Economy

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ECONOMY

The United States Constitution is much more than the formal document ratified in 1789. It is the preeminent symbol of the American preference for continuity over radical change, a collection of myths that provides a common faith, and a complicated dialogue between written and unwritten rules of law. As such it reflects and embodies many of the conflicting values at the core of American culture. The law itself, as an extended commentary on the Constitution, has perpetuated many of those conflicts by seeking to balance essentially irreconcilable objectives. It has always attempted, with mixed success, to reconcile elitism and democracy, individual opportunity and community, enterprise and equity, growth and stability, competition and cooperation, and freedom and responsibility. Moreover, it has both liberated and encouraged economic growth even as it has tried to make economic institutions responsible and accountable.

The Constitution's Framers could not anticipate the dramatic changes that occurred in the United States during the first half of the nineteenth century. After all, they drafted the document to serve an economy in which most farmers practiced subsistence agriculture and in which factories were rare, transportation limited, banking and credit primitive, and business transactions simple and direct. Nevertheless, the Constitution provided a congenial legal environment during the first phase of industrialization. The rapid expansion of the nation in size and population was an inherently decentralizing force, as the Supreme Court recognized when it began to interpret the commerce clause and the contract clause. The Court might have defined constitutional power over the economy in several ways. For example, in explaining the meaning of the commerce clause, it might have prohibited the states from enacting any statutes regarding interstate trade. It might also have ruled that state laws could coexist with federal laws in the absence of direct conflict between the two or that the states could legislate only until Congress decided to address the same subject. But in an age when the fear of centralized power was all-pervasive, particularly in the South, the Court's decisions were inevitably compromises. Although the Court prohibited states from taxing the federal government, blocked them from limiting or excusing debts, denied their right to violate corporate charters, banned them from directly interfering with interstate commerce, confirmed the sanctity of contracts between individuals in two or more states, and granted corporations perpetual existence—all important prerequisites to the establishment of national markets—it left the states plenty of responsibilities. They could charter, license, and regulate businesses, and they could regulate working conditions. And because the Constitution provided for a government of enumerated powers, leaving a broad economic arena to the states under the tenth amendment, the relationship between federal and state law hinged on the assumption that state statutes were constitutional unless prohibited by the Constitution or preempted by Congress.

In short, even john marshall's most nationalistic decisions reinforced the idea of separate realms of power with separate responsibilities. The Supreme Court's commentary on economic powers did not end with its early decisions regarding the commerce and the contract clauses. Following the depression of 1837, the Court formally recognized a general federal commercial law and a national credit system protected by "impartial" federal courts. That business law provided national rules for the marketplace, but did not entirely displace state rules. Hence, corporations could "forum shop" for the laws, state or federal, best suited to their needs. Then, at the end of the century, the I. M. Singer Company and the Big Four meat-packing firms persuaded the Court to strike down state licensing and tax laws designed to exclude the products of out-of-state corporations. By doing so, the Court may have played an even more important part in creating a continental market than did the railroads.

During the nineteenth century the Constitution was defined as much by the inaction of Congress as by the actions of the Supreme Court. Preoccupied as it was with a host of thorny sectional issues, Congress refused to intervene in new questions concerning the relative powers of the states and the federal government. For example, although the Constitution granted the power to coin money to the national government, Congress did not authorize the issuance of national bank notes until the civil war. In the meantime, state-chartered commercial banks issued debt instruments that doubled as the nation's currency. Equally significant, Congress used the central government's power to issue corporate charters, which Marshall had read into the Constitution in 1819, only to create national banks and to encourage a few land-grant railroads. Congress might have used the commerce power to license bridges and highways—a logical extension of the power over interstate trade—but transportation decisions were left almost entirely to the states and to private enterprise. Moreover, although the Constitution permitted Congress to enact uniform bankruptcy laws, Congress used that power seldom and reluctantly, leaving the states to pass extensive debtor legislation.

By failing to limit the states' powers in most economic spheres, the Constitution indirectly encouraged legal experimentation and innovation. So did the structure of government mandated by the Constitution. The tendency of federalism to disperse power to the local level reinforced the dependence of Americans on quasi-governmental associations, such as commercial federations, civic organizations, and booster clubs—organizations that often served as better forums for collective action than did formal institutions of government. Given the decentralized nature of the pre-Civil War political system and the lack of major ideological differences between the political parties, the controversies over tariffs, banks, and internal improvements reflected localism and particularism more than states ' rights. Not only did federalism institutionalize the nation's centrifugal, localistic impulses; it also reinforced the American tendency to view economic conflicts in constitutional and legal terms, and it reduced tension among competing economic groups by providing a variety of jurisdictions in which to fight for their objectives.

By barring certain acts, the Constitution encouraged the states to expand powers indisputably their own, especially their police powers over private property. For example, had the eminent domain power not been granted to private companies, the construction of bridges, turnpikes, canals, and railroads—and industrial development in general—would have been impeded. Individual property owners could be recalcitrant. Railroads needed to acquire broad ribbons of land; without the state's power of condemnation, the property had to be purchased at great expense on the open market. In 1807 the Schuylkill and Susquehanna Navigation Company failed to complete its canal because of the high prices it had to pay for land and water rights.

But under the new eminent domain statutes, which spread throughout the nation after the 1830s, indirect damages were not subject to compensation, and benefits to property not taken—such as any appreciation in property values—could be deducted from required compensation. Those were important subsidies to public works. The courts also limited the liability of transportation companies for injuries to workers, and the legislatures enacted new laws relaxing penalties for usury and debt.

The transformation of law was linked to the emergence of the business corporation, which tapped a vast pool of small investors, permitted them to transfer and withdraw their funds quickly, spread the risk of investment, and limited their liability. But the railroads grew so fast and became so powerful that by the 1870s and 1880s the promotion of capital investment had given way to demands for regulation in many parts of the nation.

Regulation has served many purposes, including the disclosure of illicit activities, the restraint of monopolies and oligopolies, fact gathering, the protection of industries from harmful competition, publicizing the problems of various businesses, and coordinating business activities. It has also served more ritualistic, almost mythic, purposes consistent with the dictates of constitutionalism. For example, it has maintained the illusion of accountability, the notion that the economy works in rational ways subject to public control. It has also perpetuated the idea that there is a "public interest," not just a multitude of special interests competing for preference in an open market. And it has formally acknowledged free competition, one of the most cherished American values. The classical model of free competition was valued not only because it promoted economic efficiency or even provided maximum individual opportunity but also because it built character and mollified some of the antisocial elements in unrestrained individualism.

The promotion of businesses by the state—such as providing exclusive charters, tax exemptions, land, or capital—had always implied a right to regulate those businesses. That right had been freely admitted, at least by businesses that served the public, such as canals and railroads. But by the end of the nineteenth century, corporations tried to free themselves from restrictions—except when restrictions served their interests. State and federal courts aided them in many ways, such as by limiting the state police powers, exalting freedom of the courts, and devising substantive due process to limit the power of Congress and the state legislatures. Because many congressional leaders shared the assumptions of the Supreme Court's conservative majority, Congress failed to provide the basic ground rules needed for effective antitrust actions. It did not, and probably could not, define what size business should be. Those who supported antitrust actions were not well armed with evidence concerning the potential impact of that policy on income distribution, on the concentration of wealth, on the efficiency of production, and on a host of related matters.

The American respect for private property and the rule of law, as well as the inability of Congress and the legislatures to decide how big was too big and what constituted "unfair" business practices, made regulation all the more difficult. The sherman antitrust act (1890) failed more for this reason than because of opposition from the courts or the power of special interests. Not surprisingly, the regulatory commission became the favored alternative not just to antitrust prosecutions but also to using taxation, federal incorporation, or national police power to discipline the economy. The Interstate Commerce Commission, created in 1887, set the legalistic precedent of case-by-case regulation, and that approach blended well with the faith of many Progressive politicians in panels of experts working through a process relatively immune from political influence. Many reformers favored regulatory commissions because they considered the political process clumsy and easily corrupted. They also assumed that men of good will could compromise or reconcile their differences if they could find reliable facts and that fact-finding was a job for experts.

At the federal level, the regulatory commission was a child of the Progressive Era, but the number of commissions proliferated during the 1930s with the establishment of the Civil Aeronautics Board, the Tennessee Valley Authority, the Bonneville Power Authority, the Securities and Exchange Commission (SEC), and the multitude of National Recovery Administration code boards. The SEC brought credibility and order to the securities industry largely because the agency's first chairman, James M. Landis, recognized the value of close relations with the stock industry. For example, the SEC provided "advance opinions" in response to specific regulatory questions, a dramatic departure from the formal adjudicatory procedures followed by both the ICC and the Federal Trade Commission (FTC). Yet, despite the number and influence of the new deal commissions, they did little to change the shape of industrial America. Instead, they showed the limits of commission-style regulation. The reform movement of the 1930s included many competing visions: a cartelized industrial order regulated by business leaders through trade associations; a sink-or-swim free market economy; a corporate state in which government provided both centralized planning and a forum where different interest groups could resolve their differences; and the older Progressive ideal of government as a referee, intervening only to insure that participants followed the rules. The regulatory commission had become a cheap alternative to structural reform.

After world war ii, regulatory commissions faced increasing criticism. Some critics charged that the commissions were elitist and undemocratic: by combining executive, legislative, and judicial functions in appointive bodies, the agencies constituted a "fourth branch of government" that was clandestine, remote, and capricious. Other critics insisted that over time regulatory boards became narcissistic and bureaucratized as the reform impulse suffocated under crushing caseloads and the staggering range of trivial detail encountered in day-today deliberations. Others complained that commissions were not independent enough, that they were too subject to political interference, such as being staffed by political hacks and cronies unsympathetic to regulation. Still another criticism was that commissions were easily "captured" by those they regulated, either through direct means or through the subtle process by which the regulator gradually came to speak the same language and to hold the same economic philosophy as the regulated. Finally, many politicians and academics charged that commissions were grossly inefficient, a judgment hard to dispute when cases brought before the Civil Aeronautics Board and the FTC often took years to settle.

Two things happened in the postwar period. First, the old constitutional goal of balancing public and private, individual acquisitiveness and the common welfare, and stability and growth seemed anachronistic—perhaps even faintly absurd—to many Americans who had come of age in the ronald reagan era. And second, to most Americans the size of a business became far less important than its sense of social responsibility. During the 1960s and 1970s, Americans discovered the dangers of DDT, phosphates in laundry detergents, propellants in aerosol cans, lead-based paints, nuclear power, radioactive wastes, chemical dumps, oil spills, saccharin, Pintos, Corvairs, Volkswagens, and dozens of other staples of modern industrial society. Economic regulation gave way to social and environmental regulation as the Environmental Protection Agency (1970), the Occupational Safety and Health Review Commission (1970), the Consumer Product Safety Commission (1972), the Mining Enforcement and Safety Administration (1973), the Office of Strip Mining Regulation and Enforcement (1977), and a host of other agencies demonstrated their popularity. In 1981 the EPA alone had more employees than the ICC, FTC, SEC, and Federal Power Commission, even though the youngest of those four had been around for nearly fifty years and the oldest for almost a hundred. Moreover, while "consumers" had little affect on New Deal regulatory policies, the Sierra Club, the National Audubon Society, Common Cause, and many other citizen groups gave the public far greater influence over the new regulation.

Over time, the law has been far more successful in its quest to encourage economic growth than in its representation of interests outside the marketplace. The Framers faced many difficult problems, none more vexing than how to elevate basic principles of law above the push and pull of day-to-day politics without rendering those principles blind to new economic needs. Of necessity, the Constitution transcended time and place. To ensure that the law would be responsive yet responsible, two choices were made: vast economic power was granted to state and local governments to decide their economic futures, and the courts and stand-in regulatory commissions were left to resolve most conflicts. Promotion and regulation were clearly complementary, and they often pulled in the same direction, but the balance inherent in the nineteenth-century law was impossible to maintain.

Donald J. Pisani
(1992)