After the Civil War, capital-scarce states and localities continued the antebellum practice of granting subsidies to encourage business enterprise. Railroads were the principal beneficiaries of such aid. Subsidy arrangements typically took the form of stock subscriptions by local governments, which were paid for by the issuance of negotiable bonds. The bonds were serviced by revenue raised from taxation. State courts generally upheld financial assistance to railroads but insisted that taxes could only be levied for a public purpose. Although not expressly written in federal or state constitutions, this requirement was viewed by judges as an inherent principle of republican government. As state and local governments lavished aid on businesses, however, courts occasionally groped to fashion some limit on the power of taxation.

Loan Association v. Topeka (1874) marked the Supreme Court's endorsement of the public purpose doctrine as a means of restricting grants of public revenue to private enterprise. As authorized by state law, the city of Topeka donated municipal bonds to an ironworks company to encourage that business to establish shops in the city. The city soon ceased making interest payments. When a bondholder in Ohio sued to collect interest on these bonds, the Supreme Court was called upon to consider the validity of such subsidy arrangements.

Stressing that there were limits on governmental power that "grow out of the essential nature of all free governments," the Supreme Court, in an opinion by Justice Samuel F. Miller, warned: "Of all the powers conferred upon government that of taxation is most liable to abuse." Miller ruled that "there can be no lawful tax which is not laid for a public purpose." He then concluded that taxation to aid manufacturing was not for a public purpose and that the municipal bonds were therefore invalid. In reaching this result, Miller was clearly influenced by the perceived excesses of public aid to railroads and seemed determined to draw the line against grants of public revenue to other types of private business. Dissenting alone, Justice Nathan Clifford maintained that courts could only strike down state laws that violated specific constitutional provisions and that it was inappropriate for courts to rely on vague theories of government to curb state legislative taxing authority.

Following Loan Association the public purpose doctrine was sometimes invoked to curb use of the tax power to subsidize business enterprise. Moreover, the ruling made clear that the Supreme Court distrusted the judgment of state authorities concerning disbursement of tax revenue and was prepared to render an independent assessment about which projects were for a public purpose. The decision is also significant because the Supreme Court accepted the premise that legitimate government was restrained by certain fundamental if unwritten principles. Thus Loan Association paved the way for the Supreme Court to adopt a substantive reading of the due process clauses in the late nineteenth century. Lastly, the case demonstrated that the Court in the late nineteenth century was not following a monolithic course of assisting business enterprise.