by Adam Winkler
Brandeis’s most famous explanation of the curse of bigness came decades later, when he was a justice on the Supreme Court. In Louis K. Liggett Company v. Lee, decided in 1933 near the end of his tenure, he dissented from the court’s decision to invalidate a Florida law designed to limit the spread of chain stores. Brandeis argued that the law should be upheld because the rise of national chains, “by furthering the concentration of wealth and power” and reducing competition, was “thwarting American ideals; that it is making impossible equality of opportunity; that it is converting independent tradesmen into clerks; and that it is sapping the resources, the vigor, and the hope of the small cities and towns.” Due to these “giant corporations,” he wrote, “individual initiative and effort are being paralyzed.” Invoking a metaphor that would capture how many in his day viewed the large corporation, Brandeis warned of a “Frankenstein monster” over which the people, the corporation’s creators, were losing control.44
Besides the size of the new modern corporations, Brandeis was also concerned about their internal organization—and how it enabled management to misuse other people’s money. In 1914, Brandeis would publish a collection of essays on these issues under the title Other People’s Money: And How the Bankers Use It, which became an instant classic and remains an iconic analysis of why and how American corporate finance and management should be reformed. Yet it was nine years earlier, in his reflections at the Commercial Club, that he initially identified the problem. The Great Wall Street Scandal had exposed that executives of the great insurance companies were using the policyholders’ money against the policyholders’ interests. The “American people have entrusted to the managers of these large companies” their savings, which have since been used “selfishly” and “dishonestly,” through “exorbitant salaries,” “persistent perversion of sacred trust funds to political purposes,” and an “elaborate system of fraud” in bookkeeping.45
While Brandeis became the most famous critic of “other people’s money” corruption, the notion was not new. The same concern was raised about the very first English stock corporation, the Muscovy Company of 1555. The company’s innovative approach to raising money through the sale of stock was the brainchild of Sebastian Cabot, who was not a financier but, rather, an explorer. He sought to raise funds to finance an expedition to establish a trade route from England to Russia through the icy northern seas. Unlike Christopher Columbus, who relied upon an “elaborate array of sponsors and patrons” to finance his voyages, Cabot adapted a practice he had witnessed in Italy, where groups of people bought little pieces, or shares, of a business and would divide the profits. When Cabot proposed to do the same for his venture, business traditionalists scoffed, predicting he would squander away the investors’ money. Nonetheless, with few other investment options, English merchants and notables bought up the full issue of shares. Cabot still faced hardships, such as when one of his first ships was shipwrecked in Lapland, only to be found a year later with the crewmen’s bodies frozen in place. Yet he established the trade route, and the Muscovy Company gained a monopoly on Russian furs, tallow, and other commodities. The investors who took a chance on Cabot were richly rewarded; the first English stock corporation remained in operation for nearly four hundred years, felled finally by the Russian Revolution of 1917.46
Concern about corporate leaders misusing other people’s money reached a new level of urgency in the years surrounding the Great Wall Street Scandal. Insurance companies held in trust the money of millions of people, giving executives more money to play with than ever before and increasing exponentially the number of victims. Insurance companies, however, were not the only corporations financed with other people’s money. The decade before Brandeis’s speech to the Commercial Club saw an unprecedented rise in stock ownership by the public. The aggregate value of stocks and bonds of corporations listed on the country’s major exchanges went from under $1 billion in 1898 to over $7 billion only four years later. The number of companies listed on the exchanges increased just as dramatically. Nearly everyone with money to invest wanted to share in the gains. Taking advantage of this growing demand for stock were two reporters, Charles Dow and Edward Jones, who in 1889 launched a daily newsletter of stock prices and information about public companies they called the Wall Street Journal.47
By focusing on the misuse of other people’s money, Brandeis added important nuance to the Progressive era’s uprising against the large corporation. The trusts and other big businesses of the era were not just the overwhelmingly powerful titans of industry portrayed in Keppler’s “Bosses of the Senate.” They also posed a threat to the people within them—the members, like policyholders and stockholders—from managerial misconduct. Because of the way these organizations raised money, ordinary Americans had become an integral part of them. The people provided the financing that made corporate corruption possible. Their savings and investments were the electric charge that pulsed the Frankenstein monster to life. Brandeis’s realization was essentially that, if one looked closely, Keppler’s titans were actually made up of millions of tiny, ordinary people. We the people had become we the corporations.
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IN FEBRUARY OF 1906, four months after Brandeis’s speech, Hughes’s committee issued its Final Report on the insurance investigation, charging the companies with both political and financial corruption. It was not merely that campaign spending enhanced the power of the corporations. The corruption was a modern sort that emerged from changes in the corporate form itself. Echoing Brandeis, the report warned that the separation of ownership from control in modern corporations allowed executive officers to use other people’s money “virtually as their own.” Political expenditures by corporations were wrong, and Hughes offered a populist solution: corporate political spending should “be expressly prohibited and treated as a waste of corporate moneys.”48
President Roosevelt, eager to salvage his public image, agreed. The day after Perkins’s testimony about corporate campaign contributions, Roosevelt met with his top advisors to begin plotting a response. At first the administration insisted that even if the campaign had received corporate money, Roosevelt had never been influenced by the gifts. When that did not dampen the public outrage, Roosevelt endorsed Hughes’s recommendation. “All contributions by corporations to any political committee or for any political purpose should be forbidden by law,” Roosevelt announced in his State of the Union address of December 1905. Roosevelt rested his justification on the concerns about other people’s money revealed by the Great Wall Street Scandal and described by Brandeis in his speech at the Commercial Club: “Directors should not be permitted to use stockholders’ money for such purposes.”49
In Congress, the corporate contribution ban proposed by Hughes and endorsed by Roosevelt was sponsored by an unlikely ally to either man, South Carolina senator “Pitchfork” Ben Tillman. A natural showman who earned his nickname after a speech threatening to poke President Grover Cleveland, a fellow Democrat, with a farm tool, Tillman despised Roosevelt. Part of the reason was partisan politics, but Tillman’s racism also had something to do with it; he bristled at Roosevelt’s daring to dine at the White House in 1901 with Booker T. Washington, the leading African American intellectual of his day. Like many southern Democrats, Tillman hated federal legislation almost as much as he hated racial minorities, arguing often for states’ rights and limited federal power. Yet, like many states’ rights advocates before and since, Tillman could be a fair-weather federalist. A federal law banning corporations from making any monetary contributions to federal campaigns was an opportunity to rub salt in Roosevelt’s wound and make it harder for the Republican Party, and the Yankees who ran the nation’s largest business corporations, to control Congress.50
AFTER USING CORPORATE MONEY TO WIN REELECTION, PRESIDENT THEODORE ROOSEVELT PROPOSED A BAN ON CORPORATE MONEY IN ELECTIONS TO SALVAGE HIS TRUST-BUSTING PUBLIC IMAGE.
Enacted in 1907, the Tillman Act was landmark legislation on money i
n politics. Outside of civil service reform, the Tillman Act was the first significant effort by Congress to regulate how money was raised or spent in election campaigns. The ban set a precedent for federal regulation of campaign finance that would be followed repeatedly in the years to come: the Publicity Act of 1910, which required disclosure of certain contributions; the Taft-Hartley Act of 1947, which prohibited contributions from labor unions; the Federal Election Campaigns Acts of 1971 and 1974, which imposed contribution and spending limits; and the Bipartisan Campaign Reform Act of 2002, whose restrictions on independent expenditures by corporations would be challenged in Citizens United. The Tillman Act also demarcated a clear limit to the political rights of corporations: they had no right to influence electoral politics. The public outcry from Perkins’s revelations would also propel a wave of similar legislation at the state level banning corporate spending in state elections.
The Great Wall Street Scandal would also launch Hughes’s distinguished career. Although Hughes might have worried about being blacklisted by an angry Republican establishment, his service on the committee had the opposite effect. Seeking to take back the initiative after the embarrassing discoveries, the Republican Party, like Roosevelt himself, embraced the cause of reform. The same year the Tillman Act was signed into law, Hughes, just two years from being a little-known corporate lawyer, was elected governor of New York as a Republican. Soon after, there were rumors that Hughes would be a viable candidate for president of the United States in 1908. He did not run, although he was asked by William Howard Taft to be his vice president. In 1910, he accepted another offer from Taft instead, this one to join the Supreme Court of the United States. Like campaign finance law, Hughes’s historic career was just beginning.
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AT THE SAME TIME Congress and the states were enacting campaign finance laws to limit the political spending of corporations, the Supreme Court was once again confronting questions about the constitutional rights of corporations. The issue before the high court in 1907, the year of the Tillman Act, was not whether corporations could be prohibited from making political contributions. The question instead was whether corporations had the freedom of association. The court’s opinion in that case and a series of other freedom of association cases would nonetheless influence how the courts would rule on the constitutionality of the campaign finance restrictions on corporations a decade later.
Although the Supreme Court had held that corporations had only property rights but not liberty rights, corporations still pushed the justices to extend to businesses liberty rights, such as the freedom of association. The 1907 case involved the Western Turf Association, a company that operated horse tracks, which sought a declaration that corporations have a fundamental right to associate only with those with whom they wished to do business. The specific person Western Turf did not want to associate with was Hyman Greenberg, a racing form publisher the company forcibly ejected from its state-of-the-art racetrack at Tanforan in San Mateo County, California. Western Turf already had an exclusive contract with another racing form provider, but California law prohibited places of public amusement from denying admission to any person of age with a valid ticket. The company challenged the law, claiming it interfered with the corporation’s right to control whom it does business with. Forcing the company to admit Greenberg was the equivalent of allowing a “newspaper reporter to force his way into a private reception.”51
The Supreme Court, however, ruled in favor of Greenberg. The justices in Western Turf Association v. Greenberg held that equal access laws do not infringe corporations’ rights. This was not a property right, the court explained, and even if it were, California was within its traditional power to regulate property “not only for the public health, the public morals, and the public safety, but for the general or common good, for the wellbeing, comfort, and good order of the people.” The right here was a liberty right, one associated with personal freedom and autonomy. And the Constitution refers, the court said, only to “the liberty of natural, not artificial persons.” The Court’s decision not only affirmed the distinction between property and liberty rights, but also provided an important precedent for later civil rights laws mandating equal access to public accommodations and places of public amusement.52
The next year, 1908, the freedom of association returned to the court in Berea College v. Kentucky. While the Western Turf Association had business reasons motivating its constitutional claims, Berea College in Kentucky had moral ones. At the time, the college, which was organized as a corporation like one of the earliest corporate rights litigants, Dartmouth College, was the only racially integrated school in the South. After Roosevelt’s fateful dinner with Booker T. Washington at the White House, Kentucky lawmakers hardened their segregationist resolve and passed a law prohibiting any school from having a racially integrated student body. The college challenged the law on various grounds, including interference with its right to choose its own students. It was unconstitutional, the college argued, to prohibit “the voluntary association of persons of different races” absent compelling reasons.53
Kentucky’s defense rested on the Supreme Court’s embrace of racial segregation a dozen years earlier in Plessy v. Ferguson (1896). Just as the court then had upheld a law requiring racially segregated railway cars, now the justices should affirm Kentucky’s authority to require racially segregated schools. Although the relatively enlightened leaders of the college would probably have liked to see Plessy overturned, their lawyers had to accept the decision for purposes of Berea’s case. They told the justices that Kentucky’s law should be struck down despite Plessy. The difference in the two cases, the lawyers argued, was that unlike Kentucky’s law, the law in Plessy was designed to protect white people from being forced to associate involuntarily with people of other races. In other words, the law in Plessy might be seen to further associational freedom rather than restrict it. Kentucky’s law, by contrast, prevented Berea’s students, all of whom attended voluntarily, from associating with people of their choice.54
The court upheld Kentucky’s law and rejected Berea College’s assertion of the freedom of association. The opinion was written by Justice David Brewer, Stephen Field’s nephew and one of the foremost advocates of the liberty of contract jurisprudence. Although the educational corporation’s claims might be valid if raised by an individual, the state was “under no obligation to treat both alike,” Brewer wrote. “In creating a corporation a State may withhold powers which may be exercised by and cannot be denied to an individual.” The unique nature of the corporate form justified distinct treatment. Corporations, for one, had charters granted by the state that were subject to revision by the legislature. (Although corporate charters were deemed inviolate contracts by the Supreme Court in the Dartmouth College case in 1819, Kentucky had followed the advice of Justice Joseph Story’s concurring opinion in that case and explicitly reserved the power to amend charters.) Here, Brewer held, all Kentucky had done was to amend Berea College’s charter. The argument was a stretch, as the law never even mentioned the college’s charter much less purported to revise it. Yet the decision was consistent with the broader framework articulated by the court in previous corporate rights cases of the Lochner era: corporations had property rights, not liberty rights.55
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NO LIBERTY RIGHT IS more important to a nation committed to democratic self-governance than the right to speak freely about electoral politics. In Citizens United, the Supreme Court held that corporations enjoyed this constitutional right, but the issue first arose nearly a century earlier, in the 1910s, when corporations first challenged the bans on corporate contributions to political campaigns enacted in the wake of the Great Wall Street Scandal. The trigger for those earlier challenges was the temperance movement. As advocates pushed for local referendums to ban alcohol, brewing companies fought back against the measures by making illegal expenditures. When they were prosecuted, the corporations became constitutional first movers, asse
rting for the first time that laws restricting money in politics violated the freedom of speech. Although the issue did not reach the Supreme Court, the state and lower federal courts did confront the question of free speech rights for corporations long before Citizens United.
Within the liquor industry, the beer companies had been the most politically active, even before temperance began to take hold. During the Civil War, when President Abraham Lincoln proposed a tax on malt liquors to help defray the costs of the fight, beer makers mobilized to form the nation’s first trade group to lobby against the proposal. The United States Brewers Association was not able to defeat the tax, but its political engagement from then on paid dividends. Although Congress repeatedly raised taxes on distilled spirits in the years that followed, the tax on malt liquors remained low.56
One impact of the relatively low taxes on beer as compared to other forms of alcohol was a vast increase in beer sales. Between 1860 and 1900, the annual consumption of beer per adult rose dramatically from five gallons to twenty-three gallons. The beer companies were also helped by technological inventions of the Gilded Age, such as pasteurization and artificial refrigeration, both of which extended the shelf life of beer and enabled national distribution. Business boomed—but so did the backlash against alcohol in the form of temperance advocacy. With Carrie Nation quite literally using her hatchet to wreck saloons in the Midwest, the movement to restrict alcohol won headlines and gained political momentum. Nation’s home state of Kansas was the first to outlaw alcohol in 1881. By 1912, eight other states had followed suit, along with individual counties in more than half the other states.57