NEEDS TO BE REWRITTEN AND MIGHT BE SUPERFLUOUS OR INCORPORATED INTO ONE OR SEVERAL MODULES
Nation/State-Building and ED-Relevant Institutionalization through 1837
During that time period when Nation/State-building was the predominant priority of the unit of government, one should construe that economic development-relevant institutionalization became the first order of that state’s ED-relevant policy system. When reasonably institutionalized, those entities could, and should, be “spun off” into their own separate (if critically relevant) policy area, apart from economic development. In the Nation/State-building phase, however, they belong in our economic development history as legitimate forms of early American S&L ED.
The battles fought in Washington D.C. were replicated in their fashion in the state capitals of the Early Republic. This is because both the Nation, and the States were engaged, necessarily and simultaneously, in America’s initial nation and state-building–i.e. setting up the rules of the system, and the institutions that produced its policies, and managed its economy. Nation/State-building was institution-building.
Lacking consensus on these rules and institutional structures and purposes, States forged their own distinctive paths, and created their own versions of institutions (or not), and tasked them to serve their defined needs and objectives. Obviously regional variation ensued; each state, as it entered the Union during the 19th Century engaged in its own distinctive state-building process. That will be very apparent in the various Themes and Modules of this history.
Lacking divine-right Kings to compel unity, this resulted in today’s fifty-state economic development system. Hardened, some might suggest fermented, over as much as two-hundred and fifty years, these fifty states constitute the basic structure of contemporary American-style federal economic development.
In any case, ED-institutionalization became a primary strategy in the States during the first several decades (especially) of the Early Republic. Some states resolved it relatively quickly, others, for example Alabama, arguably never resolved it until the Civil War settled the matter. DTIS, internal improvements” strategy that each state followed, while exhibiting some shared features, flowed from the implications of the decisions made in this state-building period. The fundamental institution that was a precondition for ED, MED in particular, was a banking system. As we have seen in the section above, from the start there was no consensus on how (if) that institution should be structured.
The confusion of banking systems that resulted were economic time bombs whose weaknesses came home to roost in the Panic of 1837. Caught in the cross-hairs was American MED’s major EDO: the late-medieval state-chartered corporation. The banking system and the state-chartered corporation were so closely tied in politics and polarized political cultures that for all practical purposes something had to go. It was the state-chartered corporation.
To what extent the state-chartered corporation was the evil it was made out to be by its opponents, whether it caused the Panic or whether multiple other causes such as legislative incapacity/corruption or DTIS infrastructure debt levels has been a matter of some debate–and is still ongoing. The Panic objectively certainly had many causes, but in hindsight each state’s financial implosion, varied by the state–and was often directly related to the decisions made by its state legislature. DTIS, conducted in a land rush-settlement boom atmosphere which generated more than its fair share of legislative corruption certainly was an important factor. Suffice this to say, Nation/State-building and ED-relevant institutionalization in the period after 1837 left a lasting, and major heritage (scars, some would say) on American S&L ED. These wounds, now well-healed scars, are lost in the mists of a boring and seemingly irrelevant period of our history. Their legacy, and the still underlying tensions that caused this crisis, however, are still alive, well, and very relevant to our Contemporary Era.
State-Chartered Corporations: Unstable DTIS State-Building EDO
If Washington and Hamilton had uncorked a surge in state-chartered banks, they also legitimized the state-chartered corporation as the principal structure of business (and ED) during the Early Republic. Corporate charters were approved at the discretion of the state legislature for those purposes deemed essential or appropriate to the public interest–by the legislature. The dominant structure of business at that time was the family partnership, a structure wholly unsuited to both larger market areas, and to organizational complexities induced by complex operations in sectors such as manufacturing, trade, and transportation/communication. Our modern private corporation did not appear until the 1850s and for good or ill, the state-chartered corporation emerged as the “can-do” organizational structure of the era.
Up to 1789 when the Federal government was first created, states had dominated the state-charter process. Bruchey estimated that state governments had created “more than three-hundred business [state-chartered] corporations between the Revolution and 1801 [with] fully two-thirds of them were established to provide inland navigation, turnpikes and toll bridges … thirty-two were empowered to underwrite insurance policies … 32 for the supply of water [to urban areas] and after 1795, four docks … and a dozen mutual companies to protect against fire losses, and, as we discovered above, 34 banks were approved, 27 between 1790 and 1801 [4] Stuart Bruchey,the Roots of American Economic Growth, 1607-1861, p. 129. Finance and DTIS dominated Early Republic state-chartered corporations–in the North especially.
Supported by many analyses of individual states, post-1800 Early Republic state legislatures continued DTIS-relevant two-thirds proportion of state chartered corporations through 1861. Pennsylvania chartered 2,333 business-related state-chartered corporation between 1790 and 1860 with 64% in transportation, 11% insurance, 7% banking, and 6% for utility-like urban services. A new entry, however, appeared in the form of manufacturing state-chartered corporations; over 7% of the state’s total were manufacturing. Over these years Pennsylvania invested over $6 million of its funds in the various state-chartered non-DTIS corporations, but over $100 million on corporations involved with its Main Line canal and railroad system. Pennsylvania was not alone. Massachusetts invest $8 million of its monies on railroads, Missouri $23 million in various internal improvements [5] Stuart Bruchey,the Roots of American Economic Growth, 1607-1861, pp. 129-32.
Most manufacturers were chartered in the years of, and surrounding, the War of 1812 when British FDI was not available to finance manufacturing. Bruchey confirms that between 1808 and 1815, New York issued 165 charters to joint-stock companies engaged in manufacturing–one more than all other charters issued in that period [6] Stuart Bruchey,the Roots of American Economic Growth, 1607-1861, pp. 129-30. Between 1812 and 1813, Vermont provided a tax exemption to manufacturing firms, and New York (post 1817) granted freedom from jury duty and militia service to textile mill employees.
In the 1830’s, especially after the Panic several states specifically created state-chartered banks specifically tasked to lend to fledgling railroad projects–banks whose boards were chiefly composed of the railroads themselves. In retrospect, it was empowering railroads through state-chartered corporations was the bridge too far. When the dam burst during the Panic of 1837, in the North mostly railroads were bankrupted, not canals. We shall deal with that subject in a later module, but it reveals that the Panic was a major break-point in the use of state-chartered corporations.
A Frail Structure Indeed: At root, the state-chartered corporation was a business structure empowered by the state legislature with certain public powers (tax abatement, bond issuance, eminent domain, right of way) or benefits (limited liability, stock issuance) which in the Early Republic most generally were outright land grants to the corporation. In return public purposes were injected into the business model, sometimes including membership on its board by public officials, some regulation where appropriate (limitations on tolls for example, or how much debt the corporation could assume), and measures, audits, and reports to ensure public accountability. DTIS-relevant corporations often used public funds to purchase the corporation stock–making the State an owner of the corporation–and state bond issuance proceeds could directly be injected into the corporation. The state (and large municipal governments) could “guarantee” the debt issued by the corporation.
Usually, the opening preambles of these charters clearly made evident the structure was public-private in its purposes, and in its nature. These were business organizations entrusted to serve public purposes and in return were endowed with public powers. It was not at all clear, however, whether the state was entering into the world of business, or business was intruding into the public sphere.
DTIS projects enjoyed a measure of clarity in this regard as the public interest in a project could be discerned, but the larger issue remained–the sphere that would most directly profit financially from the project was usually the private sphere. Since public and private funds were mingled, and review of financial reports was never the legislature’s strength, it was seemingly inevitable that state-chartered corporation project management would invite considerable scrutiny and “opportunity”. If the project ran into tough times, a crisis could easily result.
Politicization: This blurred boundary between the public and private spheres allowed great flexibility of purpose, but place the legislature in the position of defining the public interest and selecting from the various applications for charters which merited their sanction and approval. Chartering a state-chartered corporation was political in nature, and a policy decision of the legislature. That political process was fractured during the 1790’s by the movement into partisan, two-party politics.
That the two parties had different conceptions of the public and private spheres, and to which sphere DTIS most properly belonged a potential public-private endeavor or partnership increasing entered into the process of charter approval–with all that entailed. In essence after 1800 it was never clear where politics ended and business began, whether competition or monopoly would exist, for example, or when new sections would be added to the initial charter. All these fragility invited even more politicization. State-chartered corporations were flawed, and invited legitimate concern over who was getting the better of the deal.
It did not take long for politicians to figure out ways to use state-chartered corporations to their partisan advantage. In a message to his Secretary of the Treasury, Albert Gallatin in 1803, President Jefferson expressly supported the latter’s deposit of federal monies in politically-friendly banks: “I am decidedly in favor of making all the banks [Democrat] Republican, by sharing deposits among them in proportion to the dispositions they show. It is material to the safety of Republicanism to detach the mercantile interests from its enemies [Federalists] and incorporate them into the body of its friends” [7] Stuart Bruchey, the Roots of American Economic Growth, 1607-1861, p. 122. Jefferson, as the reader might remember, supposedly hated banks, but his position on geographic expansion, economic development, even internal improvements –as described above–is more complex than characterized in much of today’s textbooks.
Remarkably, the structure seemed to work reasonably well for local roads, bridges, even river improvements, but larger more complicated projects, canals for example, and later steamboats invited substantial politicization and the need for greater public regulation–which the Marshall Supreme Court would provide first in defining which DTIS projects fell under federal jurisdiction through interstate commerce (steamboats and multi-state river projects), and by its Dartmouth College decision (1819) which held that a contract between the state and a state-chartered corporation (Dartmouth College) was valid and enforceable.
The State-Chartered Corporation
We are retelling the “birth” of modern American capitalism during the Early Republic. American MED, operating at the nexus of capitalism,politics, society and government, cannot avoid playing a major role in facilitating and adapting to whatever path or transformation capitalism stumbled into. As legislatures and business people experimented to find structures that worked amid ceaseless change, dead ends,cul du sacs, and unsettling success, MED was dragged along. That meant the state-issued corporation charter as our first major EDO.
The Boston Tea Party off-ended British East India Company Ships
The structural vehicle initially used, arguably the only one legally available at the time, was the private state-issued corporate charter. The modern business “corporation” we know today did not exist until the 1850’s. The “corporation” that did exist in 1790 was of late medieval vintage. It required authorization by the state (or federal) legislature to exist. Accordingly, private corporations, such as the well-known British East India Company or Virginia/Jamestown Company, were rare. The predominant business organization was family partnership. Most private commercial ventures were run by “families”, including the family farm/plantation.
The Early Republic’s first EDOs were experimental adaptations of the medieval corporation. In 1790, there were only twelve, thirteen lending institutions, if you count Hamilton’s later National Bank, American. Corporate charters were approved at the discretion of the state legislature, for purposes alleged to be in the public interest. The opening legislative preamble almost always definitively specified the entity created was a public-private affair, with interests in both profit and the public welfare. The preamble for many such incorporations established that corporate charters were both a “corporation and a body politic”. “Among the privileges [included in these charters] were monopoly rights of way, tax exemption, the right of eminent domain, and the right granted to non banking corporations to hold lotteries in order to raise needed capital…”[i] (Bruchey, 1968, p. 130). Elaborate regulations establishing some measure of accountability were usually included in these charters (boards of directors, liability, permitted sources of financing and financial standards). Charters defined and limited the scope of action permitted the corporation.
Thus the charter created a semi-private, usually tax-exempt (for a specified period of time), corporation, operated and controlled by private investors and management. There were fiscal and accountability requirements, often including public membership on the board of directors. This was particularly true for developmental infrastructure corporations. In some cases (for example the NY State (Erie) Canal Corporation) verged on being a public-private entity.
The developmental transportation-related corporation customarily was empowered to own, construct, manage, lease and operate the infrastructure /transportation mode within a specified geography. Included in most state-chartered corporations were extensive array of eminent domain, tax-free bond issuance (called public subscriptions), right-of-way and adjacent land uses, ports and stations, and tax abatements. Public funds and investor equity flowed awkwardly into budgets and bank accounts.
Present-Day Erie Canal, outside of Rochester
Despite likely reader skepticism, the first decades adventures proved positive and more likely than not fared well. Until the 1840’s the state-chartered corporation/EDO “connected the dots” personified by the success of the New York State Canal Corporation. Specifically, canal-building went remarkably well. It was only when the economy turned south, transportation shifted to railroads, and legislatures became a bit too cocky–verging on negligence and corruption–did things go awry.
In their day, corporate charters were viewed as appropriate instruments of public policy. “From more than a generation, from the Revolution to the Panic of 1837, Americans had accepted state intervention in the economy as a legitimate, indeed essential function of government…. Invoking the public interest as justification, the states … consciously sought to stimulate economic growth through positive government action. They subsidized agriculture and industry, invested directly in private enterprise, constructed vast transportation systems at public expense, lent the public credit to private “entrepreneurs, and granted special legal privileges to [charter] corporations” (Gunn, 1988, p. 1).
Dr. Peter Galie uncovered the earliest corporate charter. He reports New York’s “first foray into government stimulus to create jobs dates back to 1790”. The New York State legislature incorporated the “New York Manufacturing Society” and authorized the state treasurer to use public funds to purchase shares in the corporation—a practice which today is illegal in every state. The Society’s purposes, expressed, were “to establish manufacturies (firms), and furnishing employment for the honest industrious poor”, purposes characterized by the legislature as “patriotic”. (Galie, 2012, pp. 2009-10)
The most common beneficiaries of state-approved corporate charters were “insurance companies, commercial banks, canal, dock and highway companies all concerned with the growth of cities and the expansion of internal trade”(Trachtenberg, 2007, p. 6). It is not unreasonable to assert “these business corporations were no more exclusively profit-seeking associations than were the chartered joint stock companies with which the English had” (Bruchey, 1975).
Little known, Early Republic state-chartered corporations were used to startup manufacturing companies, and city-building private ventures. Such charters provided state/municipal (public) venture capital to startup sectors such as manufacturing, banking and insurance. Bruchey’s Pennsylvania state charter study (Bruchey, 1968, p. 129) reported that 8% of that state’s charters (1790-1860) were issued to manufacturing firms. Between 1808 and 1815, Pennsylvania issued more charters to joint stock companies engaged in manufacturing than to all public utilities combined. This overlaps very nicely with the drift to, and including, the War of 1812 when the principal source of American private capital, British capital, was more costly or not available. States/local jurisdictions “stepped up to the plate” providing the missing capital to grow their manufacturing base.
The Policy Backdrop/Environment
When the American Republic began (1789) industrial capitalism (and urbanization) was a babe in the cradle. Horribly dependent on its mother, Great Britain, incapable to sustaining itself without her nourishment, our emerging MED had to learn from her experiences, while also starting down the long road to adult independent maturity. The love/hate worldview that resulted from these two conflicting realities permeated into our national foreign policy, and into partisan (Federalist versus Democratic) politics. The pivotal role of East Coast trading and finance-laden Big Cities in particular, stood in stark contrast to new cities founded in the “western” interior who were in direct, often violent conflict, with the British and their Indian allies.
That is why prolonged terrible relations, starting with the French Revolution, Napoleonic Wars, leading to the War of 1812 with Great Britain, the 1814-5 New England Hartford Convention, and final American 1815 “victory” necessitated innovation by American policy systems (and EDOs) in substituting our indigenous-devised solutions for British practices, experience, and resources (FDI, for example). War fostered growth of American business, industrial revolution and urbanization only because S&L policy systems firmly embraced ED innovation, creativity and experimentation. In so doing, our cities and states pioneered strategies, tools and programs substantially, certainly functionally, similar to those used in promoting today’s Transition/Contemporary Era technological innovation and economic growth. It may be some surprise ED strategies, tools, and programs that served successfully in the First Industrial Revolution have been reshaped to promote the Third and Fourth.
Henry Clay–He looks like I thought he would
Experimentation played out differently between North and South. Each proceeded along a different economic path—industrial/finance capitalism or agriculture/export. This divergence impacted our ED history. Wonder why Jefferson and Jackson didn’t like banks and nationally-financed infrastructure? Why did Daniel Webster and Henry Clay support it? Because we were a nation, didn’t mean we were destined to view S&L ED uniformly–the national economy was bifurcated or bimodal. This bifurcated national economy existed for seventy-five to almost a hundred years and left behind its legacy-baggage on how we “do” S&L ED today.
The State-Chartered Corporation
We are retelling the “birth” of modern American capitalism during the Early Republic. American MED, operating at the nexus of capitalism,politics, society and government, cannot avoid playing a major role in facilitating and adapting to whatever path or transformation capitalism stumbled into. As legislatures and business people experimented to find structures that worked amid ceaseless change, dead ends,cul du sacs, and unsettling success, MED was dragged along. That meant the state-issued corporation charter as our first major EDO.
The Boston Tea Party off-ended British East India Company Ships
The structural vehicle initially used, arguably the only one legally available at the time, was the private state-issued corporate charter. The modern business “corporation” we know today did not exist until the 1850’s. The “corporation” that did exist in 1790 was of late medieval vintage. It required authorization by the state (or federal) legislature to exist. Accordingly, private corporations, such as the well-known British East India Company or Virginia/Jamestown Company, were rare. The predominant business organization was family partnership. Most private commercial ventures were run by “families”, including the family farm/plantation.
The Early Republic’s first EDOs were experimental adaptations of the medieval corporation. In 1790, there were only twelve, thirteen lending institutions, if you count Hamilton’s later National Bank, American. Corporate charters were approved at the discretion of the state legislature, for purposes alleged to be in the public interest. The opening legislative preamble almost always definitively specified the entity created was a public-private affair, with interests in both profit and the public welfare. The preamble for many such incorporations established that corporate charters were both a “corporation and a body politic”. “Among the privileges [included in these charters] were monopoly rights of way, tax exemption, the right of eminent domain, and the right granted to non banking corporations to hold lotteries in order to raise needed capital…”[i] (Bruchey, 1968, p. 130). Elaborate regulations establishing some measure of accountability were usually included in these charters (boards of directors, liability, permitted sources of financing and financial standards). Charters defined and limited the scope of action permitted the corporation.
Thus the charter created a semi-private, usually tax-exempt (for a specified period of time), corporation, operated and controlled by private investors and management. There were fiscal and accountability requirements, often including public membership on the board of directors.This was particularly true for developmental infrastructure corporations. In some cases (for example the NY State (Erie) Canal Corporation) verged on being a public-private entity.
The developmental transportation-related corporation customarily was empowered to own, construct, manage, lease and operate the infrastructure /transportation mode within a specified geography. Included in most state-chartered corporations were extensive array of eminent domain, tax-free bond issuance (called public subscriptions), right-of-way and adjacent land uses, ports and stations, and tax abatements. Public funds and investor equity flowed awkwardly into budgets and bank accounts.
Present-Day Erie Canal, outside of Rochester
Despite likely reader skepticism, the first decades adventures proved positive and more likely than not fared well. Until the 1840’s the state-chartered corporation/EDO “connected the dots” personified by the success of the New York State Canal Corporation. Specifically, canal-building went remarkably well. It was only when the economy turned south, transportation shifted to railroads, and legislatures became a bit too cocky–verging on negligence and corruption–did things go awry.
In their day, corporate charters were viewed as appropriate instruments of public policy. “From more than a generation, from the Revolution to the Panic of 1837, Americans had accepted state intervention in the economy as a legitimate, indeed essential function of government…. Invoking the public interest as justification, the states … consciously sought to stimulate economic growth through positive government action. They subsidized agriculture and industry, invested directly in private enterprise, constructed vast transportation systems at public expense, lent the public credit to private “entrepreneurs, and granted special legal privileges to [charter] corporations” (Gunn, 1988, p. 1).
Dr. Peter Galie uncovered the earliest corporate charter. He reports New York’s “first foray into government stimulus to create jobs dates back to 1790”. The New York State legislature incorporated the “New York Manufacturing Society” and authorized the state treasurer to use public funds to purchase shares in the corporation—a practice which today is illegal in every state. The Society’s purposes, expressed, were “to establish manufacturies (firms), and furnishing employment for the honest industrious poor”, purposes characterized by the legislature as “patriotic”. (Galie, 2012, pp. 2009-10)
The most common beneficiaries of state-approved corporate charters were “insurance companies, commercial banks, canal, dock and highway companies all concerned with the growth of cities and the expansion of internal trade”(Trachtenberg, 2007, p. 6). It is not unreasonable to assert “these business corporations were no more exclusively profit-seeking associations than were the chartered joint stock companies with which the English had” (Bruchey, 1975).
Little known, Early Republic state-chartered corporations were used to startup manufacturing companies, and city-building private ventures. Such charters provided state/municipal (public) venture capital to startup sectors such as manufacturing, banking and insurance. Bruchey’s Pennsylvania state charter study (Bruchey, 1968, p. 129) reported that 8% of that state’s charters (1790-1860) were issued to manufacturing firms. Between 1808 and 1815, Pennsylvania issued more charters to joint stock companies engaged in manufacturing than to all public utilities combined. This overlaps very nicely with the drift to, and including, the War of 1812 when the principal source of American private capital, British capital, was more costly or not available. States/local jurisdictions “stepped up to the plate” providing the missing capital to grow their manufacturing base.
IMAGE Lowell Canal System for Textile Mill
Pennsylvania was not alone. “the strength of the American desire for economic development, the scarcities of capital funds in the early years following independence, and the sharpness of competition from foreign suppliers [of capital], manufacturing was endowed with a quasi-public and not private character, and given numerous encouragements by the state”. In the bastion of Progressivism, an 1818 Massachusetts corporate charter reads “Be it enacted by the Senate and House of Representatives in General Court assembled that the following named individuals hereby are constituted a corporation and body politic for the purpose of erecting a flour mill”.
Bruchey further reports that between 1808 and 1815 New York state issued more charters (165) to state-chartered manufacturing corporations than to all “public utilities–developmental infrastructure” corporations (164) combined. In 1817, NY offered freedom from jury duty and compulsory militia service to all textile employees. Vermont exempted manufacturing firms from state taxes between 1812 and 1830 (Bruchey, the Roots of American Economic Growth, 1607-1861, pp. 128-130). Eastern states and Big Cities clearly targeted manufacturing during the first decades of the Early Republic–state-chartered corporations were only one tool used by states in their agglomeration development.
Post-1815 reliance on state-chartered corporations deepened. Between 1824 and 1840, [mid] western and southwestern states issued $165,000,000 in bonds to provide banking capital to manufacturing firms. (Bruchey, 1968, pp. 129-30). Not infrequently, states guaranteed private corporation bonds–such indebtedness ultimately secured by taxes, not on the revenues and profitability of the corporation. What’s more, it appears that states played a secondary role, compared to municipalities, in financing start up financing to private corporations. Bruchey again reports that between 1830 and 1890 no fewer than 2200 laws passed by states authorized municipalities to provide local assistance to such entities (Bruchey, 1968, p. 135).
Pennsylvania offers the most detailed summary of how varied were the uses put to state-chartered corporations. Between 1790 and 1801 Pennsylvania chartered 27 commercial banks; between 1795 and 1801 32 corporations for supply of water and 4 for docks, and between 1786 and 1800 12 insurance companies. Amazingly, between 1790 and 1860, Pennsylvania charted 2,333 such corporations of with nearly two-thirds (64%) were transportation-related, 11% insurance, 8% manufacturing, 7% banking, 3% gas, 3% water, and 4% misc (Bruchey, p. 129). State-chartered corporations were no sideline or tangent in our history. They were the backbone of Early Republic city-building, development of manufacturing, financial agglomeration, and were the principal instrument or EDO in developmental-transportation infrastructure. In fact, unintentionally, Chief Justice Marshall in his 1819 Dartmouth College decision held a corporate charter to be contract that the state could not break without cause.