From time to time, some of us wonder how we got here. We hear quaint expressions like “freedom of contract” and ask, whatever happened to that? How is it that two people are no longer allowed to enter into an enforceable contract without running afoul of some government restriction?
A recent example is that I can no longer agree to a contract with a health insurance company that does not cover contraceptives. Why? If I and an insurance company are both willing to sign such a contract, how is it that the government says we cannot?
This and many, many more restrictions on freedom came about during a seven-year (1937-1944) reign of terror by Franklin Delano Roosevelt’s Supreme Court that shredded all traditional understandings of the Constitution’s limits on federal power. It began with Social Security, went on to eliminate freedom of contract, expand the Commerce Clause, and redefine the meaning of insurance, all in the service of the Progressive movement to put an elite bureaucracy in charge of all economic activity in the United States
SCOTUS Approves Questionable Social Security
The first and most important SCOTUS decision was affirming the constitutionality of the Social Security Act. At the time it was enacted, it was no sure thing that the Supreme Court would uphold it. It was unprecedented for the federal government to provide such a sweeping social safety net, and several key New Deal programs had been thrown out, including the Railroad Retirement Act in 1935, the National Industrial Recovery Act, also in 1935, and the Agricultural Adjustment Act in 1936.
The reversals frustrated President Roosevelt to the point that in 1937 he proposed legislation allowing him to appoint additional judges to all federal courts when there were sitting judges over the age of 70 who refused to retire. This move was widely seen as a political blunder and a power grab at the time, but the mere threat of such legislation intimidated judges, including the Supreme Court, into being more accommodating to New Deal programs. Most notable was Justice Owen Roberts, who switched from opposing most New Deal legislation to supporting the programs in the course of a single year. His change of heart was characterized as “the switch in time that saved nine.”
The issues involved in the decision were profound. As Larry Dewitt, historian for the Social Security Administration, wrote in 1999, “The basic problem is that under the ‘reserve clause’ of the Constitution (the 10th Amendment) powers not specifically granted to the federal government are reserved for the States or the people…. Obviously, the Constitution did not specifically mention the operation of a social insurance system as a power granted to the federal government.” The authors of the bill opted to dodge this issue by relying on Congress’ power to tax on one hand and to spend money to “provide for the general welfare” on the other. The authors went so far as to write separate titles keeping the raising of revenue and the spending of money apart, as if they had nothing to do with each other.
The Court eventually accepted this reasoning in Helvering v. Davis (1937), but its decision makes it clear that it did so as a political pretext to address what it called a “nation-wide calamity that began in 1929.” Indeed, the whole episode illustrates the use of political hysteria to reorder American society, as in “never let a crisis go to waste.” This reordering is reflected in President Roosevelt’s statement, “We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and unemployment benefits. With those taxes in there, no damn politicians can ever scrap my social security program.”
This statement has all the veracity of “if you like your health plan, you can keep your health plan.” Michael Tanner, writing in 1998, noted that the Helvering v. Davis decision stated that Social Security was not a contributory insurance program. It wrote, “The proceeds of both the employee and employer tax are to be paid into the Treasury like any other revenue generally, and are not earmarked in any way.” Tanner adds, “(I)n the 1960 case of Fleming v. Nestor, the U.S. Supreme Court ruled that workers have no legally binding contractual rights to their Social Security benefits, and that those benefits can be cut or even eliminated at any time.”
The other curious thing about this episode: the Court accepted that, under its “general taxing power,” Congress could institute an entirely new form of taxation—the payroll tax. Just a few years earlier, in 1913, the nation thought it was necessary to amend the Constitution (the sixteenth) to impose an income tax. Apparently, the new thinking was that such an effort was too cumbersome to bother enlightened progressivism.
The Social Security decision was only the first of a flood of Supreme Court decisions in the short seven-year span of 1937 to 1944 that would completely reorder American society and the Constitution itself. The current devotion to the principle of stare decisis is often cited by today’s progressives to protect these decisions, while such devotion would have been denounced as reactionary in 1937. This Social Security decision wasn’t the only revolutionary decision from this era.
The Supreme Court Eliminates Freedom of Contract
Article 1, Section 10 of the Constitution states, “No State shall… pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts….” The courts have never found this to be an unlimited right of contract, but there was an ongoing dispute over when a state’s policing power could override the due process clause of the Fourteenth Amendment in regulating contracts. Law professor David E. Bernstein writes that, in the late nineteenth and early twentieth centuries, “The Supreme Court gradually accepted the notion that liberty of contract was an enforceable constitutional right under the due process clause.” Progressivism and the rash of labor law regulations in the twentieth century eroded this protection. Bernstein writes, “By 1934, a majority had formed willing to broadly expand the ‘affected with a public interest’ doctrine to the point where just about any regulation of prices was constitutional.” After 1937, the Roosevelt Court eliminated virtually any limitation on the government’s power to violate contracts.
The Supreme Court Redefines Interstate Commerce
Article 1, Section 8 of the Constitution reads, “The Congress shall have the power…to regulate Commerce with foreign Nations, and among the several States, and with the Indian tribes.” It would seem this applies to goods and services passing between jurisdictions, not within the jurisdiction. But the Roosevelt Court decided otherwise.
The most famous, and outlandish, case here was Wickard v. Filburn, decided unanimously in 1942. In this case, an Ohio farmer who was growing wheat for his own consumption exceeded the quota set by the Agricultural Adjustment Act of 1938. Filburn argued that Congress had no jurisdiction over what he did on his own farm, since his wheat never left his farm and was not used in “commerce.” The Court reasoned that by growing his own wheat, Filburn was failing to buy wheat that might have been sold across state lines, so his activity affected interstate commerce, and could so be regulated.
While this case is the one most often cited, it is far from the only decision between 1937 and 1942 to expand what the federal government can regulate under the Commerce Clause. Writing in the Marquette Law Review in 1945, Joseph Ziino provides quite a laundry list, including –
- NLRB v. Jones & Laughlin Steel Corp (1937). A company not engaged in interstate commerce was found in violation of the National Labor Relations Act because “the local business of the corporation substantially affected interstate commerce.”
- Santa Cruz Fruit Packing Co. v. NLRB (1937). While 37 percent of this company’s products were intended for interstate commerce, the products had not yet been actually shipped. The Court ruled that the feds could regulate them well before the commerce actually took place.
- Sunshine Anthracite Coal v. Adking (1941). The Court ruled the federal government could regulate the price of coal that was not sold across state lines because the price in one state affected the prices in other states.
- Mulford v. Smith (1939). The Court applied a tax to tobacco that exceeded the production quotas. “Congress may tax any activity to promote and foster commerce.”
- United States v. Darby (1941). The Court decided that Congress could regulate the wages, hours, and working conditions of workers in a local lumber mill because the products might be shipped in interstate commerce.
Insurance Previously Didn’t Count as Commerce
For most of American history, insurance wasn’t considered “commerce” at all, let alone interstate commerce. Commerce was defined as the buying and selling of goods by merchants, according to David Kopel and Rob Nateson in the National Law Journal. This understanding was the basis for a Supreme Court ruling in Paul v. Virginia in 1869, and was repeatedly affirmed over the years. But this understanding was turned on its head in a narrow 4-3 ruling in 1944 in United States v. South-Eastern Underwriters Association. The case ruled that the Sherman Anti-Trust Act applied to the insurance industry and that fire insurance companies were subject to federal regulation under the Commerce Clause.
Chief Justice Stone wrote a strongly dissenting opinion that relied on the traditional understanding of the word “commerce” and argued that Congress was well aware of this understanding when it passed the Sherman Act, so did not intend for it to cover the insurance industry. Plus, he argued, the states are well equipped to regulate insurance, while the federal government has no such experience or expertise. The ruling, he said, would “loosen a flood of litigation” and cause great disruption in an otherwise-stable industry.
Congress largely agreed with the chief justice and immediately (on January 25, 1945) enacted the McCarran-Ferguson Act to return to the states the sole power to regulate and tax the insurance business. Still, the precedent had been set, and this one ruling empowered Congress to directly regulate insurance whenever it chose. It has frequently made use of the power in the years since.
This series of cases set the stage for an entirely new American governance that has little to do with the system the founders established. It was a revolution as profound as that of 1776, only no one sets off fireworks to commemorate the occasion.