Wednesday, November 20, 2019

Liberty Lost: Antebellum America’s Independent Sector


Liberty Lost: Antebellum America’s Independent Sector

By Robert E. Wright, Nef Family Chair of Political Economy, Augustana University, Sioux Falls, SD, for the Dartmouth College Decision Bicentennial Conference, University of Oklahoma Law School, Norman, OK, 14-16 November 2019


Historian Peter Dobkin Hall once claimed that “historians have tended to ignore the nonprofit sector.” This paper, by contrast, centers non-profits in early America’s business, economic, and political history. First, it argues, on the basis of ongoing data collection, that non-profit corporations were at least as numerous as for-profit corporations formed by special act of incorporation in the U.S. between Independence and the Civil War and sketches the numerous socioeconomic problems addressed by the Third, Independent, or Nonprofit Sector in the antebellum period. Second, it shows that voluntary association, not the right to vote in political elections, grounded early Americans’ conception of democracy and good governance. Third, it argues that the right to voluntarily associate drove US economic growth and development.
De Tocqueville was right to consider antebellum America a nation of joiners. As I showed in Corporation Nation and the accompanying database, “US Corporate Development, 1790-1860,” available online at the Magazine of Early American Datasets (2015), between the Revolution and the Civil War, several hundred thousand Americans joined together to charter over 22,000 for-profit corporations by act of special incorporation, plus thousands more by means of general incorporation. Over a million different Americans owned at least one share of corporate stock over that period.[1] Most tellingly, perhaps, Kevin Butterfield shows that the legal knowledge needed to associate and incorporate, i.e., to write lawful charters and by-laws, was widespread.[2]
My RAs continue to collect data on specially-incorporated non-profit corporations but thus far non-profits are holding their own. Consider the following table, which shows that the total number of non-profits that received special charters exceeded for-profits in eight of the 12 sampled states and only slightly trailed for-profit formation overall, mostly due to Indiana and Vermont:
STATE
FOR-PROFITS
NON-PROFITS
Arkansas
83
110
California
11
42
Delaware
153
174
Georgia
506
621
Iowa
24
54
Indiana
602
310
Kentucky
1,151
898
New Mexico
9
9
Oregon
55
69
South Carolina
256
754
Vermont
663
311
Washington
11
26
TOTAL
3,524
3,378
SOURCE: PRELIMINARY DATA based on the state statutes in the Hein Collection coded from microfiche.
Some types of nonprofits in some states also enjoyed access to general incorporation. In fact, nonprofit general incorporation acts for churches preceded for-profit ones for manufacturers and banks by several decades and the relative dearth of specially-chartered nonprofits in Vermont and Indiana appears attributable to their early penchant for passing general incorporation laws for the most common types of non-profits.
            Even more interestingly, perhaps, the variety of nonprofit organizations that incorporated was truly astounding and overlapped both the for-profit and government sectors. Although most non-profits were charities, almost any enterprise, from lenders to military units, could be, and were, organized as non-profits. Although some Americans feared the power of non-profit organizations, like that of the Freemasons, relatively free entry meant that unduly large or powerful groups could be checked via other non-profits, just as the American Wine Growers Association offset the temperance movement in the 1850s.[3] Non-profits also could be found on both sides of the colonization and slavery issues. In addition, intense competition in spiritual services helped to make, and keep, America a religious nation.[4]
As the authors of America’s first legal treatise on corporations put it in 1831, “these associations we not only find scattered throughout every cultivated part of the United States, but so engaged are they in all the varieties of useful pursuit, that we see them directing the concentration of mind and capital to the advancement of religion; to the diffusion of literature, science and the arts; to the prosecution of plans of internal communication and improvement; and to the encouragement and extension of the great interests of commerce, agriculture, and manufactures.”[5] De Tocqueville also marveled at the “thousand other kinds” of corporations antebellum Americans formed, “religious, moral, grave, futile, very general and very particular, immense and very small.”[6]
            Some scholars, deeply imbued with the tenets of statism, have tried to usurp the Third Sector into their narratives of American state development by casting voluntary associations as appendages of government. Alas, many non-profits became wards of the state in the second half of the twentieth century but in antebellum America the reality was just as John Marshall noted in his Dartmouth decision, that the corporation “is no more a state instrument, than a natural person exercising the same powers, would be.”[7] Overall, the decision re-affirmed the independence of non-profits and the existence of a Third or Independent Sector distinct from government.[8]
            In fact, for- and non-profit voluntary associations, formally incorporated or not, were central to the causal web that catapulted America from colonial to superpower status in the century following adoption of the Constitution. That frame, as implemented by Alexander Hamilton during his tenure at Treasury, credibly promised not a frail and worthless fabric but an energetic national government strong enough to defend Americans’ core rights triad of life, liberty, and property from foes foreign and domestic, including the national government itself. Fairly well understood now is the importance of Hamilton’s policies for basic government stability: a scientifically-based revenue tariff, supported by a voluntary association known as the Bank of the United States, serviced the nation’s Revolutionary war debts, including those incurred by the several states, which Hamilton transformed into easily traded federal bonds that cemented the interests of bondholders to the still new and hence fragile national government.[9]
Greatly increased bond prices provided impartial evidence that the new government’s policies were functional, rational, and non-predatory. Price collapses in 1791 and 1792 only returned them to their fundamental value, greatly augmented by Hamilton’s sundry policies. Prices gathered from newspapers and broker account books show that they settled at yields generally above those of British Consols and Dutch bonds, but below those of most other advanced nations, and far below what holders of Revolutionary War debt had required before passage of the Constitution and Hamilton’s reforms.
            Hamilton’s bonds were long-term debt obligations, not short-term loans, which the Bank of the United States provided when necessary. They traded regularly and internationally, so there is no way to get around the fact that they represented the expectation that the new republic would not just survive but thrive. Clearly, Hamilton’s fiscal apparatus impressed investors, but it would have come to naught had the nation splintered. Ditto the collateral implicit in western lands. The Constitution’s explicit checks and balances, as brilliantly explicated in the Federalist Papers, further strengthened the expectation that the new government was viable in the long-term.[10]
            What scholars have forgotten, however, is the crucial context provided by the Constitution’s Preamble, which promised a national government that would establish justice, ensure domestic tranquility, provide for the common defense, promote the general welfare, AND secure the blessings of liberty to posterity. AND, not OR, secure eternal liberty. Of course that raises the question of what members of the Founding generation meant by liberty, a topic that has consumed many a tree and joule. As an economic historian, I like to operationalize such issues by distilling them to an empirical essence, as I just did by reducing complex debates about Hamilton’s fiscal reforms to the path of bond prices and yields.
At its essence, liberty for early Americans meant the ability to address socioeconomic problems voluntarily, as individuals, unincorporated assemblies or associations, or incorporated organizations driven by motives of profit, service, or both. Local, state, and national governments might also attempt to ameliorate such problems, to wit to promote the general welfare, but not at the expense of liberty and its many blessings.
            Representational democracy, the founding generation understood, was fraught due to agency, time inconsistency, and space inconsistency problems. Representatives may act in their own interests instead of the interests of their constituencies, whose preferences are never homogenous and can change, sometimes rapidly, over time and place. Dates and districts influence election results in profound and potentially capricious ways. The loudest or richest can drown out the wishes of the too silent, too busy, or too rationally ignorant majority. Unlike jurors, those willing and able to serve, especially in national office, are not peers of the median voter but elites bound, whether they admit it or not, to serve the interests of other elites. And even when it flawlessly represents the desires of the majority, representational democracy still threatens to tyrannize the minority, be they members of a small group of dissenters or an entire race, religion, or gender. Minorities also face the possibility that government will neglect their needs, leaving them without organized recourse, unless, that is, they enjoy the liberty to voluntarily associate.
For the founding generation, the solution to those and other shortcomings of representational democracy was to limit the scope of government and rely on relatively open access voluntary association to ameliorate most socioeconomic problems. Many agreed that voluntarism constituted a better form of democracy than any type of representational democracy ever could as it allowed each individual, man, woman, and child, to decide if, when, how, and to what degree, to support sub-republics dedicated to addressing specific problems.
Importantly, corporations, especially non-profit associations, were more fraternal than paternal. They worked through mutual aid instead of force. “The true idea of government of the people,” Bostonian Samuel Eliot explained in 1845, “is that of an association, the members of which are ready to aid each other not merely in the attainment of those objects in which they have a common interest, but also to reach such as may be particularly desirable to only one or two of the number.”[11]
In more concrete terms, if some people wanted to reduce travel times between A and B, they might try to use the power of government to tax the people of C and D to pay for bridges, roads, and so forth, but C and D might do likewise to A and B, raising everyone’s taxes to create infrastructure improvements of dubious quality or necessity. Instead, people in A and B could form a corporation and try to induce investors or donors to voluntarily fund construction of the desired improvements. If connecting A and B was not merited by economic conditions, investors or donors would be few and the corporation would dissolve, as many did. If connecting the two places was inexpensive and would increase commerce, investment or donations would flow in, perhaps even from C and D and beyond. No coercion required, or desired. The same logic applied to banks, insurers, mines, manufacturers and sundry other enterprises clearly commercial, as well as to cemeteries, libraries, parks, and all other goods not clearly public, by which I mean nonexcludable and nonrivalrous, in nature. Most contemporaries, from Adam Smith to Samuel Eliot, believed that voluntary associations were more efficient than governments across a broad spectrum of activities because tighter budget constraints required them to be.[12] Unlike governments, they could not force people to fund them but rather had to persuade them of the profitability or utility of their activities.
The logic of voluntarism also held for social problems where pecuniary profit was clearly not to be had, as in charity and missionary work. In the non-profit realm, organizations competed for the material resources needed to carry out their missions. Surviving institutions managed to elicit numerous small donations, the strenuous exertions of a few devotees, or something in between. They were essentially voting schemes weighted by dollars, and hence capable of achieving much more than the simple up or down, yes or no voting schemes used in most representational democracies.
None of this is to say that voluntarism worked perfectly. Far from it. Speculators sometimes bilked investors while worthy supplicants wallowed in want, the wolf of hunger at their door, because nobody felt moved to aid them. While the profit motive ensured that few worthy commercial projects went unfunded, free riding, the incentive to allow someone else to bear the costs of social problem amelioration, meant that non-profits were not as prolific as they could or should have been. A strong sense of Christian charity, the relegation of half of the free adult population to the non-profit corporate sector, and innovative fundraising techniques, though, served to reduce free riding in the period before the Civil War.[13]
Due to the impoverished state of the historiography of the US economic growth miracle, which wrongly, and wrong-headedly, now attributes growth to slavery, the opposite of liberty, it may be difficult to persuade listeners that voluntarism undergirded the sustained increases in real per capita output that America experienced before the Civil War. But I will try anyway and for details urge you to read my first ten or so books, or at least my 2017 The Poverty of Slavery and various article-length summaries of my application of incentive growth theory to antebellum America.[14]
In a nutshell, economic growth boils down to individual incentives. What percentage of the population wakes up thinking “how can I work harder, longer, and smarter?” compared to the percentage that wakes up thinking “what is the minimum I have to do today to make it to tomorrow?” compared to the percentage that wonders “how can I steal resources from other people?” Slaves and white trash asked the second question, while slaveholders and a small group of Northern businessmen asked the third. Each of those groups contributed to economic output, but not to economic growth, not to increased productivity per person. The third group, in fact, reduced growth by inducing more people to ask the second question instead of the first.
Antebellum America grew rich because most white men and women in the North enjoyed incentives that induced them to ask the first question. Those incentives were the root of Yankee ingenuity, the vigorous spirit of enterprise, and the Benevolent Empire upon which so many observers, foreign and domestic, remarked. Northerners rightly believed that limited governments would protect their rights triad so if they made physical or mental exertions that increased their incomes or utility, they would be able to reap, and keep, just their just rewards. Many tried, and most failed, but a few came up with the right contraption or innovation at the right time and are now household names or at least extolled in the pantheons of business and non-profit history. And even those who failed provided valuable information about what not to do. Many made multiple attempts before achieving a modest competency that, in aggregate, added up to productivity increases that exceeded those of business history heroes like Evans, Fulton, McCormick, Vanderbilt, or Whitney, or non-profit heroes like Douglass, Everett, Mott, or Stanton.
Note that incentives were the key, not gender, race, religion, or section. Poor whites and slaves were not inherently dumb or lazy, as those who managed to escape to the North repeatedly showed. Some Northerners with access to government subsidies, limited as they were at the time, were just as intent on stealing the labor of others as any slaveholder. Indians working on their own account labored just as mightily and ingeniously as any Boston mechanic or Philadelphia shopkeeper until it became clear that national and state governments would not protect their rights triad, inducing them to ask question 2 or 3 instead of 1.
Northern whites, though, rightly felt protected by their racial privilege as well as the assumption of limited government embedded in the liberty of voluntary association promised in the Constitution, including its Preamble. Taxes might increase due to wars, territorial acquisitions, or the few other clear responsibilities of the federal government, but they knew the burden would be spread, using the tools of Hamiltonian finance, over decades. With the domestic price level tied to international gold and silver prices, a sustained bout of inflation like that suffered in the colonial and Revolutionary periods also seemed unlikely. Any attempts at overreach, like the Alien and Sedition Acts or the American System, would be quickly squelched by the First Amendment and elections, and, in the breach, by the Second Amendment.
Personal and familial responsibility remained virtues but large, complex problems were best met by voluntary association. Commercial problems regarding credit or manufacturing could be ameliorated by for-profit corporations, while non-profits combated social ills like ignorance, insobriety, and poverty in equally localized and nuanced ways. The world remained imperfect but only because of the nature of reality, not the incapacity of government, as shown by its inability to improve much, if at all, on the efforts of voluntary associations in most realms as Americans ceded their original liberty to government by degrees during each of its major wars, beginning with the uncivil one that transformed chattel into modern slavery.[15]
Thank you!
Notes


[1] Robert E. Wright, “For- and Non-Profit Special Corporations in America, 1608-1860,” in Harwell Wells, ed., Research Handbook on the History of Corporate and Company Law (Northampton, MA: Edward Elgar Press, 2018): 480-509.
[2] Kevin Butterfield, The Making of Tocqueville’s America: Law and Association in the Early United States (Chicago: University of Chicago Press, 2015).
[3] Jed Dannenbaum, Drink and Disorder: Temperance Reform in Cincinnati from the Washington Revival to the WCTU (Chicago: University of Illinois Press, 1984), 135-36, 147.
[4] Robert E. Wright, “Godly Nonprofits: Extending the Porterfield Thesis,” in Anthony R. Cross and Greg Forster, eds., Human Flourishing (Wipf and Stock, 2020), forthcoming.
[5] Joseph K. Angell and Samuel Ames, A Treatise on the Law of Private Corporations Aggregate (Boston: 1832), iii.
[6] Alexis de Tocqueville, trans. Harvey C. Mansfield and Delba Winthrop, Democracy in America (Chicago: Chicago University Press, 2000), 489.
[7] Trustees of Dartmouth College v. Woodward, 17 US 4 Wheaton, 518 (1819), at 636.
[8] Robert E. Wright, “Corporate Social Responsibility and the Rise of the Non-profit Sector in America,” in Will Pettigrew and David Smith, eds., A History of Socially Responsible Business, c. 1600-1950 (New York: Palgrave Macmillan, 2017), 117-36.
[9] Robert E. Wright, One Nation Under Debt: Hamilton, Jefferson, and the History of What We Owe (New York: McGraw-Hill, 2008); Richard Sylla, Alexander Hamilton: The Illustrated Biography (New York: Sterling, 2016); Kate Brown, Alexander Hamilton and the Development of American Law (Lawrence: University Press of Kansas, 2017).
[10] Wright, One Nation; Sylla, Alexander Hamilton.
[11] Samuel Atkins Eliot, “Public and Private Charities in Boston,” North American Review (1845): 139.
[12] Adam Smith, Wealth of Nations, Book V, Chap. 1, Part II, Article 1 “Of Public Works and Institutions Which Are Necessary for Facilitating Particular Branches of Commerce”; Eliot, “Charities,” 149.
[13] Wright, “Godly Nonprofits.”
[14] Robert E. Wright, The Poverty of Slavery: How Unfree Labor Pollutes the Economy (Cham, Switz.: Palgrave, 2017); Robert E. Wright, “Economy and Economic Policy,” in Christopher Bates, ed., Encyclopedia of the Early Republic and Antebellum America (New York: M.E. Sharpe, 2010), 1:13-22; Robert E. Wright, “Financing U.S. Economic Growth, 1790-1860: Corporations, Markets, and the Real Economy,” in Peter Rousseau and Paul Wachtel, eds. Financial Systems and Economic Growth: Credit, Crises, and Regulation from the 19th Century to the Present (New York: Cambridge University Press, 2017), 76-104.
[15] Robert Higgs, Crisis and Leviathan: Critical Episodes in the Growth of American Government, 25th Anniversary Ed. (Oakland: Independent Institute, 2012).

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