Frug begins the second chapter by tracing the legal basis of the American city. In medieval times, merchants used their economic power to form integrated groups that would enter into political arrangements with outsiders (i.e. the king or other towns). Internally, the medieval town protected workers from competition and exploitation by regulating production factors, as well as implementing a system of civic peace. As such, the medieval city was an exclusive, self-sufficient economic unit , free from the distinctions between the rights of its citizens as opposed to those of the city itself.

In 1682, city charters came under attack when King Charles II challenged the legitimacy of the corporate status, asserting that state control was essential to prevent social conflicts. The kings legal victory preserved his control over cities. This course of events represented fundamental split in modern political theory between the Hobbesian positivist view (that individual rights are strictly subordinate to the state) and Lockes natural view (that state power was reaffirmed and thus limited - by individual rights). The subsequent Glorious Revolution of 1688 restored some protection for corporate rights, but the final authority of Parliament remained unsettled. Thus, the issue of sovereign authority over corporate rights remained unresolved at the time of the founding of the United States

This very same debate over city power continued in the US throughout the 19^th Century. Initially, towns were considered associations based on both their public participation and hierarchical structures, though not legally designated as corporations. Regardless, the American court system considered them bodies politic, and analogous to corporations.

As the United States settled into the Lockean concept of legislative power limited by natural rights, a dilemma presented itself: like individual rights, corporate rights once recognized deserved protection from legislative infringement. However, corporations often wielded such economic power and wealth that they curtailed the very rights of individual laborers to earn a fair living. Moreover, at the time, all corporations cities and mercantile entities were created to further public purposes. Yet, these creatures of the state had an inherent identity crisis when the mercantile form sought to protect the investment of its individual founder(s). To settle this issue, the courts officially divided corporations into public and private in the 1819 Dartmouth v. Woodward case.

In 1872, John Dillon advocated for state control to curb excessive power of cities in order to protect private property. In addition to protection against an abusive sovereign, he sought to protect against unbridled corporate power. To execute this goal, Dillon advocated for a strict separation of the public and private sectors to prevent the interference of private interests in government. Dillons view came to represent the legal framework of cities as subordinate state entities; by the late 19^th Century, state constitutions passed only general legislation rather than specific, local rules governing cities. Although this home rule authorization gave the city some local flexibility, its power was curtailed in favor of the interest of the state and the rights of the individual.

In efforts to further curb local corruption, 20^th Century reformers inserted controls on the city that would be unthinkable for any American business. The reforms included tests for civil servants and competitive bidding for city contracts. Frug asserts that these actions, over time, gradually exacerbated city powerlessness. In sum, our author concludes that the legal history of protection of private rights from city power evolved over a century of legal rulings that gradually diminished the power of cities.