by Adam Winkler
Marshall’s opinion flirted with corporate personhood, and it has occasionally been misunderstood to support the idea that corporations are people in the eyes of the law. Corporations, he wrote, were a means “by which a perpetual succession of many persons are considered as the same, and may act as a single individual.” A corporation was a legal person. At the same time, Marshall explained, the corporation “possesses only those properties which the charter of its creation confers upon it either expressly or as incidental to its very existence.” As legal persons, corporations had rights—but only those granted by charter or inherent in that type of corporation.
Yet Marshall then abruptly reversed course and, as in the Bank of the United States case, pierced the corporate veil. He embraced Webster’s argument that this was a case about the property rights of the corporation’s members. The “corporation is the assignee of [the donors’] rights” and “stands in their place.” The trustees were responsible for carrying out the corporation’s mission and, according to Marshall, the charter gave those trustees a property right to manage the corporation’s affairs. The rights of the corporation were defined by the rights of the indivudal members—here, the trustees. So when Marshall echoed his line from Bank of the United States and described the corporation in Dartmouth College as “an artificial being, invisible, intangible, and existing only in contemplation of law,” he was offering a justification for once again rejecting corporate personhood. The artificiality and invisibility of the corporation made it appropriate to look right through the corporation to focus instead on the members.24
The impact of the Dartmouth College case was felt well beyond New Hampshire. The decision established the principle that corporations were creatures of private initiative formed in the marketplace over which states had only limited regulatory authority. They were accountable to their members but not necessarily to the larger public. Although Parliament had the power to alter corporate charters, the American states did not. And while an educational corporation may have been the instigator, the diminished regulatory authority of states over corporations had the greatest impact on business. Because the ruling applied to all types of corporations, Dartmouth College made business investment more secure by limiting the government’s power to interfere with corporate property. The decade following the decision saw astonishing growth in the number of corporations, which were quickly becoming the preferred form of business enterprise in the American economy. Equally significant, the decision became, according to historian R. Kent Newmyer, “a potent legal and ideological weapon for corporations who sought to defeat regulation and establish the ideological primacy of laissez-faire capitalism.”25
Dartmouth College did not mean that corporations were completely immune from all regulation, of course. In his concurring opinion in the case, Justice Story observed that the logic of Marshall’s ruling might still allow states to require future charters to include a “reservation clause,” reserving the state’s authority to alter or amend charters. Nevertheless, the contract clause became “the primary constitutional protection for property rights during the first half of the nineteenth century.” Courts used it to strike down bankruptcy laws forgiving debts, laws repealing tax exemptions, and laws reorganizing bond payments. The burden on lawmakers was nonetheless such that the normally levelheaded jurist Thomas Cooley bemoaned more than a half-century after Dartmouth College the consequences of Marshall’s decision: “The most enormous and threatening powers in our country have been created; some of the great and wealthy corporations actually having greater influence in the country and upon the legislation of the country than the states to which they owed their corporate existence.”26
While Dartmouth’s original trustees celebrated the Supreme Court’s landmark ruling, the school was nevertheless on the verge of bankruptcy. Webster’s fees were enormous, and the school’s revenue had fallen precipitously during the course of the legal battle. In time, of course, Dartmouth would prosper to become a world-class institution of higher education, with Webster receiving his fair share of credit. In 1901, the school installed a bronze plaque on a building named in Webster’s honor which read, “Founded by Eleazar Wheelock, Refounded by Daniel Webster.”27
* * *
IN 1839, TWENTY YEARS after the Dartmouth College case and just a few weeks after his 57th birthday, the Corporation’s Lawyer was once again standing before the justices of the Supreme Court arguing for expansive constitutional protections for corporations—though this time for business corporations. Much had changed in those two decades. Webster was now a US senator, a former presidential candidate, and one of the nation’s leading advocates for a strong national government in the face of growing demands for states’ rights. The once strapping young man had been transformed by age and perhaps even more so by his two populist rivals, President Andrew Jackson and Chief Justice Roger Taney. Webster’s penetrating black eyes had become severe and unwelcoming, flashing suspicion and anger rather than charm and authority.
The corporations seeking constitutional protections in Webster’s later case, Bank of Augusta v. Earle, were a railroad and two banks, including one with a familiar name. Like the corporation involved in the first corporate rights case, the Second Bank of the United States was also a political and financial powerhouse, at least in its youth. It used the financial leverage gained from holding the federal government’s deposits to control the nation’s credit and money supply. And like the first Bank, the Second Bank would become the victim of partisan disputes. By 1839, when Webster appeared on the Second Bank’s behalf in the Supreme Court, the once mighty corporation was but a shell of its former self—like Webster, a victim of Jackson and Taney.28
A CHECK FROM THE SECOND BANK OF THE UNITED STATES, SIGNED BY DANIEL WEBSTER AND DATED JULY 24, 1824.
With Webster as its attorney, the Second Bank had once enjoyed great success in the Supreme Court. Back in 1819, the same year he rescued Dartmouth College, Webster also came to the defense of the Second Bank in the famed case of McCulloch v. Maryland. As mentioned earlier, the facts were similar to those of Bank of the United States v. Deveaux. After the Second Bank was founded, Maryland opponents of the new corporation imposed a tax on it. While the Supreme Court in the first Bank case only addressed whether corporations have a constitutional right to sue in federal court, the court in McCulloch went further and clarified that federally chartered corporations were indeed protected against state taxes. It was another Hamiltonian victory for business, and Marshall’s opinion relied heavily on Webster’s arguments, repeating them almost verbatim.29
During Marshall’s tenure on the Supreme Court, Webster enjoyed an impressive track record of success for his corporate clients. The Marshall court consistently promoted the powers of Congress and the rights of corporations. Yet by the time of Marshall’s death in 1835, the nation’s political tide had turned against him and his Hamiltonian allies. The Federalist Party had folded (largely replaced by Webster’s Whig Party), and populists like Jackson, the intellectual heir to Jefferson, were now in power. President when Marshall died, Jackson selected Roger Taney to replace him.
Taney, both before and after his Supreme Court appointment in 1836, was a populist and a corporate reformer. The Marylander bolted the Federalist Party out of disgust when northern business interests in the party refused to support the War of 1812. He was drawn instead to the Jacksonian movement, which condemned corporate monopolies and advocated for broad state control over business. This put him directly at odds with Webster, whom Taney knew well. The two men had worked together on Taney’s first case as a lawyer before the Supreme Court. Yet by the time of Taney’s confirmation as chief justice, the two men had come to despise each other. Taney, guided by his populism and fueled by his hatred of Webster, would move the court toward a more restrictive approach to corporate rights under the Constitution.30
* * *
THE PERSONAL ANIMOSITY BETWEEN Taney and Webster grew out of disagreements about the very client Webst
er was representing in the Bank of Augusta v. Earle case, the Second Bank of the United States. To Jackson and Taney, the Second Bank was the most egregious example of how corporations corrupted politics and the economy.
At the heart of the Jacksonian complaint about corporations was the chartering process. Corporations, in Jackson’s view, were too often a way by which politically connected insiders obtained special economic privileges unavailable to others. Corporate charters usually gave a business a monopoly: the Virginia Company had exclusive rights to trade in the northern hemisphere of the New World, for example, and the first Bank of the United States alone had the right to print federal notes. The impetus for monopoly was to encourage capital investment, but the effect was also to reduce competition, closing off economic opportunities for new businesses that wanted to compete in the same space. Corporate monopolies not only corrupted the marketplace, they soiled democratic politics. The special privileges of a corporate charter were so valuable that some people were more than willing to pay to persuade lawmakers, creating a political culture of bribery and extortion. Jackson won the presidency in 1828 with the anticorporate slogan, “Equal rights for all. Special privileges for none.”31
Jacksonsonians argued that special corporate chartering was also fundamentally at odds with democratic principles. Chartered corporations “take away from the people, their common rights, and give them to a few,” argued Pennsylvania’s populist governor Francis Rawn Shunk. The Dartmouth College decision exacerbated the democratic defect of corporations by limiting the ability of the community to regulate and control them once created. “Whatever power is given to a corporation, is just so much power taken away from the State, in derogation of the original power of the mass of the community,” concluded the delegates at the 1837–1838 Pennsylvania constitutional convention. Because of the chartering process, Jacksonians argued that wealth was determined by one’s political connections, not hard work and industry. Their answer, however, was not to destroy the corporation. Instead, populists sought to democratize the corporation to better serve the public welfare.32
PRESIDENT ANDREW JACKSON, A POPULIST, ARGUED FOR LIMITING THE SPECIAL PRIVILEGES OF CORPORATIONS.
Indeed, Jacksonians expanded access to the corporate form—but theirs was a more democratic version. Jacksonians pushed for laws allowing “general incorporation,” permitting anyone to form certain types of corporations once a set of legally specified conditions were met, without the need for a special act of the legislature. In the 1830s, states increasingly adopted general incorporation statutes for specific industries like manufacturing, banking, or infrastructure construction to make the corporate form more accessible to businessmen. Newcomers were better able to compete with wealthy, established entrepreneurs. General incorporation was not, however, intended to end legislative supervision and regulation of corporations, which had traditionally been achieved through the charting process. Jacksonians were strong proponents of the idea that corporations had to be disciplined and controlled by the people. Even general incorporation laws typically set floors and ceilings on capitalization, imposed obligations on directors to protect investors, vested stockholders with voting rights, and required the filing of annual disclosures as ways of protecting investors and the public.33
The Second Bank was not created under a general incorporation law. It was chartered by a special act of Congress and exercised effective monopoly power over the nation’s credit—much to the anger of Jackson. Jacksonians blamed the Second Bank’s lending practices for the devastating financial panic of 1819, whose effects reverberated throughout the economy of the 1820s. Moreover, because the Second Bank was a stock corporation accountable to investors, the “Eastern Monster,” as Jackson said, was just a means by which “the rich and powerful too often bend the acts of government to their own selfish purposes.” Sounding like Jefferson, Jackson complained about “powers and privileges” of the national bank—special benefits that were “unauthorized by the Constitution, subversive of the rights of the States, and dangerous to the liberties of the people.”34
Nelson Biddle, the Second Bank’s forceful chief executive, had been a longtime Federalist and ardently opposed Jackson. Biddle believed his corporation was more powerful than the president of the United States, and he challenged Jackson to a uniquely Washington game of chicken. The Second Bank’s charter, like that of the original Bank of the United States, was for only a limited duration, and was due to expire in 1836. In 1832, Biddle, with Webster’s support, pushed the Second Bank’s allies in Congress to pass a bill four years early to extend the bank’s charter. Biddle was betting that Jackson, facing reelection, would not want to risk the public backlash and economic disruption that might come from undermining the bank. Jackson, however, held steady and vetoed the bill. The Second Bank was forced to reorganize under Pennsylvania law, becoming a Pennsylvania corporation. Jackson also ordered the withdrawal of all federal deposits held in the Second Bank, depriving Biddle of the one thing most responsible for his corporation’s outsized influence on the national economy.35
Biddle used all of his corporation’s amassed resources to fight back. The Second Bank called in loans, restricted access to credit, and reduced the nation’s money supply. Biddle set out to humiliate Jackson and saddle his presidency with the hard times. It worked in part, successfully putting the brakes on what had been a period of rapid economic expansion. Yet Jackson, who appeared strong in the face of the corporation’s onslaught, won reelection nonetheless. Rather than break Jackson’s resolve, Biddle’s aggressive response proved to many the accuracy of Jackson’s accusation that the Second Bank was an irresponsible, untrustworthy, and all-too-powerful corporation.36
Both Webster and Taney played leading roles in the bank controversy. In 1833, Jackson’s first treasury secretary, Louis McLane, a former Federalist who thought the Second Bank was a benefit to the national economy, refused to follow Jackson’s order to withdraw all the federal government’s funds from the institution. Jackson shipped McLane off to the State Department, only to find that his replacement at Treasury, William Duane, a Pennsylvanian who also favored the national bank, similarly refused to comply. Jackson then fired Duane and nominated Taney, who had been Jackson’s attorney general and was known to be fiercely loyal to the president. Taney’s new position, however, required confirmation by the Senate, and Webster, one of Massachusetts’s two senators, led the opposition to Taney’s nomination. Webster was on retainer for the Second Bank and his loyalties were to his financial patron. Fighting the Second Bank’s fight, Webster was able to defeat the nomination, humiliating Taney, who became the first cabinet nominee in American history rejected by the Senate.37
It is tempting to believe that Washington today suffers from unprecedented rancor and partisanship, especially when it comes to the judicial confirmation process. Critics often point to the Senate’s 1987 rejection of Robert Bork, an outspoken conservative nominated by President Ronald Reagan, as the turning point. Yet politics in the 1830s was equally divisive, if not more so, and Webster was one of the most aggressive partisan warriors. Unsatisfied with merely embarrassing Taney by defeating his cabinet nomination, Webster in 1834 organized a Senate censure of both Taney and Jackson. Nonetheless, when a seat opened up on the Supreme Court, Jackson submitted Taney’s name again. Webster once again led the opposition, publicly questioning Taney’s integrity and calling him “a pliant instrument” of the president. Taney returned the charge in a public address, saying that “it is well known that [Webster] has found the bank a profitable client, . . . he has become its ‘pliant instrument,’ and is prepared on all occasions to do its bidding, whenever and wherever it may choose to require him.” Webster, however, still had the upper hand in the Senate, and Taney’s nomination to the Supreme Court was rejected largely on partisan grounds—a hundred fifty years before Bork.38
Jackson, upon learning that Webster had frustrated Taney’s Supreme Court nomination, stormed out of the Capitol swearing reve
nge on the “gang of scoundrels.” After midterm elections brought a wave of populist Democrats to Washington, the president in 1836 nominated Taney to the Supreme Court once again, this time to replace the recently deceased Marshall as chief justice. Despite newspaper editorials calling for rejection of “the elevation of any man who is not perfectly sound in regard to the fundamental principles of the Constitution as expounded by Daniel Webster,” Taney easily won confirmation in a Senate now controlled by Jackson’s allies. In a note to Jackson hinting at Webster, Taney thanked the president for sticking with him “in spite of the opposition of the men who have so long and so perseveringly sought to destroy me.”39
With Taney the corporate reformer ensconced as chief justice of a court quickly being filled with Jackson appointees, a gloomy Webster groaned, “the Supreme Court is gone.” Webster was referring to how the new justices would transform constitutional law, but he could just as easily have been referring to how the new justices would react to him personally. No more could Webster count on dazzling the justices with his soaring, emotional oratory; no longer could he bring tears of sympathy to the eyes of the chief justice. Webster’s troubles were apparent from his very first argument before the Taney court in 1837, just a year after Taney had won confirmation, in Charles River Bridge Company v. Warren Bridge Company.40
Webster was representing the Charles River Bridge Company, which operated a toll bridge over the waterway separating Boston and Charlestown. For nearly sixty years, the company had the only bridge for miles and, as a result, was immensely profitable. Yet those profits, and the high tolls charged to the public to earn them, eventually turned local residents against the company. Responding to public pressure, the Massachusetts legislature awarded a charter to the Warren Bridge Company to build a competing, toll-free bridge nearby. The Charles River Bridge Company hired Webster to defend its monopoly, which it claimed was part of its constitutionally protected property rights. Under the rule of Dartmouth College, the company’s long-standing charter was an inviolable contract which the state government was not free to revise.41