Economic Regulation

2012-06-15 10:59:03

The Framers of the Constitution who met in Philadelphia in 1787 were all or nearly all well-off property owners. One of their major concerns was the need to protect property owners in the unprecedented experiment in democracy that they were proposing. A major defect of democracy, they feared, was that debtors, always greatly outnumbering creditors, would be able to pass laws relieving themselves of their debt obligations. Probably the most important of the very few restrictions placed on the states in the original Constitution, therefore, was a provision prohibiting the states from passing any law ‘‘impairing the Obligation of Contracts,’’ the principal purpose of which was to prevent debtor relief legislation. Further, James Madison, the principal author of the Constitution, in preparing a first draft of a bill of rights from suggestions made by many of the ratifying states, decided on his own to add a provision that private property may not be ‘‘taken for public use without just compensation.’’

In the last third of the nineteenth century following the Civil War, the nation experienced, in the neartotal absence of government regulation, the greatest growth of industrial development and wealth in history. Alleged abuses of economic power by railroads and other large business entities led to demands for national economic regulation. The Interstate Commerce Commission was created in 1887 to regulate the railroads, and the Sherman Antitrust Act was adopted in 1890 to protect free market competition from business combines. Similar developments took place at the state level with the adoption of various price and wage controls and other economic and business regulations.

Attorneys for railroads, grain elevators, and other businesses subjected to economic regulation repeatedly besieged the Supreme Court to hold such regulations unconstitutional under the Due Process Clauses of the Fourteenth Amendment, applicable to the states, and the Fifth Amendment, applicable to the federal government. The clauses, providing that no person shall be deprived of ‘‘life, liberty, or property without due process of law,’’ were understood to impose only a requirement of fair legal procedures. The attorneys argued that the Court should interpret the clauses as also placing a restriction on the substance of law, permitting the justices to declare unconstitutional any law they considered ‘‘unreasonable.’’ After first dismissing this argument as based on ‘‘some strange misconception of the scope’’ of the Due Process Clause, the Court finally succumbed at the end of the nineteenth century, creating the oxymoronic doctrine of ‘‘substantive due process.’’

The Court thereafter and through the first third of the twentieth century invalidated more than 180 business or economic regulations as violating the ‘‘liberty of contract’’ that the Court read into the Due Process Clause or as simply ‘‘unreasonable’’ (most challenged regulations, however, were upheld). This period in the Court’s history became known as the Lochner era, epitomized by the Court’s 1905 decision in Lochner v. New York, holding unconstitutional a New York law that limited the working hours of bakers to sixty hours a week. The Court held that this restriction on liberty of contract between bakers and employers was not necessary to protect the health of bakers, and that it was not a legitimate use of state power to seek to improve the condition of the working class.

During the same period, the Court invalidated two federal anti–child labor laws as beyond the power of Congress to regulate interstate commerce and to tax. It then stopped the carrying out of President Franklin Roosevelt’s New Deal during his first term (1933– 1936) by invalidating a series of attempts to regulate the national economy as beyond Congress’s commerce power and as a violation of substantive due process.

Two important five-to-four decisions in 1934, however, pointed in a different direction. In Nebbia v. New York, the Court upheld price controls on the dairy industry, making clear that such controls were no longer generally impermissible. Even more remarkably, in Home Building & Loan Ass’n v. Blaisdell, the Court upheld a Minnesota mortgage moratorium law that prevented unpaid creditors from foreclosing on property, precisely the type of debtor relief measure that the Contracts Clause was meant to prohibit. The effect of the decision was virtually to read the clause out of the Constitution as a limitation on state economic regulation. The clause enjoyed a surprising partial revival in the late 1970s when two state laws were found to be in violation, but later decisions indicate that the revival is over.

The era of judicial concern with economic regulation came to a sudden and apparently complete end in 1937, often referred to as the year of the ‘‘constitutional revolution.’’ Overwhelmingly reelected in 1936, President Roosevelt undertook to keep the Court from continuing to frustrate his New Deal by proposing what became known, derisively, as his ‘‘Courtpacking’’ plan. If justices over seventy years of age failed to retire, the plan would have permitted the appointment of additional justices up to a total of fifteen. While the plan, which aroused intense opposition, was pending in Congress, the Court, almost entirely due to a change in the position of a single justice, Owen Roberts, handed down two opinions that seemed to reverse the position it had taken on federal and state economic regulation just the year before.

In NLRB v. Jones & Laughlin Steel Corp. (1937), the Court upheld application of the National Labor Relations Act, prohibiting the firing of union organizers, to a steel mill as a valid exercise of Congress’s power to regulate interstate commerce. In West Coast Hotel Co. v. Parrish (1937), the Court upheld a state minimum wage law after invalidating a similar law the year before. Whether or not the pending plan was the cause, the Court made what was called ‘‘the switch in time that saved nine.’’ The plan was then defeated, but President Roosevelt was able to claim that although he lost the battle, he had won the war. Jones & Laughlin and companion cases initiated the Court’s withdrawal from attempts to limit Congress’s regulation of economic and business affairs by means of the commerce power, and West Coast Hotel signaled the end of the Court’s invalidation of state regulations of business or economic affairs on the basis of substantive due process.

The Fifth Amendment’s prohibition of the taking of private property for public use without just compensation, originally applicable only to the national government, was held in the late 1900s to be, in effect, applicable to the states as well through the Fourteenth Amendment. The Court has read the ‘‘public use’’ requirement very broadly so as to impose no real limit on the taking of property by eminent domain. It is clear that just compensation is required when government takes possession of or asserts title to property. In Pennsylvania Coal Co. v. Mahon (1922), the Court held that compensation may also be required when a regulation of the use of property reduces its value even when the government does not take possession.

The Court has not, however, been able to state a rule as to what constitutes such a ‘‘regulatory taking,’’ and none was again found until several regulatory taking claims were upheld in a series of five-to-four decisions beginning in 1987. The five more conservative justices attempted to breathe new life into the Taking Clause by holding that even a temporary restriction on the use of property could constitute a taking requiring compensation, that a regulation that deprives property of ‘‘all economically beneficial or productive use’’ constitutes a taking per se (automatically), and that a property owner could base a taking claim even on restrictions that were on the property before he bought it. Finally, the Court held that when government requires a permit for a certain use of property (for example, to build a house), any conditions attached to a grant of the permit must be related to the reason for requiring a permit.

Much of the increased protection apparently given property owners by these decisions was undone, however, by the Court’s decision in Tahoe-Sierra Preservation Council, Inc. v. Tahoe Regional Planning Agency (2002) denying a regulatory taking claim. The Court very much limited, if it did not effectively overrule, both its earlier temporary regulatory taking decision, and its per se rule by holding that a regulation that prohibited all productive use of property for (at least) thirty-two months did not constitute a taking per se because the property retained value because productive use will be possible when and if the restriction is removed.

In sum, Congress’s virtually unlimited power to regulate economic and business affairs under the Commerce Clause, the demise of the doctrine of economic substantive due process, the virtual elimination of the Contract Clause, and the very limited application of the Taking Clause mean that there are now very few constitutional restrictions on either national or state regulation of economic and business affairs.


References and Further Reading

  • Ackerman, Bruce. Private Property and the Constitution. New Haven, CT: Yale University Press, 1977.
  • Alsop, Joseph, and Turner Catledge. 168 Days. New York: Doubleday Doran, 1938.
  • Corwin, Edward. Liberty Against Government. Baton Rouge: Louisiana State University Press, 1948.
  • Epstein, Richard. Takings: Private Property and Eminent Domain. Cambridge, MA: Harvard University Press, 1985.
  • Rossiter, C., ed. The Federalist Papers, No. 10 (Madison). New York: Penguin Books, 1961.
  • McClosky, Robert. The American Supreme Court. Chicago: University of Chicago Press, 1960.
  • Novak, John, and Ronald O. Rotunda. Constitutional Law. 7th ed. St. Paul, MN: Thomson West, 2004.
  • Twiss, Benjamin. Lawyers and the Constitution: How Laissez Faire Came to the Supreme Court. New Haven, CT: Princeton University Press, 1942.
  • Wright, Benjamin F. The Growth of American Constitutional Law. Boston and New York: Houghton Mifflin, 1942.

Cases and Statutes Cited

  • Home Building & Loan Ass’n v. Blaisdell, 290 U.S. 398 (1934)
  • Lochner v. New York, 198 U.S. 45 (1905)
  • Nebbia v. New York, 291 N.Y. 502 (1934)
  • NLRB v. Jones & Laughlin, 301 U.S. 57 (1937)
  • Pennsylvania Coal Co. v. Mahon, 260 U.S. 393 (1922)
  • Tahoe-Sierra Preservation Council v. Tahoe Regional Planning Agency, 535 U.S. 302 (2002)
  • West Coast Hotel Co. v. Parrish, 300 U.S. 379 (1937)
  • U.S. Const. art. I, sec. 10; Fifth and Fourteenth Amendments