US Supreme Court: Capitalism
In a capitalist economic system most productive assets are held by private owners, and most decisions about production and distribution are made by the market rather than government command. Capitalism thus suggests a system of economic regulation that involves minimal state involvement. Nonetheless, even the most capitalistic economic systems contain some governmental supervision. The government must establish basic institutional rules, such as contract law. The government must also legislate to correct “market failure,” or situations where the unregulated market does not work well. Most importantly, in any democratic system a large number of interest groups continually petition the government for laws that bias market processes in their favor. Perhaps the Supreme Court's most important function as regulator of capitalism is to define the appropriate constitutional limit of governmental interference with individual, market‐driven decision making.
The word “capitalism” does not appear often in Supreme Court opinions. Further, nearly all the references before 1950 are pejorative, appearing in first amendment cases involving the right to make statements attacking capitalism as an institution. Examples include United States v. Debs (1919), where the defendant attacked capitalism as a cause of war, and Abrams v. United States (1919). In addition, Justice Louis D. Brandeis used the term occasionally in dissenting opinions to speak about the evils of uncontrolled capitalism (Liggett v. Lee, 1933; Maple Flooring Manufacturers Association v. United States, 1925).
The Supreme Court has always occupied a central position in the development of American capitalist institutions since the beginning of the nineteenth century. The Constitution's framers envisioned a regime in which most decisions about the allocation of goods and services should be private. The Contracts Clause, the Commerce Clause, the Due Process Clause, and the Takings Clause of the Fifth Amendment are strong examples of that commitment. Through its interpretation of the Constitution and a wide array of federal and state statutes and common law rules, the Supreme Court has defined the balance between individual prerogative and the independence of markets on the one hand, and sovereign power to interfere on the other.
Until the late 1930s the prevailing economic ideology on the Supreme Court was that of the classical political economists, who had a strong bias in favor of the “unregulated” market. This is not to say that there was little regulation. States and local government regulated a great deal. Indeed, the Supreme Court believed that there was too much regulation and that much of it was created in the interest of regulated firms rather than the consuming public.
The historical relationship between the Supreme Court and American capitalism has developed through several controversies concerning the proper scope of federal and state regulatory power.
Recognition of the Business Corporation and Facilitation of Its Development
Modern American capitalism would be unthinkable without the giant, multistate business corporation—a creature whose development was facilitated by a series of Supreme Court decisions.
The Supreme Court both adopted and expanded the common law's view that the business corporation is a “person” entitled to many of the same constitutional protections given to natural persons. Chief Justice John Marshall had clung to the traditional English view of Sutton's Hospital Case (1613) that a corporation was incapable of suing and being sued in its own name. Rather, the suit must name all the shareholders individually. Marshall's view was rejected by his own Court in Bank of United States v. Dandridge (1827). From that point on corporations could freely sue and be sued in federal court. Likewise, the Marshall Court held in Bank of the United States v. Deveaux (1809) that a corporation was not a “citizen” under the Constitution, but should be treated merely as a collection of its individual shareholders. Such decisions limited federal court access, because jurisdiction based on diversity of citizenship did not exist unless every shareholder in the dispute was from a different state than any party on the opposite side. Deveaux was overruled by the Taney Court in Louisville, Cincinnati & Charleston Railroad Co. v. Letson (1844), which held that a corporation should be deemed a “citizen” of the incorporating state. The result was substantially to increase federal protection of corporations.
The Supreme Court recognized the American business corporation as a “person” for federal constitutional purposes in Santa Clara Co. v. Southern Pacific Railroad (1886). Although liberals attacked the Santa Clara decision as biased in favor of big business, the decision's importance should not be exaggerated. Santa Clara was a sensible mechanism for permitting the corporation as an entity rather than its separate shareholders to assert the corporation's constitutional claims. Giving the corporation itself the constitutional claim was more efficient than giving it to the shareholders themselves. After Santa Clara individual shareholders could assert the constitutional rights of the corporation only if they brought a stockholders' derivative suit designed to force the corporation to defend its own rights. Such suits had been approved by the Court in Dodge v. Woolsey (1856).
One of the most important doctrines facilitating the multistate business corporation during the late nineteenth century was that the states lacked the power to exclude “foreign” corporations, or those chartered in a different state, from doing business within their borders. The traditional view had been to the contrary. In Bank of Augusta v. Earle (1839), the Taney Court held that corporations of one state could do business in another state, but only subject to that state's permission and regulation. As late as the 1880s the Supreme Court permitted states to exclude foreign corporations from doing business directly within their borders. However, in Welton v. Missouri (1876) it held that the Commerce Clause forbad states from excluding the products made by out‐of‐state corporations. Under Welton a corporation chartered, for example, in New Jersey could not build a plant in New York without New York's consent, but New York did not have the power to exclude the New Jersey corporation's goods, if the goods could legally be sold by New York's own corporations. The Court gradually narrowed state power to exclude foreign corporations from manufacturing within their borders as well, finally holding in Western Union Telegraph Co. v. Kansas (1910) that a corporation is a “person” within the jurisdiction of a state where it is doing business, and entitled not to be expelled except for violations of state law.
During the nineteenth century the Supreme Court frequently became involved in matters of corporate finance, the extent of limitations on corporate liability, and the scope of a corporation's power under its charter. The result was substantial federal doctrine regulating the inner workings of the corporation, its finances, and its dealings with outsiders. For example, in Sawyer v. Hoag (1873) the Court adopted the “trust fund” doctrine, which held that if a corporation's stated paid‐in capital was larger than the amount the shareholders had actually paid in, the shareholders themselves could be liable for the shortfall. The doctrine was designed to protect creditors from “watered” stock. Likewise, the Court often considered the question whether corporate activities were ultra vires, or unauthorized by the corporate charter—generally adopting a narrower view than that which prevailed in the states. For example, in Thomas v. West Jersey Railroad (1879), the court struck down as ultra vires an effective merger of two railroads when one leased all its track to the other.
The Supreme Court gradually relaxed the strict rule preventing corporations from doing business not authorized in their charters, particularly if the additional business was “necessary or convenient” to the corporation's authorized business. For example, in Jacksonville, Mayport, Pablo Railway & Navigation Co. v. Hooper (1896), the Court permitted a railroad to acquire a hotel in order to accommodate railroad passengers. The result was increased judicial approval of corporate vertical integration, a phenomenon that characterized much of the corporate growth at the turn of the century.
An unanticipated result of the use of business purpose statutes to challenge corporate mergers was that mergers of competitors were generally legal. For example, a corporation authorized to manufacture and distribute fuel oil, such as Standard Oil Company, could legally acquire a competing refinery, for that acquisition would not involve the corporation in unauthorized business. However, if Standard attempted to acquire a shoe factory, the acquisition would have been challenged as outside the scope of Standard's charter. As a result mergers of competitors—usually the most damaging to competition—were generally legal, while “conglomerate” mergers, whose competitive consequences are generally negligible, were forbidden. The result was that American merger policy gradually ceased to be the prerogative of corporate law and entered the domain of the antitrust laws.
In Briggs v. Spaulding (1891) the Court adopted a broad version of the “business judgment” rule, thereby giving corporate directors expansive power to make decisions without concern about liability suits from stockholders. This decision as well as others served to separate the ownership of the American business corporation from its management. The eventual result was a cry for more intensi
· 1 decade ago