U.S. Constitution's impact on business

Identification Foundation document that established the structure and principles governing the national government of the United States

Date Ratified in 1789

The U.S. Constitution provides a stable rule of law and an economic framework that makes American business and finance possible.

From the earliest recorded times, successful business activities have depended on the existence of peaceful and stable legal environments. When human societies moved beyond the hunter-gatherer stage to primitive agriculture, their members recognized that peace and security were extremely important to the growing and harvesting of crops. Without such security, farmers might expend their labor planting and weeding only to have neighbors steal their crops when they ripened. Within the United States, the federal Constitution has provided the basis for such an environment.

The Constitution was drafted during the summer of 1787, because the nation’s previous foundation document, known as the Articles of Confederation, failed to provide a secure environment for living and for conducting business. Tariff barriers and trade wars among the states dampened economic development and threatened outright civil war. The lack of a national currency and the inability of the weak national government to protect contracts and private property made conducting business across state lines extremely difficult. Moreover, the absence of a national court system meant that disputes between citizens of different states could not be reliably resolved, as each state’s courts tended to uphold the interests of its own citizens against those of other states. National economic activity was becoming stagnant.

The Framers of the U.S. Constitution addressed business and financial security in a number of specific ways. For example, Article I, section 9, prohibits taxes and duties on items exported from states. This clause promotes business by protecting the value of agricultural and manufacturing goods from being eroded by taxes. Article I, section 8, known as the commerce clause, gave the U.S. Congress authority to regulate commerce among the states, centralizing that critical power at the federal level. These two sections of the Constitution went a long way toward ending the dangerous trade wars among the original thirteen states and created one of the world’s largest free trade areas.

The Constitution and Contract Law

Article I, section 10, of the Constitution prohibits states from passing any law impairing the obligation of contracts. This clause is vitally important for financial and business activity. Without enforceable contracts, almost any transaction beyond simple barter requires some way to allow transactions over time. Transactions often must take place over months or years, as is true, for example, in buying expensive properties, such as a home or an automobile.

Article III provides for a single Supreme Court and such other federal courts as Congress may decide to create, generating a national court system to resolve—among other things—disputes between citizens in different states. The Supreme Court also interprets the language in the Constitution and arbitrates disputes between the federal government and the various states. For example, early in U.S. history, the Supreme Court in Fletcher v. Peck (1810) voided a Georgia state law in which the Georgia legislature attempted to nullify a contract a previous legislature had made. Virtually every legislator in the previous legislature had taken a bribe to give away 35 million acres of state land for 1.5 cents per acre. No matter how corrupt the contract, however, the Court held that contracts were sacrosanct, thereby underscoring how important contracts are to the business life of a nation.

Protecting private property is a major concern of the Constitution that is exemplified by the Fourth Amendment, which prohibits, among other things, unreasonable searches and seizures. Private property is further protected by the Fifth Amendment’s guarantee that it cannot be taken for a public purpose without just compensation. The Fifth Amendment also prohibits the federal government from taking property without due process of law.

About eighty years after the nation’s founding, the Fourteenth Amendment was added to the Constitution, enacting two important provisions that have had a great impact on business and finance. This amendment guarantees that no state can deprive any “person[s]” of their property without due process of law. The Supreme Court held during the late nineteenth century that a corporation was a legal “person” entitled to Fourteenth Amendment protection, powerfully advancing the power of corporations in the United States. This decision meant that states were limited in the amounts and kinds of regulations they could impose on corporations, and it allowed for a dramatic increase in corporate power well into the twentieth century.

By the middle of the twentieth century, the Supreme Court decided that the Fourteenth Amendment’s “equal protection” clause guaranteed individuals a number of important rights that have served to limit corporate power. This decision demonstrates that the U.S. Constitution can both strengthen and weaken business interests. Despite these and other limits on business and finance, the basic rule of law provided by the Constitution remains the most important underpinning for the stable peaceful environment in which American business and finance operate.

Bibliography

Amar, Akhil Reed. America’s Constitution: A Biography. New York: Random House, 2005. Provision-by-provision study of the Constitution that incorporates the events and issues that have helped shape each portion of the document.

Berkin, Carol. A Brilliant Solution: Inventing the American Constitution. New York: Harcourt, 2002. History of the Constitutional Convention of 1787, describing the conflicts and compromises among delegates, the disagreements between Federalists and anti-Federalists, and the development of the document itself. Contains one hundred pages of appendixes, including the full text of the Constitution and brief biographies of convention delegates.

Ely, James W., Jr. The Guardian of Every Other Right: A Constitutional History of Property Rights. 3d ed. New York: Oxford University Press, 2008. Scholarly history of property rights under the Constitution and its interpretation by the Supreme Court.

‗‗‗‗‗‗‗, ed. Contract Clause in American History. New York: Garland, 1997. Scholarly study of the impact of the Constitution’s contract clause on American business history.

Farrand, Max. The Records of the Federal Convention of 1787. 4 vols. New Haven, Conn.: Yale University Press, 1966. The definitive set of primary source documents for the convention.

May, Christopher N., and Allan Ides. Constitutional Law—National Power and Federalism: Examples and Explanations. 3d ed. New York: Aspen, 2004. Examination of the U.S. federal system that analyzes the federal government’s power to regulate interstate commerce.

Rakove, Jack N. Original Meanings: Politics and Ideas in the Making of the Constitution. New York: A. A. Knopf, 1996. Examines the concerns that shaped constitutional decision making during the late 1780’s, exploring federalism, representation, executive power, civil rights and liberties, and other issues confronting delegates.