicott was a crooked banker bent on seeing pet banking put in place as a way of rescuing local banks in Baltimore that had been engaged in reckless speculation, and to fund further gambling of the kind via another fraudulent entity. Under Ellicott’s influence, Taney had come to believe that the only danger to pet banking could come from the imperious operations of Biddle’s BUS. If the BUS’s local branch manager in Baltimore refused to do business with Ellicott and his cronies, well, it was yet another instance of the big Bank oppressing Main Street America. Only afterward, when Ellicott turned to blackmail in attempt to force Taney to cough up more taxpayer funds, did the Treasury secretary come to understand that smaller commercial actors are no more immune to corruption and insider games than larger ones. “BUS officials in Baltimore were merely acting prudently in refusing to deal with the Ellicott gang, following systematic procedures long in place for assessing the creditworthiness and reliability of smaller institutions. Had Taney followed similar methods, rather than gauging good and evil by the size of institutions, he could have avoided much anxiety. As Taney later reflected, “five minutes talk with Mr. White” — the Baltimore cashier who served the “enemy” Biddle — “would have put me on my guard, by shewing the impositions [Ellicott] had practised upon me.”