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The Supreme Court’s Destruction of Liberty of Contract


Found in Article I, Section 10, of the Constitution, the Contract Clause is a failed attempt to prevent the government from taking actions that would compromise the integrity of contractual obligations — failed, in large part, because of the 1934 Supreme Court case Home Building & Loan Association v. Blaisdell. Blaisdell is arguably the centerpiece of the Supreme Court’s Contract Clause jurisprudence; it represents, along with much of the Court’s body of decisions since the New Deal era, the impotence of the Constitution’s text when tested against the imperious actions of government at all levels, the near-omnipotence of modern government. Of course, the deteriorative process that the case represents was already well under way for many decades prior to Blaisdell. As law professor Samuel R. Olken observes, the Court had developed several “significant inroads” against the Clause in the lead-up to the case, steadily crippling its ability to meaningfully limit state action. Olken notes that the distinction “between the rights and remedies of a contract,” present even in the Marshall Court’s decisions, became an early point of vulnerability for the more- robust reading of the Contract Clause. By January of 1934, when the case was decided, the poisonous fruits of those seeds, long since sewn by successive decisions, were ready for harvest, for a wholesale repudiation of the Clause.

The facts from which the dispute arose concern a 1933 Minnesota state statute, the Minnesota Mortgage Moratorium Law, passed during the Great Depression and designed to relieve delinquent homeowners, many of whom were farmers, by allowing them more time to cure default. A thoroughgoing examination of the causes of the Great Depression is the subject of another article. It will suffice to point out that the Depression was brought on by a fateful blend of government oversteps, among them the looming passage of the disastrously protectionist Smoot-Hawley Act, expansionary Federal Reserve policy, and the generally interventionist domestic policies of the Hoover administration. The Minnesota statute meant that the bargained-for rights of lender-mortgagees were limited by the operation of the law, which prevented them from foreclosing in ways otherwise well within their legal and contractual rights. The statute illustrates the familiar temptation to respond (really overreact) to a crisis with bad public policy, the harmful bias in favor of doing something — anything — rather than allowing civil society to formulate its own solutions organically.

Succumbing to this bias, policymakers fail to realize that their frantic attempts to address the defects of interventionism with more intervention prepare the ground for the next crisis. They seem never to consider the unintended consequences of such confidently prescribed solutions. Laws like the one at issue in Blaisdell are sources of moral hazard and therefore risk. In studying these aspects of the historical and policy contexts surrounding Blaisdell, one is naturally reminded of the most recent home-finance crisis and the misguided responses thereto. Assured a relatively painless escape, mortgagor-borrowers will be more likely to take on too much debt with too little equity, the aggregate effect of which is the kind of unsustainable systemwide risk that in time gives way to crisis. Mortgagee-lenders, too, will be reluctant to finance new home purchases, robbed of their rights and remedies under properly executed contracts. As legal scholar Lawrence M. Friedman explains, “A strong mortgage law, giving creditors strong rights, was as necessary for debtors as for creditors, if only to make capital flow into real-estate investment.” One would think that a moment’s quiet reflection would yield those insights; they were, in any case, either not apparent or simply ignored by both the Minnesota legislature and the Supreme Court.

Political considerations

Writing for a 5-4 majority, Chief Justice Charles Evans Hughes affirmed the judgment of the Supreme Court of Minnesota, which had “upheld the statute as an emergency measure” legitimately “within the police power of the state,” the apparent limitations provided by the Contract Clause notwithstanding. Progressives have long praised Hughes’s majority opinion for its pragmatism and flexibility. Hughes reasoned that although the mortgage agreement indeed “contained a valid power of sale to be exercised in case of default,” the Minnesota law did not fundamentally alter the character of the parties’ agreement such as to impair it within the meaning of the Contract Clause.

The law, according to Hughes, did “not impair the integrity of the mortgage indebtedness,” only extending the time within which the mortgagor could redeem. Hughes arrogated to the Court the power to balance the Constitution’s prohibition against such power, which he seemingly acknowledged, against considerations attending the emergency at hand. Yet “emergency,” Hughes insisted, “does not create power.” He reconciled this apparent contradiction by asserting that the power at issue in the case had always been within the scope of the police power, as the language of the Contract Clause was “not to be read with literal exactness like a mathematical formula.”

Conveniently, then, determination of the exact contours of the restraint on the government’s power falls to judges equipped with some special insight as to what the Constitution really means. Well-established principles of construction, Hughes said, must guide this mysterious exercise. The process of judicial construction to which he refers is, of course, inherently informed by political considerations, that is, by the normative political theory that every judge carries with him into his work. Even conclusions about the meaning of the judicial pragmatism Hughes so assuredly recommends must be based on some extralegal reasoning process, some set of assumptions about the likely empirical result of a particular application of the law.

For example, the Blaisdell opinion cannot be regarded as pragmatic in any sense worth defending if its effect as a matter of fact is to aggravate the economic problems at the heart of the case’s facts. This, as noted above, is precisely what libertarians argue, quite apart from the fact that the Minnesota law and the Court’s decision represent an affront to individual liberty. Whether a particular course of action is pragmatic depends not on its departure from strict free-market principles, as big-government Progressives such as Hughes seem to believe, but on its relative ability to bring about a particular desired end. It never occurs to such Progressives that adherence to free-market principles — and, accordingly, strong judicial protection of contracts — may actually be the pragmatic response.

Some members of the Court knew that the pragmatism of the decision was indeed a false, self-defeating one. In a letter to his sister, Justice Willis Van Devanter, a nominee of William Howard Taft and a general opponent of the overbearing, overreaching government of the New Deal, remarked that the decision could be a source of “incalculable harm and instability.” Van Devanter joined the dissent in Blaisdell, along with the three other members of the so-called Four Horsemen, Justices Pierce Butler, James Clark McReynolds, and George Sutherland, all of whom fought in vain for the classical liberal ideals of constitutionally limited government and individual liberty. Sutherland’s dissent begins with the observation that “few questions of greater moment … have been submitted for judicial inquiry during this generation.” In the majority’s opinion, Sutherland presciently saw “the potentiality of future gradual but ever-advancing encroachments.” He stressed that the requirements of the Constitution’s plain language could not be suspended merely because they seem to be inexpedient, that the very purpose of a written constitution dissolves if its dictates change with the vagaries of either public opinion or events.

It is, moreover, not as if the possibility of economic emergency had been ignored in the debates of the Constitutional Convention and the drafting of the document’s language. Those debates specifically addressed the likelihood that the Contract Clause would limit the government’s ability to act in a time of crisis. In point of fact, Maryland Anti-Federalist Luther Martin opposed the inclusion of such a clause for that very reason. The objection had been raised and its reasoning rejected with the Constitution’s ratification. Just as the First Amendment’s protection of free speech is tested primarily when the speech at issue is of a kind that many or most would find objectionable, unworthy of legal safeguarding, so is the guarantee embodied in the Contract Clause most important in times of great economic crisis. As political scholars Lee Epstein and Thomas G. Walker observe in their discussion of Blaisdell, “After all, legislatures would have little reason to pass such a statute in good economic times.”

The Society of Status

The lessons of Isabel Paterson’s libertarian manifesto, The God of the Machine, illuminate a proper understanding of Blaisdell and cases like it. “In the Society of Status,” Paterson explained, “nobody has any rights.” In such a society, the rule of law is no rule at all, the arbitrary prerogative power of the state determining right and wrong according to its whim and caprice. The rights of the individual may be abolished by the stroke of a pen. There can be no expectation that one will be secure in his property or in his contracts, and thus no foundation for prosperity. The durability of contracts — confidence that one’s agreements will be enforced — is among the bedrock legal preconditions of a free and prosperous society. To undermine the enforcement of voluntarily executed agreements is to imperil commerce itself, for one could never be sure that his business arrangements will not be annulled in favor of some apparent political expedient. Home-loan agreements and the liens associated therewith provide for the possibility of both missed payments and default.

The Contract Clause forbids any state action that would impair such contractual obligations. Those who authored the document understood the importance of preempting the reach of the politically powerful into this integral area of economic life. They believed that the very point of the previous decade’s war was to throw off the rule of a Society of Status and inaugurate a Society of Contract. And indeed, the language of the Contract Clause appears to contemplate the very same distinction between these two possible bases of society, status and contract, including in that Clause (as well as elsewhere) an explicit prohibition against the grant of “any Title of Nobility.” Certainly it is more than a mere accident or coincidence that such a prohibition should appear alongside the Constitution’s expression of respect for contracts; its drafters understood well that kings and the various lesser lords of the Old World held themselves above the dirty, mundane world of commerce and contract, their titles allowing them special license to disregard the rights and interests of the common people.

In contrast to this Old World philosophy, Paterson argued that “the primary postulate of the Society of Contract” is its respect for the “axiom of the Declaration Independence that all men are endowed by their Creator with the inalienable right to life.” Contracts instantiate the agreements of free men, equally possessed of natural rights and forswearing the use of force to attain their ends. In the Society of Status, arbitrary, unaccountable power and its symbols predominate. Today, both halves of the political establishment favor such power, seduced by the promise it holds out to enrich them and their friends. The Supreme Court has, as it did in Blaisdell, long deferred to assumptions of power fundamentally inimical to a free society. The friends of liberty, meanwhile, hold out the hope for Paterson’s Society of Contract.

This article was originally published in the September 2017 edition of Future of Freedom.

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    David S. D'Amato is a policy advisor at the Future of Freedom Foundation, an attorney, and an adjunct law professor. He is also a regular contributor at the Cato Institute's Libertarianism.org and a policy advisor at the Heartland Institute. His writing has been featured at public policy organizations such as the Institute for Economic Affairs, the Centre for Policy Studies, and the Foundation for Economic Education, and in popular media such as Forbes, Investor's Business Daily, Newsweek, and RealClearPolicy.