Corporations; a study of the origin and development of great business combinations and of their relation to the authority of the state

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^^^Mll

BOUGHT WITH THE INCOME FROM THE

SAGE ENDOWMENT FUND

Preface

AS the following pages are about to be given to the public I am reminded of the story told of a professor in one of the German universities. He had announced for the semester a course of lectures on the political institutions of the Middle Ages ; when the end of the semester was reached he had only just finished his introductory remarks. A few years ago I projected a study of the modern "corporation question," and intended to clear the ground for the subject by a short introductory chapter on the history of corporations. I am now congratulating myself that the introduction has consumed no more than three years and has demanded no more than thirteen chapters. The present volumes are intended to serve as an introduction to a volume on the subject of modern corporations, especially those in the United States, to be written during the next five or ten years. Chapter XIV. is not intended to be exhaustive, but to show briefly the connection between the old and modern corporations.

In the early history of the United States and Canada many corporations are found that would have to be classified with the corporations described in the present volume ; but few references have, however, been made to these, because I have conceived it more convenient to consider them in connection with modern corporations. To have made place for their consideration in connection with the classes of English corporations to which they belonged might have distracted the attention of the iv Preface

student and have interfered with the effectiveness of the main narrative.

It need hardly be suggested that the present volumes are to be considered not as a work of historical research, but as an interpretation of existing and accessible historical material. When particular classes of corporations have been adequately considered by scholars, I have been glad to accept the results of their labors, while I have frequently taken the liberty to disagree with these scholars in their interpretation of the facts. My indebtedness to others I have aimed to acknowledge fully in footnotes and references. It is unfortunate that so few classes of corporations have been critically studied by scholars. With the exception of certain kinds of gilds and of the mediaeval universities, they have been greatly neglected. Why have authoritative histories never been written of the English municipalities, the monastic associations, of the Merchants of the Staple, the Merchant Adventurers, the Russia Company, the Turkey Company, the Eastland Company, the East India Company, the South Sea Company, the Hudson's Bay Company and the American Colonial Companies? An abundance of material is in existence, but only a small part of it is accessible to those who must confine their work to American libraries. As it has been my task to correlate and systematize the existing body of facts, taken for the most part from secondary sources, rather than to discover new facts, I have not often yielded to the temptation to indulge in research and investigation of original material.

A prerequisite to a study of corporations is a sound conception of their nature, itself derived from an extended study of their history. The technical legal conception of them is so clearly unscientific that it must sooner or later be greatly modified or entirely dispensed with. If I should find that I had contributed even in a

Preface v

small degree to the formation of a new and better conception of corporations, I should feel that my labor had at least in that respect borne good fruit.

I indulge the hope that my efforts to make a scientific study of corporations may stimulate others to investigate special classes of corporations or special features of corporate life. The field is almost entirely new, and so broad that it offers very many inducements to investigators.

John P. Davis.

Brooklyn, N. Y., May, 1897.

NOTE

MR. DAVIS'S manuscript on corporations was completed April 8, 1897, and the preface written not later than six weeks after that date. Ill-health contracted during the period that he was engaged in the preparation of this work prevented him from writing the contemplated treatise on modern corporations. Leaving the East in 1897 in search of a climate where he might regain his health, he took up his residence at Nampa, Idaho, which place he claimed as his home until his death in December, 1903, at Asheville, N. C.

It must be regarded as a distinct loss to the literature of political science that a writer so well equipped to deal with the modern -corporation problem and so keenly alive to the significance of the present-day tendency toward the corporate form of organization did not live to complete the work which he had planned.

The painstaking work of reading the proofs of these volumes has been done by the author's legal representative.

J. Allen Smith, University of Washington.

December, 1904.

Contents

I. Introduction .

II. The Nature of Corporations

III. Ecclesiastical Corporations

Introduction

THE most important and conspicuous feature of the development of society in Europe and America on its formal or institutional side during the past century ' (and particularly during the second half of it) has been the growth of corporations. The movement has been most noticeable in the domain of industry,'' but has by no means been confined to it ; only less influential has it been in religion, in the promotion of science, the arts and literature, in amusements, and in the satisfaction of the social-fraternal impulses of mankind. So rapidly have the industrial corporations increased in numbers and wealth in the United States that they are counted by the

' ' ' When Alexander Hamilton wrote his celebrated report on the establishment of the First United States Bank in 1790, there existed only three banking corporations in the United States." — Richard T. Ely, " The Growth of Corporations," Harfer^s Magazine, vol. Ixxv., p. 71 (June, 1885).

* ' ' The rapid growth of private corporations is one of the striking features of the present industrial development. More prominent perhaps in the United States than elsewhere, it is nevertheless to be observed in all countries which have felt the spur of recent industrial progress." — -"Statistics of Private Corporations," by Roland P. Falkner, in Publications of American Statistical Association (June, 1890), p. 50.

VOL. I. 1.

thousands ' in the several States and are estimated to own from one fourth" to four fifths " of all the property in the

"'Before 1850, [in Michigan] we had about forty-five mining corporations, seven or more railroad corporations, a few banking corporations, several plank-road corporations, and a few of a miscellaneous character ; all, of course, under special charters [with the exception of religious corporations] .

' ' General laws to the number of one hundred and fifty-six have been passed from time to time since 1850 for incorporating almost every kind of lawful business and association, and the result has been that we now have [in Michigan] about eight thousand corporations which are organized under those general laws, divided as follows: manufacturing and mercantile, twenty-five hundred; mining, thirteen hundred and twenty-eight; railroad, seventy-nine ; street railway, one hundred and thirty-two; transportation, one hundred and twenty-three; state banking, one hundred and fifty-nine ; charitable, two hundred and forty-eight; improvement, seventy-seven; miscellaneous, twenty-eight hundred and eighty-two.

" To this great number of domestic corporations must be added one hundred national banking corporations, and a large and not ascertainable number of foreign corporations, . . . which do business in this state by its express permission." — Address of President (Alfred Russell) at Jackson, Michigan, March, 1894, on " Corporations in Michigan," Publications of Michigan Political Science Association, No. 2, p. 97.

" ' It is within the bounds of moderation to estimate the wealth of corporations as one-fourth of the total value of all property in the United States. The most significant fact, however, is the rapidly increasing proportion of all the resources of the country which belongs to corporations." Richard T. Ely, op. cit., p. 73.

" Not far from one-quarter of the wealth of the United States is held by trading corporations. It is not improbable that half the permanent business investment of the country is owned in this way." — Arthur T. Hadley in Railroad Transportation (1885), pp. 42, 43.

* " The facility with which corporations can now be formed has also increased [the Supreme Court's] business far beyond what it was in the early part of the century. Nearly all enterprises requiring for their successful prosecution large investments of capital are conducted by corporations. They, in fact, embrace every branch of industry and the^wealth that they hold in the United States equals in value four-fifths of the entire property of the country. They carry on business with the citizens of every state as well as with foreign nations, and the litigation arising out of their transactions is enormous, giving rise to every possible question to which the jurisdiction of the federal courts extends." — Address of Justice Field at the Centennial Celebration of the Organization of the Federal Judiciary, at New York, February 4, 1890, 134, U. S. R., 742. .

nation. Hardly a supreme court in the land does not complain that more of its time and attention is devoted to cases involving corporations than to cases of any other kind/ The mass of laws, rules and decisions evolved from the creation of corporations and from the interpretation and enforcement of their rights and duties, both by legislatures and courts, has become so great and so confusing in its details, and at the same time the dependence of society on the activity of corporations has become so close and vital, ° that special governmental bodies have been formed for the purpose of both restraining and protecting them, while the "corporation lawyer" has been clearly differentiated in the legal profession, and the corporation journal among publications. So extensively have the people become organized in corporations for almost every social purpose that, it is feared, the integrity

' The Law and Jurisprudence of England and America (pp. 'il^-'ili), John F. Dillon.

' " There can be no question that corporate organization has been of great advantage to the country — to the poor as well as the rich. By greater economy in production, rendered possible by concentration of capital, the poor have profited in the reduced price of most of the necessaries and comforts of life. . . . The comfort and convenience of all dwellers in this country have been greatly promoted by corporate control of business. Take for instance our facilities for traveling. Again, the regularity and cheapness of communication by mail, telegraph, and telephone have only been made possible by the cooperation of hundreds of corporations all working together in intelligent harmony. Again, what could we do without banks, and without insurance companies ? We owe it to the corporation that we can protect our property against loss by fire and our families from want in the case of the death of their breadwinner ; and to the savings-banks that we can safely keep our surplus earnings, and receive them back again, safe and intact, with reasonable interest. And so we may sum it all up in one word and say that the conditions of modern life would be impossible were it not for the corporations. Whether sleeping or waking, engaged in business or pleasure, eating, drinking, dressing, or traveling, or whatever we may be about, we must thank them to a great extent for the means and opportunity of doing so.'' — William Jay, "The Corporation in Commerce," chapter viii. in One Hundred Years of American Commerce, vol. ii. , pp. 47, 48.

of the individual as the unit of society within the state has been seriously impaired.' The anarchist views with delight the growth of corporations because he considers them the framework for the aggregation and consolidation of wealth that will eventually end in the destruction of all institutions. The socialist, not averse to the submersion of the individual in the social group, is willing to believe that the flourishing of corporations is preparing society for the acceptance of a future socialistic regime. The older "individualists" are apparently maintaining a hopeless struggle against the social tendencies that make it impossible for them to gain a footing in society except through the medium of corporate organizations or in subordination to them. Even the apologists for corporations deplore the elimination from trade and industry of the individual as an efficient unit.^ Notwithstanding

' ' ' Organized wealth and power have not yet grown wise enough to scent danger before it is upon them. The Eastern section of our country is already in danger, and I have an impression that it does not see this. In its concentration of the wealth of the country and in its ostentatious display of its wealth, in the gradual cultivation of caste, in the tendency to hug its vast riches and in finding means to keep its millions at home, let it behold a danger it will do well to consider in the light of both ancient and modern history.

" If it has any real statesmen, they cannot put their genius and resources to better uses than to formulate some policy which will bring the conflicting elements [of the eastern and western United States] together.

" In 1800 we were a few millions of people and we loved liberty. In 1900 we are nearly a hundred millions of people and we love money. Moreover, individually and collectively, we have a great deal of money. Most of this money is invested in what are called corporations. From a handful of individuals we have become a nation of institutions. The individual counts for less and less, organizations for more and more. It is the idiosyncrasy of the age we live in."— Interview of Henry Watterson, in New York Journal, November 29, 1896.

' " How great have been the advantages to our commerce and our country's development from corporate organization no one can say. Have these advantages been to some extent counterbalanced by certain evils? The concentration of wealth in the hands of corporations has had the effect of driving the individual producer out of business. In the early days of our their vital importance to modern society by reason of their great number and increasing resources, and of the universality of their presence in the several branches of social life, corporations have shared so fully in the complexity of the growth of society during the past century that a clear comprehension of their true relations to it has not been attained. Those who have given them critical consideration have usually begun and ended with an indistinct conception of their nature, even if it be conceded that they have made efforts to provide such a conception as the basis of their study or to attain one as the result of it.' Like most other criticism of immature social movements, the criticism of corporations has gone to one or the other of two extremes : it has been largely negative and destructive from a failure to recognize their permanent and enduring elements and to give them due weight, or it has credited to them social elements contributed by other social factors ^ ; the result has been

country's existence many industries were carried on in the towns and villages by skilled workmen who were their own masters, and who were in business for themselves. Tailors, shoemakers, weavers, blacksmiths, tinsmiths, saddlers, and many other manufacturers on a small scale carried on their business for their own account, and were a useful, self-reliant, and manly element in our population. These industries are now to a great extent monopolized by large corporations, and the men who were formerly independent in their business are now represented by salaried workmen. The gradual extinction of this class of men of moderate means who carried on their business for their own account seems to be a distinct loss to the community." — William Jay, "The Corporation in Commerce," chapter viii. in One Hundred Years of American Commerce, vol. ii., p. 4.8.

" [As one of the evil effects of corporate organization] we shall have, in place of the independent business men of to-day, each gaining his livelihood by his success in a wide range of thought and action, a body of clerklike functionaries, each of whom will do a certain limited kind of work at the command of his superiors." — Charles Francis Adams, "The Place of Corporate Action in Our Civilization," chapter iv. of Shaler's The United States of Am-erica, vol. ii., p. 197.

' Cf. Arthur T. Hadley, Railroad Transportation, p. 43.

' No little confusion is caused by the failure to separate the ' ' corporation question" from questions allied to it; it must be borne in mind that it is unqualified denunciation by one group of critics and unlimited approbation by another. An effort must be made to avoid the two extremes ; to attain a conception of corporations that will include all their essential and permanent attributes and exclude such as are not essential or are merely temporary.

Possibly the failure to appreciate the true relations of corporations to society and social progress, that has caused unscientific criticism of them, is also accountable for the condition of the body of law intended for the interpretation and enforcement of their rights and duties. The principles of the law of corporations, derived chiefly from the seventeenth and eighteenth centuries and formulated by Blackstone in 1758, are in the main the principles still applied, subject to modification by legislatures and courts. Both the modifying agencies have proceeded somewhat blindly but not entirely without wisdom. Legislative bodies, it hardly need be suggested, do not always act consistently ; they do not always have policies founded on broad principles; they see a social need and see it distinctly, but they do not always supply it with due regard to the ultimate consequences of the remedy. In dealing with questions relating to corporations they have, in general, had in mind rather the needs of society than the nature of the corporation, the means through which the needs were supplied. The result is a heterogeneous mass of laws from which it would be difficult to say what the legislative conception of a cor-

primarily a question of social form and only secondarily one of social function. Mankind or human energy is the content, the corporation is one of the forms through or within which the human energy becomes human activity. E. g., the corporation question is often carelessly confused with that of the consolidated control of capital or "trusts,'' — but the latter comes within the scope of the former only through an enquiry to what extent the corporation by virtue of providing a fit or usual form for the activity of trusts, affects such activity by restricting, expanding or otherwise influencing it.

poration is. The courts, on the other hand, seek a fundamental principle on which to base every decision ; they aim at system and consistency. The fault of judicial interpretation of rights and obligations is inflexibility. The anxiety to conform to established principles carries the courts not infrequently beyond the point at which the principles cease to be wholesome. Principles are gradually abandoned, however, and new ones substituted for them, though, unfortunately for system and consistency, interdependent principles relating to the same subject-matter are not changed at the same time. As far as corporation law is concerned, the courts have succeeded in fairly administering justice, but only at the expense of injecting into the system represented by Coke and Blackstone a body of new principles, one at a time, until it has become necessary for the text writers to divide the law of corporations into separate bodies according to the varieties of corporations. It has been virtually conceded by the courts that the older principles of the law of corporations have become inadequate for the interpretation and regulation of their relations to present society, but they have been unable to do more than amend them or partially substitute others for them. The difficulty seems to be fundamental. The conception of a corporation badly needed by critical students of social institutions, is only a little worse needed by the legislatures and courts. Such a conception can hardly be attained otherwise than by a careful historical and statistical study of the past development and present condition of corporations in their relations to the society of which they have heretofore formed and now form a part. The new conception attained, the legislator and judge have a centre about which to group a system of laws and rules for their creation, control and protection.

The condition of the literary material for a study of corporations is unfortunately such as to impose on the student and investigator an unusual degree of selfreliance. The historical and statistical ' material is scanty and unreliable, while the work of interpretation alreadydone is of little service. Less enlightenment on the nature and history of corporations than one would be inclined to expect is given by jurists, either in legal treatises, opinions or judicial decisions, though they alone, with the exception of recent sociologists, have essayed to present a systematic treatment of the subject.^ When new social forces make their appearance and begin to be expressed in new social relations, the jurist endeavors to explain and control them by the application of legal principles already established in analogous social relations rather than by the application of principles that might be discovered through scientific study in the workings of the new forces." For most practical pur-

' Dr. Roland P. Falkner, of the University of Pennsylvania, deserves much credit for his efforts to collect and tabulate some of the statistics of modern private corporations. Some of the results of his work are found in a very instructive paper on the ' ' Statistics of Private Corporations "in the Publications of the American Statistical Association, June, 1890, p. 50.

^ " American lawyers have written more voluminously, not to say more diffusely, on corporation law than those of any other country; but they have usually elected to treat the subject from a strictly legal standpoint. Their works have been planned merely to serve busy attorneys." — A. G. Warner, Annals of American Academy of Political and Social Science, vol. ii., p. 551 (January, 1892). Review of W. W. Cook's The Corporation Problem.

^ When sleeping-cars first came into extensive use, the first efforts of the courts were to construe the liabilities of the companies operating them as those of either common carriers or inn-keepers, but it was found later that the legal rules relating to those two classes of persons were inapplicable to sleeping-car companies; now "according to the weight of authority, the liability of the sleeping-car company is neither that of a common carrier nor of an inn-keeper." — American and English Encyclopaedia of Law, sub verbo " Sleeping-cars."

It is believed that the chief difficulty in legislative and judicial control of corporations at present is due to the effort to apply to them legal principles elaborated in a system of law founded on individual social units instead of modifying the existing system so as to make its principles applicable to agposes, the lawyer must assume that society is not subject to historical development, though such an attitude, while it conduces to the stability and conservation of social institutions, requires for a study of institutions the necessity of exercising extreme caution in the use of technical legal material. Yet, without pretending to discard the established legal principles, legislatures and courts, as already suggested, have made so many modifications of the law of corporations that the principles formulated by Coke and Blackstone have become quite inadequate as a foundation for the modern law of corporations ' ; consequently the later legal writers that have undertaken to expound the law of private corporations have struck at the very root of the older law of corporations by discarding, in whole or in part, the cardinal theory of "artificial personality,"^ though for very good reasons they have not been followed by the expounders of the law of public corporations.'

gregate social units; the tlieory of "artificial personality," though harmless when applied with due limitations, has been the source of much confusion in legislation and legal decisions on questions relating to corporations.

I " The demand for the use of corporate powers in combining the capital and energy required to conduct . . . large operations, is so imperative, that by the tendency of the courts to meet the requirements of . . . public necessities, the law of corporations has been so modified, liberalized, and enlarged, as to constitute a branch of jurisprudence, with a code of its own, due mainly to very recent times. To attempt, therefore, to define a corporation or limit its powers by the rules which prevailed when they were rarely created for any other than municipal purposes, and generally by royal charter, is impossible in this country and at this time." — Justice Miller, in Liverpool & London Life and Fire Insurance Company vs. Commonwealth of Massachusetts, 10 Wallace, 566.

' Morawetz on Private Corporations, § i (2d edition), Taylor on Private Corporations, § 22. W. W. Cook, in his work on Stock and Stockholders (§1), seems to adhere to the conception with modifications, as does also J. L. Lowell in his work on Transfers of Stock. See article on '" The Legal Idea of a Corporation," in American Law Review, vol. xix., pp. 114-116.

' " Up to the present century, the fiction [of an artificial person] was adequate for the regulation of corporate affairs." — Taylor, Law of Private Corporations, § 22. See preceding note.

lo Corporations

Writers of political history, it must be admitted, cast little light on the subject of corporations. Constitutional history, as written, may be relied on for a knowledge of the form or framework of the state, and popular history for a knowledge of national activity. Corporations, however, have constituted, for the most part, the framework of society subordinate to that of the state and have been largely overlooked or ignored by both classes of historians.' The results achieved by recent sociologists are more serviceable. In recognizing that all men and all combinations of men have their peculiar and appropriate social functions exercised in relations and sets of relations subject to constant change and development, they have been led to a comprehensive view of the formal or institutional side of society and have avoided the narrowness of both jurists and historians. But in their efforts to classify and systematize social forms and functions, it is feared that they have not infrequently chosen objectionable bases of classification and have somewhat arbitrarily exaggerated or disparaged particular attributes of institutions to make them fit into their system — tendencies for which more extended historical and statistical study of particular institutions must act as a corrective.

A study of corporations has primarily for its subject-matter a particular class of subordinate social forms.'' Like all other social forms, corporations are subject to modification : (i) internally, by the influence of their con-

lEven Stubbs, in his monumental Constitutional History of England, views the Enghsh municipalities at the end of the Middle Ages almost solely as a part of the central administration machinery of the state. Mrs. J. R. Green, in Town Life in the Fifteenth Century, has given an adequate treatment of one phase of corporate life. Gross's Gild Merchant is the only complete study of any one class of corporations.

^ This particular characteristic has been appreciated by Franklin H. Giddings in his Principles of Sociology, in which he has very appropriately assigned a discussion of corporations to the chapter on " The Social Constitution " (Book II., chapter iv.).

tent, the social activity exercised within them, and (2) externally, by the influence of other social forms and other social activity, (i) Social forms and social functions are intimately interdependent. Lack of adaptation of either to the other must result in modifications in one or the other or in both, (a) If the form, whether originally or as the result of subsequent more or less arbitrary modification, is unsuitable for a particular function, it must be altered to conform to the character of the function, or perish, — unless it be adapted or adaptable to some other social function to which it may be readily transferred, {b) If a particular function may not be exercised, within a form provided for it, it must be either wholly unexercised, only partly exercised or fitted into another form. (2) Social forms have also a close relation to their environment, made even more intimate by the concurrent close relation of their functions to the same environment, {a) One social form may be superseded by another, may absorb it or may anticipate either result by internal modification ; even when entirely efficient for its function, a form may be swept away by a public opinion that finds in it a want of harmony with some accepted type of social forms. (3) A form in being expanded to include new social functions, either in addition to or in place of those already included in it, is likely to undergo modification in the process, {c) A form may be indirectly influenced through changes in its own function caused by changes in other forms and functions with which its own comes in contact. Corporations must be studied, then, not merely in their own internal structure, — though their peculiarity of form is their distinguishing feature, — but in the relations of their structures to the functions exercised within them and in their relations to their formal and functional environment. Corporate forms and functions and the environment by which they are influenced are all products of time. They are all meaningless except as they register past experience or predict future social growth, stagnation or decay. They must therefore be subjected to historical treatment.