In the early decades of the American republic, as states actively sought to promote internal economic development, they turned heavily to the creation of corporations. Starting in the 1790s, state governments began chartering banks, turnpike companies, bridges, and all manner of other commercial and municipal organizations. However, these early corporate charters were not freely available to the general public. Initially, every single charter required a specific, special act of the state legislature, meaning that all corporations were legally classified as “special”. Because these corporate charters functioned as grants of special, exclusive privileges to small groups of citizens, they immediately raised the specter of corruption.
Democratic state governments quickly realized that selling monopoly privileges and corporate charters was a highly effective way to generate revenue to fund public services without levying direct taxes. But this system of special incorporation inherently required negotiations, bargains, and political favoritism. By limiting economic entry, the political system created immensely valuable economic rents. This structure inevitably opened the door for political factions to manipulate the economy to consolidate their own power.
The most notorious example of this phenomenon occurred in New York under the “Albany Regency,” a political machine headed by Martin Van Buren. The Regency systematically used the state legislature to grant lucrative bank charters exclusively to its political allies. In return for these special economic privileges, those favored bankers provided the financial backing the Regency needed to entirely dominate state politics. It was a textbook case of systematic corruption: a group of politicians using the creation of economic privileges to secure uncontested control of the political system.
Following the economic depression that began in 1839 and the resulting state debt crises, the American public demanded structural reform to prevent politicians from exploiting the economy for political gain. To cut away the roots of this systematic corruption, Americans realized they needed to permanently limit the government’s ability to create economic rents through restricted entry and special privileges. The states’ solution to the paradox of promoting economic development while preventing systematic corruption was elegantly simple: let anyone have a corporate charter who wants one.
To accomplish this, states eliminated the pressure to create special corporate privileges by enacting constitutional provisions that required legislatures to pass general incorporation laws. Instead of requiring a prospective business owner to successfully lobby the legislature for a special bill, these new laws allowed unlimited entry into corporate status through a standard, objective administrative procedure. Opponents of the Albany Regency effectively said “never again!” to the machine’s political monopoly, passing the New York Free Banking Act in 1838, which took bank charters out of the realm of political patronage and mandated free entry. Between 1841 and 1852, twelve states wrote new constitutions; eight of them mandated general incorporation acts, and nine explicitly prohibited incorporation by special legislative acts altogether. Indiana’s 1851 constitution pioneered this sweeping reform by forbidding the legislature from enacting special or local bills, declaring instead that corporations “shall not be created by special act, but may be formed under general laws”.
These constitutional reforms were not intended to limit the creation of corporations; in fact, general incorporation laws made it vastly easier for average citizens to obtain a charter. The true purpose of these laws was to eliminate the private economic rents that were created when the political system artificially limited entry to favored insiders. By legally mandating open economic entry and unrestricted competition, American states in the 1830s and 1840s solved a deeply constitutional and political problem. In successfully dismantling systematic corruption, they inadvertently laid the critical institutional underpinning for modern competitive capitalism.