Capitalism and the Supreme Court

Description: Economic system based on private property, competition, and the production of goods for profit, with the market rather than a central government making decisions about production and distribution.

Significance: The Supreme Court’s responsibility is to weigh the constitutional limits of governmental interference against the market’s free operation. The Court defines the rules governing the market’s operation, adjusts market mechanisms that are not functioning properly, and considers the claims of the many groups involved.

In a basically free-market economic system, the Supreme Court has been obligated to set restrictions on the power of the states and the federal government to intervene in the market’s growth and direction. In the nineteenth century, the Court frequently cited substantive due process in rebuffing state proposals to regulate wages or free trade. It upheld freedom of contract, encouraged corporations, and regulated competition.

The Court tried to minimize political interference with capitalism by restricting state authority to the state’s own borders and by limiting federal powers to the area of interstate commerce. Swift v. Tyson (1842) allowed federal judges to bypass state law in cases between citizens of different states, a decision extended in Watson v. Tarpley (1855) to cover not only common-law rules but also state statutes. In Chicago, Milwaukee, and St. Paul Railway Co. v. Minnesota (1890), a state regulatory agency was forbidden to set railroad rates. A change of philosophy occurred during the administration of President Franklin D. Roosevelt, when Swift was overturned by Erie Railroad Co. v. Tompkins (1938) and a general turn toward acceptance of regulation took place on the Court.

Freedom of Contract

In the nineteenth century, the Court’s preference for an unregulated market contributed to several important decisions involving freedom of contract. The contracts clause (Article I, section 10, clause 1, of the Constitution) says that “No State shall…pass any Law impairing the Obligation of Contracts,” and its interpretation featured in several early Court decisions opposing actions by states. The private branch of contracts clause jurisprudence dealt mostly with state attempts to weaken contracts between private parties, usually to effect debtor relief. In Sturges v. Crowninshield (1819), the Court allowed creditors to attach a debtor’s wages, and in Bronson v. Kinzie (1843), the Court denied mortgagors additional redemption rights on foreclosed property, a ruling nullified by Home Building and Loan Association v. Blaisdell (1934), in which contracts were made subject to reasonable policing by states. In Gelpcke v. Dubuque (1864), the Court ruled against the claim that final authority in interpreting the state’s laws lay with the state judges, overturning the Iowa supreme court’s decision that Dubuque could invalidate its own municipal bonds.

The public branch of contracts clause jurisprudence forced the states to uphold their contracts faithfully. In Fletcher v. Peck (1810), the Court, led by Chief Justice John Marshall, forbade the state of Georgia from rescinding a land grant even though the transaction had been shot through with bribery. When the New Hampshire legislature moved to revise the Dartmouth College charter, the Court held in Dartmouth College v. Woodward (1819) that Dartmouth’s contract was a charter and that the college was a private corporation not subject to state interference. In Charles River Bridge v. Warren Bridge (1837), the proprietors of the Charles River Bridge sought to halt construction of an adjacent bridge, arguing that the contracts clause protected them from a new bridge that would lessen their toll income. Chief Justice Roger Brooke Taney’s opinion for the 4-3 majority stated that the rights and needs of the community overrode the rights of private property. The bridge case illustrates well how the principle of contract often clashed with the vision of those like Taney who realized how regressive it could be, and from then on, the states were allowed greater freedom in regulating their corporations. Part of this change resulted from the dilemma confronting early jurists who were caught between their devotion to contracts and their contempt for the many privileges the states had conferred on corporations in the early nineteenth century.

Substantive Due Process

Whereas procedural due process ensures fair procedures, the doctrine of substantive due process derived from the Fourteenth Amendment and enabled the Court to judge the substance of legislation. It evolved from American reverence for a free market and assumed tremendous importance in the late nineteenth century. Justice Stephen J. Field’s dissent in the Slaughterhouse Cases (1873) and his concurrence in Butchers’ Union Co. v. Crescent City Co. (1884) stressed the “liberty of the individual to pursue a lawful trade or employment.” With this new doctrine, the Court was able to judge all state regulatory statutes. In Allgeyer v. Louisiana (1897), the Court struck down a Louisiana law forcing corporations trading with Louisiana residents to pay fees to the state. In Lochner v. New York (1905), a statute governing maximum work hours for bakers was found unconstitutional. In Coppage v. Kansas (1915), a state law forbidding yellow dog contracts (contracts in which employees agreed not to join a union) was overturned, and in Adkins v. Children’s Hospital (1923), the Court invalidated the District of Columbia’s employment commission’s minimum-wage-setting authority.

Even in its period of strongest support of substantive due process, however, the Court took a generally broad view of issues. State regulation of railroad rates, for example, was accepted with the understanding that investors must be allowed reasonable competitive profits. In Muller v. Oregon (1908), a ten-hour workday law like that in Lochner was upheld because it applied only to women, who were thought to have special needs. In Euclid v. Ambler Realty Co. (1926), the Court demonstrated a sensitivity to community welfare by upholding broad land-use and zoning statutes. Probusiness regulatory legislation suffered the same disfavor accorded wage and hour legislation, as shown by the Court’s decision in Liggett v. Baldridge (1928), in which a statute calling for licensing of pharmacists was struck down as an attempt to discourage competition. In New State Ice Co. v. Liebmann (1932), ice makers lost their bid to force potential competitors to demonstrate a need for more ice manufacturers.

Criticism by Progressives combined with the New Deal to end the dominance of substantive due process in economic affairs. In Nebbia v. New York (1934), the Court accepted the formation of a New York commission to regulate milk prices on the grounds of health concerns. In West Coast Hotel Co. v. Parrish (1937), a divided Court approved a Washington state minimum-wage law for women. In a reversal of Justice Field’s earlier argument for free labor, Chief Justice Charles Evans Hughes stated in West Coast Hotel that the due process clause entailed “the protection of law against the evils which menace the health, safety, morals, and welfare of the people.” After these rulings, substantive due process has shifted in emphasis from economics to social issues regarding various manifestations of discrimination.

Corporations

The Court handed down several important decisions in the nineteenth century establishing corporations as individuals. The old view that shareholders had to be named separately in any suit was overthrown in Bank of the United States v. Dandridge (1827). In Bank of the United States v. Deveaux (1809), the Court ruled that corporations were collections of individual shareholders and that in any suit each shareholder had to come from a different state than its disputants, making federal jurisdiction difficult to claim. However, Deveaux was invalidated by Louisville, Cincinnati, and Charleston Railroad Co. v. Letson (1844), which held that corporations were citizens of their incorporating states, thus enabling federal court jurisdiction over suits between corporations and out-of-state parties. In Santa Clara County v. Southern Pacific Railroad Co. (1886), the Court defined a corporation as a “person” under the Constitution, with the effect that only the corporation, not its individual shareholders, could make constitutional claims on behalf of the corporation.

In Welton v. Missouri (1876), the Court abandoned the traditional understanding that corporations could not do business directly outside their own states. Welton held that a corporation could not build a plant outside its own state but that its products could not be barred from sale in other states. However, in Western Union Telegraph Co. v. Kansas (1910), the Court held that as a person, a corporation could not be prevented from doing any legal business in a given state. In another important case, Sawyer v. Hoag (1873), the Court established the trust fund doctrine to safeguard against watered stock by demanding that shareholders had to make up any difference between what they had actually paid in and what the corporation claimed. The Court in these years frequently ruled that a corporate action was ultra vires, or beyond the limits of the corporate charter, holding, for example, in Thomas v. West Jersey Railroad (1979), that for one railroad to lease its track to another would create a de facto merger. Ironically, a corporate merger with a competitor, despite its potential dampening of competition, was safe because it did not result in business beyond the corporate charter; however, the relatively innocuous conglomerate merger could be forbidden as ultra vires. The practice of invoking actions as ultra vires soon waned, however, as the Court ruled in Jacksonville, Mayport, Pablo Railway and Navigation Co. v. Hooper (1896) that a railroad could purchase a hotel for its passengers. This kind of integration aided corporate growth. In Briggs v. Spaulding (1891), the Court relaxed its restraints even further, allowing corporate directors broad authority to make decisions without a threat of stockholders filing liability suits.

Beginning with the New Deal in the 1930s, the Court allowed more state and federal regulation of corporations, as in Federal Trade Commission v. F. R. Keppel and Bros. (1934), which gave the Federal Trade Commission increased oversight of business practices. Several later decisions gave more freedom to the market. In Chiarella v. United States (1980) and Basic v. Levinson (1988), the market for corporate securities was judged efficient enough to relieve corporate managers of the responsibility to provide information about their corporation’s securities to buyers and sellers. In Dirks v. Securities and Exchange Commission (1983), the Court allowed buying and selling corporate stock on the basis of secret information about corporate wrongdoing as a practice that encouraged market efficiency.

Regulation of Competition

Before the passage of the Sherman Antitrust Act in 1890, the Court relied on the common law of trade restraint in making decisions, but a series of rulings after the act’s passage disallowed price fixing and anticompetitive mergers. In United States v. Trans-Missouri Freight Association (1897), the Court rejected the argument that railroads were a unique industry that needed an industry wide plan for rate scheduling. In Loewe v. Lawlor(1908), agreements by workers on the wage they could demand were outlawed, although laborers were to receive expanded bargaining rights in National Labor Relations Board v. Jones and Laughlin Steel Corp. (1937). In Northern Securities Co. v. United States (1904), the Court forbade an anticompetitive merger between two transcontinental railroads, and the Court has commonly applied the rule of reason to judge the effects of mergers. The rule of reason remains controversial, largely because one person’s reason can be another’s prejudice.

Bibliography

Bowles, Paul. Capitalism. 2nd rev. ed. Routledge/Taylor & Francis Group, 2015. A general consideration of the subject.

Friedman, Lawrence M. A History of American Law. 4th ed., Oxford UP, 2019. This text has important chapters on law and the economy 1776-1850, corporation law, and commerce, labor, and taxation.

Geisst, Charles R. Wall Street: A History. 4th ed. Oxford UP, 2018. Details the struggles between financial institutions and the Court.

Geisst, Charles R. Wall Street: A History--From Its Beginnings to the Fall of Enron. Rev. ed. Oxford UP, 2004. A comprehensive history of the stock market.

Hovencamp, Herbert. Enterprise and American Law, 1836-1937. Harvard UP, 2014. Focuses on capitalism and the law.

Miller, Arthur Selwyn. The Supreme Court and American Capitalism. Greenwood Press, 1968. Focuses on capitalism and the law.

Hall, Kermit L. The Magic Mirror: Law in American History. 2nd ed. Oxford UP, 2009. An excellent study.

Horwitz, Morton J. The Transformation of American Law, 1780-1860. 2nd ed. Oxford UP, 2022. Horwitz argues that the body of common law developed in the nineteenth century worked for entrepreneurs against laborers and farmers.

Hurst, James Willard. The Legitimacy of the Business Corporation in the Law of the United States, 1780- 1970. UP of Virginia, 2014.

Hurst, James Willard. Law and Markets in United States History: Different Modes of Bargaining Among Interests. Lawbook Exchange, 2001.