FDR and the Supreme Court: End of the Line for the Disruptive Technology of Its Day: The Railroad

Dan Denning discusses FDR’s battles with the Supreme Court over various provisions of the New Deal — and how the president got the Supreme Court to let Social Security stand when so many other provisions were declared unconstitutional.

Dear Reader,

In 1934, the railway unions were in trouble. As William E. Leuchtenburg writes in The Supreme Court Reborn: The Constitutional Revolution in the Age of Roosevelt,

“The onset of the Great Depression, though, dealt savagely with the railroad industry. Even before 1929, competition from trucks, intercity buses, pipelines, even the first sign of commercial air travel, was already threatening the supremacy of the railways, and each year at the start of the Depression — 1930, 1931, 1932 — operating revenues of railroads fell another billion dollars, so that by 1932, income had dropped to under half that of 1929.”

Sounds a bit like the current state of the North American auto industry, doesn’t it? Leuchtenburg continues:

“From 1929 to 1933, railroads fired more than two out of every five railway workers, and total compensation in 1933 was less than half of what it had been four years earlier. Railroad employment, which had peaked at above 2 million in 1920, fell to under a million. By the late summer of 1932, more than 760,000 railroad workers had lost their jobs, a decline since 1929 of 54%, and thousands of those still employed drew only part-time pay.”

Sounds even more like the current state of the North American manufacturing industry. But in 1934, no public pension system existed that could absorb such high levels of unemployment. I will submit that none such exist today, either. But more of that in a future Whiskey.

With the help of allies in Congress, the railroad unions helped draft the Railroad Retirement Act of 1934. According to Leuchtenburg:

“It required carriers to contribute 4% of their payrolls to a common pension pool for more than 2 million railway workers, past and present, and assessed employees 2% of their wages…Workers would be eligible for pensions on reaching the age of 65, or upon completing 30 years of service on the roads, or if they became disabled.

“It was the first compulsory plan ever imposed by the federal government on private industry. The carriers protested that in the first year, the law would double the $35 million the railroads were currently laying out under private pension programs and that by 1953, that sum would nearly quadruple.”

On May 6, 1935, the Supreme Court ruled the act unconstitutional. Writing for the majority, Owen Roberts laid out the basis of the court’s disagreement with the act:

“The federal government is one of enumerated powers; those not delegated to the United States by the Constitution, nor prohibited by it to the states, are reserved to the states or to the people. The Constitution is not a statute, but the supreme law of the land to which all statutes must conform, and the powers conferred upon the federal government are to be reasonably and fairly construed, with a view to effectuating their purposes. But recognition of this principle cannot justify attempted exercise of a power clearly beyond the true purpose of the grant.”

Roberts cited due process and the 10th Amendment as reasons for the ruling. He wrote:

“It results from what has now been said that the act is invalid because several of its inseparable provisions contravene the due process of law clause of the Fifth Amendment. We are of opinion that it is also bad for another reason, which goes to the heart of the law, even if it could survive the loss of the unconstitutional features which we have discussed. The act is not in purpose or effect a regulation of interstate commerce within the meaning of the Constitution.”

Roberts saw that the real goal of the act was not to regulate interstate commerce, but to create a government role in the pension system. He objected to this at the time and wrote as much:

“We feel bound to hold that a pension plan thus imposed is in no proper sense a regulation of the activity of interstate transportation. It is an attempt for social ends to impose by sheer fiat noncontractual incidents upon the relation of employer and employee, not as a rule or regulation of commerce and transportation between the states, but as a means of assuring a particular class of employees against old-age dependency. This is neither a necessary nor an appropriate rule or regulation affecting the due fulfillment of the railroads’ duty to serve the public in interstate transportation.”

FDR and the Supreme Court: Social Security

Roosevelt was appalled at the ruling, and the Railroad Retirement Act wasn’t even his legislation. But the Social Security Act was. And he realized that if the court struck down the Railroad Retirement Act, Social Security didn’t stand a chance.

Congress passed the Social Security Act on Aug. 14, 1935. But it had yet to be challenged — and upheld — by the Supreme Court. Based on the court’s ruling on the Railroad Retriment Act, the prospects for Social Security and other pieces of Roosevelt’s socialist agenda did not look good. Indeed, the court rapidly struck down other New Deal initiatives.

In May, the court threw out the National Industrial Recovery Act, the centerpiece of the New Deal. It was a huge blow to Roosevelt’s interventionist ambitions. Section 3 of the act allowed the president to “implement industrial codes to regulate weekly employment hours, wages and minimum ages of employees.”

In Schechter Poultry Corp. v. the United States, the court held that Congress had unconstitutionally delegated legislative power to the president. It gave the president the power to simply make up rules.

In writing for the majority, Chief Justice Charles Evans Hughes wrote:

“Extraordinary conditions do not create or enlarge constitutional power. The Constitution established a national government with powers deemed to be adequate, as they have proved to be both in war and peace, but these powers of the national government are limited by the constitutional grants. Those who act under these grants are not at liberty to transcend the imposed limits because they believe that more or different power is necessary. Such assertions of extraconstitutional authority were anticipated and precluded by the explicit terms of the 10th Amendment.”

There were more detailed arguments in the decision pertaining to specific aspects of the act. But the general dismissal of the act was grounded in the argument above. Namely, extraordinary circumstances don’t allow the Congress or the president to exceed the limits of Constitution.

It’s not as if the court routinely rejected acts of Congress before Roosevelt. In fact, you can find a listing of acts of Congress that the court has held unconstitutional at http://www.gpoaccess.gov/constitution/pdf/con039.pdf. Up through the late 1990s, only 127 acts have been overturned as unconstitutional. Roosevelt, though, was pushing the envelope. The court pushed back.

In January 1936, the court threw out the Agricultural Adjustment Act. The majority concluded that the “Agricultural Adjustment Act providing for processing taxes on agricultural commodities and benefit payments therefore to farmers” was “not within the taxing power under Article I, Section 8, Clause 1.” But far from reaching arid, legal conclusions, the court’s 5-4 majority thoroughly rejected the idea that a tax could be constitutionally levied in the manner the act conceived.

Writing for the majority, Justice Owen Roberts wrote:

“A tax, in the general understanding of the term, and as used in the Constitution, signifies an exaction for the support of the government. The word has never been thought to connote the expropriation of money from one group for the benefit of another. We may concede that the latter sort of imposition is constitutional when imposed to effectuate regulation of a matter in which both groups are interested and in respect of which there is a power of legislative regulation. But manifestly no justification for it can be found unless as an integral part of such regulation. The exaction cannot be wrested out of its setting, denominated an excise for raising revenue and legalized by ignoring its purpose as a mere instrumentality for bringing about a desired end. To do this would be to shut our eyes to what all others than we can see and understand.”

Roberts waxed philosophic about the role of the judiciary in public life — and of the proper scope and power of the federal government. He wrote:

“The question is not what power the federal government ought to have, but what powers in fact have been given by the people. It hardly seems necessary to reiterate that ours is a dual form of government; that in every state there are two governments; the state and the United States. Each state has all governmental powers save such as the people, by their Constitution, have conferred upon the United States, denied to the states, or reserved to themselves. The federal union is a government of delegated powers. It has only such as are expressly conferred upon it and such as are reasonably to be implied from those granted. In this respect we differ radically from nations where all legislative power, without restriction or limitation, is vested in a parliament or other legislative body subject to no restrictions except the discretion of its members.”

What was Roberts getting at? He was trying to show that any laws that expand the scope of federal power — for whatever benignly stated purposes — violate the letter of the Constitution. It was especially important with respect to taxes, as the Agricultural Act sought to ground the power to levy taxes in the general welfare language in Article I, Section 8, Clause 1 of the Constitution, which states:

“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.”

FDR and the Supreme Court: The General Welfare

Justice Roberts rejected the government’s reasoning. Roberts wrote (emphasis mine):

“The clause thought to authorize the legislation, the first, confers upon the Congress 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.’ It is not contended that this provision grants power to regulate agricultural production upon the theory that such legislation would promote the general Welfare. The government concedes that the phrase ‘to provide for the general welfare’ qualifies the power ‘to lay and collect taxes.’ The view that the clause grants power to provide for the general welfare, independently of the taxing power, has never been authoritatively accepted. Mr. Justice Story points out that, if it were adopted, It is obvious that under color of the generality of the words, to ‘provide for the common Defence and general Welfare,’ the government of the United States is, in reality, a government of general and unlimited powers, notwithstanding the subsequent enumeration of specific powers.’ The true construction undoubtedly is that the only thing granted is the power to tax for the purpose of providing funds for payment of the nation’s debts and making provision for the general welfare.”

What goes “general welfare” mean, then? I suppose that depends on whom you ask. For example, if you asked Alexander Hamilton, you’d get one answer. James Madison would give you an entirely different one. Roberts opines:

“Since the foundation of the nation, sharp differences of opinion have persisted as to the true interpretation of the phrase. Madison asserted it amounted to no more than a reference to the other powers enumerated in the subsequent clauses of the same section; that, as the United States is a government of limited and enumerated powers, the grant of power to tax and spend for the general national welfare must be confined to the enumerated legislative fields committed to the Congress. In this view the phrase is mere tautology, for taxation and appropriation are or may be necessary incidents of the exercise of any of the enumerated legislative powers. Hamilton, on the other hand, maintained the clause confers a power separate and distinct from those later enumerated is not restricted in meaning by the grant of them, and Congress consequently has a substantive power to tax and to appropriate, limited only by the requirement that it shall be exercised to provide for the general welfare of the United States.”

You can see why the older argument between Hamilton and Madison mattered very much to Roosevelt. To redress the social evils of the Depression, Roosevelt needed the court to sign off on the idea that the general welfare of the nation permitted Congress and the president to levy new taxes and impose new regulations that were not specifically enumerated in the Constitution.

But Roberts utterly rebuffed Roosevelt at every turn. If you’re still with me at this point, then you’re interested in the argument. So I’ll quote one last big chunk of Owens’ decision. In this conclusion, Owens shows that giving the federal government the power to levy specific taxes or lay specific regulations in order to redress some general social evil and promote the general welfare essentially destroys the federal character of the Constitution and imposes no limits on Congress except what it chooses to impose on itself (emphasis mine):

“Suppose that there are too many garment workers in the large cities; that this results in dislocation of the economic balance. Upon the principle contended for, an excise might be laid on the manufacture of all garments manufactured and the proceeds paid to those manufacturers who agree to remove their plants to cities having not more than a hundred thousand population. Thus, through the asserted power of taxation, the federal government, against the will of individual states, might completely redistribute the industrial population.

“A possible result of sustaining the claimed federal power would be that every business group which thought itself underprivileged might demand that a tax be laid on its vendors or vendees, the proceeds to be appropriated to the redress of its deficiency of income. These illustrations are given, not to suggest that any of the purposes mentioned are unworthy, but to demonstrate the scope of the principle for which the government contends; to test the principle by its applications; to point out that, by the exercise of the asserted power, Congress would, in effect, under the pretext of exercising the taxing power, in reality accomplish prohibited ends. It cannot be said that they envisage improbable legislation. The supposed cases are no more improbable than would the present act have been deemed a few years ago.

“Until recently no suggestion of the existence of any such power in the federal government has been advanced. The expressions of the framers of the Constitution, the decisions of this court interpreting that instrument and the writings of great commentators will be searched in vain for any suggestion that there exists in the clause under discussion or elsewhere in the Constitution, the authority whereby every provision and every fair implication from that instrument may be subverted, the independence of the individual states obliterated, and the United States converted into a central government exercising uncontrolled police power in every state of the Union, superseding all local control or regulation of the affairs or concerns of the states.

“Hamilton himself, the leading advocate of broad interpretation of the power to tax and to appropriate for the general welfare, never suggested that any power granted by the Constitution could be used for the destruction of local self-government in the states. Story countenances no such doctrine. It seems never to have occurred to them, or to those who have agreed with them, that the general welfare of the United States (which has aptly been termed ‘an indestructible Union, composed of indestructible States’) might be served by obliterating the constituent members of the Union. But to this fatal conclusion the doctrine contended for would inevitably lead. And its sole premise is that, though the makers of the Constitution, in erecting the federal government, intended sedulously to limit and define its powers, so as to reserve to the states and the people sovereign power, to be wielded by the states and their citizens and not to be invaded by the United States, they nevertheless by a single clause gave power to the Congress to tear down the barriers, to invade the states’ jurisdiction, and to become a parliament of the whole people, subject to no restrictions save such as are self-imposed. The argument, when seen in its true character and in the light of its inevitable results, must be rejected.”

FDR and the Supreme Court: Packing the Court
After the Butler decision in 1936, it was emphatically clear that the court wasn’t going to play ball. Roosevelt decided if he couldn’t get five votes on the court, he’d simply enlarge it and pack it with justices that would vote his way.
On March 9, 1937, Roosevelt introduced the nation to the idea of packing the court in one of his famous fireside chats. To read the whole thing, or better yet, listen to it as an MP3 file, go to http://millercenter.virginia.edu/scripps/diglibrary/prezspeeches/roosevelt/fdr_1937_0309.html. And by the way, isn’t it amazing the lack of condescension in public dialogue back then? Roosevelt expected the public would listen to a long speech and handle complicated ideas. Contrast that with today’s approach, which seems to suggest that the affairs of state are too complicated for average Americans to worry their little old heads over.
In his folksy and charming way, Roosevelt makes the cases for a strong “national power.” He says:

“I hope that you have reread the Constitution of the United States in these past few weeks. Like the Bible, it ought to be read again and again.

“It is an easy document to understand when you remember that it was called into being because the Articles of Confederation, under which the original 13 states tried to operate after the Revolution, showed the need of a national government with power enough to handle national problems. In its preamble, the Constitution states that it was intended to form a more perfect union and promote the general welfare; and the powers given to the Congress to carry out those purposes can be best described by saying that they were all the powers needed to meet each and every problem which then had a national character and which could not be met by merely local action.

“But the framers went further. Having in mind that in succeeding generations many other problems then undreamed of would become national problems, they gave to the Congress the ample broad powers ‘to levy taxes…and provide for the common defense and general welfare of the United States.’

“That, my friends, is what I honestly believe to have been the clear and underlying purpose of the patriots who wrote a federal Constitution to create a national government with national power, intended, as they said, ‘to form a more perfect union…for ourselves and our posterity.'”

Let us give the man at least some credit. He says the Constitution and the Bible should be read “again and again.” I wonder how many modern-era Democrats would agree. He suggests we should “reread” the Constitution, assuming most Americans have already read it at least once. I wonder how true that is today.

But then, he grounds the power to deal with national problems in the ability of Congress to levy taxes. Is there any clearer expression of the idea that all problems are political problems and can be solved if only the right government program is properly funded with taxpayer dollars? Roosevelt practically advocates a kind of national socialism.

Roosevelt did not succeed in packing the courts. There’s a whole other story there. But he didn’t entirely fail in influencing the direction of the courts’ opinions.

FDR and the Supreme Court: Upholding Social Security

In three crucial opinions delivered in 1937, the Supreme Court — with Roberts voting with a new majority — upheld the major tenets of the Social Security Act. What’s more, Benjamin Cardozo, writing for the majority, captured the suddenly new spirit suffusing the Constitution. I’ll quote it at length and emphasize what I think are the crucial passages.

By the way, the passages are crucial because they establish the foundation for defending a changing interpretation of the Constitution, a sort of unholy trinity of ideas that still find purchase today. One, taxes can be levied to promote the general welfare, as determined by Congress. Two, the general welfare changes with the times. Three, what is critical or urgent changes with the times. And if you wanted to throw in a fourth, it would this: When Congress has one idea of the general welfare and the states another, “the locality must yield,” according to Justice Cardozo, who continues:

“The scheme of benefits created by the provisions of Title II is not in contravention of the limitations of the 10th Amendment.

“Congress may spend money in aid of the ‘general welfare.’ Constitution, Article I, Section 8; United States v. Butler, 297 U. S. 1, 65; Steward Machine Co. v. Davis, supra. There have been great statesmen in our history who have stood for other views. We will not resurrect the contest. It is now settled by decision. United States v. Butler, supra. The conception of the spending power advocated by Hamilton and strongly reinforced by Story has prevailed over that of Madison, which has not been lacking in adherents. Yet difficulties are left when the power is conceded. The line must still be drawn between one welfare and another, between particular and general. Where this shall be placed cannot be known through a formula in advance of the event. There is a middle ground or certainly a penumbra in which discretion is at large. The discretion, however, is not confided to the courts. The discretion belongs to Congress, unless the choice is clearly wrong, a display of arbitrary power is not an exercise of judgment. This is now familiar law…Nor is the concept of the general welfare static. Needs that were narrow or parochial a century ago may be interwoven in our day with the well-being of the nation. What is critical or urgent changes with the times.

“The purge of nationwide calamity that began in 1929 has taught us many lessons. Not the least is the solidarity of interests that may once have seemed to be divided. Unemployment spreads from state to state, the hinterland now settled that in pioneer days gave an avenue of escape. Spreading from state to state, unemployment is an ill not particular but general, which may be checked, if Congress so determines, by the resources of the nation. If this can have been doubtful until now, our ruling today in the case of the Steward Machine Co. supra, has set the doubt at rest. But the ill is all one or at least not greatly different whether men are thrown out of work because there is no longer work to do or because the disabilities of age make them incapable of doing it. Rescue becomes necessary irrespective of the cause. The hope behind this statute is to save men and women from the rigors of the poor house as well as from the haunting fear that such a lot awaits them when journey’s end is near.

“Whether wisdom or unwisdom resides in the scheme of benefits set forth in Title II, it is not for us to say. The answer to such inquiries must come from Congress, not the courts. Our concern here as often is with power, not with wisdom. Counsel for respondent has recalled to us the virtues of self-reliance and frugality. There is a possibility, he says, that aid from a paternal government may sap those sturdy virtues and breed a race of weaklings. If Massachusetts so believes and shapes her laws in that conviction must her breed of sons be changed, he asks, because some other philosophy of government finds favor in the halls of Congress? But the answer is not doubtful. One might ask with equal reason whether the system of protective tariffs is to be set aside at will in one state or another whenever local policy prefers the rule of laissez faire. The issue is a closed one. It was fought out long ago. When money is spent to promote the general welfare, the concept of welfare or the opposite is shaped by Congress, not the states. So the concept be not arbitrary, the locality must yield.”

From there on out, it was mostly smooth sailing for FDR, at least when it came to the court. In fact, in the decision I quoted from above — Helvering v. Davis — the vote was 7-2 to, de facto, uphold the Social Security Act. The dissent, from what I can gather, was terse:

“Mr. Justice McReynolds and Mr. Justice Butler are of opinion that the provisions of the act here challenged are repugnant to the 10th Amendment, and that the decree of the Circuit Court of Appeals should be affirmed.”

The battle over the constitutionality of Social Security was over, at least the legal battle. With the litany of other entitlement programs that have sprung up under the logic of the court’s rulings in 1937, we now have a government that’s promised more that it can deliver.

Who will pay for it? Foreign bondholders? New workers paying higher taxes? The Easter Bunny?

The financial consequences of a taxpayer-funded national retirement system will come into full maturity in the next 20 years. What is obvious in logic — that the system cannot support itself without the kind of high taxes that actually reduce economic growth — will become obvious in reality.

The promise of the New Deal and the Great Society, that the state could provide for your retirement by levying a tax on your wages, has proven to be a big, fat, empty lie. Unfortunately, by the time many Americans find that out, they will need a financial helping hand just as badly as Americans did in 1933.

Who will be there to give it?

Dan Denning
May 5, 2005

P.S. The End of the Line for the Disruptive Technology of Its Day: the Railroad

A coda to the bond supply story. Earlier this morning, the Treasury Department announced it was considering reintroducing the 30-year bond. The decision on whether to do so will be announced in early August. Assistant Secretary for Financial Markets Timothy S. Bitsberger wrote that Treasury will, “examine if we have the flexibility to issue 30-year bonds while maintaining deep and liquid markets in our other securities and determine if nominal bond issuance is cost effective.”
Treasury seems to be wondering out loud if reintroducing the 30-year bond would actually push rates UP on the ten-year bond. And why would that happen? Ten-year demand would slow, and existing holders might sell, looking to lock in the longer but slightly lower yield on the 30-year. In point of fact, both TLT and IEF-proxies for 10- and 20-year U.S. bonds-are down this morning.
If you go back at look at the spread between 10-year notes and 30-year bonds in the 1970s and 1980s, you’ll find that the spread between the two rarely exceeded one percent (or one hundred basis points.) That is, investors didn’t demand a much higher rate of interest to loan money over 30-years than they did over 10-years.

In fact, if you look at the chart below, you’ll see that while Paul Volcker was pushing the Fed Funds rate up over 20%, the spread between the 10-year and the 30-year didn’t differ much at all. And in the context of the Fed’s decision yestserday, note that the last time inflation was a serious problem, ten-year rates were three times higher than they are today. By increasing the supply of bonds, Treasury has to weigh the practical benefit of financing the U.S. government’s spending needs versus the potential of having to pay higher rates to do so. But by reintroducing the 30-year bond, it gets the benefit of paying America’s debts back over time, and giving America’s borrowers a convenient way to roll over their short term debt into something longer and…uh…safer.


And if you were going to think about it strategically, if the Chinese are going to scarf up American bonds, isn’t it better to sell them 30-year bonds than 10-year bonds. You solder the economic fetters just a little bit more by extending the relationship out in time. When the Chinese commit to buying a 30-year U.S. bond, it’s a way to further attach the two economies at the hip, near where the pocketbooks meet.

The Daily Reckoning