U.S. Politics and Corporate Speech: A Two-Edged Sword
By Richard Sylla

In its 2010 Citizens United decision, the Supreme Court gave corporations relatively unlimited free-speech rights to spend corporate funds for political causes and candidates. A part of the majority’s reasoning was that if corporate media entities — for example, The New York Times, The Wall Street Journal, Fox News and CNN — have undeniable First Amendment rights to endorse causes and candidates, why should non-media corporate entities be denied the same rights?

In essence, the court based its decision on reasoning that corporations are associations of individuals and so ought to have the same free-speech rights as individuals, that spending money on politics is a form of free speech and that corporate political spending was not and would not be seen as corrupt.

Regardless of one’s opinion of the court’s decision, it is worth pointing out that having a right does not mean one has to exercise it. American citizens have a right to keep and bear arms, but many of them don’t. They have a right to vote, but many don’t.

U.S. history suggests that corporate executives and boards might want to think long and hard before exercising the rights granted by Citizens United. They should take note of what President Theodore Roosevelt said in his first annual message to Congress in 1901: “Great corporations exist only because they are created and safeguarded by our institutions, and it is therefore our right and duty to see that they work in harmony with those institutions.” Roosevelt reminds us that corporations are “legal-person” creatures of government, not “We the People” who created our governments. Citizens United, in holding that corporations are just like people and have the same rights as people, is antithetical to Teddy Roosevelt’s view of corporations.

Banks were the first large corporations in the United States. In the early decades of our history, they were created by individual acts of legislatures, which involved the banks in politics. Corruption became rampant, as would-be banks paid politicians to grant corporate charters and existing banks paid politicians not to do that, so as to avoid more competition. By the 1830s and 1840s, public opinion turned against this corruption, leading to free-banking laws that removed bank chartering from legislatures and made it an administrative function of government with more open access. What had been good for existing banks and the politicians who supported them for a “fee” was not so good for the economy. Banks in general suffered a reputational loss with the public that has persisted in American history. A decade ago, after considerable U.S. financial deregulation contributed to a global financial crisis, the Dodd-Frank Act reinstituted stricter regulation of banks. That stricter regulation, along with the Occupy Wall Street populist movement that challenged federal bank bailouts while homeowners suffered massive foreclosures, reminded us that Americans continue to loathe both big banks and the mixing of banks and politics.

In the early 1830s, the Second Bank of the United States, by far the largest corporation in the country with branches in many states, paid politicians such as Daniel Webster and Henry Clay to help it have Congress renew its charter, which was set to expire in 1836. It worked. Congress enacted a re-charter bill. But President Andrew Jackson vetoed the bill, charging that the bank was an elite, privileged and corrupt institution of men of wealth, including too many foreign stockholders, and thus it was inimical to American institutions. Jackson won reelection, dooming the bank.

The consensus of economic historians is that this turn of events was unfortunate. The bank was actually a good bank and a nascent central bank. It brought stability to the nation’s currency and banking system, fostered economic growth and performed many useful services for the government. The United States would not have another central bank for seven decades, when the Federal Reserve System took on its functions. Those decades witnessed frequent banking crises. And the country would not have interstate banking again until the late 20th century. The Second Bank’s political activities did more than doom it. They did long term damage to the stability of the American economy and the efficiency of its banking system.

By mid-19th century, railroads succeeded banks as the largest U.S. corporations. They, too, often enmeshed themselves in politics in ways that seemed, and often were, corrupt. Their promoters paid cash bribes for favorable legislative actions and distributed free or discounted shares in their companies to favored politicians, who also got free passes to ride the rails. The western transcontinental lines, in particular, were involved in numerous scandals. The promoters lobbied for land grants and direct financial support in the form of U.S. government bonds to subsidize construction. The promoters grew personally rich by forming closely held construction companies that overcharged the more widely held railroad corporations for materials and labor, with the promoters pocketing the difference. The railroads themselves, saddled with more debt than they could service, too often ended up in bankruptcies, receiverships and reorganizations.

As the American public became aware of these shenanigans and scandals, railroad corporations became as loathed as banks, perhaps even more. Their leaders were deemed “robber barons.” Several states passed so-called Granger laws at the behest of farmers and populist organizations to specify the maximum rates railroads and grain elevators could charge for hauling and storing grain. In the 1877 case of Munn v. Illinois, the U.S. Supreme Court upheld the constitutionality of the Granger laws. Since rational railway systems crossed state lines, the federal government in 1887 got into the act by creating the Interstate Commerce Commission as a federal regulatory body. It soon gained authority to regulate rail rates and conditions of service, reducing the traditional scope of corporate decision-making.

Far from solving the problems railroad corporations posed, state and federal regulation seems to have marked the beginning of a long-term decline in the industry. Newer modes of transporting people and freight arose — cars, trucks, highways and airplanes. These newer technologies represented progress, and the relative diminishment of railroads in the panoply of transport modes was inevitable. But it went farther in the United States than in other many other countries, where railways continue to move freight and especially people to a much greater extent. The political machinations and scandals of U.S. railroads long ago, which made them highly unpopular with the American people and their elected representatives, made it easier for them to favor the newer modes of transportation.

This brief look at the American past suggests that the right of corporations to engage in politics and spend corporate funds on favored causes and candidates is a proverbial two-edged sword. Whatever corporate short-run objective might be gained (which is never certain) could in the longer run turn into something that might harm the company and the industry, and perhaps even threaten its existence. Wisdom may lie in not exercising every right one has.

Richard Sylla is a professor emeritus of economics and the former Henry Kaufman Professor of the History of Financial Institutions and Markets at New York University Stern School of Business. He teaches courses in financial history, economic and business history of the United States, and comparative enterprise systems.

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