Boston Manufacturing Company is First Private Corporation in United States

Manufacturing activity continued dominated by the use of partnerships until the Boston Manufacturing Company, the first of the large New England textile firms, was incorporated by Francis Cabot Lowell in Waltham, Massachusetts, in 1813. Mr. Lowell envisioned a fully integrated textile factory, building upon the success of the Slater Mills in Rhode Island in 1793 in inventing a machine process for spinning cotton thread.

While the bloody war for independence was finished, the war for economic independence was in full swing. The economic model of the time was based on raw materials from the United States being shipped to England and Europe and finished there. The United States remained dependent, therefore, on England and Europe for finished goods, which were expensive.

Not surprisingly the English were not eager to share their technological advances, which included the development of the power loom. In 1810 Lowell went on a two-year trip around England and Scotland, trading on family ties when he could to secure visits to production facilities and posing as a peasant worker when he could not gain access any other way. Though he was suspected of industrial espionage at that point and stopped and searched in Nova Scotia on his return, no stolen plans were ever discovered. Mr. Lowell had memorized the pertinent details of the looms he wanted to replicate and managed to create an even better loom for his factory.

His factory needed capital however, which he raised using the corporate form, as it had the capacity to attract larger sums than could a partnership. He assembled a board and eleven initial stockholders, built his factory, created finished goods for the domestic market, and along the way revolutionized American business practice. He pioneered the use of water to power his big looms, carefully selected his workforce, paid them in cash and provided safe onsite housing for them. As time went on, the novelty of this non-farm employment for what became known as mill girls wore off. Mr. Lowell’s factory and its shift ending bell also served as catalysts for the first strikes and efforts of labor to organize to secure better conditions.

As production grew, more power and space were needed, and the factory moved to East Chelmsford on the Merrimack River. Renamed Lowell in honor of Francis Cabot Lowell at his premature death at 42 years old in 1817, Lowell became the first planned factory town in the U.S. and boasted dozens of textile factories by the 1840s. Maybe more importantly, by that time the U.S. produced cloth at a lower cost than England could, and England finally lost her dependent colonies. Allegedly even Thomas Jefferson, famously dedicated to the notion of the United States as a bountiful agrarian economy, began through his acquaintance with Lowell and his innovations to see the need for large-scale mechanization to allow the U.S. to compete on the world stage.

In an early demonstration of the use of the corporate form in a private enterprise that separated economic ownership from management control, by 1830 the stockholders had grown from 11 to 76, no individual owned more than 8½ percent of the stock, and the board of directors’ combined holdings amounted to only 22 percent. Twenty years later there were 123 stockholders, while the board held only 11 percent.

Corporations Gain Power Under State Control

Over the course of the 19th century, more and more states allowed incorporation of limited liability corporations with a simple registration procedure. In the late 19th and early 20th centuries, one industry after another found the corporate form attractive, in part because it was the only legal form that allowed the corporation to offer limited liability to investors. This is a very important attraction when large amounts of capital are required for huge undertakings such as railroads and canals.

State legislators tried to maintain control of the corporate chartering process: incorporated businesses were prohibited from taking any action that legislators did not specifically allow. Unless a legislature renewed an expiring charter, the corporation was dissolved and its assets divided among shareholders. Many required a company’s accounting books to be turned over to a legislature upon request. The power of large shareholders was limited by scaled voting, so that large and small investors had equal voting rights. Interlocking directorships were outlawed. Shareholders had the right to remove directors at will, and so on.

The penalty for abuse or misuse of the charter was not a plea bargain and a fine, but dissolution of the corporation by the legislature. In 1819 the U.S. Supreme Court tried to strip states of this sovereign right by overruling a lower court’s decision that allowed New Hampshire to revoke a charter granted to Dartmouth College by King George III. The Court claimed that since the charter contained no revocation clause, it could not be withdrawn. State legislators saw this as an attack by the Court on state sovereignty, and laws were re-written, and state constitutional amendments passed to circumvent the Dartmouth v. Woodward ruling.

Over several decades starting in 1844, nineteen states amended their constitutions to make corporate charters subject to alteration or revocation by their legislatures. In 1855 it seemed that the Supreme Court had adjusted its position when in Dodge v. Woolsey it reaffirmed states’ powers over “artificial bodies.”

Government spending during the Civil War brought some corporations significant wealth. Political power began flowing to absentee owners, rather than locally rooted enterprises. Legislators were persuaded to extend durations of charters, and slowly their control diminished as corporate power grew. Importantly, the 1886 Supreme Court case of Santa Clara County v. Southern Pacific Railroad set the precedent for seeing a corporation as a “natural person.”

Economic Opportunity Expands; Farmers and Artisans Suffer Disruption

The growing impact of the industrial age, as demonstrated by the Boston Manufacturing Company discussed above, provided both expanding economic opportunity and began the conversion of a nation of farmers and artisans to wage earners no longer self-employed and self-reliant. Dependence on the larger employer grew, along with the concomitant fear of unemployment.

From the era of reconstruction to the end of the 19th century, the United States underwent an economic transformation marked by the maturing of the industrial economy, the rapid expansion of big business, the development of large-scale agriculture, and the rise of national labor unions and industrial conflict.

An unprecedented surge in immigration and urbanization after the Civil War contributed significantly to economic growth. American society was in transition as waves of immigrants arriving from Europe, Asia, Mexico, and Central America were creating a new American mosaic. And the dominance of the Anglo-Saxon Protestants who founded the nation, once so important to the development of political and economic organization, began to wane.

Corporate Control is Concentrated

Technological innovation in the late 19th century also fueled this surging economic growth. However, the accompanying rise of the American corporation and the advent of big business resulted in the concentration of the nation’s productive capacities in fewer and fewer hands. Mechanization brought farming into the realm of big business as well, making the United States the world’s premier food producer—a position it has never surrendered.

Agricultural modernization disrupted family farms, for example, provoking the country’s farmers to organize and protest as never before. Social and economic tensions created by industrial development fueled the rise of national labor unions and ugly clashes between capital and labor.

Business and industry were undergoing enormous changes during the 1890s. The first class of multimillionaires had made their fortunes in the Civil War, and during subsequent decades they began to consolidate their holdings, dominating a number of industries with national and international reach. One historian estimates that 1,800 firms disappeared during that period, resulting in the formation of ninety-three trusts.

Public antagonism toward “trusts” and “monopolies” boiled over. Critics of “The Trusts” often targeted silver and gold mines in the West and other large companies whose employees faced hazardous conditions and low wages. Others attacked “The Trusts” and “Wall Street” in the same breath, identifying J.P. Morgan and other financiers as the agents of industrial consolidation. In rural areas, the most dangerous monopolies appeared to be the railroads, which controlled shipping rates along their lines.

Farmers also denounced grain elevators and speculators: the rise of agricultural futures markets, accompanying mechanization of harvesting and processing, caused many farmers to feel increasingly helpless in the face of large institutions beyond their control. In short, denunciation of “The Trusts” symbolized broad fears about the size and power of big business in America.

The Government Fights Back, Kind Of

But this secrecy was to no avail. The success of Standard Oil was too obvious. In 1890, the U.S. Congress passed the Sherman Antitrust Act, the first federal legislation prohibiting trusts and combinations that restrained trade. Two years later, the Ohio Supreme Court dissolved the Standard Oil Trust; however, the businesses within the trust soon became part of Standard Oil of New Jersey, which functioned as a holding company. In 1911, after years of litigation, the U.S. Supreme Court ruled Standard Oil of New Jersey was in violation of anti-trust laws and forced it to dismantle. It was broken up into thirty individual companies.

Rockefeller’s enormous success made him a target of muckraking journalists, reform politicians and others who viewed him as a symbol of corporate greed and criticized the methods with which he’d built his empire. As The New York Times reported in 1937: “He was accused of crushing out competition, getting rich on rebates from railroads, bribing men to spy on competing companies, of making secret agreements, of coercing rivals to join the Standard Oil Company under threat of being forced out of business, building up enormous fortunes on the ruins of other men, and so on.”

Rockefeller retired from day-to-day business operations of Standard Oil in the mid-1890s, even as the contest between Main Street have-nots and Wall Street haves reached new intensity with the presidential election of 1896, in which William Jennings Bryan galvanized the public with his promises to bust the trusts. Rockefeller joined forces with Andrew Carnegie, his contemporary who made a fortune in the steel industry, and J.P. Morgan to help finance the ultimately successful campaign of then Ohio Governor William McKinley.

Following Carnegie’s model in which he became a philanthropist and gave away the bulk of his money, Rockefeller donated more than half a billion dollars to various educational, religious and scientific causes. Among his activities, he funded the establishment of the University of Chicago and the Rockefeller Institute for Medical Research, now Rockefeller University. Laura Rockefeller became the namesake of Spelman College, the historically black women’s college in Atlanta, Georgia. In 1909, the Rockefeller Sanitary Commission was founded. Less than 20 years later, its primary goal was achieved: the successful eradication of hookworm disease across the southern United States. In 1920, after decades of adventure, and with little to lose, Standard Oil of New Jersey, a remnant of Rockefeller’s empire finally listed on a major stock market, the New York Stock Exchange.

Government Power Takes on Commercial Power: Teddy v J.P.

Roosevelt nonetheless sensed that he had a sympathetic Court by 1902, and rapidly took action, choosing as his target the most powerful industrialist in the country. J.P. Morgan controlled, among many other ventures, Northern Securities, a railroad conglomerate that dominated railroad shipping across the northern United States.

Legend has it that Morgan was enjoying a peaceful dinner at his New York home on February 19, 1902, when his telephone rang. He was furious to learn that Roosevelt’s Attorney General was bringing suit against the Northern Securities Company. Stunned, he muttered to his equally shocked dinner guests about how rude it was to file such a suit without warning.

Four days later, Morgan was at the White House with the president. Morgan bellowed that he was being treated like a common criminal. The president informed Morgan that no compromise could be reached, and the matter would be settled by the courts. Morgan inquired if his other interests were at risk, too. Roosevelt told him only the ones that had done anything wrong would be prosecuted.

Roosevelt sought to apply a moral standard of right versus wrong and good versus bad to evaluating the trusts. If a trust controlled an entire industry but provided good service at reasonable rates, it was a “good” trust to be left alone. Trusts that exploited their monopoly power, jacking up rates and exploiting consumers came under attack. The Supreme Court, in a narrow 5 to 4 decision, agreed and dissolved the Northern Securities Company. Roosevelt said confidently that no man, no matter how powerful, was above the law. As he landed blows on other “bad” trusts, his popularity grew and grew.