Creating Legal Infrastructure for a National Economy
Part II of The Supreme Court Affirms the American System
by Edward Spannaus
April 17, 2018–As we discussed in the first article in this series, John Marshall’s monumental ruling in McCullough vs. Maryland not only upheld the constitutionality of the National Bank, but it established in American law the principle that the Constitution emanated from the people, not from the states.
But McCullough was only one of a series of rulings in the 1819 term of the United States Supreme Court, which laid the legal and constitutional basis for the creation of a truly national economy, as opposed to the separate state economies which existed up to that time.
To create a national economy required not only a physical infrastructure; it required a legal and constitutional infrastructure as well. This is what the Marshall Court built between 1819 and 1824 – which enabled the unprecedented expansion of the U.S. economy which was launched under the administration of John Quincy Adams (1825-29) . Without a uniform legal system which included federal supremacy, respect for charters and contracts within and between the states, and a standardized system of commercial law, the Union would have disintegrated long before the Civil War.
This is what Alexander Hamilton sought from the beginning. In the Federalist papers (especially Nos. 6-7, and 11-13), Hamilton argued that commercial rivalries between the states would result in dissensions, reprisals, and even war. But unity among the states, uniformity of commercial regulations, and a vigorous national government, were the keys to American greatness, and “would baffle all the combinations of European jealousy to restrain our growth.”
Breaking down the barriers to trade and commerce between the states, and establishing a uniform commercial policy – including with respect to contracts and debts – were essential to the prosperity of the nation (which Hamilton sometimes called the “commercial republic”). This would cement the common interests of the merchant, the farmer, the mechanic, and the manufacturer, and would prevent the dissolution of the Union into 13 separate states, or into three or four regional groupings of states. Rather than our weakness making us vassals of Europe, Hamilton declared:
Let the thirteen States, bound together in a great and indissoluble Union, concur in erecting on great American system superior to the control of all transatlantic force or influence, and able to dictate the terms of the connection between the old and the new world! (emphasis added)
Charters and Contracts
The Marshall Court’s rulings on the inviolability of contracts may sound archaic – even reactionary – to today’s ears, conditioned as we are to being told that the Founding Fathers were primarily concerned with protecting their property. And apart from contemporary interpretations of history, it is true that in the late 19th and early 20th centuries, the Supreme Court used the notion of “liberty of contract” to invalidate all manner of social legislation and labor laws.
But for men like Marshall and Hamilton, protection of property and contracts was not an end in itself: it was a means toward creating a thriving industrial and agricultural economy which would promote the happiness and development of all its citizens. Such an economy depended on credit and investment, which in turn required good-faith fulfillment of agreements – which had not been the case during the anarchy and corruption that prevailed in the 1780s prior to the adoption of the Constitution.
Marshall put it this way, in summarizing the arguments made in the Dartmouth College case, when he pointed to the reasons why the contract clause had been included in the Constitution:
That, anterior to the formation of the Constitution, a course of legislation had prevailed in many, if not all of the States, which weakened the confidence of man in man, and embarrassed all transactions between individuals, by dispensing with a faithful performance of engagements. To correct this mischief, by restraining the power which produced it, the State Legislatures were forbidden “to pass any law impairing the obligation of contracts.
The Dartmouth College case in 1819 was not the first case to come before the Supreme Court involving the Constitution’s prohibition against the impairment of contracts by the states, but it was the most decisive.
Federal Supremacy
The first such case was Fletcher vs. Peck in 1810, which grew out of the Yazoo land frauds by the Georgia legislature. The Yazoo lands comprised some 35 million acres, most of today’s states of Alabama and Mississippi. Although the original land grants to four private companies by the Georgia legislature in 1795 were found to have been secured by bribery, the issue was whether the legislature, once caught, could legally rescind those corrupt land grants to the detriment of third-party purchasers who bought parcels of those lands in good faith. Among the lawyers involved in the litigation over the Yazoo lands was Alexander Hamilton, who represented some of the “innocent purchasers.”
Hamilton’s views were published in a 1799 pamphlet, in which he opined that it would be “a contravention of the first principles of natural justice and social policy” to revoke the land grants to the prejudice of innocent third-party buyers. As well, Hamilton wrote, this would violate Article I, Section 10 of the U.S. Constitution which declares that no state shall pass a law impairing the obligation of contracts.
Marshall’s 1810 opinion in Fletcher vs. Peck was the first Supreme Court case to take up the Contract Clause of the Constitution, and it showed his commitment to subordinate state policy and practice to the federal Constitution. The Contract Clause was one of the ways in which the framers sought to protect the fundamental interests of the Republic against the passions of the moment, Marshall wrote:
Whatever respect might have been felt for the state sovereignties, it is not to be disguised that the framers of the Constitution viewed, with some apprehension, the violent acts which might grow out of the feelings of the moment; and that the people of the United States, in adopting that instrument, have manifested a determination to shield themselves and their property from the effects of those strong and sudden passions to which men are exposed.
Speaking for a unanimous Supreme Court, Marshall pronounced the Georgia rescinding act to be in violation of the U.S. Constitution – the first time that Court had invalidated a state law.
This was also the Court’s first ruling interpreting the Contract Clause. That clause was again the issue in the far more dramatic Dartmouth College case, which involved not a commercial contract, but a college charter which was rescinded by a state legislation. The case was of profound importance for the development of the national economy, in that it held that a corporate charter was a contract, and thus entitled to constitutional protection, thereby paving the way for the rise of the industrial corporation as a vehicle for private investment.
Freedom from Legislative Whim
Dartmouth College, first established as a school for the education of Indians in 1754, was reorganized under a royal charter granted 1769. Theological differences between the College’s president and board of trustees grew into political disputes over the years, to the point where the New Hampshire legislature (dominated by Jeffersonian Republicans) revoked the College’s charter in 1816, in what amounted to a state government takeover of the institution.
The old trustees brought a legal action to restore the original charter, which the New Hampshire Supreme Court refused to do. An appeal was taken to the U.S. Supreme Court, and the case was argued in March of 1818. Daniel Webster – incidentally a Dartmouth alumnus – argued that the issue in this matter “is the case of every man who has property of which he may be stripped,” and he posed the question as whether a state legislature would be allowed to take something that is not their own, and apply it to such purposes as they see fit.
At the conclusion of the arguments, Marshall announced that, some of the justices not having reached a decision, the case would be held over to the next term. When the Court reconvened on February 2, 1819, Marshall delivered the opinion of the Court.
He pointed out that, prior to the Revolution, the British Parliament, being unbounded in its power, would have been able to revise or revoke Dartmouth’s charter, but since “all contracts and rights respecting property remained unchanged by the revolution” (a point on which Hamilton had been insistent), the charter remained in full effect. After the Revolution, the New Hampshire legislature’s power to repeal charters was subject to the limitations imposed by the state Constitution, but more importantly, also to those imposed by the federal Constitution. The Constitution of the United States prohibits the states from impairing contracts, and the Dartmouth charter is such a contract – and therefore, Marshall held, its action in repealing the charter was in violation of the U.S. Constitution.
The implication of the Dartmouth ruling went far beyond educational and charitable institutions. Freeing corporate charters from the whims of state legislatures provided a degree of security to contracts and investments which enabled the rise of the industrial corporation, and the emergence of the United States as the world’s leading industrial and scientific power.
Marshall’s ruling set loose a proliferation of corporations, for both private and public purposes. Over the next four decades, it is reported, the number of for-profit corporations leapt from 300 to over 20,000 – encompassing railroads and transportation, manufacturing, and all manner of industrial and commercial activity. Marshall biographer Alfred Beveridge put it this way, in describing the stimulus that the Dartmouth opinion gave to the American economy:
It reassured investors in corporate securities and gave confidence and steadiness to the business world. It is undeniable and undenied that America could not have been developed so rapidly and solidly without the power which the law as announced by Marshall gave to industrial organization.
The Bankruptcy Issue
About two weeks after this, the Marshall Court issued a second landmark ruling on the sanctity of contracts. This case, known as Sturges vs. Crowninshield, revolved around a New York law passed in 1811, for the relief of insolvent debtors.
Two constitutional issues presented themselves. First, since the Constitution gave Congress the power to establish uniform laws on bankruptcy, but it had not done so, could New York pass a bankruptcy law? (Marshall, as a Federalist leader in Congress in 1800, had gotten the nation’s first bankruptcy law passed, but it was repealed by the Jeffersonians in 1803.) Second, did the New York bankruptcy law violate the Constitution’s bar against the states impairing of contracts?
As to the first question, Marshall held that so long as Congress had not enacted a uniform national bankruptcy statute, the states were free to do so, within constitutional limitations. Not all powers granted to Congress are exclusive, that is, precluding the states from acting in the same field.
But the next question was: did the New York law constitute an impairment of a contract, in violation of the U.S. Constitution? Marshall said that the meaning of the Constitution on this issue was clear, and he held that the New York law did violate the Constitution, at least in its retroactive effect.
Lest Marshall’s ruling seems to have been cruel to distressed debtors, it is important to note that he was not against debt relief; he just thought it should be done in a uniform manner by federal law. The mood for debt repudiation was widespread at the time, particularly as involved out-of-state creditors, and left unchecked, it would have posed a fatal danger to the development of a unified national economy.
The Dartmouth College and the Sturges bankruptcy cases were followed up in early March by the national bank case, McCulloch vs. Maryland – which we discussed in the first article in this series.
Important constitutional cases had preceded these three, and others followed. But this trio of rulings, coming in a period of economic distress, and at the time when the future of the Union was already being tested in the debate over the Missouri Compromise, firmly established the principle of federal supremacy, particularly as regards the drive for uniformity of commercial law and the protection of charters and contracts.
A Constitution “Framed for the Ages”
One other major nationalist ruling deserves mention in this context: the 1821 decision in the case Cohens vs. Virginia, which came after two years of virulent attacks on Marshall and the Supreme Court over the McCulloch opinion.
The Cohen brothers were bankers and financiers based in Baltimore, who also ran the National Lottery which had been authorized by Congress to finance municipal improvements in the District of Columbia. But Virginia had prohibited out-of-state lotteries, so that only the sale of lottery tickets authorized by the laws of Virginia was permitted.
Consequently, when Philip and Mendes Cohens’ Norfolk office sold some tickets for the National Lottery to a Virginian, the Cohens were charged with violating the Virginia law and fined $100. Spending far more than that on top-flight lawyers, the Cohens appealed the Norfolk Court’s ruling to the U.S. Supreme Court, arguing that the National Lottery, having been authorized by Congress, was exempt from state regulation.
For Virginia, the issue was states’ rights, and whether the U.S. Supreme Court could hear an appeal from a state court – a question which seems clear to us today, in matters where a federal issue or constitutional principle is involved, but one which had never been definitively decided up to this point.
Behind the jurisdictional question lay a much larger question: the future of the Union. Virginia’s attorney, who was U.S. Senator James Barbour, was fresh from the debate in Congress over the Missouri Compromise, and he argued for dismissal of the Cohens’ appeal. Barbour came close to threatening secession if the National Government continued to infringe on the sovereignty of the states:
Nothing can so much endanger it [the National Government] as exciting the hostility of the state governments. With them it is to determine how long this government shall endure.
For Marshall, the issue was federal supremacy, that is, the supremacy of the Union. The bulk of his opinion concentrated on the jurisdictional issue: did the Supreme Court have the power to hear a citizen’s appeal from a state court ruling? In its power and constitutional sweep, it equalled his opinion in McCulloch. Marshall reviewed the nature of the Union and the National Government, and how the Constitution gave the National Government ample powers to carry out its purposes as set forth in the Preamble. Likewise, this is why the Constitution set limits of the sovereignty of the states.
But a constitution is framed for ages to come, and is designed to approach immortality as nearly as human institutions can approach it. Its course cannot always be tranquil. It is exposed to storms and tempests, and its framers must be unwise statesmen indeed, if they have not provided it, as far as its nature will permit, with the means of self-preservation from the perils it may be designed to encounter.
Marshall’s defense of the Court’s jurisdiction, and the importance of vesting in one body – the Supreme Court – the power to determine the constitutionality of state laws and state court decisions, drew explicitly on Hamilton’s arguments in the Federalist papers, particularly No. 80.
Showing that he was acutely aware of what exactly was at stake in this seemingly-minor case involving a paltry $100 fine, Marshall declared:
In war we are one people. In making peace, we are one people. In all commercial regulations, we are one and the same people. In many other respects, the American people are one, and the government which is alone capable of controlling and managing their interests in all these respects, is the government of the Union. It is their government, and in that character they have no other. America has chosen to be, in many respects, and for many purposes, a nation; and for all these purposes, her government is complete; to all these objects, it is competent. The people have declared, that in the exercise of all powers given for these objects, it is supreme. It can, then, in effecting these objects legitimately control all individuals or governments within the American territory. The constitution and laws of a state, so far as they are repugnant to the Constitution and laws of the United States, are absolutely void.
Having determined that the Supreme Court possessed jurisdiction to hear, and rule on, an appeal from a state court involving a constitutional question, the Court adjourned for the weekend. When it returned, Marshall went to the merits of the case, and here he held that Congress had not intended to authorize the sale of lottery tickets in Virginia, but only in the District of Columbia. Therefore, he ruled, Virginia had the right for legislate for the welfare of its citizens by restricting the sale of lottery tickets, and Virginia’s fine against the Cohens was upheld.
This was not the first time that Marshall had given the tactical victory to his political opponents, in the interests of establishing a more important, and enduring, Constitutional principle. He had done the same in Marbury v. Madison, where he ruled in Jefferson’s favor while establishing the principle of judicial review of acts of Congress by the Supreme Court, and also in the Aaron Burr treason trial, where Marshall’s strict adherence to the Constitutional requirements for conviction for treason, allowed for Burr to be acquitted.
As he showed again in the Cohens case, Marshall was willing to forego political and partisan advantage, in order to establish a Constitutional principle that would “endure for the ages.”
These four rulings – in the cases of Dartmouth College, the New York bankruptcy law (Sturges), the National Bank (McCulloch), and the Virginia lottery law (Cohens) – brought the nation much closer to the fulfillment of Hamilton’s vision of a unified commercial republic.
But they also triggered a reaction, on the part of the Jeffersonian slavocracy and its northern sympathizers, which was not resolved until the Civil War. We will examine this reaction, in the next article.
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