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  The contradictions and inconsistencies in ultra vires doctrine were becoming unmanageable. In 1898, William W. Cook wrote:

  The doctrine of ultra vires is disappearing. The old theory that a corporate act beyond the express and implied corporate powers was illegal and not enforceable, no matter whether any actual injury had been done or not, has given way to the practical view that the parties to a contract which has been partially or wholly executed will not be allowed to say it was ultra vires of the corporation.60

  While judges thus continued to sound like antebellum grant theorists when they were deciding executory contract cases, the vitality and coherence of the grant theory and the regulatory premises that underlay it had long been eroded.

  Foreign Corporations

  Despite the advent of general incorporation laws by the 1870s, we have seen that the Supreme Court continued into the twentieth century to treat the corporation as an artificial entity subject to ultra vires constraints.61 It was only a series of state corporation statutes, buttressed by Legal Realist attacks, that finally destroyed most ultra vires limitations during the 192os.

  A second set of doctrines provides another measure of the gradual shift in the conception of the corporation from an artificial to a real or natural entity. They deal with the power of a state to prevent "foreign" corporations-that is, corporations chartered in another state-from doing business within its boundaries.

  The "original fountain head of the law of foreign corporations" 62 was Chief Justice Taney's decision in Bank of Augusta v. Earle (1839),63 which represents as clear a statement of the artificial entity theory as any in American law. The corporation "exists only in contemplation of law, and by force of the law," wrote Taney. Since it is "a mere artificial being" of the state of its creation, "where that law ceases to operate, and is no longer obligatory, the corporation can have no existence."64 Thus, a state was not constitutionally obliged to allow foreign corporations to do business within its boundaries.

  The doctrine of Bank of Augusta v. Earle was vigorously reaffirmed after the Civil War65 and continued to find favor in the U.S. Supreme Court throughout the nineteenth century, even in the face of the Court's assumption that the corporation was a person under the Fourteenth Amendment. By the end of the nineteenth century, however, there were signs of increasing strain not only between an expanding Supreme Court protection of interstate commerce and the foreign incorporation doctrine but also between the latter and the natural entity conception that was emerging in legal thought. And yet it was only in a group of cases in igio that the Supreme Court finally put to rest the doctrine of Bank of Augusta v. Earle.66 From that time on, expanding Fourteenth Amendment protections of the corporation swept aside Taney's vision of the business corporation as an artificial creature of the state.

  As with the history of ultra vires, we see that it was not the Supreme Court of the Gilded Age that renounced the artificial entity theory of the corporation, but rather the judges and legal writers of the early twentieth century who came to understand the corporation as a normal and natural mode of doing business. And, as we shall see, it was a group of Legal Realist thinkers who developed and articulated this new conception of the corporation.

  From the era of general incorporation on, legal writers had commented on the disparity between the reality of free incorporation and those artificial and unrealistic restrictions on corporate power that continued to derive from the antebellum grant theory. Yet, in the Supreme Court, an old conservative majority perpetuated the Jacksonian tradition of competitive capitalism and suspicion of corporate power,67 not only by continuing to invoke legal doctrines derived from the artificial entity theory but also by giving a strict literalist reading to the Sherman AntiTrust Act.68 By 1911, the new conservatives finally overthrew the strict construction of the Sherman Act in the Standard Oil case;69 they also reversed those doctrines in corporation law based on a conception of the corporation as a creature of the state. They were creating the distinction ultimately articulated in 1912 by Theodore Roosevelt between "good" and "bad" trusts. 70

  The "Inevitability" of Concentration

  Are the large combinations of capitalists and corporations known as "trusts" a logical and therefore proper development of the present economic system, or are they abnormal excrescences that can and should be eradicated by, legislation?

  Question to Professor William W. Folwell of the University of Minnesota by a Committee of the Minneapolis Socialist Labor Party (1888)"

  The efforts by legal thinkers to legitimate the business corporation during the 189os were buttressed by a stunning reversal in American economic thought-a movement to defend and justify as inevitable the emergence of large-scale corporate concentration.

  Until the late 188os, prevailing American economic thought refused to accept either the inevitability or the naturalness of large-scale concentrations of capital. Most discussion of the "monopoly problem" during the 1870s and early 188os focused on the railroad, which was treated as something of a special case.72 Whether defenders and opponents of railroad consolidation emphasized the "overproduction" of lines after the Civil War or argued about a "natural monopoly" analysis of the railroad, they tended to regard the problem as unique. Before the late 188os, few saw in the railroad problem a more general pattern of industrial concentration.

  Popular attention began to be drawn to the question of industrial concentration with the publication of Henry Demarest Lloyd's muckraking articles on monopoly. His first magazine article, "The Story of a Great Monopoly,"73 in 1881, was an attack on the Standard Oil Company. "As early as 1884 he asserted that combinations were dominating most, if not all, industries in the country, from coffin-making to iron pipe foundries."74 Above all, the attention paid to the formation of the notorious trusts during the 188os raised more general questions concerning the causes of industrial concentration.

  In 1882 the first great trust, Standard Oil, was born after "the sharp mind of Standard's legal counsel, S. C. T. Dodd, conceived of the new trust form of organization."" The trust was designed to bring about corporate consolidation while avoiding the prohibition under state corporation laws of one corporation holding the stock of another. Since the individual shareholders of the consolidating corporations tendered their stock to trustees in exchange for trust certificates, the resulting trust was not incorporated and hence was thought to be immune from the limitations of corporation law.

  Five other successful nationwide trusts were organized during the 188os: the American Cotton Oil Trust (1884), the National Linseed Oil Trust (1885), the National Lead Trust (1887), and the Whiskey and Sugar trusts (1889). The "trust problem" therefore became a central issue of public policy only a few years before the Sherman Act was enacted in 1890. The act itself reflected the still widely shared orthodox laissez-faire position that industrial concentration was an unnat ural interference with the laws of free competition and could be achieved only through conspiracy or illicit financial manipulation.76 Except for the relatively rare case of natural monopoly, it was thought that the "laws" of the marketespecially the "law of diminishing returns"-would continue to prevail.

  Some orthodox theorists traced the causes of monopoly to illegitimate governmental interference in the economy-through tariffs and other intrusions on free competition, governmental grants to railroads, grants of corporate privileges, and the operation of the patent laws. But most were complacently confident that monopoly was inherently impermanent. " 'Trusts', as a rule, are not dangerous," the dean of the Columbia Law School, Theodore W. Dwight, wrote in 1888. "They cannot overcome the law of demand and supply nor the resistless power of unlimited competition."" Indeed, the intellectual paralysis of laissez-faire theorists in the face of combination was captured best in 1891 by judge Seymour Thompson of St. Louis, a vocal opponent of the trust.

  The problem . . . of restraining corporate and individual combinations and monopolies, is the problem of restraining a species of communism; it is communism against communism, an
d the question is, how far communism ought to go in restraining communism. The general rule is that it ought not to go at all. The general rule is that commerce should be free. . . .78

  Beginning in the late 188os, however, several writers began to ponder the question of whether large-scale enterprise was inevitable. Perhaps the earliest was Arthur 1'. Hadley, whose book, Railroad Transportation (1885), was the first to generalize from railroad consolidation to the inevitability of industrial concentration. Seeing the "present age" as "an age of industrial monopoly," Hadley argued that the American economy was moving away from free competition. Yet the existing system of thought blinded men to the changes that were occurring.

  All our education and habit of mind make us believe in competition. We have been taught to regard it as a natural if not necessary condition of a healthful business life. We look with satisfaction on whatever favors it, and with distrust on whatever hinders it. We accept almost without reserve the theory of Ricardo, that, under open competition in a free market, the value of different goods will tend to be proportional to their cost of production .71

  But, ultimately, Hadley's analysis was limited by his effort to generalize from the railroad problem. He sought to explain the particular forms of cutthroat competition that enabled railroads to cut prices below marginal costs, but he did not propose any general analysis of how industrial concentration could be explained in terms of economic theory. That task fell to another writer, Henry C. Adams, the chief statistician for the newly formed Interstate Commerce Commission.

  Adams's path-breaking and influential tract, "The Relation of the State to Industrial Action," was the best expression of the new anti-laissez-faire sentiment behind the recently formed American Economic Association.S° It sought to define the conditions under which governmental regulation would be legitimate. Seeking to explain industrial concentration, Adams invoked John Stuart Mill's tripartite distinction among industries that displayed "constant," "diminishing," or "increasing" returns to scale. While the railroad was "a good illustration of this third class of industries,"" there were also "many other lines of business which conform to the principle of increasing returns, and for that reason come under the rule of centralized control."82

  Such businesses are by nature monopolies. We certainly deceive ourselves in believing that competition can secure for the public fair treatment in such cases, or that laws compelling competition can ever be enforced. If it is for the interest of men to combine no law can make them compete. For all industries, therefore, which conform to the principle of increasing returns, the only question at issue is, whether society shall support an irresponsible, extra-legal monopoly, or a monopoly established by law and managed in the interest of the public.83

  Though it was thereafter expressed in many different ways, the argument for the inevitability of industrial concentration always represented some variation on Adams's original insight about increasing returns to scale.

  Among the earliest to proclaim the inevitability of industrial concentration were social thinkers who were influenced by European socialism and Marx's prediction of the inevitability of monopoly capitalism. In 1889, President E. Benjamin Andrews of Brown University declared that the competitive system was fast disappearing and giving way to trusts and combinations. 84 Although competition had "hitherto been assumed as the certain postulate of all economic analysis and generalization," in fact "in a great variety of industries, perhaps a majority of all, permanent monopolies may be maintained, apart from any legislative or special aids. . . . No economic laws prevent the permanent existence of monopo 85

  In the same year, the Christian Socialist Edward Bellamy pronounced with satisfaction the "doom" of the competitive system. Competition was at odds with the fundamental principles of Christianity. "[T]he competitive system tends to develop what is worst in the character of all, whether rich or poor. The qualities which it discourages are the noblest and most generous that men have, and the qualities which it rewards are those selfish and sordid instincts which humanity can only hope to rise above by outgrowing."86

  Moving from the "moral iniquities of competition,"87 Bellamy turned to an analysis of the causes of consolidation. "It is a result of the increase in the efficiency of capital in great masses, consequent upon the inventions of the last and present generations. . . . The economies in management resulting from consolidation, as well as the control over the market resulting from the monopoly of a staple, are also solid business reasons for the advent of the Trust."88

  The few economists who still seriously defend the competitive system are heroically sacrificing their reputations in the effort to mask the evacuation of a position which, as nobody knows better than our hard-headed captains of industry, has become untenable. . . . While the economists have been wisely debating whether we could dispense with the principle of individual initiative in business, that principle has passed away, and now belongs to history. 89

  Except for his conclusion, Bellamy's vision of the inevitability of economic concentration was echoed by the new titans of industry. In 1888, the president of the American Cotton Oil Trust, John H. Flagler, defended the development of trusts as a reflection of "a steady, logical and wise evolution, or improvement in the method of conducting industrial affairs." There was an historical evolution in the conduct of business that passed through "successive stages of development" from individual to partnership to corporation and, now, to the trust. "This progressive development in the machinery for the conduct of business was impelled by the growing and ever-increasing demand for larger facilities, greater capital, greater energy, combination of activities, skill and intelligences."90

  The courts did not yet agree. Beginning in the late 188os, six different states brought suits to revoke the charters of corporations that had become constituents of one of the great trusts.91 The most famous lawsuits involved the successful Ohio and New York attacks on, respectively, the Standard Oil and Sugar trusts.92 In both cases, the courts dealt a setback to any entity theory of the corporation, holding that the act of the individual shareholders in joining the trust was really the act of the corporation.

  As the attacks on the trust form mounted, corporation lawyers realized that the earlier strategy of simply evading the restrictions of corporation law would no longer work. "It was considered wise to yield in the matter of form. The trusts were transformed into companies."93 In the words of the biographer of one of these lawyers, William Nelson Cromwell, "[t]he vulnerability of the trust arrangement to the combination and conspiracy concept of the Sherman Act and to the legal analysis of the Ohio and New York decisions led to the finding of new legal techniques. The need was met by an amendment to the corporation law of New Jersey."" Several corporation lawyers connected with Cromwell's firm, "were among those active in the drafting of this amendment."95 And, as Alfred D. Chandler has written, "The New Jersey legislature quickly obliged."96

  The New Jersey Law of 1889"' which permitted incorporation "for any lawful business or purpose whatever," was among the first to allow one corporation to own the stock of another, thus legalizing the holding company and making the trust device unnecessary. Cromwell himself seems to have been the first lawyer to use the New Jersey provisions. As counsel to the Cotton Oil Trust, he appears to have conceived of the need for the New Jersey law after a lower court in Louisiana in 1889 sustained the state's effort to dissolve several of the trust's constituent corporations.

  Pending the appeal of an adverse decision, Cromwell called special meetings of all of the constituent corporations, obtained the necessary proxies and quietly dissolved the Louisiana corporations and transferred all their assets to a Rhode Island corporation set up for that purpose, whose stock was held by the trustees. When the appeal came on, he announced to the consternation of the Attorney General of Louisiana that the relief requested was no longer necessary for the Corporations were no longer in existence.98

  In the same year, the American Cotton Oil Trust was reorganized once more as a New J
ersey holding company, perhaps the first major enterprise to take advantage of the change in New Jersey law. The successful New York attack on the Sugar Trust also led it to reorganize as a New Jersey corporation. It soon received the additional benefit of immunity from the Sherman Anti-Trust Act when the U.S. Supreme Court held in the E. C. Knight Case' that the act could not constitutionally reach "manufacturing."

  After the passage of the New Jersey Act, the entire expenses of the state of New Jersey were paid out of corporation fees. "[S]o many Trusts and big corporations were paying tribute to the State of New Jersey," noted New York corporation lawyer Charles F. Bostwick, "that the authorities had become greatly perplexed as to what should be done with [its] surplus revenue.. . ." 100 "[T]he relation of the state toward the corporations resembles that between a feudal baron and the burghers of old, who paid for protection," observed William H. Cook.10' Lincoln Steffens simply called New Jersey the "traitor state." 102

  The passage of the New Jersey Corporation Law followed by the rapid-capitulation of many other states, marked the end of all serious efforts to use corporation law to regulate consolidation. Urging repeal of many New York restrictions on corporations, New York lawyer Charles F. Bostwick noted "the sudden exodus of hundreds upon hundreds of millions of dollars, controlled by corporate interests and financiers from New York into the State of New Jersey" 103 during the decade after the passage of the New Jersey law. "New York, although disclaiming any intention of entering into legislative competition for the securing of corporate capital within its jurisdiction, is, in fact, one of the most ardent bidders," Bostwick wrote. 104 For example, only three years after the passage of the New Jersey law, "the State of New York could no longer withstand the temptation, and the incorporation laws of this State were radically amended" to match the single most attractive New Jersey provision allowing holding companies. "[B]ut this came too late to get back any fugitive capital and still it continued to go elsewhere." 105