Legal Path for Intervention Was Blazed in FDR's Time

OCTOBER 15, 2008
By JESS BRAVIN

WASHINGTON -- The legal path to Tuesday's broad federal intervention in the financial markets was paved more than 70 years ago, when President Franklin D. Roosevelt instigated a revolution in constitutional law.

President Roosevelt, above, with Lyndon B. Johnson, revolutionized constitutional law.

Until 1937, the Supreme Court sharply limited government action that could affect private markets, applying various constitutional provisions to block minimum-wage laws, workplace regulations and, to Roosevelt's fury, much of his New Deal program.

In 1936, for example, the court found that a federal program to prop up farm prices exceeded congressional power to regulate interstate commerce and intruded upon state authority. Following Roosevelt administration legal theories "would inevitably lead" to "obliterating" the autonomy of state government, Justice Owen Roberts wrote for the majority.

President Roosevelt took his case to the public. "The court has been acting not as a judicial body, but as a policy-making body," he told the nation in a March 1937 fireside chat. He proposed to install a pro-Roosevelt majority by expanding the court beyond its traditional nine members.

Later that month, in what was called the "switch in time that saved nine," Justice Roberts voted to uphold a state minimum-wage law, ushering in the modern era of constitutional law. Ever since, the court has almost never found a constitutional bar on government intervention in the marketplace.

Although the Constitution gives Congress power to tax and spend for the "general welfare," John Eastman, dean of Chapman University law school in Orange, Calif., says that pouring money into banks is essentially using tax funds to prop up a particular industry, and isn't a "national purpose" as the framers understood. He thinks the courts should reject the government's bank plan -- but he acknowledges that won't happen.

There's "zero chance of that argument getting anywhere, but it's the right answer," Mr. Eastman says.

Mr. Eastman also questions the broad authority the plan gives the Treasury secretary and the Federal Reserve to spend funds as they see fit. The powers are so broad that they amount to an unconstitutional delegation of congressional authority to autonomous officials, he says.

William Leuchtenburg, professor emeritus at the University of North Carolina, agrees that the plan wouldn't exist without the New Deal legal revolution.

"If this was the court in the 1930s, the court would have struck it down," says Prof. Leuchtenburg, who has written extensively on the era and has a biography of President Hoover coming out. In 1935 and 1936, the court invalidated New Deal laws for delegating legislative powers.

"That's the last time anything has been struck down on improper-delegation grounds," Prof. Leuchtenburg says.

On the current Supreme Court, conservatives have sought to rein in some of the New Deal doctrines. One justice has suggested the court's direction since 1937 is dead wrong.

In 1995, the court struck down the Gun Free School Zones Act, the first time since the New Deal that Congress was found to have exceeded its powers under the Commerce Clause. Chief Justice William Rehnquist, writing for the majority, accepted New Deal precedents but declared that "we decline here to proceed any further."

In a concurring opinion, Justice Clarence Thomas suggested that the precedents should be rolled back.

"From the time of the ratification of the Constitution to the mid-1930s, it was widely understood that the Constitution granted Congress only limited powers," he wrote. "If anything, the 'wrong turn' was the Court's dramatic departure in the 1930s from a century and a half of precedent."

But he added in a footnote, "I recognize that many believe that it is too late in the day to undertake a fundamental re-examination" of legal principles that underpin modern American society.

Write to Jess Bravin at jess.bravin@wsj.com