Contemporary American History, 1877-1913 Part 4

The opinion of the Court, written by Justice Blatchford, has frequently been interpreted to hold, and was indeed interpreted by the dissenting minority to hold, that the judiciary must, to satisfy the requirements of "due process," have the power of final review over the reasonableness of all rates, however fixed. It is doubtful whether the language of the opinion sustains this reading; but the strong emphasis on the place of the judiciary in determining the reasonableness of rates lent color to the contention that Mr. Justice Blatchford was setting up "judicial supremacy." In the course of his opinion, he said: "The question of the reasonableness of a rate of charge for transportation by a railroad company, involving as it does the element of reasonableness both as regards the company and as regards the public, is eminently a question for judicial investigation requiring due process of law for its determination. If the company is deprived of the power of charging reasonable rates for the use of its property, and such deprivation takes place in the absence of an investigation by judicial machinery, it is deprived of the lawful use of its property, and thus in substance and effect, of the property itself without due process of law and in violation of the Const.i.tution of the United States."

The dissenting members of the Court in this case certainly saw in Justice Blatchford's opinion an a.s.sertion of the doctrine that whatever the nature of the commission established by law or the form of procedure adopted, the determination of rates was subject to review by a strictly judicial tribunal. In his dissent, Mr. Justice Bradley declared that the decision had practically overruled Munn _v._ Illinois and the other Granger cases. "The governing principle of those cases," he said, "was that the regulation and settlement of the affairs of railways and other public accommodations is a legislative prerogative and not a judicial one.... The legislature has the right, and it is its prerogative, if it chooses to exercise it, to declare what is reasonable. This is just where I differ from the majority of the Court. They say in effect, if not in terms, that the final tribunal of arbitrament is the judiciary; I say it is the legislature. I hold that it is a legislative question, not a judicial one, unless the legislature or the law (which is the same thing) has made it judicial by prescribing the rule that the charges shall be reasonable and leaving it there. It is always a delicate thing for the courts to make an issue with the legislative department of the government, and they should never do it, if it is possible to avoid it.

By the decision now made we declare, in effect, that the judiciary, and not the legislature, is the final arbiter in the regulation of fares and freights of railroads and the charges of other public accommodations. It is an a.s.sumption of authority on the part of the judiciary which, it seems to me, with a due reverence to the judgment of my brethren, it has no right to make.... Deprivation of property by mere arbitrary power on the part of the legislature or fraud on the part of the commission are the only grounds on which judicial relief may be sought against their action. There was in truth no deprivation of property in these cases at all.... It may be that our legislatures are invested with too much power, open as they are to influences so dangerous to the interests of individuals, corporations, and societies. But such is the Const.i.tution of our republican form of government, and we are bound to abide by it until it can be corrected in a legitimate way."

_The Development of Judicial Review_

A further step toward judicial review even still more significant was taken, in the case of Reagan _v._ Farmers' Loan and Trust Company, decided by the Supreme Court in 1894. This case came up from the Federal circuit court of Texas which had enjoined the state railway commissioners from fixing and putting into effect railway rates which the Trust Company, as a bondholder and interested party, contended were too low, although not confiscatory.

The opinion of the Court, written by Justice Brewer, who, as Federal circuit judge, had already taken advanced ground in favor of judicial review, went the whole length in upholding the right of the judiciary to review the reasonableness, not only of a rate fixed by a commission, as in the case in hand, but even of one fixed by the legislature. The case differed in no essential way, declared the justice, from those cases in which it had been the age-long practice of the judiciary to act as final arbiters of reasonableness--cases in which a charge exacted by a common carrier was attacked by a shipper or pa.s.senger as unreasonable. The difference between the two cases was merely that in the one the rate alleged to be unreasonable was fixed by the carrier; in the other it was fixed by the commission or by the legislature. In support of this remarkable bit of legal reasoning, the opinion adduced as precedents merely a few brief excerpts, from previous decisions of the Court, nearly all of which were pure _dicta_.

The absence of any dissent from this opinion, in spite of the fact that Judge Gray, who had concurred in Justice Bradley's vigorous dissenting opinion in the Chicago-Minnesota case four years before, was still on the bench, indicates that the last lingering opposition to the doctrine of judicial review in the minds of any of the Court had been dissolved.

Henceforth it was but the emphatic affirmation and consistent development of that doctrine that was to be expected.

If we leave out of account Mr. Justice Brewer's _dicta_ and consider the Court to have decided merely the issues squarely presented, the Reagan case left much to be done before the doctrine of judicial review could be regarded as established beyond all possibility of limitation and serious qualification. Other cases on the point followed quickly, but it was not until the celebrated case of Smyth _v._ Ames, decided in 1898, that the two leading issues were fairly presented and settled. In this case the rate attacked was not fixed by a commission, but by a state legislature itself; and the rate was not admitted by the counsel for the state to be unreasonable, but was strongly defended as wholly reasonable and just. The Court had to meet the issues.

The original action in the case of Smyth _v._ Ames was a bill in equity brought against the attorney-general and the Nebraska state board of transportation, in the Federal circuit court, by certain bondholders of the railroads affected, to restrain the enforcement of the statute of that state providing a comprehensive schedule of freight rates. The bills alleged, and attempted to demonstrate by elaborate calculations, that the rates fixed were _confiscatory_, inasmuch as a proportionate reduction on all the rates of the railroads affected by them would so reduce the income of the companies as to make it impossible for them to pay any dividends; and in the case of some of them, even to meet all their bonded obligations. On behalf of the state, it was urged that the reduction in rates would increase business, and, therefore, increase net earnings, and that some at least of the companies were bonded far in excess of their actual value. Supreme Court Justice Brewer, sitting in circuit, on the basis of the evidence submitted to him, consisting mainly of statements of operating expenses, gross receipts, and inter- and intra-state tonnage, found the contention of the railroads well taken, and issued the injunctions applied for.

The opinion of the Supreme Court, affirming the decree of Judge Brewer, was, in the essential part of it--that a.s.serting the principle of judicial review in its broadest terms--singularly brief. Contenting himself with citing a few short _dicta_ from previous decisions, Justice Harlan, speaking for the Court, declared that the principle "must be regarded as settled" that the reasonableness of a rate could not be so conclusively determined by a legislature as to escape review by the judiciary. Equally well settled, it was declared, was the principle that property affected with a public interest was ent.i.tled to a "fair return"

on its "fair" valuation. These principles regarded as established, the Court proceeded to examine the evidence, although it admitted that it lacked the technical knowledge necessary to a completely equitable decision; and sustained the finding of the lower court in favor of the railroads. There was no dissent.

With Smyth _v._ Ames the doctrine of judicial review may be regarded as fully established. No portion of the judicial prerogative could now be surrendered without not merely "distinguishing" but flatly overruling a unanimous decision of the Court.

The significance of Smyth _v._ Ames was soon observable in the activities of the lower Federal courts. Within the nine months of 1898 that followed that decision, there were at least four applications for injunctions against alleged unreasonable rates, and in three of these cases the applications were granted. During the years that followed Smyth _v._ Ames, Federal courts all over the country were tying the hands of state officers who attempted to put into effect legislative measures regulating railway concerns. In Arkansas, Florida, Alabama, Minnesota, Missouri, Illinois, North Carolina, Louisiana, and Oregon, rates fixed by statute, commission, or ordinance were attacked by the railways in the Federal courts and their enforcement blocked. In several instances the injunctions of the lower courts were made permanent, and no appeal was taken to the Supreme Court of the United States. With Smyth _v._ Ames staring them in the face, state attorneys accepted the inevitable.

The decision in Smyth _v._ Ames left still one matter in doubt. The allegation of the railroads in that case had been that the rates fixed were actually confiscatory--that is, so low as to make dividends impossible. In the course of his opinion, Justice Harlan had stated, however, that the railroads were ent.i.tled to a "fair return," an opinion that had been expressed also in the Reagan case, where indeed it had been necessary to the decision, and still earlier, but with little relevancy, in the Chicago-Minnesota case. In none of these cases, however, had any precise definition of the terms "reasonable" or "fair"

return been necessary, and none had been made.

The first direct suggestion of the development of the judicial reasoning on this point that was to take place is found in the Milwaukee Electric Railway case, also decided in 1898. In that case Judge Seaman, of the Federal circuit court, found from the evidence that the dividends of the street railway company for several years past had been from 3.3 to 4.5 per cent, while its bonds bore interest at 5 per cent. Anything less than these returns, the judge declared, would be unreasonable, inasmuch as money loaned on real estate, secured by a first mortgage, was at that time commanding 6 per cent in Milwaukee.

Eleven years later, in 1909, the Supreme Court sustained virtually the same rule in the New York Consolidated Gas case, holding, with the lower court, that the company was ent.i.tled to _six_ per cent return on a fair value of its property (including franchises and the high values of the real estate used by it in the business), because six per cent was the "customary" rate of interest at that time in New York City. On the same day the court decided that a return of six per cent on waterworks property in Knoxville, Tennessee, was also not unreasonable. In neither of these cases, however, did the Court attempt any examination or explanation of the evidence on which it rested its determination that six per cent was the "customary" rate in the places named; nor did it attempt to explain the principle on which such "customary" rate could be determined for other times and places. Plainly there is still room for a great deal of "distinguishing" on this point. The extreme vagueness of the rule was exemplified by the decision of Federal circuit Judge Sanborn in the Shephard case (1912), in which he decided that, for a railroad running through Minnesota, _seven_ per cent was no more than a "fair" return, and that any reduction in rates which would diminish the profits of the road below that figure was unreasonable.

Equally important and of as great difficulty are the questions entering into the determination of a "fair" valuation. This point is both too unsettled and too technical to render any discussion of it profitable here. Attention may, however, be called to two of the holdings in the Consolidated Gas case. In arriving at a "fair" valuation of the gas company's property, the Court allowed a large valuation to be placed upon the franchises of the company--none of which had been paid for by the companies to which they had originally been issued, and which had not been paid for by the Consolidated Company when it took them over, except in the sense that a large amount of stock, more than one sixth of the total stock issued by the company, had been issued against them, when the consolidation was formed. The particular facts surrounding this case are such as to make it very easy for the Court to "distinguish"

this case from the usual one, for the consolidation was formed, and its stock issued, under a statute that authorized the formation of consolidations, and forbade such consolidations to issue stock in excess of the fair value of the "property, franchises, and rights" of the const.i.tuent companies. This last prohibition the Court construed as indicative of the legislative intention that the franchises should be capitalized. Equally plain is it, however, that this particular circ.u.mstance of the Consolidated Gas case is so irrelevant that it will offer no obstacle whatever to the Court's quoting that case as a precedent for the valuation of franchises obtained _gratis_, should it so desire.

Another holding of great importance in the Gas case was that the company was ent.i.tled to a fair return on the value of real estate used in the business, that value having appreciated very greatly since the original purchase of the real estate, and there being no evidence to show that real estate of so great value was essential to the conduct of the business.

The importance of these two holdings is exemplified by the fact that in this particular case the combined value attributed to the franchises and the appreciation of real estate was over $15,000,000--more than one fourth of the total valuation arrived at by the Supreme Court. It will readily be seen that if these two items had been struck from the valuation by the Court, it would be possible for the state to make a still further substantial reduction in the rate charged for gas in New York City without violating the Court's own canon of reasonableness--a six per cent return.

The steps in the evolution of the doctrine of judicial review may be summarized in the following manner:

The Supreme Court first declared that the legislative determination of what was a "reasonable" rate was not subject to review by the courts.

The first departure from this view was an intimation, confirmed with increasing emphasis in several cases, that a rate so low as to make any return whatever impossible was confiscatory and would be set aside by the Court as violating the Fourteenth Amendment. For a time, however, the Court took the position (steadily undermined in subsequent decisions) that a rate which allowed some, even though an "unreasonably low" return, was not prohibited by the Fourteenth Amendment and could not be set aside by the Court.

Next in order came the holding that the determination of a commission as to what was reasonable could not be made conclusive upon the courts, at least when the commission had acted without the forms and safeguards of judicial procedure, and, probably, even when it had acted with them.

In the same decision appeared an intimation, which in subsequent decisions became crystallized into "settled law," that not only were totally confiscatory rates prohibited by the Fourteenth Amendment, but also any rates which deprived the owners of the property regulated of a return equal to what was "customary" in private enterprises.

This rule was applied by the Court for the first time against a rate fixed by a commission, and where the rate was admitted by the pleadings to be confiscatory. But it was shortly thereafter applied to a rate fixed by a legislature, and where the "reasonableness" (not the confiscatory character) of the rate was a direct issue on the facts and evidence.

Finally, the principle that what is a "fair" or "reasonable" rate is to be measured by the customary return in private enterprises under similar conditions, has been applied in several cases to warrant the requirement of a definite rate of interest; but no precise rules have been laid down for the determination of such rate in all cases.

The most striking feature, perhaps, of the development of the doctrine of judicial review here traced, as seen in the opinions of the Supreme Court, is the brevity and almost fortuitous character of the reasoning given in support of the most important and novel holdings. A comparison of the reasoning in Smyth _v._ Ames, for example, with that in Marbury _v._ Madison, in which Chief Justice Marshall first held a law of Congress unconst.i.tutional, will forcibly exemplify this. The explanation is to be found largely in the fact that each step in advance in the building up of the doctrine had been foreshadowed in _dictum_ before it was established as decision. It was thus possible for the judge writing the opinion in a case when a new rule was actually established, to quote, as "settled law," a mere _dictum_ from a previous opinion.

Justice Gray's citation, in this fashion, in the Dow case, of Chief Justice Waite's _dictum_ in the Ruggles case (although he might, with equal cogency, have cited the Chief Justice's contrary _dictum_ in the Munn or Peik cases), is a good instance of this curious use of "precedent"; and parallel instances could be adduced from virtually every one of the important subsequent cases on this subject.[22]

It is apparent from this all too brief and incomplete account of the establishment of judicial review over every kind and cla.s.s of state legislation affecting private property rights that no layman can easily unravel the mysterious refinements, distinctions, and logical subtleties by which the fact was finally established that property was to be free from all interference except such as might be allowed by the Supreme Court (or rather five judges of that Court) appointed by the President and Senate, thus removed as far as possible from the pressure of public sentiment. Had a bald veto power of this character been suddenly vested in any small group of persons, there can be no doubt that a political revolt would have speedily followed. But the power was built up by gradual accretions made by the Court under the stimulus of skilful counsel for private parties, and finally clothed in the majesty of settled law. It was a long time before the advocates of leveling democracy, leading an attack on corporate rights and privileges, discovered that the courts were the bulwarks of _laissez faire_ and directed their popular battalions in that direction.

Those who undertake to criticize the Supreme Court for this a.s.sumption of power do not always distinguish between the power itself and the manner of its exercise. What would have happened if the state legislatures had been given a free hand to regulate, penalize, and blackmail corporations at will during the evolution of our national economic system may be left to the imagination of those who recall from their history the breezy days of "wild-cat" currency, repudiation, and broken faith which characterized the thirty years preceding the Civil War when the Federal judiciary was under the dominance of the states'

rights school. The regulation of a national economic system by forty or more local legislatures would be nothing short of an attempt to combine economic unity with local anarchy. It is possible to hold that the Court has been too tender of corporate rights in a.s.suming the power of judicial review, and at the same time recognize the fact that such a power, vested somewhere in the national government, is essential to the continuance of industries and commerce on a national scale.

Thus far attention has been directed to the activities of the Federal Supreme Court in establishing the principle of judicial review particularly in connection with legislation relative to railway corporations, but it should be noted that judicial review covers all kinds of social legislation relative to hours and conditions of labor as well as the charges of common carriers. In 1905, for example, the Supreme Court in the celebrated case of Lochner _v._ New York declared null and void a New York law fixing the hours of work in bakeshops at ten per day, basing its action on the principle that the right to contract in relation to the hours of labor was a part of the liberty which the individual enjoyed under the Fourteenth Amendment. Mr. Justice Holmes, who dissented in the case, declared that it was decided on an economic theory which a large part of the country did not entertain, and protested that the Fourteenth Amendment did not "enact Mr. Herbert Spencer's _Social Statics_."

As a matter of fact, however, the Supreme Court of the United States has declared very little social legislation invalid, and has been inclined to take a more liberal view of such matters than the supreme courts of the states. The latter also have authority to declare state laws void as violating the Federal Const.i.tution, and when a state court of proper jurisdiction invalidates a state law, there is, under the Federal judiciary act, no appeal to the Supreme Court of the United States.

Consequently, the Fourteenth Amendment means in each state what the highest court holds it to mean, and since the adoption of that Amendment at least one thousand state laws have been nullified by the action of state courts, under the color of that Amendment or their respective state const.i.tutions.

As examples, in New York a law prohibiting the manufacture of cigars in tenement houses, in Pennsylvania a law prohibiting the payment of wages in "scrip" or store orders, and in Illinois a statute forbidding mining and manufacturing corporations to hold back the wages of their employees for more than a week were declared null and void. Such laws were nullified not only on the ground that they deprived the employer of property without due process, but also on the theory that they deprived workingmen of the "liberty" guaranteed to them to work under any conditions they chose. In one of these cases, a Pennsylvania court declared the labor law in question to be "an insulting attempt to put the laborer under a legislative tutelage which is not only degrading to his manhood but subversive of his rights as a citizen of the United States."

Where the state court nullified under the state const.i.tution, it was of course relatively easy to set aside the doctrines of the court by amending the const.i.tution, but where the state court nullified on the ground of the Fourteenth Amendment to the Federal Const.i.tution, there was no relief for the state and even no appeal for a review of the case to discover whether the Supreme Court of the United States would uphold the state tribunal in its view of the national law. Under such circ.u.mstances, the highest state court became the supreme power in the state, for its decrees based on the Federal Const.i.tution were final. It was the freedom, one may say, recklessness, with which the courts nullified state laws that was largely responsible for the growth of the popular feeling against the judiciary, and led to the demand for the recall of judges.[23]

FOOTNOTES:

[13] A. R. Conkling, _Life of Roscoe Conkling_, p. 297.

[14] A. R. Conkling, _Life of Roscoe Conkling_, p. 699.

[15] _Ibid._, p. 671.

[16] _Ibid._, pp. 679 ff.

[17] See below, p. 57.

[18] _Ibid._, p. 540.

[19] Taylor, _Origin and Growth of the American Const.i.tution_, p. 355. As a matter of fact, Conkling, who was a member of the committee that drafted the Fourteenth Amendment, voted against these provisions in Committee.

[20] It is to be noted that the demand of the warehous.e.m.e.n on the second point was not for a judicial _review_ of the reasonableness of a rate fixed by the legislature, but a total _denial_ of the _power_ of a _legislature_ to act in the matter. The question of the propriety of a judicial review of the reasonableness of the rates in question was not raised in the pleadings. It was not difficult, therefore, for judges in subsequent cases in which the question of judicial review was squarely raised to explain away as mere _dictum_ this solemn statement by Chief Justice Waite to the effect that the power of the legislature to regulate being conceded, the determination of the legislature was binding on the courts and not subject to review.

[21] Except for two unimportant cases decided in the lower courts.

[22] It should be noted that the Supreme Court not only undertook to pa.s.s upon the reasonableness of such rates as the states were permitted to make, but also added in 1886 that no state could regulate the rates on goods transported within its borders, when such goods were in transit to or from a point in another state. Such regulation was held in the Wabash, etc., Railway Company _v._ Illinois (118 U. S.

557) to be an interference with interstate commerce which was subject to control by Congress only.

[23] Below, p. 287.