The Promise of American Life

by Herbert David Croly

CHAPTER XII

PROBLEMS OF RECONSTRUCTION—(continued)

Any proposal to alter the responsibilities and powers now enjoyed by the central and the state governments in respect to the control of corporations and the distribution of wealth involves, of course, the Federal rather than the state constitutions; and the amendment of the former is both a more difficult and a more dangerous task than is the amendment of the latter. A nation cannot afford to experiment with its fundamental law as it may and must experiment with its local institutions. As a matter of fact the Federal Constitution is very much less in need of amendment than are those of the several states. It is on the whole an admirable system of law and an efficient organ of government; and in most respects it should be left to the ordinary process of gradual amendment by legal construction until the American people have advanced much farther towards the realization of a national democratic policy. Eventually certain radical amendments will be indispensable to the fulfillment of the American national purpose; but except in one respect nothing of any essential importance is to be gained at present by a modification of the Federal Constitution. This exception is, however, of the utmost importance. For another generation or two any solution of the problem of corporation control, and of all the other critical problems connected therewith, will be complicated, confused, and delayed by the inter-state commerce clause, and by the impossibility, under that clause, of the exercise of any really effective responsibility and power by the central government. The distinction between domestic and inter-state commerce which is implied by the Constitutional distribution of powers is a distinction of insignificant economic or industrial importance; and its necessary legal enforcement makes the carrying out of an efficient national industrial policy almost impossible.

Under the inter-state commerce clause, a corporation conducting, as all large companies do, both a state and an inter-state business, is subject to several supplementary jurisdictions. It is subject, of course, primarily to the laws of the state under which it is organized, and to the laws of the same state regulating its own particular form of industrial operation. It is subject, also, to any conditions which the legislatures of other states may wish to impose upon its business,—in so far as that business is transacted within their jurisdictions. Finally, it is subject to any regulation which the central government may impose upon its inter-state transactions. From the standpoint of legal supervision, consequently, the affairs of such a corporation are divided into a series of compartments, each compartment being determined by certain arbitrary geographical lines—lines which do not, like the boundaries of a municipality, correspond to any significant economic division. As long as such a method of supervision endures, no effective regulation of commerce or industry is possible. A corporation is not a commercial Pooh-Bah, divided into unrelated sections. It is an industrial and commercial individual. The business which it transacts in one state is vitally related to the business which it transacts in other states; and even in those rare cases of the restriction of a business to the limits of a single state, the purchasing and selling made in its interest necessarily compete with inter-state transactions in the same products. Thus the Constitutional distinction between state and inter-state commerce is irrelevant to the real facts of American industry and trade.

In the past the large corporations have, on the whole, rather preferred state to centralized regulation, because of the necessary inefficiency of the former. Inter-state railroad companies usually exercised a dominant influence in those states under the laws of which they had incorporated; and this influence was so beneficial to them that they were quite willing for the sake of preserving it to subsidize the political machine and pay a certain amount of blackmail. In this way the Pennsylvania Railroad Company exercised a dominant influence in the politics of Pennsylvania and New Jersey; the New York Central was not afraid of anything that could happen at Albany; the Boston and Maine pretty well controlled the legislation of the state of New Hampshire; and the Southern Pacific had its own will in California. Probably in these and other instances the railroads acquired their political influence primarily for purposes of protection. It was the cheapest form of blackmail they could pay to the professional politicians; and in this respect they differed from the public service corporations, which have frequently been active agents of corruption in order to obtain public franchises for less than their value. But once the railroads had acquired their political influence, they naturally used it for their own purposes. They arranged that the state railroad commissioners should be their clerks, and that taxation should not press too heavily upon them. They were big enough to control the public officials whose duty it was to supervise them; and they were content with a situation which left them free from embarrassing interference without being over-expensive.

The situation thereby created, however, was not only extremely undesirable in the public interest, but it was at bottom extremely dangerous to the railroads. These companies were constantly extending their mileage, increasing their equipment, improving their terminals, and enlarging their capital stock. Their operations covered many different states, and their total investments ran far into the hundreds of millions of dollars. In the meantime they remained subject to one or several different political authorities whose jurisdiction extended over only a portion of their line and a fraction of their business, but who could none the less by unwise interference throw the whole system out of gear, and compromise the earning power of many millions of dollars invested in other states. Moreover, they could, if they chose, make all this trouble with a comparative lack of responsibility, because only a fraction of the ill effects of this foolish regulation would be felt within the guilty state. As a matter of fact many railroads had experiences of this kind with the Western states, and were obliged to defend themselves against legislative and administrative dictation, which if it did not amount to confiscation, always applied narrow and rigid restrictive methods to a delicate and complicated economic situation. Most of the large Eastern and some of the large Western companies purchased immunity from such "supervision," and were well content; but it was mere blindness on their part not to understand that such a condition, with the ugly corruption it involved, could not continue. The time was bound to come when an aroused public opinion would undermine their "influence," and would retaliate by imposing upon them restrictions of a most embarrassing and expensive character. In so doing the leaders of a reformed and aroused public opinion might be honestly seeking only legitimate regulation; but the more the state authorities sought conscientiously to regulate the railroads the worse the confusion they would create. The railroad could not escape some restrictive supervision; neither were they obliged wholly to submit to it on the part of any one state. The situation of a railroad running through half a dozen states, and subject to the contradictory and irresponsible orders of half a dozen legislatures or commissions might well become intolerable.

Just this sort of thing has been recently happening. The state authorities began to realize that their lax methods of railway supervision were being used as an argument for increased Federal interference. So the state governments arose in their might and began furiously to "regulate" the railroads. Commissions were constituted or re-constituted, and extremely drastic powers were granted to these officials in respect to the operation of the railroads, the rates and the fares charged, and their financial policies. Bills were passed severely restricting the rights which companies had enjoyed of owning the stock of connecting railroads. Many of the states sought to forbid the companies from charging more than two cents a mile for passenger fares. The issuing of passes except under severe restrictions was made illegal. The railroad companies were suddenly confronted by a mass of hostile and conflicting legislation which represented for the most part an honest attempt to fulfill a neglected responsibility, but whose effort on the whole merely embarrassed the operations of the roads, and which in many instances failed to protect the real public interests involved. Even when this legislation was not ignorantly and unwisely conceived, and even when it was prepared by well-informed and well-intentioned men, it was informed by contradictory ideas and a false conception of the genuine abuses and their necessary remedies. Consequently, a certain fraction of intelligent and disinterested public opinion began soon to realize that the results of a vigorous attempt on the part of the state governments to use their powers and to fulfill their responsibilities in respect to the railroads were actually worse and more dangerous to the public interest than was the previous neglect. The neglect of the responsibility implied corruption, because it provoked blackmail. The vigorous fulfillment of the responsibility implied confusion, cross-purposes, and excessive severity, because the powers of a single state were too great within its specific jurisdiction and absolutely negligible beyond.

The railroad companies suffer more from this piecemeal and conflicting regulation than do corporations engaged in manufacturing operations, not only because they discharge a peculiarly public function, but because their business, particularly in its rate-making aspect, suffers severely from any division by arbitrary geographical lines. But all large inter-state corporations are more or less in the same situation. Corporations such as the Standard Oil Company and some of the large New York life insurance companies are confronted by the alternative either of going out of business in certain states, or of submitting to restrictions which would compromise the efficiency of their whole business policy. Doubtless they have not exhausted the evasive and dilatory methods which have served them so well in the past; but little by little the managers of these corporations are coming to realize that they are losing more than they gain from subjection to so many conflicting and supplementary jurisdictions. Little by little they are coming to realize that the only way in which their businesses can obtain a firm legal standing is by means of Federal recognition and exclusive Federal regulation. They would like doubtless to continue to escape any effective regulation at all; but without it they cannot obtain effective recognition, and in the existing ferment of public opinion recognition has become more important to them than regulation is dangerous.

Many important financiers and corporation lawyers are still bitterly opposed to any effective centralized regulation, even if accompanied by recognition; but such opposition is not merely inaccessible to the lessons of experience, but is blinded by theoretical prejudice. Doubtless the position of being, on the one hand, inefficiently regulated by the state governments, and, on the other hand, of being efficiently protected in all their essential rights by the Federal courts—doubtless such a situation seems very attractive to men who need a very free hand for the accomplishment of their business purposes; but they should be able to understand that it would necessarily produce endless friction. The states may well submit to the constant extension of a protecting arm to corporations by the Federal courts, provided the central government is accomplishing more efficiently than can any combination of state governments the amount of supervision demanded by the public interest. But if the Federal courts are to be constantly invoked, in order to thwart the will of state legislatures and commissions, and if at the same time the authority which protects either neglects or is unable effectively to supervise, there is bound to be a revival of anti-Federal feeling in its most dangerous form. Whatever the corporations may suffer from the efficient exercise of Federal regulative powers, they have far more to fear from the action of the state governments—provided such action proceeds from an irresponsible local radicalism embittered by being thwarted. The public opinion on which the corporations must depend for fair treatment is national rather than local; and just in as far as they can be made subject to exclusive centralized jurisdiction, just to that extent is there a good chance of their gradual incorporation into a nationalized economic and legal system.

The control of the central government over commerce and the corporations should consequently be substituted for the control of the states rather than added thereto; and this action should be taken not in order to enfeeble American local governments, but to invigorate them. The enjoyment by any public authority of a function which it cannot efficiently perform is always a source of weakness rather than of strength; and in this particular case it is a necessary source, not merely of weakness, but of corruption. The less the state governments have to do with private corporations whose income is greater than their own, the better it will be for their morals, and the more effectively are they likely to perform their own proper and legitimate functions. Several generations may well elapse before the American public opinion will learn this lesson; and even after it is well learned there will be enormous and peculiar obstacles to be removed before they can turn their instruction to good account. But in the end the American Federal Constitution, like all the Federal Constitutions framed during the past century, will have to dispense with the distinction between state and inter-state commerce; and the national authority will prevail, not because there is any peculiar virtue in the action of the central government, but because there is a peculiar vice in asking the state governments to regulate matters beyond their effective jurisdiction.