|
Part V 8. The Lochner Era Reconsidered 8.1 Transition to Lochner-Style Jurisprudence (1890-1895) 8.2 Lochner Era Commerce and Labor Cases |
Nearly a century of legal commentary has heaped disparagement on the Lochner era court, which we need not repeat except to summarize the accusations. The Court, ever jealous of the interests of big business and beholden to the ideology of laissez faire, adopted an unjustifiably absolutist defense of the right to private contracts against state regulation. This defense took the form of siding with capitalists against labor. The dubious constitutional basis of this defense was in the Fourteenth Amendment’s Due Process Clause, which prohibited states from depriving persons of their liberty or property without due process of law.
This prohibition was construed so broadly as to prohibit even legitimate police regulations with sound procedural guarantees, transforming due process
into a substantive
guarantee of liberty and property that could not be infringed. This substantive due process
jurisprudence was the earliest systematic form of judicial activism, prescinding from sound rules of constitutional interpretation in favor of results-oriented judging that was grounded in ideological convictions. This Court transformed the Constitution from an instrument that empowered the legislature into one that prevented it from doing anything to correct the excesses of Gilded Age capitalism.
It would be futilely contrarian to deny that there is much justification for these criticisms, yet, on the other hand, many of the attacks on this Supreme Court era are unbalanced and steeped in their own ideological motivations. A survey of the data from this period and close examination of some of its infamous cases may cause us to pull back and reconsider some of these criticisms. This Court included some of its most eminent members of all time, particularly Oliver Wendell Holmes Jr. and John Marshall Harlan, and they were not always dissenters in these supposedly poorly decided cases. Many of the rulings actually opposed monopolistic, anti-competitive business interests, so that it would clearly be a mistake to characterize the Court simply as pro-business.
A fairer characterization would be they took a strong view of personal freedom in economic affairs against federal and state governments, which were constitutionally limited in the scope of their power.
While freedom of contract and what we now call substantive due process were invoked in multiple opinions, this was not as prevalent as one might think. The Court rarely invoked the Contracts Clause, following settled interpretation that prohibited state abridgement only of contracts that were already executed. The overall effect of substantive due process jurisprudence was not nearly as predominant as one might expect. A careful scrutiny of such claims was made by Michael J. Phillips (1997) in the Mercer Law review. The claim that 200 state and federal laws were overturned by the Lochner court seems to be based on Felix Frankfurter’s 1938 book, Mr. Justice Holmes and the Supreme Court, which lists 220 cases from 1897 to 1937 under the heading Cases Holding State Action Invalid Under the Fourteenth Amendment.
If we include eight cases involving federal action and foreign law, and make other corrections, the net increase of eight comes to 228 cases. Yet many of these Fourteenth Amendment cases are not due process cases. Thirty-three at least are Equal Protection Cases. Another thirty-five have to do with procedural due process,
not substantive due process.
The Lochner court rarely used either of these terms, but we can glean from the opinion’s argument which doctrine was invoked. Adding a privileges and immunities case, a total of sixty-nine (30%) were not substantive due process cases at all.
Among the remaining 70%, all but fifty-five are only peripherally concerned with substantive due process. These fifty-five cases fit within the core of Lochner-era substantive due process.
If we were to include the other 104 peripheral
cases, we should have to include many cases that Justice Oliver Wendell Holmes espoused, thereby weakening the claim that substantive due process was a vicious doctrine. These peripheral cases include cases on tax doctrine that have parallels even in the modern Court. Holmes dissented in just nine of those thirty-two cases, and wrote three of the decisions. Holmes did not dissent in any cases involving incorporation of Takings Clause, and he even wrote two majority opinions, including Pennsylvania Coal Co. v. Mahon, 260 U.S. 393 (1922).
Holmes dissented at a much higher rate in the core fifty-five Lochner era cases, but even there not invariably. He joined the majority in twenty-seven of these, and he did not even participate in all of them, since he left the Court in 1932. Only eleven of these substantive due process cases explicitly invoked freedom of contract, and Holmes joined two of these.
Since the substantive due process cases repealed some regulation against business, it is incontrovertible that these decisions benefited business, but this does not prove that they were wrongly decided. As for benefiting big business,
several of the decisions actually opposed favoritism toward monopolists, while others had small businesses as the litigants. We have seen in the slaughter-house and Chinese laundry cases that certain classes of regulation affect predominantly small businesses. Indeed, a regulation that is merely inconvenient to large businesses can be fatal to small businesses, which are also less likely to have behind-the-scenes influence over legislation, regulations and ordinances.
We shall review some of the higher profile, more impactful Lochner era cases in various domains of law, to see which legal doctrines were invoked and why the famous dissenters Holmes and Harlan disagreed or sometimes agreed with the majority. For our purposes, we will be especially attentive as to when substantive due process was invoked and whether this doctrine was founded in traditional jurisprudential principles or was an early form of judicial activism.
Although the Lochner era is commonly reckoned as beginning in 1897, a transition in the composition of the Supreme Court occurred much earlier, as four new justices would join Stephen Johnson Field to form a slim majority that tended to favor a more aggressive defense of freedom of contract and private property claims under the Fourteenth Amendment. These were Chief Justice Melville Fuller (served 1888-1910), Justice Henry Billings Brown (1891-1906), who authored the Plessy v. Ferguson opinion, and had a stronger view of the police power than some of his peers, Justice George Shiras Jr. (1892-1903), who had been a private lawyer and never served as a judge before his Supreme Court appointment, and Justice David Josiah Brewer (1890-1910), who authored 540 majority opinions and was a chief intellectual exponent of the new freedom of contract and private property jurisprudence, yet he was also the most frequent dissenter on the Fuller Court, more so even than Justice Harlan. Brewer was the best known member of the Court in his own time, as he gave many public speeches and freely discussed his opinions on policy.
The Court in this period may be considered activist
or at least quasi-activist insofar as it abandoned judicial self-restraint (see Schlesinger’s 1947 definition, Section 1.2) and prescinded from jurisprudential norms in two definite domains: freedom of contract (laissez faire) and racial segregation, with the latter taking priority over the former when both issues were involved. Even in the most unfavorable assessment, this Court would not meet our more rigorous definition of judicial activism, as the Court’s opinions at least professed to follow traditional jurisprudential norms, and even Lochner itself was presented in such form. The worst that might be said is that it was bad jurisprudence, lacking clear rules or tests for constitutionality. Brewer in particular seemed to follow intuitions about the reasonableness of a regulation in order to assess its constitutionality, and the Court as a whole seemed rather inconsistent in its rulings.
While the central fault of this Court has often been considered to be a favoritism for laissez-faire ideology and the interests of big business, more recent scholarship has tempered this stance. The Court and its members, both on and off the bench, frequently opposed corporate behemoths and showed concern for the protection of private freedoms against state collusion with favored big business interests. In this attitude, they generally aligned with the economically liberal tradition that had prevailed since the Founding. Where they faltered was in establishing a sound legal basis for these views, leading to the accusation that they were just following their economic ideological preferences.
As discussed in the previous chapter, the doctrine of substantive due process is often faulted for Lochner era jurisprudence. Yet many key rulings did not invoke the doctrine, nor the Fourteenth Amendment at all. Moreover, it is unclear that the doctrine itself should be considered a product of illicit activism, for even Holmes sometimes ruled on substantive due process grounds, showing that this doctrine was not always out of bounds, even for a champion of restraint.
It should be remembered that the Fuller Court, though vilified by later historians for contradicting their own ideological preferences, was esteemed in its own day, and none more so than Justice Brewer. Their reluctance to allow governments to extend their police power into purely socioeconomic tinkering, without any credible grounding in public safety or health, was in accord with the spirit of the time. Even those who favored a strong police power, such as Justice Brewer, would deny similar regulatory power to the federal government, again in accord with widely accepted principles of the time.
Nonetheless, the accusation of activism is not purely anachronistic. Justice Harlan even then sounded the alarm with his dissents about usurpations by the Court. He was a strict constructionist, favoring literal interpretation of a text, departing from this only when it is ambiguous or this would frustrate the intentions of the legislation. Departure from this methodology, in his view, made judges illicit legislators, when their role was simply to apply the law passed by the people’s legislature. Likewise, to interpret the Constitution meant to apply the instrument that was ratified by the people’s representatives.
While this originalist
philosophy was widely held, at least in principle, there was still considerable latitude as to whether one should apply a narrow or broad reading to the text of the Constitution. Some, like Chief Justice Marshall, may read the powers of government broadly, but even here it is because he believed the Framers intended for them to be construed broadly, so that the national government would have all available means to exercise its powers. Strict constructionism
in the sense of an always narrow reading would be wrong. Nonetheless, favoring the substance of the text that was passed is just sound common sense. We assume that anyone who goes to the trouble of crafting a legal instrument, even a contract or testament, means what they say, so there is a presumption of the literal sense when the sense is doubtful. To deny that we can arrive at an objective meaning, even in principle, from the text or the intentions of legislators would imply that the legislators are incapable of saying anything or of knowing what they are saying. If that is truly so, it begs the question why we should have a legislature or written law. Surely, in particular cases there will be ambiguity which the Court must supply, but even this must give deference to those aspects of the law which are clearly articulated and those intentions that are clearly expressed.
The foregoing need not imply that judging is reducible to some formula or algorithm. Indeed, we will find that the Fuller Court generally were not formalists,
and may have had the opposite fault of not proposing any test or rule as the basis for their opinions. We can review some of this Court’s more important private property, contracts and taxation cases, deferring civil rights cases to a later section.
In Chicago, Milwaukee and St. Paul Railway Co. v. Minnesota, 134 US 418 (1890), the Fuller Court struck down a Minnesota statute that authorized a commission to regulate railroad rates at any level it deemed equal and reasonable,
with no recourse for judicial investigation of its decisions. Without questioning the right of the legislature to regulate railroad rates, the Court denied that the legislature could invest a commission with the power to impose any rates whatsoever without any judicial process for appeal. If the rates were too low, the state could command a corporation to transport persons or goods without reward, which would be a taking of private property without due process. The Court did not rule as to whether the rates in question were unreasonable, but only that the statutory denial of any judicial process for contesting the commission’s decisions was unconstitutional. This invoked due process in the traditional, procedural sense. While the legislature might delegate its regulatory authority to a commission, that commission did not meet due process requirements, as it cannot be regarded as clothed with judicial functions or possessing the machinery of a court of justice.
The dissenters, led by Justice Bradley, held that the question of the reasonableness of rates was to be decided by the legislature or its delegates, not by the judiciary, as this was a policy question. Yet the majority conceded this only in a general sense, while holding that the power to regulate is not unlimited. This power to regulate is not a power to destroy, and limitation is not the equivalent of confiscation.
The Court remanded the case, without ruling as to whether the rates in question were unreasonable and confiscatory, but requiring that there should be judicial recourse for the plaintiffs on such matters.
Notwithstanding the concerns of the dissenters, this case did not overturn Munn v. Illinois, 94 U.S. 113 (1878), nor did the later cases Budd v. New York, 143 U.S. 517 (1892) and Brass v. North Dakota, 153 U.S. 391 (1894). In Budd, which like Munn involved imposing a maximum rate on grain elevators, the Court majority confirmed that its intention to uphold Munn had never been revoked. The petitioner in Budd contended that New York’s statutory rate precluded all inquiry as to whether the rate is reasonable, so it should fall afoul of the Due Process Clause, just as the Minnesota statute did. On the contrary, the Court in Budd found that the Minnesota ruling, which involved a commission appointed by the legislature, did not apply to the current case, where the rates are prescribed directly by the legislature.
While the legislature’s regulatory power is not without limit, the records do not show that the charges fixed by the statute are unreasonable, or that property has been taken without due process of law… even if under any circumstances we could determine that the maximum rate fixed by the legislature was unreasonable.
This time the dissenters were Justices Brewer, Field, and Brown, who made plain their desire to overturn Munn. The central fault of that case was mistaking public interest in the use of property as a basis for public regulation. Practically any business that is open to the public has some public interest, but this did not imply a right for public fixing of all prices for all businesses. Justice Brewer made his ideological motivation plain: The paternal theory of government is to me odious. The utmost possible liberty to the individual, and the fullest possible protection to him and his property, is both the limitation and duty of government. If it may regulate the price of one service which is not a public service, or the compensation for the use of one kind of property which is not devoted to a public use, why may it not with equal reason regulate the price of all service, and the compensation to be paid for the use of all property?
The particular regulation in question was especially objectionable, since it forbade the elevator proprietor to charge more than what he paid the longshoreman, who were independent contractors, so his work of managing the operation was uncompensated.
While the Budd dissenters did not adequately distinguish between the prudence of price regulation and the legislature’s constitutional authority to impose such regulations on private property, they were on sounder ground when pointing out the compulsion of uncompensated services, which would be an unconstitutional deprivation of property without due process, even if commanded directly by the legislature. The Budd majority’s distinction between rates set by the legislature and those set by an appointed commission did not seem especially germane, except perhaps to avoid courting further controversy by overturning Munn.
Another grain elevator rate case, Brass v. North Dakota, 153 U.S. 391 (1894), was similar on the surface to Munn and Budd, so the statute being upheld is unsurprising, though the identities of the dissenters are noteworthy. Justice Brown, who dissented in Budd, now joined the majority, perhaps because he now considered Munn to be settled precedent. The dissenters Brewer and Field were now joined by Justices Jackson and White, though neither of these were especially noted as ardent substantive due process
advocates. The dissent, written by Justice Brewer and joined by the other three, did not repeat criticism of Munn, but instead focused on the particular that the petitioner was compelled to engage in the business of maintaining a public elevator, though the grain elevator was only for the purpose of his main business of trading grain, and sometimes shared with his neighbors. The fact that he has vacancy in his elevator should not compel him to make it available to others, who may store grain there indefinitely, limiting his own usage of his property. His was but one of 600 elevators in the area with 125 different owners, so there was no question of a monopoly. This public commandeering of private property was sufficiently confiscatory to attract even moderate justices to join the dissent.
Far from advocating the interests of big business,
these early rate cases pitted the property rights of individual proprietors against the regulatory power of the state, testing the limits of the latter. There was no pretext of public health or safety, but rather of public interest
in the use of private property. States now used this concept elastically, where once it was restricted to state-sanctioned public services such as ferries, road-building, or other necessary monopolies, in order to regulate just about any aspect of the economy. While the Court’s resistance was often couched in language that was hostile to the overreaching regulatory state, it continued to recognize a broad authority for legislatures, even to the point of making some of its rulings in tension with each other. This early jurisprudence would be objectionable only to those who thought there should be no limits on the state’s regulatory power.
The Fuller Court’s first truly notorious case had nothing to do with regulating businesses, but with the constitutionality of a federal income tax. In Pollock v. Farmers’ Loan & Trust Co., 157 U.S. 429 (1895), the Court found two provisions of the 1894 income tax (sections 27-37 of the Wilson-Gorman Tariff Act) to be unconstitutional. The Court unanimously (8–0) found that taxation on income from municipal bonds was an unconstitutional tax on the power of the state to borrow money. More controversially, and without precedent, a 6–2 majority found that a tax on income from real property was a direct tax
that was not apportioned among the states in proportion to representation as required by the Article I, Section 9. At a rehearing with all nine justices 158 U.S. 601 (1895) a 5–4 majority found that income tax on personal property was likewise unconstitutional, and so the entire income tax scheme must be void. As the apportionment requirement would make progressive taxation on income from real or personal property impossible, this decision was derided as an unjustified restriction of the federal government’s taxation power. The motives of the justices were impugned as protecting the wealthy from taxation. The Sixteenth Amendment, passed by Congress in 1909 and ratified in 1913, overruled Pollock by establishing the power to collect tax on income from any source without any apportionment requirement.
The constitutional meaning of a direct
tax is notoriously unclear, and we need not try to determine so much whether the Court got it right,
if that is even answerable, as whether the majority’s approach to the constitutional question was in line with accepted norms of jurisprudence. We should note that an income tax was a relatively recent innovation, attempted only once before, during the Civil War, and weakly enforced, so there were few relevant precedents.
At the Constitutional Convention, there was a consensus that Congress should have broad taxation powers, as this was a principal reason for abandoning the Articles of Confederation. Nonetheless, several restrictions were inserted, mainly at the behest of the southern states. Most importantly, Congress could not tax exports at all. Second, it could impose a direct tax
such as a capitation tax only if it were apportioned among the states in proportion to their representation in the House. For such apportionment, slaves would count as three-fifths of a person, so that the southern states were not taxed without representation. (Recall that it was the free states that opposed counting slaves fully toward Congressional apportionment, so the South should not benefit from counting a class of persons denied the rights of citizens.) Lastly, all other taxes must be uniform
throughout the United States, i.e., the rates should not vary from one state or local jurisdiction to another. These provisions made their way into Article I in this form:
The Congress shall have power to lay and collect taxes, duties, imposts and excises, to pay the debts and provide for the common defence and general welfare of the United States; but all duties, imposts and excises shall be uniform throughout the United States;
…
No Capitation, or other direct, tax shall be laid, unless in Proportion to the Census or enumeration herein before directed to be taken.
…
No tax or duty shall be laid on articles exported from any state. (Article I, Sec. 8-9)
A further restriction, borrowed from the Articles of Confederation, is that federal taxes are only for paying debts and providing for the common defense and general welfare of the United States.
This was understood as prohibiting federal taxes for construction of roads, piers, etc. for the benefit of particular states.
The Convention was silent as to the meaning of a direct
tax. The North Carolina delegation understood this to apply not only to head taxes, but also to taxes on land, so that Southern land, being more valuable, is not taxed more heavily on that account. No other example of a direct tax was advanced. Economic writers of that period spoke of direct taxes, usually as those that could not be pushed on to one’s customers, but that does not appear to have been the meaning here.
In Hylton v. United States, 3 U.S. 171 (1796), arguably the first true judicial review
case, though here the law was upheld, the Supreme Court considered whether a tax on carriages was a direct tax,
and therefore subject to the apportionment rule. Only four of six justices heard the case, and two of them issued written opinions speaking only for themselves, though all four agreed on the constitutionality of the tax.
Justice Paterson considered capitation and land taxes to be direct taxes,
a tax on land being so deemed both in theory and in practice.
It was not necessary in this case to determine if the immediate product of the land, in its original and crude state, ought to be considered as of the land.
Land, independently of its produce, is of no value. When the produce is converted into a manufacture… its nature is altered… it becomes quite another subject…
Individuals, not states, were the objects of taxation, except in the case of direct taxes. Apportionment is an operation on states…
Uniformity is an instant operation on individuals…
The apportionment rule could not be fairly applied to the carriage tax, as some states may have many carriages and others had few. The uniformity rule can be applied equitably, as it depends on the object (carriages) and not the caprice of the assessor. This suggests the tax falls under indirect taxes. Another consideration: All taxes on expenses or consumption are indirect taxes. A tax on carriages is of this kind, and of course is not a direct tax. Indirect taxes are circuitous modes of reaching the revenue of individuals, who generally live according to their income.
Here Paterson appeals to the economists’ notion of direct and indirect taxes, quoting Adam Smith: the state, not knowing how to tax directly and proportionally the revenue of its subjects, endeavors to tax it indirectly by taxing their expense, which it is supposed in most cases will be neatly in proportion to their revenue.
Justice Iredell made an even simpler argument, noting that Congress may tax anything other than exports, save with two restrictions: 1) All direct taxes must be apportioned. 2) All duties, imposts and excises must be uniform. If the carriage tax were a direct tax
in the meaning of the Constitution, it must be apportioned. As all direct taxes must be apportioned, it is evident that the Constitution contemplated none as direct but such as could be apportioned. If this cannot be apportioned, it is therefore not a direct tax in the sense of the Constitution.
This obviously cannot be done for a tax on carriages without resulting in wild inequities, as the share paid by each state would have no correlation with the number of carriages in each state, in which case it can hardly be a tax on carriages. Therefore it must fall under the second provision, a duty, impost or excise, unless there is some third category of tax, in which case neither restriction applies, though such taxes still ought to be uniform as applied to individuals. Iredell did not try to define what is a direct or indirect tax in all cases. He only offers land or poll taxes as examples, as these are susceptible to apportionment. The implication is that states are here taxed directly, so it is just that they should be taxed in proportion to their representation.
The first federal income tax was included in the wartime Revenue Act of 1861 (Thirty-Seventh Congress, Sess. I, Ch. 45. 1861), which applied a 3 percent tax on all income over 800 dollars, with different rates applied to income on treasury note interest (1.5 percent) and income on property owned in the U.S. by citizens residing abroad (5 percent). (Sec. 49) This same act also had a twenty million dollar direct tax apportioned among the states (Section 8), including the western territories and the ten states that had declared secession as of August 5. Within each state or territory, the tax was to be assessed in proportion to the value of lands and their improvements (Section 13). Thus the direct tax in question was a real estate tax. By silent implication, the income tax was not considered a direct tax.
This short-lived income tax was soon superseded by the Revenue Act of 1862 (Thirty-Seventh Congress, Sess. II, Ch. 119. 1862), which established an income duty
on all gains or profits from any kind of property, rents, interest, dividends, salaries, or from any profession, trade
in excess of 600 dollars. This was the first progressive income tax, with a rate of 3 percent for income over 600 dollars, unless total income exceeded 10,000 dollars, in which case all income over 600 dollars would be taxed at 5 percent. Although the apportionment requirement was evaded by considering this a duty,
it seemed to fail the uniformity requirement, since a particular object, namely income over 600 dollars, was taxed differently depending on the total income of a person. (In a modern progressive tax code, the higher rate would only be applied to income above 10,000 dollars, thus guaranteeing uniformity based on the object taxed, not varying by person.) Again, a higher 5 percent rate applied to all income on property held in the U.S. by citizens residing abroad.
A further revision in 1864 (Thirty-Eighth Congress, Sess. I, Ch. 173. 1864) rectified the uniformity problem mentioned above, as all income in a bracket was taxed the same regardless of a person’s total income. A duty
of 5 percent was applied to income exceeding 600 dollars, up to 5000 dollars, then 7.5 percent was applied to the excess over 5000 dollars up to 10,000 dollars, and 10 percent was applied to the excess over 10,000 dollars. This graduated income tax applied equally to citizens residing in the U.S. or abroad, whether derived from any kind of property, rents, interests, dividends, salaries, or from any profession, trade, employment or vocation, carried on in the United States or elsewhere…
(Sec. 116) Interests from bonds were to be included as income, and gains or losses from sale of real estate could add to or subtract from income.
The constitutionality of the federal income tax, as amended in 1864, was upheld unanimously (including by Justice Field) in Springer v United States, 102 U.S. 586 (1880). The Court found that the only direct taxes
were capitation taxes and real estate taxes. Income tax, by contrast, is an excise or duty. As an indirect tax, it must be applied uniformly, and the 1864 version of the income duty met this criterion.
Notwithstanding this settled law, the income tax provision of the Revenue Act of 1894 would be struck down in Pollock v. Farmers’ Loan & Trust Co.. In its first hearing on April 8, 1895 [157 U.S. 429], a 6–2 majority led by Chief Justice Fuller ruled that taxes on income from real estate were effectively property taxes, since these affect the underlying assets, and thus were direct taxes subject to the criterion of apportionment. The Court unanimously held that taxation of a private entity’s income from municipal bonds was really a taxation on the state’s power to borrow, and therefore unconstitutional. Fuller nonetheless admitted that income tax as such was an indirect tax, subject only to the uniformity rule. The Court split 4–4, on the questions of whether personal property income was taxable, whether the entire tax scheme should be voided, and whether some indirect taxes failed the uniformity standard. To decide these questions, Justice Jackson, dying from tuberculosis, joined the Court in a rehearing on May 6, 1895 [158 U.S. 601], adding himself to the dissenters. Yet another justice changed sides to join Chief Justice Fuller in a 5–4 majority on these issues, and the entire income tax was voided. The identity of the vacillating jurist
has never been proven, as an evenly divided Court does not publish the names on each side. By eliminating those who wrote opinions, it would have to be Shiras, Gray, or Brewer. [H.G. Hudspeth. The Case of the
Essays in Economic and Business History (2003), pp.103-113.]
Vacillating Jurist
: Pittsburgh’s George Shiras, Jr. and the Income Tax Case of 1895.
The tenuousness of Fuller’s arguments invited criticism, but we are concerned less with the correctness of the decision than with its method. The opinion written by Chief Justice Fuller in the first hearing exercises the usual originalist approach in ascertaining what is meant by a direct tax, citing the Framers in their deliberations and in their communications to their states prior to ratification. The types of taxes then envisioned were taxes on real and personal property. In a debate in Congress in 1794, distinctions were posited as to whether the taxpayer was recompensed by the consumer, or whether the duty fell on the possession rather than the use of an asset, the latter being an indirect tax. This shows there was no universal agreement on the matter. Albert Gallatin in 1796 wrote: The most generally received opinion, however, is that, by direct taxes in the Constitution, those are meant which are raised on the capital or revenue of the people; by indirect, such as are raised on their expense.
In this view, which agrees with Adam Smith’s definition, well known to the Framers, it would mean taxes paid directly from revenue, rather than indirectly on revenue by taxing the expense. The Supreme Court in Hylton v. United States (1796) upheld the contested carriage tax by regarding it as a duty, or a tax on the expense of the owner. They declined to decide whether tax on the product of land would be a direct or indirect tax.
Fuller cites Benjamin Franklin’s 1766 opinion on internal
and external
taxes, and evidently assumes these correspond to direct
and indirect
taxes. Franklin had said: An external tax is a duty laid on commodities imported; that duty is added to the first cost and other charges on the commodity, and, when it is offered to sale, makes a part of the price. If the people do not like it at that price, they refuse it; they are not obliged to pay it. But an internal tax is forced from the people without their consent if not laid by their own representatives.
The relevant distinction is that an external tax can be avoided by simply not engaging in the taxed activity, i.e. by not purchasing imported commodity. An internal tax, by contrast, is unavoidable for anyone who owns property or engages in any profitable economic activity, and at least one of these is necessary for survival.
Before the Constitution, states had already imposed taxes on land, personal property, and profits. There was strong opposition to Congress having direct taxation power over individuals. This is why the careful compromise of apportionment had to be crafted, in order to grant Congress the power to impose compulsory direct and indirect taxation. The apportionment criterion addressed concerns by some states that direct taxation would otherwise be inequitably burdensome to them, and these should only be imposed in cases of extreme necessity. While it was unclear what was the extent of things subject to a direct tax, all agreed that real estate or land was one such item. Thus it was uncontroversial that a land tax was subject to the principle of apportionment.
Seizing on this point, Fuller asks if it can be contended that, although a tax on real estate is a direct tax, a tax on the rent or income incident to owning real estate is an indirect tax? We are unable to perceive any ground for the alleged distinction. An annual tax upon the annual value or annual user of real estate appears to us the same in substance as an annual tax on the real estate, which would be paid out of the rent or income. This law taxes the income received from land and the growth or produce of the land.
Fuller holds that a tax on income from lands is just a real estate tax in another form, and a Constitutional requirement cannot be evaded by a mere change in form, when the substance is the same.
Analogously, it had been long held by the Court that a tax on the dividends or interest of a municipal security operates on the power of the State to borrow, and is thus repugnant to the Constitution, for nothing of substance is changed by claiming the tax is on the interest of the bonds rather than on the bonds themselves. [Weston v. City Council of Charleston, 27 U.S. 449 (1829); United States v. Railroad Company, 84 U.S. 322 (1872)]
Thus the Court in the first hearing of Pollock made a narrow ruling, only judging that the tax on rents or incomes from land is a direct tax requiring apportionment, and that the tax on municipal bonds unconstitutionally interferes with the power of the state to borrow. (Making the interest income taxable presumably drives up the interest rate states must offer on their bonds.) The Court declined to decide or opine: 1, Whether the void provisions as to rents and income from real estate invalidated the whole act? 2, whether, as to the income from personal property as such, the act is unconstitutional as laying direct taxes? 3, Whether any part of the tax, if not considered as a direct tax, is invalid for want of uniformity on either of the grounds suggested?
No majority was formed on any of these questions.
The argument by Fuller has merit, for a real estate tax is assessed on the value of the land in question. But the value is determined primarily by its income-generating capability, through rent or produce, without which the value would be zero. Whether one imposes a one-percent tax on the value of the land or a ten-percent tax on the income of the land amounts to more or less the same thing (assuming a 10:1 price-to-rent ratio in this case). It may be objected that the latter tax can be avoided by abstaining from income-generating activity for this land, charging no rent and growing no produce. Yet this effectively makes the property worthless, thereby despoiling the owner of his property. It seems clear (though this argument is not unassailable) that a tax on income from land ownership is really a tax on the value of real estate in another guise. Such a change in form would not matter, were it not for the fact that it is being used as a basis to circumvent the constitutional requirement of apportionment.
Justice Field went further than the majority and found that the whole act should have been voided, even its indirect taxes. The indirect taxes were not uniform, because certain corporations were taxed at higher rates than individuals and partnerships, and other corporations were exempt altogether. The exemption of income less than $4000 applied only to some taxpayers. One could make that level arbitrarily higher, to the point that it is just a tax on the rich, and thereby discriminatory, not uniform. Moreover a tax on judges’ salaries would be an unconstitutional reduction of their salary, disrupting the balance of power since the Congress could make the taxation rate as high as it wished.
Justice White, in his dissent (with which Justice Harlan concurred), wrote that Pollock overturned a long chain of precedents, mainly to the effect that Congress’s power will not be constrained by the courts. He writes of the Court’ function of interpreting the Constitution:
It sits removed from the contentions of political parties and the animosities of factions. It seems to me that the accomplishment of its lofty mission can only be secured by the stability of its teachings and the sanctity which surrounds them. If the permanency of its conclusions is to depend upon the personal opinions of those who, from time to time, may make up its membership, it will inevitably become a theatre of political strife, and its action will be without coherence or consistency. There is no great principle of our constitutional law, such as the nature and extent of the commerce power, or the currency power, or other powers of the Federal government, which has not been ultimately defined by the adjudications of this court after long and earnest struggle. If we are to go back to the original sources of our political system, or are to appeal to the writings of the economists in order to unsettle all these great principles, everything is lost and nothing saved to the people. The rights of every individual are guaranteed by the safeguards which have been thrown around them by our adjudications. If these are to be assailed and overthrown, as is the settled law of income taxation by this opinion, as I understand it, the rights of property, so far as the Federal Constitution is concerned, are of little worth.
The Court has never held that anything other than land or capitation taxes are direct taxes
, and White would keep to this narrow construction.
To say that any burden on land, even though indirect, must be apportioned is not only to incorporate a new provision in the Constitution, but is also to obliterate all the decisions to which I have referred by construing them as holding that, although the Constitution forbids only a direct tax on land without apportionment, it must be so interpreted as to bring an indirect tax on land within its inhibition.
In previous income tax cases, the Court had never raised any objection about real estate income. In Insurance Company v Soule, the levy, upheld by the Court, was on net gains from all sources. Although there is no explicit indication that the tax return included real estate income, counsel did make an argument about real estate. In Scholey v Rew, ruling that Congress could not regulate or control the right to inherit, the tax was on the inheritance of real estate, yet no one raised the issue of a direct tax.
Justice Harlan, besides concurring with Justice White, added several conclusions. First, this should not even have gone to court, since by statute: no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court.
The case was unusual in that Pollock was a shareholder seeking an injunction against the company making a voluntary payment of the tax. Justice Harlan found this to be a maneuver that had the same effect as preventing the collection of a tax. The majority ruling said only that Pollock could prevent voluntary payment of the tax on rent and income of real estate of the defendant company and municipal bonds owned or held by it.
Second, a duty upon the gains, profits, and income derived from the rents of land is not a direct
tax on such land.
Third, it does not matter if tax on municipal bond interest is direct or indirect, since municipal corporations are exempt from federal taxation in any form. Private corporations are not so exempt, so they may be taxed on income they receive from municipal bonds.
Justice Harlan kept silence on questions where the Court was equally divided, following the lead of Chief Justice Fuller.
In the rehearing, Chief Justice Fuller extended his argument about tax on realty income to tax on personalty income. Here he goes beyond the evidence, and reasons abstractly that the Constitution forbids all unapportioned direct taxes, and we know of no warrant for excepting personal property from the exercise of the power…
Here Fuller clearly just takes direct tax
in the broad sense used by state taxation, rather than the more limited sense of the Constitution. The broad sweep of this expansion, its lack of foundation in precedent or texts of the Founders, and its impact on a basic government power all combine to give this the aspect of a strikingly activist
decision. The pressure that was said to be applied on some of the jurists to change their opinions, and in on case apparently successful, only heightened the perception of judicial malfeasance.
Chief Justice Fuller professed no concern with the policy of an income tax.
We are not here concerned with the question whether an income tax be or be not desirable, nor whether such a tax would enable the government to diminish taxes on consumption and duties on imports, and to enter upon what may be believed to be a reform of its fiscal and commercial system. Questions of that character belong to the controversies of political parties, and cannot be settled by judicial decision. In these cases, our province is to determine whether this income tax on the revenue from property does or does not belong to the class of direct taxes. If it does, it is, being unapportioned, in violation of the Constitution, and we must so declare.
As with the comparably maligned Dred Scott case, Pollock is more aptly characterized as a weakly argued decision than as a willful eschewing of constitutional norms. The few precedents relevant to this case were not entirely on point, and the original meaning of direct tax
was notoriously obscure even to the Founders themselves. The Fuller Court might be faulted for trying to fill in what should have been left blank. That Fuller believed he was truly reading the Constitution as it was framed is evidenced by this remark: If it be true that the Constitution should have been so framed that a tax of this kind could be laid, the instrument defines the way for its amendment.
The characterizations that the pro-income tax side was socialist-leaning and the opponents were laissez faire ideologues ignoring the law is belied by the known scruples of Shiras, who sided with majority, and by the unanimous opposition to taxation on municipal bonds. Most notably, the income tax itself was part of a bill that reduced tariffs and was promoted by free trade Democrats, who accepted the income tax amendment as preferable to high tariffs. Even if the Court had been motivated by laissez-faire ideology, this would not necessarily imply ruling against the income tax.
The prudence of the Court majority might be measured by the actual effect of making the taxation of income on all sources, without apportionment, constitutional under the Sixteenth Amendment. Now the federal government can tax absolutely any income on any property at any rate, even retroactively, so the ability to protect one’s property from despoliation so that it has no revenue-generating value, is safeguarded only by electoral politics. It remains perennially unpopular to raise taxes, but there is no longer any constitutional safeguard against such despoliation. This is why politicians promise only to raise taxes on the rich, so they can get enough votes to impose this tax on a minority against its will, as if we should vote for an unjust law because it does not apply to us. (Supposedly the rich do not deserve sympathy, but when is justice a matter of sympathy?) Indeed, the progressives wanted a tax on wealth rather than consumption, showing that the so-called income tax really was a tax on wealth in another guise, and this really was a direct tax, not an indirect tax. The only thing left out of federal government reach is to tax unrealized gains, which to date have not been considered income at all. If this were permitted, the constitutional protection against direct taxation of property would truly be a dead letter, if it is not already.
As we move to economic cases in the decade before Lochner, we find mixed outcomes with respect to laissez-faire ideology, if indeed this were an outcome-oriented Court. Moreover, there is little consistency in who falls on each side. In Hooper v. California, 155 U.S. 648 (1895), the Court ruled that insurance contracts are not commerce, so California could prohibit foreign insurance contracts within California (the premium was paid in San Francisco), as a purely local law. Justice Harlan dissented, quoting the substantive due process arguments (esp. from New York jurisprudence) discussed previously.
The Court’s 8–1 decision in United States vs EC Knight Co., 156 U.S. 1 (1895) upheld the constitutionality of the Sherman Antitrust Act, yet limited the scope of that act by narrowly defining interstate commerce. The acquisition of four Philadelphia refineries was an act of intrastate commerce, though its effect was to control the manufacture of nearly all refined sugar in the U.S. An indirect effect on interstate commerce, i.e., on prices or wages, was insufficient grounds for giving Congress the power to regulate this activity. Congress could not regulate a monopoly in manufacture, for it was established that manufacture is not commerce.
Justice Harlan dissented, noting previous state court cases establishing that an association of manufacturers to restrain trade fell afoul of state anti-monopoly laws. Surely the same principle applied to the federal government. In Gibbons v. Ogden (1824), the Supreme Court acknowledged that commerce included buying and selling, and interstate commerce included the buying and selling of products to be transported across state lines. A citizen of Missouri has the right to go in person, or send orders, to Pennsylvania and New Jersey for the purpose of purchasing refined sugar. But of what value is that right if he is confronted in those states by a vast combination which absolutely controls the price of that article by reason of its having acquired all the sugar refineries in the United States in order that they may fix prices in their own interest exclusively?
Granted that the protection against monopolistic price-fixing of goods intended for interstate commerce is a valid aim of Congressional power, the Congress should be free to exercise any means to this end not expressly prohibited by the Constitution, as per McCulloch v. Maryland (1819). The end proposed to be accomplished by the act of 1890 is the protection of trade and commerce among the states against unlawful restraints. … The means employed are the suppression, by legal proceedings, of combinations, conspiracies, and monopolies which, by their inevitable and admitted tendency, improperly restrain trade and commerce among the states.
The Lochner era proper, as commonly reckoned, opened with two cases that endorsed novel application of the Due Process Clause to restrain legislatures, an interpretation which had been specifically rejected in the Slaughter-House Cases, yet adopted by some state courts. The first, Allgeyer v. Louisiana, 165 U.S. 578 (1897), invoked the liberty
provision of the Due Process Clause as protecting the freedom of contract. The second case, Smyth v. Ames (1898), dared to restrain the otherwise valid police power of the state against deprivation of property. In both cases, the same rulings might have been upheld on other grounds (e.g., the Fifth Amendment’s Takings Clause, incorporated via the Fourteenth Amendment), yet they decided to take the more dubious route of finding substantive rather than procedural rights in the Due Process Clause. This tendentious approach tended to discredit the Court in the eyes of many, who thus accused the Court of outcome-oriented jurisprudence. We should note, however, that both rulings were unanimous.
The state of Louisiana had passed an act in 1894 that prohibited anyone in the state, with penalty of a $1000 fine, from procuring insurance on property in Louisiana from any company that did not comply with Louisiana law. E. Allgeyer & Co. had procured such insurance from a New York company that did not comply with Louisiana law, though the contract was in New York. Although the Supreme Court had ruled in Hooper v. California, 155 U.S. 648 (1895) that a state may restrict the kinds of contracts that can be executed within its borders, here the contract was executed outside the state. Louisiana argued that the act of mailing the letter of notification was done within the state, so the statute was violated. The unanimous Court found that the statute so construed was unconstitutional:
The statute which forbids such act does not become due process of law, because it is inconsistent with the provisions of the Constitution of the Union. Thelibertymentioned in that amendment means not only the right of the citizen to be free from the mere physical restraint of his person, as by incarceration, but the term is deemed to embrace the right of the citizen to br free in the enjoyment of all his faculties, to be free to use them in all lawful ways, to live and work where he will, to earn his livelihood by any lawful calling, to pursue any livelihood or avocation, and for that purpose to enter into all contracts which may be proper, necessary, and essential to his carrying out to a successful conclusion the purposes above mentioned.
The Court matter-of-factly assumes that the Due Process Clause restricts legislative acts. Its expansive list of federal rights that may not be abridged by state law is defended by citing Justice Bradley’s concurrence in Butcher’s Union Co. v. Crescent City Co., 11 U.S. 746 (1884) and some dictum in Powell v. Pennsylvania, neither of which was binding precedent. Now, substantive due process is elevated to the status of precedent, though in a limited application. The state has no authority to abridge one’s rights as a federal citizen to enter contracts, as long as the contracts are outside the jurisdiction of the state. Such a statute as this in question is not due process of law, because it prohibits an act which under the federal Constitution the defendants had a right to perform. This does not interfere in any way with the acknowledged right of the state to enact such legislation in the legitimate exercise of its police or other powers as to it may seem proper.
This avoidance of restricting the police power was short-lived. In Smyth v. Ames, 171 U.S. 361 (1898), a unanimous Court voided a railroad tariff law as unconstitutional under the Due Process Clause. This was the first success of substantive due process jurisprudence against state police power at the federal level. Justice Harlan delivered the Court’s opinion. Without denying that such tariffs are allowable, there was a question of reasonableness, i.e., whether the railroad company can still make reasonable profits on intrastate operations, without reference to any interstate profits (not regulated by states). A railroad is a public highway, and a corporation created for public purposes may be regulated by the government, but not to the point of invading constitutional protection of property.
States can regulate fares for intrastate transportation, but only to a point. In Stone v. Farmers’ Loan & Trust Co., 116 U.S. 307 (1886), Chief Justice Waite wrote for the majority: under pretense of regulating fares and freights, the state cannot require a railroad corporation to carry persons or property without reward, neither can it do that which in law amounts to the taking of private property for public use without just compensation, or without due process of law.
The statute in that case was upheld, but Justices Harlan and Field dissented, finding a violation of the obligation of contract by revoking the company’s right to set its own rates.
In the present case, all parties agreed that local rates had been statutorily reduced by 29.5 percent on average. Figures by the State Board of Transportation admitted that the operating cost of local business was at least 10 to 20 percent higher than interstate business. Analyzing the three years before the 1893 statute was enacted, the companies would have conducted their local business at a loss. Thus it was uncontroversial to the Court that this deprived the companies of their property. What is momentous is that the Due Process Clause was invoked repeatedly (though the Takings Clause was also mentioned) in this declaration of unconstitutionality toward what was otherwise a valid exercise of state regulatory power.
The Court did not consider the right of contract to be absolute, and still recognized that the state could limit this right in exercise of its police power with respect to public health and safety. In Holden v. Hardy, 169 U.S. 366 (1898), the Court upheld the limitation of mining hours, as this was related to safety. In McCray v. United States, 195 U.S. 27 (1904), the Court upheld the constitutionality of a tax on oleomargarine. States were still granted a broad taxing power, which generally did not raise due process issues, save in extreme cases where they effectively nullified property ownership by making it profitless.
In Dobbins v. City of Los Angeles, 195 U.S. 223 (1904), the Court struck down an ordinance forbidding building gas works after the beneficiary of a previous ordinance permitting this had begun construction. In general, the city could reverse itself, but this reversal had no purpose other than to benefit a monopoly. Additionally, there was positive evidence of the monopolist’s influence on the ordinance, which supersedes the presumption of good faith owed to exercises of the police power.
The Court did not consider freedom of contract to prohibit governments from passing anti-monopoly legislation. This had long been permitted at the state level, and the Court likewise affirmed the constitutionality of the federal Sherman Anti-Trust Act of 1890, which prohibited monopolies of interstate commerce. In Northern Securities v. United States 193 U.S. 197 (1904), the Court found that a holding company owning two major railroads would tend to destroy interstate competition, and such a merger therefore was contrary to the Act. The Act itself was a valid exercise of Congress’s power to regulate interstate commerce.
We now arrive at the era-defining case, Lochner v. New York, 198 U.S. 45 (1905, decided 1906), a 5–4 split decision that ruled unconstitutional a law that limited bakery employees to work ten hours a day and sixty hours a week. The majority found that this was not a legitimate exercise of the police power, as it had no demonstrable relation to public health or safety. The state had invoked public health as a justification, but the Court was not willing to grant any deference to this assertion. What divided the Court is not the legal principle about how the police power may be limited by Due Process, but how much deference should be given to a state’s claim that a regulation is related to public health or safety.
Justice Harlan, in his dissent, showed deference to the police power. Yet he went further and accused the majority of what we would now call judicial activism. Upon this point there is no room for dispute, for the rule is universal that a legislative enactment, Federal or state, is never to be disregarded or held invalid unless it be, beyond question, plainly and palpably in excess of legislative power.
Whether or not this be wise legislation it is not the province of the court to inquire. Under our systems of government, the courts are not concerned with the wisdom or policy of legislation. So that, in determining the question of power to interfere with liberty of contract, the court may inquire whether the means devised by the State are germane to an end which may be lawfully accomplished and have a real or substantial relation to the protection of health, as involved in the daily work of the persons, male and female, engaged in bakery and confectionery establishments.
In short, the Court’s work is merely to determine whether the regulation has some relation to public health, not whether it is a wise or effective remedy.
In fairness to the majority, they did not consider that they were judging the prudence of the statute, nor did they deny that legitimate concerns about public health would be grounds for regulating labor hours. After all, this same Court upheld a law restricting the hours of miners in Holden v. Hardy, 169 U.S. 366, because it was reasonable for the state to take a public health interest in limiting the hours of that kind of labor, and there was an emergency provision where it could be waived. Justice Peckham writes for the Lochner majority: This is not a question of substituting the judgment of the Court for that of the legislature. If the act be within the power of the State, it is valid although the judgment of the court might be totally opposed to the enactment of such a law. But the question would still remain: is it within the police power of the State?, and that question must be answered by the court.
We think that there can be no fair doubt that the trade of a baker, in and of itself, is not an unhealthy one to that degree which would authorize the legislature to interfere with the right to labor, and with the right of free contract on the part of the individual, either as employer or employee. In looking through statistics regarding all trades and occupations, it may be true that the trade of a baker does not appear to be as healthy as some other trades, and is also vastly more healthy than still others. To the common understanding, the trade of a baker has never been regarded as an unhealthy one. Very likely, physicians would not recommend the exercise of that or of any other trade as a remedy for ill health. Some occupations are more healthy than others, but we think there are none which might not come under the power of the legislature to supervise and control the hours of working therein if the mere fact that the occupation is not absolutely and perfectly healthy is to confer that right upon the legislative department of the Government. It might be safely affirmed that almost all occupations more or less affect the health. There must be more than the mere fact of the possible existence of some small amount of unhealthiness to warrant legislative interference with liberty. It is unfortunately true that labor, even in any department, may possibly carry with it the seeds of unhealthiness. But are we all, on that account, at the mercy of legislative majorities? A printer, a tinsmith, a locksmith, a carpenter, a cabinetmaker, a dry goods clerk, a bank’s, a lawyer’s or a physician’s clerk, or a clerk in almost any kind of business, would all come under the power of the legislature on this assumption. No trade, no occupation, no mode of earning one's living could escape this all-pervading power, and the acts of the legislature in limiting the hours of labor in all employments would be valid although such limitation might seriously cripple the ability of the laborer to support himself and his family.
If this law were admitted to be an exercise of the police power for public health, then the state could regulate the hours of any form of labor whatsoever. This would make people of various trades have their livelihoods depend on the whim of the majority. Any trade could arbitrarily have its hours limited so as to limit one’s ability to earn a living. The concern here is not for big business, as bakeries were mostly small enterprises, but for the rights of individuals to negotiate their own employment arrangements, without state interference that is unrelated to bona fide health concerns.
Viewed in the light of a purely labor law, with no reference whatever to the question of health, we think that a law like the one before us involves neither the safety, the morals, nor the welfare of the public, and that the interest of the public is not in the slightest degree affected by such an act.… It does not affect any other portion of the public than those who are engaged in that occupation.
Here the majority assumes that in the absence of any definite public interest not involving bakers, who are competent to negotiate their own labor contracts, the state has no business regulating such contracts, thereby infringing upon the freedom of contract.
Justice Oliver Wendell Holmes, who had just joined the Court in 1902, dissented on a novel basis, namely that the majority had tacitly espoused laissez faire capitalism:
This case is decided upon an economic theory which a large part of the country does not entertain. If it were a question whether I agreed with that theory, I should desire to study it further and long before making up my mind. But I do not conceive that to be my duty, because I strongly believe that my agreement or disagreement has nothing to do with the right of a majority to embody their opinions in law.
The liberty of the citizen to do as he likes so long as he does not interfere with the liberty of others to do the same, which has been a shibboleth for some well known writers, is interfered with by school laws, by the Post Office, by every state or municipal institution which takes his money for purposes thought desirable, whether he likes it or not. The Fourteenth Amendment does not enact Mr. Herbert Spencer’s Social Statics.
But a constitution is not intended to embody a particular economic theory, whether of paternalism and the organic relation of the citizen to the State or of laissez faire. It is made for people of fundamentally differing views, and the accident of our finding certain opinions natural and familiar or novel and even shocking ought not to conclude our judgment upon the question whether statutes embodying them conflict with the Constitution of the United States. General propositions do not decide concrete cases. The decision will depend on a judgment or intuition more subtle than any articulate major premise. But I think that the proposition just stated, if it is accepted, will carry us far toward the end. Every opinion tends to become a law. I think that the word liberty in the Fourteenth Amendment is perverted when it is held to prevent the natural outcome of a dominant opinion, unless it can be said that a rational and fair man necessarily would admit that the statute proposed would infringe fundamental principles as they have been understood by the traditions of our people and our law.
The question at issue is whether liberty of contract, as understood by the majority, is among those fundamental principles being infringed. In 1905 there was a diversity of views ranging from laissez faire to socialism. Earlier tradition had been strongly liberal, in the sense of jealousy of private rights against intrusions by the state, a concern that permeates the Constitution and Bill of Rights, but not to the extent of being laissez faire. All kinds of state regulations existed since the founding of the Republic, and these were not limited to public health. The state could regulate commerce and even public morality, and while there was not much attempt at labor law in the modern sense aside from short-lived attempts at wage fixing, we must concur with Massachusetts Chief Justice Lemuel Shaw that It is much easier to perceive and realize the existence and sources of this power, than to mark its boundaries, or prescribe limits to its exercise.
Anything that may credibly pertain to the public good belongs to the police power.
By this standard, the Court in Lochner likely overreached, for the state may have reasonable interest in limiting labor hours to improve the quality of life for employees, in a way that would not be possible if they had to negotiate individually. Whether this particular law was good or bad is beside the point; the question is whether a state has the power to pass it. If it were not for the Fourteenth Amendment, there would be no question the state has such a right, or we should question its sovereignty. An amendment designed to erase racial distinctions in judicial procedures was used to incorporate a list of substantive liberties that included freedom of contract, and now it seemed there was a presumption that such freedom could not be infringed unless there was a clear public health interest. Yet Justice Holmes recognized a broader basis for state action in which deference to the legislature still applied.
Justice Holmes’s complaint the Court’s jurisprudence was ideological seemed to be borne out in Adair v. United States, 208 U.S. 161 (1908), which prohibited the federal government from regulating yellow dog contracts,
where an employee agrees not to join a union. Whose freedom is being defended here? Surely, not the employee, who is effectively being coerced into surrendering a right? Nonetheless, this decision had a strong 6–2 majority, with Justice Harlan writing the Court’s opinion. He even cited Lochner, noting that all agreed there is a liberty of contract which cannot be unreasonably interfered with by legislation.
Harlan naively asserts that there is an equality of right between the employer who may terminate union employees and the employee who may quit an employer who forbids union employees, ignoring the real inequality of power, especially when there are few employment options, and much more dire consequences to the employee. He says, any legislation that disturbs that equality is an arbitrary interference with the liberty of contract which no government can legally justify in a free land.
Although the legislation applied to interstate carriers such as railroads, Justice Harlan did not see how an employee’s membership in a union had any direct bearing on interstate commerce. The Court still had a narrow construction of the Commerce Clause.
In Muller v. Oregon, 208 U.S. 412 (1908), a unanimous Court upheld the constitutionality of a law limiting women’s labor hours to ten hours a day in laundries and factories. At first blush, this seems to be contrary to Lochner. The Court based its distinction on the physical capacity of women, and the adverse health effects on child-bearing made this a matter of public interest. The ruling was influenced by a brief presented by Louis Brandeis, which consisted of extensive sociological evidence. The Court’s assumption of the prerogative of deciding whether a police action constituted a genuine public health interest invited this new mode of argument.
In the Minnesota Rate Case, 230 U.S. 352 (1913), the Court examined whether state-imposed railroad rates were confiscatory, i.e., depriving the railroad companies of compensation for their services, and whether the severe penalties for non-compliance violated the Due Process and Equal Protection clauses. The Court also examined whether this was an unconstitutional state interference with interstate commerce.
Although Minnesota only regulated intrastate railroad rates, the Circuit Court found, and the Supreme Court agreed, that these rates practically compelled the railroads to lower their interstate rates, which were for regulated by federal law for the first time in 1906. The Court did not find that the states were intruding in the regulation of interstate commerce, as these effects were only indirect burdens. Nonetheless, the rates were effectively confiscatory in the case of the Minneapolis & St. Louis Railroad, based on the small net return of the business, which could afford to pay no dividends. Only in that case did the rate effectively deny just compensation for the service provided to the public, so that the company received a meager 3.5% return on the value of the property. Much of the Court’s argument hinged on valuation methods. This part of the decision did not depart from precedent on Commerce Clause jurisprudence.
The penalties for non-compliance were found to be unconstitutional, following the recent case Ex parte Young, 209 U.S. 123 (1908), which held that, since the only way to challenge the validity of a rate was non-compliance, one was effectively denied due process, since by taking this to court one assumed the risk of the penalties of imprisonment should the statute be held valid. By making the pursuit of judicial relief so onerous, that right of due process is effectively denied, and the legislature or commission’s judgment of the reasonableness of the rate is effectively beyond appeal. The same case, Ex parte Young, held that government officials can be sued as individuals for injunctive relief when they enforce an unconstitutional law, as they do not thereby act on behalf of the state and thus lack sovereign immunity. This has a whiff of natural law jurisprudence, which considers that the unjust law can be no sovereign act. Here, however, constitutionality rather than natural justice is the criterion for sovereignty.
In the Minnesota Rate Case, the Court found that the unconstitutional penalty provisions were severable from the statute, so that the rates could be upheld insofar as they were not confiscatory. The use of the Due Process clause here did pertain to procedural due process.
The Court’s opinion was nearly unanimous, with only Justice McKenna declining to join the opinion, yet concurring in the result. Here the Court upheld the rights of states to regulate intrastate commerce even when it had indirect effects on interstate commerce. The Court was ideologically diverse. Justice Harlan had passed away, but Oliver Wendell Holmes remained on the Court. He was joined by Charles Evan Hughes as a dissenter favoring state regulations. Justice Joseph R. Lamar, who upheld state police power in more than 95% of cases, yet rarely dissented. The conservative Willis van Devanter joined the Court in 1911. The unanimity of the Court in this complex case is therefore remarkable.
The fact that states were given latitude in regulating intrastate commerce even when it indirectly affected interstate commerce did not preclude the federal government from asserting regulatory authority in intrastate commerce in order to protect interstate commerce. On its face this seems a controversial decision, yet it was supported by a 7–2 majority in the Shreveport Rate Case, 234 U.S. 342 (1914), with the opinion written by Charles Evan Hughes. Here the Court upheld a federal regulation of intrastate rates by interstate carriers, since the state-mandated rates adversely affected interstate commerce. This was not a reversal of the Minnesota Rate Case, for presumably the state regulations would have been valid had there been no federal regulatory action.
In Bunting v. Oregon, 243 U.S. 426 (1917), we find that the Lochner ruling had been conditioned by the type of work involved, for here the Court upheld an Oregon statute that limited daily work hours at mills and other manufacturing establishments. The law required overtime pay above ten hours a day, and allowed no more than three hours overtime per day. The Court found this to be a valid exercise of the police power, since it was credibly related to public health for this kind of work, and it did not impermissibly abridge freedom of contract, as it did not fix a maximum or minimum wage, and the limit in hours had already been well established practice in such industries. Three of the more conservative justices, White, Van Devanter, and McReynolds, dissented, in a rare defeat for them.
The regulation of interstate commerce by Congress was not an unlimited power, and a more controversial restriction of this power was held by the Court in Hammer v. Dagenhart, 247 U.S. 251 (1918). Here the Court held that Congress could not prohibit interstate commerce of goods manufactured by children who worked more than the hours permitted for their age. This was effectively a child labor law, and a law regulating manufacturing, not commerce. Nor could Congress regulate the states exercise of their police power, effectively creating a federal police power, though it may be argued the Court had upheld such a power much earlier in Champion v. Ames, which found valid a law prohibiting transport of lottery tickets across state lines, though this was clearly intended to be a regulation of public morals.
The Court ruled 5–3 in Adkins v. Children’s Hospital of D.C., 261 U.S. 525 (1923) that a D.C. minimum wage law for women and children infringed the Due Process Clause by restricting the freedom of contract. Minimum wage, unlike hours limitations, had no relation to public health and was not considered a lawful exercise of the police power. This ruling explicitly upheld Lochner. Justice George Sutherland, who joined the Court in 1922 and would be known as an arch-conservative in the New Deal era, wrote the majority opinion. While accepting that there should be a presumption of constitutionality of an act of Congress (on the grounds that it was scrutinized by Congress), it was nonetheless the Court’s duty to declare a statute to be opposed to the Constitution if it is so by clear and indubitable demonstration.
From the authority to ascertain and determine the law in a given case, there necessarily results, in case of conflict, the duty to declare and enforce the rule of the supreme law and reject that of an inferior act of legislation which, transcending the Constitution, is of no effect and binding on no one. This is not the exercise of a substantive power to review and nullify acts of Congress, for no such substantive power exists. It is simply a necessary concomitant of the power to hear and dispose of a case or controversy properly before the court, to the determination of which must be brought the test and measure of the law.
Justice Sutherland does not see judicial review as some extra power of the Court to review and void laws. Indeed he rejects the term review.
Rather, the Court is doing its proper job, which is to decide a case. To do that job, it must know which law to apply. If the laws conflict, it must choose the higher law (the Constitution) over the lower (act of Congress).
In American jurisprudence, however, when the Supreme Court decides a case and declares a conflict between a statute and the Constitution, all lower courts are bound to follow that precedent. A statute that opposes the Constitution will not be applied to the decision of any court case, since the Constitution applies everywhere. Such a law is effectively voided, since anyone refusing to comply with that law cannot be successfully prosecuted. Nonetheless, the law remains in the legislative code, and it could be applied to anyone who agrees to comply without resistance.
Sutherland considered it established by precedent that the right to contract is among the liberties protected by the Due Process Clause (of the Fifth Amendment, in this case). This includes labor contracts. In making such contracts, generally speaking, the parties have an equal right to obtain from each other the best terms they can as the result of private bargaining.
This statement, and others like it, may be faulted as enshrining laissez-faire capitalism as a constitutional doctrine. Yet even Justice Harlan accepted it in Adair v. United States: In all such particulars, the employer and employee have equality of right, and any legislation that disturbs that equality is an arbitrary interference with the liberty of contract which no government can legally justify in a free land.
We must recall that freedom of property and contract were jealously guarded principles of the founding generation. Unwarranted state interference that tilted the scales in favor of one party was only steps away from the tyranny of confiscation. If one can regulate how one acquires income, one effectively can control how much wealth each person can accumulate. The progressives of the era might have said, Yes, and this is a good thing,
in reaction to the extreme inequality of that age. The Court in Adkins nonetheless acknowledges that state interference in contracts may be justified by a reasonable exercise of the police power,
and that the freedom of contract is not absolute, though restraint is the exception, not the rule. Exceptions had been granted for (1) fixing rates for businesses impressed with a public interest, (2) contracts for performance of public work, (3) prescribing the character, method and time for payment of wages, and (4)statutes for fixing hours of labor in certain occupations or for women for health reasons.
The minimum wage law fell under none of these exceptions, and the Court would not create a new exception. Overtime laws were permitted for public health reasons, and rent control was permitted as short-term emergency measures, but this was not a basis for giving the state indiscriminate control over the cost of labor. In Pennsylvania Coal Co v. Mahon, the Court had noted: a strong public desire to improve the public condition is not enough to warrant achieving the desire by a shorter cut than the constitutional way of paying for the change.
Indeed, if such desire sufficed, there would be no obstacle to outright confiscation of wealth or redistribution of land and other property. The Court does not mention such radicalism, but indeed it was current among socialists and populists of the time.
The Court found fault with the lack of controls on the board that could fix wages.
The price fixed by the board need have no relation to the capacity or earning power of the employee, the number of hours which may happen to constitute the day’s work, the character of the place where the work is to be done, or the circumstances or surroundings of the employment; and, while it has no other basis to support its validity than the assumed necessities of the employee, it takes no account of any independent resources she may have. It is based wholly on the opinions of the members of the board and their advisers–perhaps an average of their opinions, if they do not precisely agree–as to what will be necessary to provide a living for a woman, keep her in health and preserve her morals. It applies to any and every occupation in the District, without regard to its nature or the character of the work.
Even by today’s standards, this was radical legislation, giving such arbitrary power to a board.
The Court does not pretend to decide whether a minimum wage is of public benefit, or whether it is economically beneficial. It only considers whether the state (or District of Columbia) has the constitutional power to impose one indiscriminately. The Court notes that, if such power be granted on the basis of public welfare,
one might similarly grant authority to impose a maximum wage, on builders for example, to keep the cost of housing down. The minimum wage takes no regard for the ability of employers to pay such wages and still run a business.
To sustain the individual freedom of action contemplated by the Constitution is not to strike down the common good, but to exalt it, for surely the good of society as a whole cannot be better served than by the preservation against arbitrary restraint of the liberties of its constituent members.
Justice Brandeis had to recuse himself from Adkins, since he had earlier argued in favor of this minimum wage law before the Supreme Court.
A dissent was instead written by new Chief Justice Taft, who considered that Lochner had been overruled sub silentio by Bunting v. Oregon, since the statute in that case applied to any factory or manufacturing establishment,
and would presumably include bakeries. Taft admitted that it was possible for the police power to transgress the liberty
of the Due Process Clause, so he did not object to what we call substantive due process jurisprudence, but he found that the Court was no longer consistent in where it drew the line. If it admitted that hours could be limited, it should also admit a minimum wage, since neither one nor the other term is more important to freedom of contract. The state may judge that low wage employees are not negotiating on an equal basis with their employer, due to their need, and the employer may still conduct business with a minimum wage, by giving up the profit he made from the workers’ necessity. The Court’s disagreement with this assessment is not a basis for denying the validity of the law, for it is not the function of this Court to hold congressional acts invalid simply because they are passed to carry out economic views which the Court believes to be unwise or unsound.
Justice Holmes wrote a more stinging dissent, which attacked the recent expansion of Due Process jurisprudence.
The earlier decisions upon the same words in the Fourteenth Amendment began within our memory and went no farther than an unpretentious assertion of the liberty to follow the ordinary callings. Later, that innocuous generality was expanded into the dogma, Liberty of Contract. Contract is not specially mentioned in the text that we have to construe. It is merely an example of doing what you want to do, embodied in the word liberty. But pretty much all law consists in forbidding men to do some things that they want to do, and contract is no more exempt from law than other acts.
Holmes cites many examples of constitutionally valid legislation (anti-usury laws, Sunday laws) that limit the freedom of contract. He fails to see any distinction between the right to regulate maximum hours and minimum wages for women. No one is being compelled to pay anything. The Nineteenth Amendment does not abolish differences between men and women, and the state still has the right to regulate with a view to the health of women. He quotes the president of Australia as saying freedom of contract is a misnomer as applied to a contract between an employer and an ordinary individual employee,
as proof that such an opinion can be entertained by reasonable men, and it is within the discretion of the legislature to agree with it.
In Tyson & Bro. v. Banton, 273 U.S. 418 (1927), the Court invalidated a New York law that prohibited theatre ticket scalping, i.e., resale at a price more than fifty cents above face value. This law was aimed to prevent a practice where theater owners colluded with scalpers, permitting the latter to buy all the best seats in advance, before a cast was even chosen, thereby mitigating risk to the owners, while the scalpers could cover losses by the exorbitant prices they charged. The Court majority found that a theatre is not a public interest
in the narrow sense, and that there was no basis for the state to regulate the prices the owners might set or the means by which they may set prices. If this were permitted, the state might fix prices for any form of entertainment whatsoever. The fraud or collusion averred was not justification for using unconstitutional means interfering with essential rights of property. Such fraud might be limited constitutionally by imitating an Illinois ordinance that required printing the price on the ticket and forbidding a theatre owner or employer from receiving more than the face price. This did not limit what price the owner could ask, nor did it prevent resale at higher prices, but the people would know what they were getting.
Justice Holmes dissented, finding the public interest
distinction to be a useless fiction, and that states could regulate anything unless it is restrained by some express prohibition in the Constitution,
and Courts should not extend such prohibitions beyond their obvious meaning by reading into them conceptions of public policy….
Justice Stone wrote a separate dissent, also finding that the public interest
criterion was too vague, and in practice just a label for whatever businesses may be regulated.
The constitutional theory that prices normally may not be regulated rests upon the assumption that the public interest and private right are both adequately protected when there isfreecompetition among buyers and sellers, and that, in such a state of economic society, the interference with so important an incident of the ownership of private property as price-fixing is not justified, and hence is a taking of property without due process of law.
The legislature may regulate price wherever some circumstance restricts the regulative force of competition.
This is often the case when there is a monopoly conferred to public service companies, or when one person has a strategic gatekeeper position (e.g., the grain elevator case, Munn v. Illinois), among other examples.
Justice Sanford added in his dissent that it is really the ticket brokers or scalpers, rather than the theatre owners, who are being regulated. They were acting as exclusive gatekeepers, exacting toll from patrons
who wished to purchase the best seats, so that they have become clothed with a public interest.
If we grant the premise that the Due Process Clause constrains how legislatures might restrict the liberty of contract and the right over property, yet also acknowledge that these private rights are not absolute, the question becomes one of where to draw the line. Chief Justice Taft and others would permit practically any state regulation that did not effectively destroy the right of contract and the right of property. A broad discretion was to be given to legislatures, as long as their rationale might be held by at least some reasonable men. Price fixing deserved special skepticism, since this could effectively destroy a person’s property. One’s right to own property becomes empty if one has no control over the price at which one may sell it. One’s right to enter a contract becomes empty if one has no control over the terms, the most important of which is the price. One can find merit in the Sutherland majority’s hesitance to concede any price-fixing authority to the state except in the narrowest of circumstances, even at the expense of perfect consistency. Such a power, once granted too broadly, might destroy the independence of private property, restoring precisely the sort of state tyranny the Founders had opposed. On the other hand, they may have been too slow to recognize a more imminent danger to private freedom in the amassing of large fortunes and combinations of industrialists who could impose inequitable contracts on the toiling masses. The inequality of labor contracts would become the most pressing issue of the day. If there were really no constitutional means by which states could provide relief to this problem, there was no shortage of those who proposed more revolutionary measures.
With the election Franklin Roosevelt as president, there was now a means of solving the labor problem short of socialist revolution. Nonetheless, many of Roosevelt’s proposed means were perceived as hardly short of revolutionary, even tyrannical. The Supreme Court initially opposed some of Roosevelt’s endeavors. A notable case was Schechter Poultry v. United States, 295 U.S. 495 (1935), invalidating parts of the National Industrial Recovery Act of 1933, which gave the president power to regulate wages and prices based on what he deemed to be unfair competition. The Court considered this to be too vague, so it did not meet due process requirements. This would fail, indeed, even under procedural due process. While it has become fashionable to villainize the conservatives on this Supreme Court, imagine if they had actually permitted the president to hold such power as even absolute monarchs had not dreamed. Is it credible that such power is compatible with the Constitution? Indeed the Court was unanimous in this decision. Here they relied not on freedom of contract, but on the Commerce Clause and the Tenth Amendment, for the NIRA would permit federal regulation of intrastate commerce that is only indirectly related to interstate commerce. Although the Court in Stafford v. Wallace (1922) allowed regulation of packers who were in the current of commerce
between states, this did not apply to the Schechters, whose chickens remained in state though they had come from other states.
The end of Lochner era freedom of contract jurisprudence is commonly reckoned to have ended with West Coast Hotel Co. v. Parrish, 300 U.S. 379 (1937), which upheld the constitutionality of a New York minimum wage law for women, and thereby overturned Adkins. It did not explicitly overturn Lochner, but abandoned the broad freedom of contract doctrine of that case. Sutherland, Van Devanter, and the other conservatives found themselves in the minority after Justice Owen Josephus Roberts changed his stance on this issue. Chief Justice Hughes reported that Roberts was influenced by the 1936 re-election of Roosevelt and the achievements of the New Deal. If true, and Sutherland seemed to think so, then this could be an early crucial instance of activism,
where one’s interpretation of the Constitution depended on wholly political considerations. Since Roberts wrote no opinion, we can only guess as to his motivations. We have only the majority opinion written by Chief Justice Hughes.
The Court still used the Due Process Clause as the relevant Constitutional provision, but applied it differently as pertaining to freedom of contract.
The Constitution does not speak of freedom of contract. It speaks of liberty and prohibits the deprivation of liberty without due process of law. In prohibiting that deprivation, the Constitution does not recognize an absolute and uncontrollable liberty.… But the liberty safeguarded is liberty in a social organization which requires the protection of law against the evils which menace the health, safety, morals and welfare of the people. Liberty under the Constitution is thus necessarily subject to the restraints of due process, and regulation which is reasonable in relation to its subject and is adopted in the interests of the community is due process.
Hughes quotes Holden v. Hardy (1898), the mining labor hours case: But the fact that both parties are of full age and competent to contract does not necessarily deprive the State of the power to interfere where the parties do not stand upon an equality, or where the public health demands that one party to the contract shall be protected against himself.
Only the public health condition was needed to decide Holden, but Hughes now invokes the dictum of unequal standing as a basis for regulation of contracts. He also quotes the various dissents from Adkins. Hughes follows Taft in characterizing Adkins as a departure from previous jurisprudence. He does not intend to overturn the last several decades of law on freedom of contract, but only this supposed aberration. Left unspoken is whether Lochner was another such aberration, overturned sub silentio as Taft supposed.
This application of a mere rational basis test for regulation of freedom of contract would seem to be incompatible with the notion that this liberty is a fundamental right, but such distinctions would not be developed until later. Justice Sutherland, in his dissent, reminds his colleagues that, while rational doubts favor the constitutionality of the statute, these doubts must be held by each jurist deciding: in the end, the question which he must answer is not whether such views seem sound to those who entertain them, but whether they convince him that the statute is constitutional or engender in his mind a rational doubt upon that issue.
Sutherland disparages the notion of judicial self-restraint
as a mischievous
suggestion for limiting judicial power. Self-restraint belongs in the domain of will, and not of judgment. The check upon the judge is that imposed by his oath of office, by the Constitution, and by his own conscientious and informed convictions, and since he has the duty to make up his own mind and adjudge accordingly, it is hard to see how there could be any other restraint.
It is not each judge’s job to stifle himself, but to judge honestly and conscientiously, and if he finds a law is to be voided for interference with a superior constitutional right, he should do so even if his colleagues disagree.
Justice Sutherland finds fault with the majority’s finding that economic conditions which have supervened
affect the reasonableness of the exercise of state power and invite reconsideration of Adkins. He writes:
…the meaning of the Constitution does not change with the ebb and flow of economic events. We frequently are told in more general words that the Constitution must be construed in the light of the present. If by that it is meant that the Constitution is made up of living words that apply to every new condition which they include, the statement is quite true. But to say, if that be intended, that the words of the Constitution mean today what they did not mean when written—that is, that they do not apply to a situation now to which they would have applied then—is to rob that instrument of the essential element which continues it in force as the people have made it until they, and not their official agents, have made it otherwise.
The Constitution is living
in that its words can apply to new conditions, but not in that the meaning of its words ought to be changed on account of new conditions. If new conditions make some constitutional provision inexpedient, the lawful remedy is amendment, not re-interpretation.
Yet Sutherland may have been unfair in his accusation of what we would call judicial activism. The majority opinion elaborates:
There is an additional and compelling consideration which recent economic experience has brought into a strong light. The exploitation of a class of workers who are in an unequal position with respect to bargaining power, and are thus relatively defenceless against the denial of a living wage, is not only detrimental to their health and wellbeing, but casts a direct burden for their support upon the community. What these workers lose in wages, the taxpayers are called upon to pay. The bare cost of living must be met.
Unless we should allow people to starve, the public bears the cost of the inadequate wages paid by exploitative employers, so there is a public interest in regulating the minimum wage, rather than subsidize the bad behavior of employers who negotiate contracts on unequal terms.
What we have here is the difficulty of how much deference to give the state in regulating contracts. Instead of a single test, courts have developed over time multiple tests and considerations. An inequality of bargaining power or one-sided terms can be characterized as unconscionability,
which the state has an interest in regulating. It is arguable that modern Courts, in reaction to Lochner era jurisprudence, have gone too far, practically dismissing the notion that freedom of contract is a fundamental right and therefore meriting strict scrutiny. On the other hand, many exercises of the police power inevitably interfere with freedom of contract, and that power has generally been broadly construed. Two venerable legal principles, the police power and freedom of contract, both construed broadly, are in tension with each other, and there is perhaps no way of reconciling them without compromising at least one of them.
Part VI Coming Soon
© 2025 Daniel J. Castellano. All rights reserved. http://www.arcaneknowledge.org
| Home | Top |