Philip Kotler calls for economic reform in Confronting Capitalism and envisions a kinder, gentler capitalism (to paraphrase President George H.W. Bush). Economic reform is not something the U.S. judicial branch takes kindly too. While Kotler’s book includes 14 shortcomings of capitalism, there is little mention of the judiciary. In my view a fifteenth shortcoming in needed. In this post I outline my case.
Perhaps the best example of judicial obstruction is provided by a rapid succession of Supreme Court decisions against the New Deal in 1935 and 1936 (Schechter Poultry, Butler, Carter Coal, Morehead). They destroyed the very foundation of the New Deal, leaving FDR and the U.S. recovery effort dead in the water. Most of the New Deal involved federal and state intervention in the economy, and the Court declared that tack illegal.
With a landslide victory behind him and supermajorities in both houses, FDR crafted a judicial reorganization bill in early January 1937, popularly referred to as the court-packing plan. Roosevelt’s efforts to win Congressional support were tactically flawed. To recover, he held a Fireside Chat on March 9. Going for the jugular, he critiqued the Court’s interference in legislative matters. He accused the Court of destroying the balance of power intended by the Framers, and referred to a half-century of decisions (later called the Lochner era) that struck down numerous state and federal laws protecting workers and consumers. Public opinion, though cautious about the notion of court packing, staunchly supported FDR and the New Deal.
The Court read the writing on the wall: Roosevelt would alter the very structure of the Court in order to reinstate the New Deal. A mere 20 days after FDR’s Fireside Chat, the Court reversed itself in West Coast Hotel. No only did they strike down Morehead and make minimum wage laws legal. They also nullified the freedom of contract doctrine, thus ending the Lochner era. Roosevelt and the New Deal were back in business thanks to what was dubbed “the switch in time that saved nine.”
To me the FDR v. SCOTUS (Supreme Court of the U.S.) drama is one of the most exciting and revealing junctures in 20th century U.S. history, but it is seldom told in its fullness. Perhaps doing so is too unsettling. When told from a common citizen’s perspective, the story portrays the Court as a usurper. The Court empowered the wealthy few to subjugate U.S. citizens. And most disturbing of all, nothing short of a dramatic, unprecedented threat was required to restore balance and bring the Court back in line.
Any plan for economic reform must consider the judicial branch. The progression of Occupy Wall Street camp closures across the U.S. can be tied to a single New York Supreme Court decision granting permission to Mayor Michael Bloomberg and the New York Police department to close down the Zuccotti Park occupation. The failure of the Arab Spring in Egypt to elect a popular reform leader can be tied to how their Supreme Court devised election rules to pit reform candidates against each other and position Mohamad Morsi for victory, a conservative Muslim Brotherhood candidate.
Moving backward in time from West Coast Hotel, the first major economic case decided by the Court was Fletcher v. Peck in 1810. Thirty-five million acres of Georgia land were sold in the Yazoo Act of 1795. Nearly every state legislator who voted for the act, however, took bribes from Yazoo land corporations. Georgia’s citizens soon discovered the graft and elected new legislators who immediately declared the Act null and void. Yazoo stockholders were also alarmed; they had paid good money for their shares. A few Northern stockholders sued each other, hoping to eventually force Georgia to honor the Yazoo Act of 1795.
Despite the 11th Amendment which prohibited citizens from one state suing another state, the Supreme Court took the case. Worse, Chief Justice John Marshall had direct personal ties to an original Yazoo conspirator but did not recused himself. The Court ruled 4-1 that Georgia had no right to repeal the fraudulent land sale. Property rights had to be protected “from those sudden and strong passions to which men are exposed.” Rather than penalize stockholders for their due diligence failures, the Court penalized Georgia’s citizens for rejecting fraud.
Moving forward in time from West Coast Hotel, there was a sustained period of rulings favoring common citizens. But the honeymoon was short-lived. Five Supreme Court appointments by President Eisenhower starting in 1953 and four by President Nixon starting in 1969 revived the Lochner era. The result was a string of decisions culminating in Citizens United in 2010. This decision was opposed by 80 percent of the voting public at the time, remains highly unpopular, and is credited with a doubling of political spending, mostly by the super-rich.
Today we face a pro-business legal precedent that is every bit as daunting as what FDR confronted in 1937. He was emboldened by a landslide election, supermajorities in Congress, and Fireside Chats. What will it take to swing the pendulum back once again? If we study the history of capitalism with a careful eye to the judicial branch, we can not only craft but also implement a comprehensive economic strategy that is even more successful than what we now enjoy.
As Phil Kotler so wisely says: “I believe capitalism is better than any other system. But I also believe that it has fourteen major shortcomings.” I ask him to consider what may be a fifteenth: judicial obstruction.