Constitutional Collapse Under the Weight of Economic Bailout

0:00I'm going to give a political historical perspective, and I think it goes without saying the collapse of the constitutional order didn't start with these recent bailouts, it began quite a while ago, but I'm going to look at a specific area of case law, you have to use your imagination a bit and it's going to be somewhat depressing to see where we were just back in the 1930s to where we are today, so try to think about what the system's supposed to look like and what it's devolving into. And I know we all know that there's a lot of talk about the end of capitalism. Boy, the Financial Times, I think every day they have an article in the editorial section about different models or alternatives to the capitalistic system. And we know what that is.

0:55is, when you talk about the end of capitalism, you're talking about the end of free markets and moving closer and closer to some type of socialism, fascism, I don't know what we call this new arrangement. But this is nothing new for the American political process. As a matter of fact, the various panics, recessions, depressions have quite a bit of precedent and American History. But the court, especially the Supreme Court, was always there to keep things in their proper place. And the due process clause of the Fifth Amendment, the Fourteenth Amendment are important, but I'm going to focus attention on the contract clause of Article I, Section 10.

1:42Now, it goes without saying, Article 1, Section 10 of the Constitution is also applicable, it was intended to be applicable to the national government, and that of course is the government, both national and state, are precluded from impairing the obligation of contracts. And I don't need to tell this audience how important contracts are to free markets and to the economy. There was a case, and there are so many of them, I'm just going to highlight the one in the 1934 case that was decided by the Supreme Court.

2:29We're going to focus in on a dissenting opinion by Justice Sutherland. And this is prior to the switching time that saved non, it's prior to the National Labor for Relations Board case, in which the Supreme Court more or less jettisoned property rights to the whims of the commerce powers of the United States Congress. So we have a system now that, going back to Rehnquist's opinion written in the U.S. v. Lopez case, that when we talk about congressional commerce powers, it covers just about everything imaginable under the sun. In that 1990s case on the Gun Free Zone Act, the court did give a little pushback to the Congressional Commerce powers, but not much, it was a 5-4 decision, it was split, if you read the dissenting opinions, they're really quite frightening that there are literally no limits to Congressional Commerce powers, including teacher certification, selecting in textbooks and schools, you name it, under commerce, the Congress can do just about anything.

3:32Rehnquist, who wrote the majority opinion in Lopez, summarized the status quo of commerce powers. And there are three broad categories that Congress can regulate insofar as its commerce powers are concerned. Those are essentially the channels of commerce, the instrumentalities of commerce, Commerce, such as persons and things, and those activities having a substantial relation to interstate commerce. And it's up to the political preferences of the court as to what falls under those three areas, those three categories, and like I said, when you consider the current administration and who's going to be on the court in the not too distant future, that'll be the main interpretation of the Supreme Court.

4:22So property rights under commerce and also under Article 1, Section 10, which also, the framers were very clear about this, also applies to the national government, more or less has carte blanche to impair the regulation of or impair the obligation of contracts. This is what some of the more important framers of the Constitution, for example Charles Pickney of South Carolina, discussing this in the South Carolina Ratification Convention, when it came to the contract clause of Article 1, Section 10, he stated that it's the soul of the Constitution.

5:15Its purpose is to cultivate those principles of public honor and private honesty, which which are due, which are the sure road to national character and happiness, honoring contracts, both private and public. James Madison, Federalist paper number 44, said it is necessary for the presence, for the perseverance of industry. In other words, there's something critical to Article 1, Section 10, and by implication, Section 9, about not impairing contracts, the obligation of contracts. Now, the recent signing statement by President Obama on the first bailout bill, he mentions, well, let me just read it very briefly.

6:11The Signing Statement states, Today I have signed into law House Resolution 1, the American Recovery and Reinvestment Act of 2009. The Act provides a direct fiscal boost to help lift our nation from the greatest economic crisis in our lifetimes and lay the foundation for further growth. The greatest economic crisis, wherever you see the word crisis, whether it's rhetorical, and Statements," or whatever. He's setting the stage. This isn't just plain old trying to get political support. This has a legal implication, because where there's a crisis, the Congress and the executive branch, based upon case law, have emergency powers. He also says in this signing statement, we have inherited an economic crisis as deep and as dire since And that links to the case law of the Great Depression, specifically the case that I'm going to look at.

7:15So crisis is important because it empowers the government with emergency powers. He also wrote in the Sonic Statement, No one policy or program will solve the challenge we face right now, nor will this crisis recede in a short period of time. So the emergency powers are for not just this maybe what might be a short-lived recession or even a depression, depending upon how you look at it, but it's to prevent a relapse into this economic cycle. Now, unfortunately, he's standing on pretty firm constitutional grounds based upon case law precedent.

8:06By characterizing this as a crisis, he confers upon his administration certain emergency powers that the framers would find to be abhorrent. I'm going to take a quick look at the Homebuilding and Loan Association vs. Blisdell, 1934. Now this has to deal with the state law, 1933 Minnesota enacted the Mortgage Moratorium Law in an effort to combat the economic emergency posed by the Great Depression. The law extended the time period in which borrowers could pay back their debts on property to lenders. The state argued that this was a legitimate use of its police powers since Minnesota faced massive economic difficulties.

8:52I also have some case law where I could make quite clear that the National Congress also has police powers. To go back to 1903, in the Champion v. Ames case, under commerce powers, had to do with lottery tickets, known as the lottery cases, the second-ring edition, to boost the morality of the Nation and the States by using commerce powers to make it a crime to transport lottery tickets across state lines. So this is also applicable to the national government. The legal question was, did Minnesota law violate both Article 1, Section 10 of the Constitution, obligation of contracts, which prevents a state from impairing the obligation of contracts and the Due Process Clause and the Equal Protection Clause of the 14th Amendment.

9:45And Justice Hughes says it did not. And it didn't because there was an emergency and because it didn't necessarily remove the obligation of contracts, it simply modified it. So the people who couldn't pay their mortgages were given an extended period of time to occupy the premises, but they would pay rent. and the rent was very much you know substantially less but it put the creditors in a quite a bind and the Supreme Court said that's constitutional because quote of the emergency that's 1934 that's prior to like I mentioned the attempt by FDR to pack the court so the court already had had this inclination going back to other cases that during times of emergency, you have expanded powers of the government, the Constitution notwithstanding. And it's a very odd logic.

10:47Hopefully I could get to it very briefly. It's quite illogical, but it's only illogical if you look at it from a constitutional jurisprudential perspective. It's a political decision to to legitimize government action in a realm of public policy that the government's precluded from acting in. Justice Sutherland wrote the dissenting opinion, and it's really quite good. He wrote the opinion in a couple of other cases which were quite bad, but that was after the attempt to pack the courts, specifically the Curtis Wright case. He takes a very restricted view of governmental powers during times of emergency, domestically, but later on he expands presidential powers and foreign policy quite a bit.

11:35And his history is all wrong in that Curtis Wright case, just wondering what the guy was thinking when he was writing it, but he's pretty solid on this one. This is what he wrote in his dissenting opinion. Now, you'll never get anything like this again in a majority opinion, at least not in the short term. Sutherland wrote, few questions of greater moment than that just decided, Justice Hughes saying you can impair the obligation of contracts, have been submitted for judicial inquiry during this generation. He simply closes his eyes to the necessary implications of the decision, who fails to to see in it the potentiality of future gradual but ever-advancing encroachments upon the sanctity of private and public contracts. The effect of the Minnesota legislation, though serious enough in itself, is of trivial significance compared to the far more serious and dangerous inroads upon the limitations of the Constitution which are almost certain to ensue as a consequence naturally following any step beyond the boundaries fixed by that instrument.

12:48And those of us who are thus apprehensive of the effect of this decision would, in a matter so important, be neglectful of our duty, should we not fail to spread upon the permanent records of the Court the reasons which move us to the opposite view. And he proceeds after warning the readers, the American people, of the ever-encroaching encroachments, the ever-advancing encroachments upon the sanctity of private and public contracts. He talks about preventing legislation designed to relieve debtors, especially in times of financial distress. Now, his position is that the Constitution, when they included that provision, the framers when they included that provision in Article 10, were also confronting a very serious emergency, in many ways much worse than what they were confronting in 1934.

13:56And he talks and he cites the precedent from the constitutional debates that by stepping over this very important constitutional limitation is despotism. This is what he writes about the economic circumstances when that provision was drafted, debated, and included in the Constitution. Following the Revolution and prior to the adoption of the Constitution, the American people found themselves in a greatly impoverished condition. Their commerce had been well nigh annihilated. They were not only without luxuries, but in great degree were destitute of the ordinary comforts and necessities of life. In these circumstances, they incurred indebtedness in the purchase of imported goods and otherwise far beyond their capacity to pay.

14:49During this situation there arose a divided sentiment. On the one hand, an exact observance of public and private engagements was instantly urged. A violation of the faith of the nation or the pledges of the private individual, it was insisted, was equally forbidden by the principles of moral justice and sound policy. So it wasn't only unconstitutional, But it would be immoral and bad political economy, public policy. This is 1787. Individual distress, it was urged, should be alleviated only by industry and frugality, not by relaxation of law or by a sacrifice of the rights of others.

15:43was not to be relieved by legislation, but restrained by the conviction that a full compliance with contracts would be exacted. On the other hand, it was insisted that the case of the debtor should be viewed with tenderness, and efforts were constantly directed toward relieving him from an exact compliance with his contract. As a result of the latter view, state laws were passed suspending the collection of debts, remitting or suspending the collection of taxes, providing for the emission of paper money, delaying legal proceedings, etc. And remember, there's also, at this point in time, the constitution, fiat money was unconstitutional, and the court decided as much until around the 1880s, for the very similar reasons.

16:41There follow, as there must always follow from such a course, a long trail of ills, one of the direct consequences being a loss of confidence in the government and in the good faith of the people, Bonds of men whose ability to pay their debts was unquestionable, could not be negotiated except at a discount of seeking to meet their obligations by a discount of 30, 40 or 50 percent. So in other words, sort of the moral political hazard, people were negotiating a reduction of their contractual debts because they would say, I'll go to the legislature and just have the debt eliminated or reduced even further. Real property could be sold only at ruinous loss.

17:27Debtors, instead of seeking to meet their obligations by painful effort, by industry and economy, began to rest their hopes entirely upon legislative interference. So you see this, you know, there's this expectation, you could even see some of the externalities that would be created. You incur a debt with the expectation that the legislature will later relieve you of that debt, The impossibility of payment of public or private debts was widely asserted, and in some instances threats were made of suspending the administration of justice by violence. The circulation of depreciated currency became common. 2009, depreciated currency, because of the printing of this fiat paper money.

18:17The circulation of the depreciated currency became common, resentment against lawyers and courts was freely manifested, and in many instances the course of the law was arrested in judges restrained from proceeding and the execution of their duty by popular and tumultuous assemblages. Now, this is against the backdrop that Justice Hughes is saying the Constitution was made with this contingency in mind. If there's an emergency, the Constitution was designed to let certain constitutional rights, in this case the right of contract, to be set aside or at least modified to some extent. And Southerners say, no, this isn't the case. This state of things alarmed all thoughtful men and led them to seek some effective remedy. And that remedy, of course, was Article 1, Section 10.

19:1210. You cannot impair the obligation of contracts. Now, in his opinion, Hughes says, well, it's not in Article 1, Section 9, so they couldn't have been too committed to it, but there was no power under the Articles to impair the obligation of contracts. It was unnecessary In the midst of this confused, gloomy, and seriously exigent condition of affairs, the Constitutional Convention of 1787 met at Philadelphia.

19:58The defects of the Articles of Confederation were so great as to be beyond all hope of Amendment and the Convention acting in technical excess of its authority proceeded to frame for submission to the people of the several states and entirely new constitution. Shortly prior to the meeting of the convention, Madison had had settled a bill pending in the Virginia assembly proposing the payment of private debts and three annual installments on the ground that quote, no legislative principle could vindicate such an interposition of the Law and Private Contracts. The bill was lost by a single vote. Another delegate had likewise assailed similar laws as altering the value of contracts. William Patterson of New Jersey insisted that the legislature should leave the parties to the law under which they contracted.

20:49And he goes on and he points out to the Northwest Territory Ordinance, this is what it states. This became part of the political constitutional landscape. The contracts are sacrosanct, even though many in the states would like to have them less so because, of course, that's where the political support was in many state legislatures. The Northwest Territory Ordinance of 1787 states, in an adjust preservation of rights and Property. It is understood and declared that no law ever to be made or have force in the said territory that shall in any manner whatsoever interfere with or affect private contracts or engagements bona fide and without fraud previously formed. Now, it's not as Almost though the majority didn't have a sophisticated argument saying that the impairment of contracts is constitutional, but the logic for it just doesn't hold up to scrutiny within the original interpretation of the Constitution.

22:07They have, for example, under the Doctrine of Implied Conditions, you can impair contracts under that particular Doctrine of Implied Conditions. So for example, this is a far-fetched example, but let's just say for some reason that the Congress may pass the law on usury and therefore nullified any mortgages that were in excess In the case of what, six percent, and those mortgages, those contracts that are at seven, eight, nine, ten percent, whatever those balloon rates are currently, would be null and void. But under the doctorate of implied conditions, they could, under English common law and American common law tradition, impair that contract, but the impairment of the contract is an indirect result of exercising another constitutional power.

23:03So if a state had usury laws that outlawed certain interest rates and some contracts were already signed at those higher rates, that would impair those contracts. And we could think of all other sorts, you know, the liquor cases in the Supreme Court and such, but it can't be the direct purpose of the legislation. The direct purpose of the Minnesota law was to relieve the debtors from their obligations to the creditors. And so there's no real, under English and American common law tradition, especially under the reasonable interpretation of the Article 1, Section 10, this is, you know, not only facially, but substantially unconstitutional.

23:48Because it's a direct assault on the sanctity of contracts. And that's where the emergency powers come in, and the court says, well, that's true, but under implied conditions, if there's an emergency, you can't impair the obligation of contracts. So that would fall under the implied conditions, something has changed, but that's, you know, as I was mentioning, Sutherland tears that logic to shreds. And just to summarize, this is what, very briefly, the Sutherland writes.

24:33And I think this is very applicable to today. A statute which materially delays the enforcement of the mortgagee's contractual right of ownership and possession does not modify the remedy merely, it destroys, for the period of delay, all remedy so far as the enforcement of that right is concerned. The phrase, obligation of a contract, in the constitutional sense, imports a legal duty to perform the specified obligation of that contract, not to substitute and perform against the will of one of the parties a different, albeit equally valuable, obligation. An estate under the contract impairment clause has no more power to accomplish such a substitution than has one of the parties to the contract against the will of the other.

25:19It cannot do so either by acting directly upon the contract or by bringing about the result under the guise of a statute and form acting only upon the remedy. If it could, the efficacy of the constitutional restriction would, in large measure, be made to disappear. So what we're seeing with this flood of legislation under, quote, this crisis, this economic emergency, is, has precedent. And the precedent is, contractual rights, you'll probably see this soon enough when it comes to the credit card bailout, are no longer being held as constitutionally viable because of the emergency, quote, the economic situation. So it empowers both state legislatures and the national government to impair, to set aside a fundamental constitutional right, the right of contract.

26:17Thank you very much.