Archives for November 2021

Benjamin M. Anderson: Economics and the Public Welfare: A financial and Economic History of the United States, 1914-1946. Indianapolis: Liberty Fund, 1979 [1949].

 

With exceptions too inconspicuous to remark, nobody loves a banker. Except other bankers. Sometime banker, sometime college professor Benjamin M. Anderson insists that “there is a great fraternity of bankers, both in the United States and in the world outside. They trust one another. They tell one another the truth about highly confidential matters. They go far out of their way to be of service to one another and to one another’s customers.” William Jennings Bryan, he isn’t.

Writing in the late 1940s, Anderson happily recalls the world prior to World War I. “There was a sense of security then which has never since existed. Progress was generally taken for granted,” since “the experience of the preceding century, so far as social and economic evolution was concerned,” consisted of “a prolonged period in which decade after decade had seen increasing political freedom, the progressive spread of democratic institutions, the steady lifting of the standard of life for the masses of men.” True, there had been “occasional sharp setbacks”—severe, short financial crises followed by severe, short economic depressions. “But they did not approach in length or depth the depression of 1929-39, or in depth the much less severe depression of 1921.” Even during the downturns, “it was axiomatic that revival would come again.” Overall, and not only in economic life, “it was an era of good faith,” when “men believed in promises,” including “the promises of governments”; “treaties were serious matters.” “No country took pride in debasing its currency as a clever financial expedient,” as for example in 1933, when the United States government suspended gold payments, reduced the dollar to some 59% of the old gold parity and repudiated the gold clause in its bonds. No politician “boasted of their achievements in unbalancing the budgets or termed the deficit ‘investments.'” As late as 1913, “men trusted the promises of government and governments trusted one another to a degree that is difficult to understand today”; indeed, “Japan and Mussolini would never have started on their careers of aggression if the great democratic nations had kept faith with one another.” 

Anderson emphasizes trust, faith, because “industry, commerce, and finance depend on credit.” Credit depends upon a measurable way of gauging profit and loss, surplus and debt. The gold standard gave governments that way. “The whole world was…far safer financially when each of the main countries stood on its own feet and carried its own gold.” The United States’ Federal Reserve banking system, instituted in 1913, could have prevented even some of the bank ‘panics’ that did occur, had it been “wisely handled,” but it wasn’t. “There was no such thing in prewar days as the kind of international cooperation which we saw in the 1920s, under which a dangerous boom was prolonged and turned into an almost uncontrollable inflation through the cooperation of the Bank of England and the Federal Reserve System of the United States.”

The First World War thus was not only a calamity but an unanticipated one, foreshadowed by the gold hoarding of Germany in 1912-14 and, in reaction, that of England of France in 1914; the imperial and regime conflicts between an absolute monarchy and two commercial republics reminded a generation that the original term for ‘economics’ was ‘political economy.’ These actions were policy decisions.

For that reason, Anderson firmly rejects economic determinism: “Political, moral, cultural, and religious forces are coefficients with economic forces in the determination of historic events, and the influence of outstanding personalities in strategic positions is often far more significant than any economic determinist will concede.” When war hit, “the American financial system met the shock with no formal governmental aid, although there was good cooperation and good understanding between New York and Washington.” Stocks declined, but not drastically. “The investor was safer in the unregulated market of 1914 than when protected by the Security and Exchange Commission in 1937.” Except for the South, where cotton exports to Europe declined badly, the crisis ended in November 1914, righted by the warring Europeans’ need for goods and leading to American “war prosperity.” Although corporations used some of their profits to increase dividends to shareholders, they “prudently recognized that they were in an extraordinary situation, that war profits could not be expected to last, and that it was well to provide for contingencies.” Wages lagged behind wholesale prices, improving profits. By contrast, “in World War II wages rose far faster than wholesale prices, and corporate profits and additions to corporate surpluses were far more moderate in relation to the national income. In World War I the thing was left to the natural play of the markets. In World War II we had elaborate government policy”—beginning with the Renegotiation Act of 1942—designed “to hold down corporate profits and to encourage wage increases.” 

When the United States entered the war in April 1917 (in large measure because Germany had been sinking U.S. merchant vessels, interfering with trade), the federal government didn’t take on many loans “for future generations to pay,” financing the war mostly with tax revenues and war bonds. The government didn’t borrow directly from the Federal Reserve. The government did fix prices but understood “that price fixing ought not to be pushed in advance of the development of machinery for commodity control,” such as rationing. “In World War I we knew these things very well. Proposals for the fixing of all prices met very little sympathy form President Wilson, who was a good economist. [1] “We established a pretty comprehensive system of commodity control of scarce essentials needed for war or for the life and health of the people.” Such price controls as were imposed affected wholesale prices; “we did very little about retail prices,” which were left to market forces within the framework of wholesale price controls. Unlike the New Dealers, the Progressives “did not look upon a great war as primarily an opportunity for accomplishing sweeping social reforms or for reconstituting the basic principles of economic life.” The newly-formed Federal Reserve Board worked well under these emergency conditions, enabling “a smoothness and simplicity in handling huge financial transactions that would have been incredible under the old system,” which depended on the friendly cooperation of the several major private banks.

Things began to go wrong in the aftermath of the war. Anderson begins his analysis with the basics: “Right prices are prices that move goods. Right prices cannot be foreseen in advance. They must be found out experimentally in the open market,” in the equation of supply and demand. Price controls therefore make sense in a major war, but continued interference with market equations will lead to serious crises when peace returns. In the United States, exports didn’t decline after the war because Europeans needed manufactured goods, given the wartime destruction of factories; the Europeans paid for these good with loans extended by American banks. “It is the duty of a lender to an embarrassed debtor to see to it that the debtor mends his ways and reorganizes his affairs so that the loan may be a good loan.” But the war’s loser, Germany, “was going to pieces financially” and American bankers “were lending to Europe overgenerously,” demanding inadequate reforms in exchange for their money. “Economic abnormalities” were bound to arise. “The heart of the business situation is the outlook for profits”; therefore “the heart of the credit situation”—the indispensable condition of good faith in economic, social, and political relations—is “the quality of credit and the quality of credits rests on the outlook for profits.”

There lay the danger. “Our great export trade was based, not on revival in Europe, but on the failure of Europe to revive.” That couldn’t last, even with the salutary end of wartime price controls. “Europe was buying goods in enormous quantity on credit from every part of the world, and building up throughout the world a fictitious prosperity similar to that which we had in the United States. Reaction and collapse were inevitable.” 

Agriculture was the first sector to feel these effects. As observed, industry had used the wartime boom “as an opportunity to accumulate additional capital funds and to increase liquidity.” Even after the stock crash in 1920, United States Steel was stronger financially than it had been at the beginning of the war. But farmers had used their wartime earnings “as a foundation for rising prices of agricultural lands and increased mortgage debt” on those lands—quite understandably so, since “a wise investor will ordinarily buy the kind of thing that he knows and understands,” and ‘the farmers knew land.” Unfortunately, land is an illiquid investment, insusceptible to the tactic of quick sell-offs or immediate reductions in the labor force. The Great Depression began early for the farmers. The stockbrokers, by contrast, were able to arrange a well-timed mass purchase of a few key stocks, sparking a rise in market confidence which caused a rapid snap-back in stock prices. Unlike American agriculture, American finance and industry took off. Japanese bankers, industrialists, and government officials did the opposite, clamping down on “freedom of the markets” by holding prices high above the world level for years, resulting in industrial stagnation throughout the decade followed by a banking crisis in 1927. “It was a stupid policy”; it resembled the policy of the New Deal, a decade later. “In contrast, in 1920-21 we took our losses, we readjusted our financial structure, we endured our depression, and in August 1921 we started up again.” That rally “was not based on governmental policy designed to make business good,” and Americans did it “without outside help” from foreigners. “From the standpoint of New Deal economics,” this policy “was extremely benighted,” as “it was not regarded as the function of the government to provide money to make business activity.” Instead, the American economy saw “a great spurt in the application of new technology to industry,” which didn’t cause unemployment but “helped to generate an immense increase in employment” in the new industries that resulted. Output per wage earner increased, which was good, and, thanks to the Federal Reserve’s policy of purchasing government bonds, bank credit expanded, which proved to be very bad, by the end of the decade.

Meanwhile, bankers understood that America’s wartime shift from a debtor to a creditor nation required “a liberal foreign trade policy,” without which exports would find no markets in devastated Europe. The Republican Party had long supported high tariffs, but they initially reversed this now-incorrect policy for a year or two after the war. But the 1920 elections brought younger, less experienced Republicans to office, including “a man little trained in economics, who looked at economic issues from the standpoint of political tradition and emotion, Warren G. Harding.” In 1922, tariffs were raised and “the seeds of death were planted into our industrial revival.” “The young student of economics, sociology, and history is easily impressed with the doctrine that history is made by impersonal social forces, irresistible in character,” but “when one sees history being made from the inside it is impossible to avoid the conclusion that a vast deal depends upon the strengths and weaknesses of the leading participants.” Harding was weak. Wilson was strong, favoring free trade against tariffs and attempting to keep the peace with the League of Nations.

Anderson deplores “our absence from the League of Nations” primarily because France then was left with too much influence in it. The peace treaties dismantled the Austro-Hungarian Empire, “which had been a great free trade area,” leaving behind a “Balkanized” Central and Eastern Europe with trade barriers everywhere. And Americans had insufficient leverage to moderate French revanchisme against Germany, whereby impossible-to-pay reparation exactions and the prevention of industrial revival contributed to the collapse of 1929 and to the rise of the Nazis. In the years 1918-24, Germany was “economically a hollow shell.” “Invaders could scarcely have done a more efficient job of denuding her of resources than her own war government,” which had loaded the Reichsbank with “government paper” in anticipation of easy repayment after (the Kaiser’s men assumed) Germany’s victory made her the master of Europe. When that didn’t happen and the debt came due, German bankers found themselves in a fix, one exacerbated by the “wholly fantastic” reparations demanded by the French. Germany attempted to inflate its currency as a means of maintaining its generous welfare payments and employment-making public works. With inflation, “thrift became folly,” the middle class “was pretty much wiped out,” and the republican regime itself fatally weakened. Continued “French insistence upon payment [of reparations] regardless of Germany’s ability to pay made the German situation pretty helpless.” 

In its domestic policies, France went on a splurge of deficit spending, under the slogan, “The Boche will pay.” But the hated Boche was bankrupt. “The one difference between the policies followed in France in this period and the policies advocated by the New Deal spenders for the United States is to be found in the fact that the French were ashamed of” its deficit spending “and tried to conceal it and to find excuses for it, whereas the New Deal spenders would glorify it and call it ‘investment.'” Quickly seeing that the Boche couldn’t pay, the French occupied the Ruhr, Germany’s industrial hub, in 1923, substituting “military decisions” for “business contracts.” Both the Germans and the French would pay for that. 

With that, the Americans did intervene with their wartime allies to assist Germany. “Great sums were not required to stabilize a country when internal financial reforms were insisted upon in connection with the loan”—as per the sound banking practices Anderson noted previously—and even in the democratic-republican regimes “it was not difficult for the finance minister of an embarrassed country to persuade his people to submit to the necessary reforms when the outside help could thereby be obtained.” The 1924 Dawes Plan provided a comprehensive settlement for Germany, and it worked, despite continued French exactions. It was foolishly abandoned in 1929; reparations were drastically reduced, but the banks called the German loans prematurely. Anderson holds this act of unsteadfastness “responsible for the collapse of Germany” two years later.

Back in the United States, the Republicans’ tariffs on foreign manufactures hurt American farmers because Europeans got such low revenues from sales of manufactured goods to the U.S. that they couldn’t pay for American farm produce. Protective tariffs on European farm produce didn’t help, inasmuch as “the protective tariff did no good to a commodity where an export surplus existed. The agricultural tariff “constitut[ed] one of the first of the many ingenious devices for spoiling markets and perverting the price mechanism in the interest of special classes, which we have later come to know at the New Deal.” In this sense, the New Deal began in the mid-1920s. At the same time, banks and other investors overreacted to the anticipated benefits of the Dawes Plan, buying German and other European bonds in too-large quantities relative to a realistic assessment of the ability to repay; as indicated earlier, the Federal Reserve bought large amounts of U.S. government securities, vastly expanding bank credit and thereby causing “the illusion of unlimited capital.” There is, alas, no such thing as unlimited capital. “Our tariffs would not allow the Europeans to earn dollars here in adequate amounts to buy our farm products and to meet service on the past debts, so we proceeded to lend them the dollars they needed for these purposes!” Anderson exclaims. 

His patience with such things temporarily exhausted, Anderson pauses to offer another brief lesson in elementary political economy. “Capital” consists of producers’ goods, not consumers’ goods, such “instruments to be used in further production” as machinery, bridges, and railroads, not hats, shoes, and ice cream. There are five main sources for capital: building (whether by raising a barn, letting fruit trees grow, or improving a tool); consumer savings, business (using profits to add to one’s surplus instead of paying dividends); taxation for capital purposes (that is, paying down public debt); and new bank credit. The latter can be dangerous, if unrestrained, since “credit and debt are merely different uses for the same thing”; the growth of bank credit “should be held in proper relation to the growth of the industrial activity of the country” and diversity of collateral must be maintained, since one kind of collateral may have little value at a given time. Since “a bank must always be prepared to pay its depositors on demand,” carefully “protect[ing] its cash” for that purpose, these precautions are indispensable. “Quantity of money and credit are less important than quality of money and credit.”

During the First World War, bank expansion of credit was necessary to raise, equip, and transport a four-million-man army to Europe and sustain them for the duration of the conflict, in the process “transform[ing] our industries from a peacetime to a wartime basis.” We also needed to finance shipments to our allies. But in the 1920s, without any such crisis, “without justification, lightheartedly, irresponsibly, we expanded bank credit by more than twice as much, and in the years which followed we paid a terrible price for this.” The Federal Reserve System “was not created for the purpose of financing a boom, least of all for financing a stock market boom.” Moreover, in the United States, commercial banks’ reserve requirements are legally fixed, giving our bankers less room for “judgment and experience in deciding how much reserve” to hold. In foreign countries, “a banker, foreseeing a crisis, would try to increase his reserves before the crisis came,” but American bankers “accustomed for two generations to having their minimum reserves fixed by law…had no such grasp of the theory of bank reserves as the best foreign bankers had.” As a result, they kept the legal minimum cash reserve on hand. “When the reserve requirements were lowered by the wartime legislation of 1917, a dangerous situation was thus created.” The Federal Reserve System increased that danger in its policy of easy money and credit expansion throughout the 1920s. In the United States, France, England, and indeed anywhere, “a high degree of banking concentration is incompatible with the exercise of free banking judgment, and the substitution of government policy in credit matters for the free exercise of banking judgment is one of the most dangerous things that can come to a country…. We should preserve competitive banking. Banks should be under pressure all the time to meet their engagements at the clearinghouse every day, so that the banker may be compelled to keep his bank liquid, to hold slow paper to a minimum, and to limit bank credit to proper bankable transactions. When, however, five hundred to a thousand banking offices are under the jurisdiction of a single central office, there is no such pressure on the individual offices; and if there can be a concerted policy among a few great central offices, the competitive pressure is so greatly lessened that unsound policies can be carried very far.”

Since the expansion of bank credit in the 1920s wasn’t needed for commerce, it was used for capital purchases but also for speculation, particularly speculation in real estate mortgage loans—an “ominous increase in illiquid assets,” in lands and buildings. This caused a ‘bubble’ in real estate prices in the United States, “an unwholesome and a precarious” position. “Speculation in real estate and securities was growing rapidly, and a very considerable part of the supposed income of the people which was sustaining our retail and other markets was coming, not from wages and salaries, rents and royalties, interest and dividends, but from capital gains on stocks, bonds, and real estate, which men were treating as ordinary income and spending in increasing degree in luxurious consumption.” Anderson criticizes Federal Reserve System chairman Benjamin Strong, President Coolidge, and Treasury Secretary Andrew Mellon for encouraging stock market investment under these circumstances. “The more intense the craze, the higher the type of intellect that succumbs to it.” Money flowed out of Europe to invest in the American stock market, further weakening Germany’s already dubious financial condition.

By 1928, the Federal Reserve was mindful of the problem, sort of. Its governors wanted “to restrain the use of credit for stock market speculation,” avoid tightening money in foreign countries, and not “let money grow tight in business uses at home.” It wasn’t possible to fine-tune credit and investment to that extent; these “efforts at restraint were handicapped and inconclusive,” and “the wild speculation ran on for a year and nine months after the restraining efforts began.” The catastrophic stock market plunge in September 1929 “demonstrated that fundamentally wrong policies had been pursued”: “cheap money and rapid expansion of credit”; high tariffs interfering with the movement of goods and preventing our European debtors from paying their debts with goods.” But to have reversed the policies in time “would have meant humiliation” for the Republican Party in a presidential election year. 

Nonetheless, had we “taken our medicine in 1929 and early 1930,” although we would still “have had a severe depression,” the federal government could have ended it by undergoing “an orderly liquidation and readjustment”—lowering our tariffs, to enable foreign debtors to pay with goods. But with “the Hoover New Deal,” Washington instead turned “to frantic economic planning,” which Anderson calls “back seat driving by a man who doesn’t know how to drive and who, except in wartime, doesn’t know where he wants to go.” “Those who condemn the New Deal for its agricultural follies in 1933 and succeeding years, and above all, for loans to farmers which held back cotton which otherwise would have gone into the export trade, should not credit Roosevelt’s New Deal with originality on this point.” In the aftermath of the stock market debacle, the Republicans nonetheless sustained their policy of “artificially cheap money” and, in a “crowning folly,” raised tariffs instead of lowering them with the Hawley-Smoot Tariff Act of 1930. This spurred protectionism all “over the world,” cutting off markets, limiting trades, and boosting both unemployment in export industries and the prices of export commodities unemployed and employed persons alike needed to buy. Not coincidentally, in Anderson’s judgment, the Nazis became the second-largest party in the Reichstag in 1930. Even so, “If the governments had acted” to lift tariffs in the winter of 1931-32, “Hitler never would have come into power, and we should have saved the democratic regime in Germany.”

The Americans weren’t the only culprits. French revanchisme continued to play its part; England, with its strong labor unions, which wanted no reduction in wages, even in the face of the downturn, along with too-heavy investment in illiquid assets by the Bank of England, took the damaging step of going off the gold standard in order to devalue its currency, a serious “breaking of faith with the world” which inspired fears about every currency. Given that credit or faith sustains financial transactions, now “governments could no longer trust governments in financial matters” and “the confidence of central banks in one another was gravely shaken.” The value of gold rose sharply, since “gold’s greatest competitor is the confidence men have in the paper promises of governments and central banks to pay gold.” This didn’t faze the Americans, who “were very strong in gold.” “Our whole financial tradition rested on the principle that we would pay gold. Grover Cleveland in the middle 1890s had defended our currency with gold payments under very much more adverse conditions,” and it worked. In 1907, the bank runs had prompted bankers to restrict cash payments by banks but to continue to allow depositors to write checks to pay debts. Only “absolutely necessary cash was provided by the banks.” But in 1933, banks were obliged to pay five percent of their deposits in cash; five percent doesn’t sound like much, but banks never keep much more than that on hand for withdrawal by depositors. The banks’ cash reserves were rapidly depleted by terrified depositors.

Why? Because “men’s memories are short. Men come into positions of great responsibility fairly late in life, and the interval between 1907 and 1933 was too great an interval”; “there was no man left of the heads of great New York banks in the panic of 1907 who was still in that position in 1933,” and “the same thing was generally true over the country.” When the New Dealers came to power in 1933 “with virtually every bank in the country closed, control of the banking situation passed both from the banks and from the Federal Reserve banks to Washington,” which under the new administration pursued a policy of “deliberately shutting out the banking community from its councils,” having decided the bankers had caused the Depression. In one way they were right. The 1920s credit expansion, masking “the scarcity of real capital” with speculative loans and investments which boosted the stock market beyond the value of the overall economy, had “misled governments and induced them to place debt payment schedules higher than they should have been.” But of course the governments had done their part, with punitive reparations, high tariffs, and (in the United States) the misuse of Federal Reserve powers. 

Roosevelt and his colleagues doubled down on government control of the economy; in their minds, the Republicans had done some good things, but not nearly enough. They failed to see that “a liberal foreign trade policy is contradictory to governmental economic planning, and the movement toward governmental economic planning grows rapidly when foreign trade is cut off. This was recognized a long time ago. One of the original economic planners was the German philosopher Fichte, a follower of Kant and precursor of Hegel,” who urged that governments adjust, “in proper proportion,” the several producing classes in each country by means of fixing the prices of commodities and manufactures while “render[ing] impossible direct trade between citizens and the foreign world,” reserving such trade to the state. So it was with the New Dealers. They “did not want either foreign trade or gold. They wanted internal regimentation.” For them, it wasn’t enough to take the role of backseat drivers; they aimed at putting themselves “in the driver’s seat.” If they “lacked economic understanding…it cannot be denied that they had a good deal of imagination regarding economic matters.” In Germany the matter went to its extreme, as the country in effect “substitute[d] the tyranny of Hitler for the tyranny” (as the bank-haters called it) “of gold.” Hitlerite venom spat at Jewish bankers gave his tyranny its genocidal edge, even as Leninist venom against the “harmful insects” of capitalism gave such an edge to that tyranny. This combination of bad economics and bad ideologies led to the military and political crises that prevailed for the six decades between 1930 and 1990.

An interesting economic experiment ensued. The widespread use of automobiles in the previous decades had “largely destroyed the usefulness of the small village” in American life, as “people did their business and sought their social life in the county seat and other nearby larger cities.” This weakened the small banks. But now, under the New Deal, the cities suffered and villages well removed from city centers survived. By accident, they found themselves out of the way of FDR’s policies, which included “blanket authority…to do pretty much as he saw fit regarding money and banking,” authority to seize the people’s gold and gold-backed certificates, preparatory to abandoning the gold standard. This again violated the public trust. “There is no need in human life so great as that men should trust one another and should trust their government, should believe in promises, and should keep promises in order that future promises may be believed in and in order that confident cooperation may be possible. Good faith—personal, national, and international—is the first prerequisite of decent living, of the steady going on of industry, of governmental financial strength, and of international strength.” Having promised to maintain the gold standard in his party’s platform, FDR committed “an act of absolute bad faith.” Since first England and then the United States broke faith with their citizens and with governments around the world, we now see “a world full of hot money, jumping about nervously from place to place, seeing no safety anywhere, but going from places that seemed unsafe to places that seemed less unsafe,” preventing men from making long-range plans of investment. 

“By 1937 the gold standard in its old form had ceased to exist. There remained no important country in the world where paper currencies would be automatically and regularly redeemed either in gold or in gold bars.” This put peoples at the mercy of their governments, since “the recipient of gold does not have to trust the government stamp upon it, if he does not trust the government that stamped it.” Pieces of paper stamped by the government “will be accepted on faith if the government or the bank which has issued the paper has proved itself worthy of confidence by a satisfactory record of redeeming the paper in gold on demand”; “gold is an unimaginative taskmaster,” demanding only issuers of paper currency “keep their promises on demand or at maturity,” which in turn requires that “they create no debts without seeing clearly how these debts can be paid.”  

A major complaint about banking practices seen in the 1920s current in the 1930s was “the alleged excess of savings over investment in the period 1924-29.” Supposedly, hoarding money in banks retarded investment. But “all of the real savings of this period” was in fact invested; the critics were really complaining that the bankers refused to invest “all of the rapidly expanding bank credit” afforded by Federal Reserve policies. On the contrary, Anderson argues, “far too much new bank credit” was invested. The banks weren’t too ‘conservative’ but too ‘liberal,’ and that contributed to the stock crash. “Men must be induced to save for the future by a reward, and that reward is interest”; banks can offer interest because they invest depositors’ savings by offering loans which, in aggregate, profit the banks after they’ve paid the interest due to depositors. The rate of interest the banks offer provides “the equilibrating factor which brings savings and consumption into balance.” Derange it and you violate the indispensable ‘credit’ or trust that makes ‘the economy’ prosper.

The New Dealers’ fondness for labor unions further complicated matters. “The idea that the purchasing power of labor is the mainspring of business activity seems to be incredibly naïve,” inasmuch as the “the prospects of profit or losses” determine “industrial decisions.” Sure enough, when the National Industrial Recovery Act came into effect, production dropped. “The theory that shortening hours and raising wages would increase business activity was conclusively exploded in this six-month period of actual test,” and the Act additionally imposed a further burden, administratively-imposed regulations “subject to change without notice.” Minimum-wage regulations alone forced an estimated half-million black Americans onto relief in 1934. Finally, in raising the price of manufactured goods, the Act frustrated the New Dealers’ agricultural policy, which aimed at bringing farm products “the same purchasing power in relation to manufactured goods that they had in the base period 1909-14.” 

During the 1932 campaign, FDR had promised a 25% reduction in government spending. A conversation with John Maynard Keynes in 1933 persuaded him that “government control of investment” was needed, which included economic stimulus at the cost of government deficits. [2] This failed. By contrast, in 1921, during the previous depression, “the government did not know about the new wisdom of Keynes.” It acted “to protect its own solvency, to protect the currency, to reduce public expenditure as rapidly as possible from the wartime levels, and to cut taxes”; “business recovery was for the people to bring about and not for the government to engineer.” The depression ended in a matter of months. In 1934, with the government bureaus multiplying, there was no one in Washington “who knew all the new bureaus that had been created and could see the government as a whole.” This suggests that a modern economy is too large and complicated for coherent rule ‘from above,’ except in one way: “The New Deal tax policy from the beginning has been more concerned with the redistribution of wealth than with raising revenue.”

Such redistribution damages investment. To invest in a new business with sufficient capital backing, the bank account of the small businessman won’t do. He needs a loan. since “the mortality among new ventures is high,” especially among firms founded upon “a real innovation,” bankers fund such enterprises reluctantly, unless the innovator has a record of success. “In American economic history such new ventures have often been financed by men of fortunes sufficiently large so that they could scatter their risks.” But if the government raises income taxes to the heights implemented by the New Dealers, why risk your money? Confiscatory inheritance taxes, intended to counter the formation of an oligarchic class, remove yet another motive for risking capital. Anderson agrees that “there is good ground for the belief that vast fortunes involve undesirable political and social potentialities, and that public policy should be direct: (a) toward making sure that such fortunes cannot be accumulated in antisocial ways, and (b) toward holding down the growth and the transmission of vast fortunes to the extent that this can be done without checking the accumulation of capital and the spirit of enterprise.” To do this without inhibiting the spirit of enterprise, legislators should impose inheritance taxes that allow “a great fortune…to reach grandchildren and great-grandchildren” only if the each new generation “add[s] very substantially to it by productive activity”—a tax rate not to exceed 50%.

All of these policies contributed throughout the 1930s to a real instance of the imagined problem of the 1920s: “unused capital and unused technological knowledge.” “The war set them to work, but it took the war to do it,” war being the one government program that does stimulate economic activity, especially if your side wins. Technological progress doesn’t lead to net unemployment, although it does make many jobs obsolete when the manufactures they supported become unnecessary. “Where did the workers go” when automobiles and other technological innovations displaced buggies, whips, and smithies? “The answer is to be found in many things, and first in the great increase in the service industries” and also into design work for newer and more elegantly styled cars. “It manifested itself also in an immense demand for education, and one of the major places to which our people went from factory labor and farm labor was to school.” Women moved from agricultural and factory work to “lighter, more interesting, and better paid occupations” in offices and hospitals.

The Second World War brought a lot of women back to the factories. Otherwise, the Roosevelt administration reorganized the American political economy not only to win the war, as Wilson had done, but “as a means of pushing further the New Deal program of the redistribution of wealth” via “a tremendous increase in taxes,” “borrowing from the people instead of borrowing from the banks” (i.e. deficit spending), restriction of bank expansion, and price fixing along with commodity controls. “If you have enough regimentation, if you have control of all commodities and all prices, if you have control of every man’s pocketbook and every man’s bank balance, if you have control of the farmer’s consumption of his own productions, and if you have a sufficiently powerful and efficient Gestapo, you can take great liberties with money and credit.”

In the event, businesses adjusted to the New Deal state, which was indeed something new and lasting. Between 1930 and 1940, the federal government saw a 73% increase in federal civilian employees, not counting the 2.9 million men and women who worked on federal relief projects. In the same period, the federal budget rose from $3.44 billion to $9.06 billion and, as the saying goes, never looked back. As the economic historian Robert M. Collins observes, although Keynes’s General Theory wasn’t published until 1936, FDR got a running start on the kinds of policies it recommended, and 1938 marked “Roosevelt’s first acceptance of fiscal policy as a legitimate tool for economic stabilization,” as he advanced a plan “to pump approximately $7 billion into the economy”—an “important turning point for the New Deal.” This, along with low interest rates determined by “central control” (the Federal Reserve) and “redistribution of wealth through taxation to increase the propensity to consume” were the trademarks of Keynesian ‘demand-side’ economic policy, which held that the way out of an economic depression was to spend your way out of it. World War II “provid[ed] striking evidence of the effectiveness of government expenditure on a huge scale,” in the minds not only of professional economists but of many business owners. The latter accommodated themselves “to the fiscal revolution and successfully turned aside the thrusts of those who sought to limit seriously [their] dominion” over American economic life. “The dynamism of American business illuminates an important trend in the relationship between state and society in modern America—the conscious effort to build a corporatist sociopolitical order that would avoid the dangers of both statist regimentation and laissez-faire waste and social tension.” (3) By the time Collins wrote this, however, this Keynesianism ‘of the right’ had more than begun to outlive the usefulness ‘pragmatists’ attributed to it. 

 

Notes

1. Anderson lavishes praise on Wilson, “the greatest man, the most upright man, and the most far-seeing man who has held great public office anywhere in the world within the memory of men now living.” One might demur, but Anderson’s assessment makes his book interesting because it means that he is sympathetic to the Progressives but bitterly critical of the New Dealers, who in so many ways continued the Progressives’ preference for administrative statism and ideological historicism.
2. “Keynes was a dangerously unsound thinker” whose “influence on the Roosevelt administration was very great.” Keynes held the principle that “purchasing power must be kept above production of production is to expand.” According to him, “supply creates its own demand.” Earlier modern economists, notably John Stuart Mill, stipulated rather that “purchasing power grows out of production”—that, for example, “supply of wheat gives rise to demand for automobiles, silk, shoe, cotton goods, and other things that the wheat producer wants.” That is, “aggregate supply and aggregate demand grow together” and that economic prosperity occurs when these are in equilibrium. “The doctrine expects competition and free markets” bring about such equilibrium. “When there is an excess of bank credit used as a substitute for savings, when bank credit goes in undue amounts into capital uses and speculative uses, impairing the liquidity of bank assets, or when the total volume of money and credit is expanded far beyond the growth of production and trade, disequilibria arise, and, above all, the quality of credit is impaired. Confidence may suddenly be shaken and a countermovement may set in.” This, as Anderson has explained, is what happened in the years before the Great Depression. Only “free prices, telling the truth about supply and demand,” can serve as the information necessary for making rational investment.
3. Robert M. Collins: The Business Response to Keynes, 1929-1964 (New York: Columbia University Press, 1984. As Collins goes on to say, the group that suffered the most from New Deal policies, especially during the war, were not “big business, big agriculture, and big labor,” which prospered from government contracts and other programs, but the small businesses. As a result, the Chamber of Commerce, whose leaders came to accept New Deal economics, lost membership, having drifted away not only from the sentiments but from the interests of its constituents. But by the 1950s, the Republican Party itself, under the presidency of Dwight D. Eisenhower, had more or less surrendered to the ‘welfare state,’ and the economics propounded by Ludwig von Mises and defended by Anderson became peripheral for a generation, until the combined effects of economic stagflation and inflation in the 1970s brought its warnings back into currency. 

The Idea of Representation and the Problem of Delegation

Lecture delivered at Hillsdale College Center for Teaching Excellence Conference

“The Purpose and Structure of the Constitution”
Fort Worth, Texas
November 12, 2021

The Declaration of Independence names life, liberty, and the pursuit of happiness as our unalienable rights under the laws of Nature and of nature’s God. It goes on to say that the purpose of government is to secure those rights. The problem the Framers of the United States Constitution faced, the problem we face today, the problem every person who has ever lived has faced and always will face is that the power to secure our rights is also the power to suppress them. The tyrant who has me herded into a gas chamber or shot in the back of the head in front of a mass grave cannot destroy my right to life, but he can destroy my life itself. As far as the tyrant is concerned, that’s close enough for government work, and government work entails the exercise of power for good or for bad. While your students, fortunately, are not immediately threatened with a genocidal level of oppression, all of them have experienced small acts of tyranny—getting pushed around in various ways—and some have experienced very grave acts of tyranny, sometimes in their own homes and neighborhoods. They, too understand the underlying problem the Framers confronted and feel its urgency, if not yet on the level of politics.

You can use that fact to answer the perennial questions students ask themselves, and each other: Why should I care about what the teacher is saying? In this case, why should I care about the U.S. Constitution, including such apparently dry subjects as representation, delegation of powers, and separation of powers? And why should I care about politics, which these days seems a circus of overhyped denunciation—not merely overheated but trivial, noisy, boring?

What I mean to do this morning is to show not only why American politics matters to every person who lives in this country, why the Constitution matters, but more particularly, the importance of the topics I’ve been asked to talk about: representation and delegation of powers, which are not ordinarily topics of interest on TikTok.

Start by asking your students, What do you want out of life? Then show them how the American style of politics under the Constitution helps them get it, and why losing their grasp on constitutional self-government might prevent them from getting it. If they want to cut through the rhetorical agitation they see and hear all around them, show them how not to feel about politics—every political flack, every ideologue in the country wants to jerk you around that way—but how to think about politics. Once they start thinking about politics, and especially about self-government, some may begin to think about life beyond what they want out of it. They may even decide they want more out of life than they had thought.

So, starting with the basics, what is politics and why does it matter? Every student sees the nucleus of politics in the life of the family, no matter how that family may be constituted. Aristotle may have lived 2,300 years ago, but he still gives you the common sense of the subject. We all understand that politics involves ruling; as I said a couple of minutes ago, that’s what makes it both indispensable and dangerous. Aristotle identifies three forms of ruling in the family. There is the rule of the parents or parent over the children. That is fundamentally a one-way form of rule, whereby the parents rule the children, preferably for the good of the ruled, the children. There was also, in the households of Aristotle’s time, the rule of the masters over the slaves. That too is one-way rule, but for the good of the rulers, not the ruled. Every household today still has slaves, namely, vacuum cleaners, washing machines, cell phones; most of us are pleased to see that we have no more need for human beings to be deprived of their liberty in order to get our servile work done. Finally, there is the relationship between the adults in the household, those who rule the children and the slaves. If rightly ordered, Aristotle says, that form of rule consists of ruling and being ruled, government by discussion and deliberation, give and take. If wrongly ordered, it consists of the tyranny of one partner over the other. The well-ordered marital relationship of shared rule, of ruling and being ruled in turn, is what Aristotle calls the only genuinely political form of rule.

These forms of rule, which your students already know about in both their good and their bad versions provide the basis of Aristotle’s understanding of politics in the larger community. Aristotle classifies political organizations according to their regimes.

A regime consists of four elements:

1. The rulers of the political community, its “ruling body” or politeuma.
2. The structures or institutions, the ruling officers, whereby the rulers rule—its politeia.
3. The way of life, the Bios ti, of the people who rule and are ruled.
4. The purpose, the tēlos, of the political community—in America, as we’ve seen, securing unalienable natural rights.

Given the three kinds of ruling present or potentially present in a political community, Aristotle lists six main regime types, based on both a numerical and a qualitative criterion:

 

                  GOOD              BAD

ONE           Monarchy        Tyranny

FEW           Aristocracy       Oligarchy

MANY       “Mixed”             Democracy

 

But more than this, Aristotle understands that political communities come in different sizes and feature different degrees of political centralization. Among his Greeks, he saw the small, highly centralized polis or ‘city-state,’ where even rulers in regimes of ‘the many’ could gather in one place and debate the course of political action. He also saw the huge, decentralized empires; his one-time student, Alexander the Great, would add substantially to the Macedonian empire he inherited from his father, Philip of Macedon. In subsequent centuries, others would see the large, decentralized feudal communities, the large, centralized modern states (sometimes linked in confederations), and the potentially universal empires of Church and Ummah.

With the knowledge of this way of understanding politics, of regimes and states, your students can begin to understand not only the politics of the family of their town, their state, their country, but the politics of every organization they see, starting with their school and their church, but also any business organization, social club—any group of human beings they are involved with, or are interested in understanding. That will give them a big advantage over people who don’t know much of this and I always let my students know that.

We now can see the monumental character of the problem the Framers of our Constitution set out to solve, and the indispensable human need to solve it. They needed to constitute a national government that would be structured in such a way as to prevent any of the bad regimes from arising here, to ensure that Americans could continue to govern themselves, to engage in politics strictly speaking, to rule and to be ruled in order to secure their natural rights. They also needed to constitute a modern state, one big enough to defend them against the other modern and indeed imperial states that surrounded them, a state that nonetheless remained under the control of the sovereign people, who are out to defend their natural and civil rights. Having learned this your students will be equipped to see why American politics then and American politics now were, and are, so contentious. Americans then and now have argued about what kind of regime they should have, and what kind of state they should have. In foreign policy, they confronted the imperial monarchies of Europe; today we confront oligarchies in China and Russia and Iran which mean our regime, and our state, no good, and do not lack imperial ambitions.

Two of the most important institutional devices the Framers built into the American regime and state were the ones for this hour: representation, which James Madison considers the heart of the republican regime, and separation of powers, which is implicated in the controversy over delegation of powers.

First, representation. The American Founders considered a republic to be the regime best suited for the effective defense of our rights. But ‘republic’ is a very broad term. In ancient Rome, it referred to a mixed regime, one which in practice was usually dominated by the landed oligarchs or (to be more charitable) aristocrats in the Senate. Modern Venice as it existed in the Founders’ time was called a republic, but an ‘aristocratic republic.’ The founders were out to establish a democratic republic, a regime they were careful to distinguish from both aristocracy and democracy (which, in agreement with Aristotle, they judged a bad regime). Publius defines a republic as a regime in which (1) all governing powers derive directly or indirectly from “the great body of the people” and (2) administrative or executive work is done by persons holding their offices for terms limited by an election cycle or at least during good behavior—that is, so long as they are unimpeachable. If the people are to rule themselves, their representatives must be responsible to them.

Popular self-government had a bad reputation in Publius’ day, thanks to the tumultuous histories of what Publius calls the “petty republics” of ancient Greece and Italy. “Advocates of despotism,” he writes, have used these examples to criticize not only republican regimes but “the very principles of civil liberty” itself, calling liberty “inconsistent with the order of society.” Such persons deny that what the Declaration identifies as the natural rights to life and liberty are compatible; therefore, one of these rights, liberty, must in large measure be sacrificed for the sake of security. The English philosopher Thomas Hobbes considered only a large, centralized state—the “mighty Leviathan”—with a regime of absolute monarchy as consistent with the preservation of human life.

Publius thinks otherwise. In his words “the science of politics” has improved since the days of the ancient Greeks and Romans, in five ways. Two of these don’t concern us here, this morning: legislative checks and balances within a structure of bicameralism and judges holding office “during good behavior.” Another, separation of power, will be the next speaker’s topic, although I will touch on it when I get to talking about delegation of powers.

The other two are directly relevant to republicanism. One is the representation of the people by elective or appointed officials, not just in executive offices, as it was in antiquity, but in the legislature. In the American form of republicanism, the people’s representatives make the laws. The other feature of the new science of politics flows from that. Because in a representative government the people don’t need to gather en masse to legislate for themselves, as they did in the Athenian democracy, popular self-government can extend over a much bigger territory, inhabited by a much bigger population. In other words, you can have a modern state that is strong enough to defend itself against rival states with monarchic, tyrannical, or oligarchic regimes. Because it is so large, the American republic has the chance for better domestic politics, too; faction will have a harder time organizing themselves among such a large and diverse population, spread out over a large and diverse territory—the famous argument of the tenth Federalist.

The constitutional provision that further strengthens this extended republic is Article IV, section 4 of the Constitution stipulates that every state within the national state must have a republican regime; there should be no regime rivalries among the American states, as there are in other part of the world. And the federal character of the American state will enable Americans to participate in politics and government, learn how to be citizens, because there will be plenty of self-government to do not only on the national levels, but in states, counties, and towns.

Publius defines representation in terms of the second topic I’ve been asked to discuss, delegation. Representation means “the delegation of the power of the people to a small number of citizens elected by the rest.” Furthermore, as Montesquieu writes, “It is false that one who is delegated has as much power as those who delegate and that he no longer depends on them.” (Pensées No. 224). The people retain their sovereignty; they, not the government, are the rulers. There is no privileged class ‘born to rule’; everyone is born to rule, although not everyone will participate in the government. America is therefore not a ‘mixed regime’ but an unmixed republic. Because voting citizens will want to be represented by person who are smart and ready to defend their interests, representative government will, in Publius’ words, “refine and enlarge the public views” in a way seldom seen in the “petty republics” or small democracies of ancient times or, for that matter, anywhere else in modern times, as of 1787. Because America is so large and diverse, “the idea of an actual representation of all classes of the people by persons of each class is altogether visionary,” something that “will never happen under arrangement that leaves the votes of the people free”—that is, free to choose their best representatives.

The extensiveness of the republic along with this institutional structure or design feature, representation, each indispensable to the other, are what Publius identifies as the distinctive and indeed unique features of the American regime.

Notice that crucial point about delegation of power. In a true, unmixed, democratic republic delegation runs from the sovereign people to their representatives. It does not run from the states’ governments to the federal government or from the federal government to the states’ governments. Governments are not sovereign. “We the people” are. Only the way the Framers have devised can enable us to govern ourselves under a federal system and defend our lives and liberty. Nor does delegation run from one branch of the government to any other branch. Not from the legislature to the executive, the legislature to the judiciary, or in any other pathway between any of the three branches.

Before the Founders’ time, the English philosopher John Locke put the matter with characteristic vigor: “the legislative [branch] cannot transfer the power of making laws to any other hands; for it being but a delegated power from the people, they who have it cannot pass it over to others. The people alone can appoint the form of the commonwealth, which is by constituting the legislative [branch], and appointing in whose hands that shall be. And when the people have said we will submit to rule, and be governed by laws made by such men, and in such forms, nobody else can say other men shall make laws for them; no can the people be bound by any laws but such as are enacted by those whom they have chosen and authorized to make laws for them.”

This was well understood and accepted throughout the nineteenth century and into the twentieth. In the 1825 case of Wayman v. Southard, Chief Justice John Marshall wrote, “the legislature makes, the executive executes, and the judiciary construes the law.” It is true he immediately adds, that “the maker of the law”—the legislature—may ‘commit something to the discretion of other department, and the precise boundary of this power is a subject of delicate and difficult inquiry,” but neither is that inquiry impossibly. That’s what they pay judges to do.

In this case, the question was: Do state legislature have the right to set rules and procedures for federal courts within their states—in this instance, the State of Kentucky? The question was then primarily a matter of delegation of powers under the system of federalism—that is, in framing the Judiciary Act of 1802, can Congress be said somehow to have delegated the power of regulating courts to the states? The answer, Marshall replies, is no. A court “is nothing without its process. To leave this dependent upon State legislation, would be to leave the administration of justice in the Federal Court at the mercy of the States.” Such a power “is wholly incompatible with the power of the Union in Congress assembled.” Indeed, the Constitution clearly states that “all the legislative power is vested exclusively in Congress,” and, as Baptist preachers like to say, ‘All is all that “all” can mean.’ The State assemblies do not constitute legislative bodies for the Union.

What is more, not only can Congress not delegate federal power to the states, it also cannot delegate legislative power to other branches of government. In Marshall’s words, Congress “cannot delegate legislative power to the courts, or to any other tribunals, powers which are strictly and exclusively legislative.” It can delegate powers which are not exclusively legislative, powers which all branches rightly possess. So, in this case, the federal court ordered its officer to take action against a debtor, deriving its authority from a federal law The officer can still “exercise his discretion” with regard to the procedures he follows in taking the action the court ordered, under Congressional law.

The Marshall Court’s distinction between strictly legislative, never-to-be-delegated powers enumerated in the Constitution and powers common to all branches of government, whereby they regulate their own proceedings and leave matters of action under specific circumstances to the discretion of those charged with taking those actions, prevailed in Supreme Court cases though the mid-1930s. Two of the most famous New Deal era cases were Panama Refining Company v. Ryan and A.L.A. Schechter Poultry Corporation v. United States. In the first case, a Texas oil company challenged the constitutionality of a section of the 1933 National Industrial Recovery Act, which authorized the President to prohibit the transportation of “hot oil”—that is, oil produced beyond quotas established by the state legislature for intrastate consumption which was then sold to other states or to foreign countries. The plaintiff contended that this was an unconstitutional delegation of power by Congress, the legislative branch, to the executive branch, whereby the Department of the Interior wrote the regulations and the President executed regulations set down by his own executive branch of government. In Schechter, the plaintiffs challenged the constitutionality of another section of the NIRA, which established “codes of competition” for industries, in this case a code governing the live poultry industry. Chief Justice Charles Evans Hughes wrote both opinions; in interest of time, I’ll summarize his argument in Panama Refining.

“Assuming for the present purpose,” Hughes wrote, “that the Congress has the power to interdict the transportation of that excess [of petroleum] in interstate and foreign countries, the question of whether that transportation shall be prohibited by law is obviously one of legislative policy.” The problem is that the disputed clause in the NIRA. “establishes no criterion to govern the President’s course”; the Act fails “to declare in what circumstances that transportation should be forbidden.” Nor does it require the President “to ascertain and proclaim the conditions prevailing in the industry which made the prohibition necessary.” This left matters “to the President without standard or rule, to be dealt with as he pleased.” Hughes cited Wayman v. Southard on the distinction between law and the mere “filling in the details” of executing the law; in the case at hand, Congress had not “sufficiently defined” the policy the law aims at, providing no “intelligible principle” of executive action. Were this clause allowed to stand, “instead of performing its lawmaking function, the Congress could at will, as to such subjects it chooses, transfer that function to the President or other offices or to an administrative body”—to what Marshall had called “another tribunal.”

Notice the phrase, “intelligible principle.” It will go on to have a checkered history. It comes from an earlier case, J.W. Hampton and Company v. United States, decided in 1928 with an opinion written by Chief Justice William Howard Taft. The plaintiff was a New York firm which imported barium oxide, a compound with numerous industrial uses. Under the Tariff Act of 1922, the President had issued a proclamation raising the rate on this product. The Court upheld the Act, ruling against the plaintiff. Taft held that the delegation of authority to the President was constitutional because Congress gave him “an intelligible principle to which the person or body authorized to fix such rates is directed to conform,” namely, that if the tariff duties fixed in the act “do not equalize the…difference in costs of production in the United State and the principal competing country,” the President shall adjust the rates accordingly. The U.S. Tariff Commission had the duty to find the facts the President would need to make that decision, a process that must include public hearings by the Commission. That is, Congress has specified in the law a means of adjusting the rates to changing circumstances, allowing a change in the details of the law by a criterion set by the law itself.

This, Taft contended, upholds the principle of Wayman v. Southard because the Constitution is violated in such instances only if Congress “gives up its legislative power and transfers it to the President, or to the judicial branch or if by law it attempts to invest itself or its members with either executive power or judicial power.” The Tariff Act did none of those things. “The Congress may not delegate its purely legislative power to a commission,” either, he added, although a commission may apply the law “to particular situations and [to] the investigation of facts.” In sum, “If Congress shall lay down by legislative act an intelligible principle to which the person or body authorized to fix rates is directed to conform, such legislative action is not a forbidden delegation of legislative power.” In both this case and the two 1935 cases—the first affirming the constitutionality of a Congressional law, the others denying it—the “intelligible principle” required by the Court was a means of action specified in the law, not only a broad, general purpose.

This matters, because after Franklin Roosevelt’s landslide election to an unprecedented third term in 1936, followed by his failed attempt to ‘pack’ the Court with New Deal supporters of the administrative state a year later, the Court never again struck down a law delegating power to an administrative agency. In order to give some sort of Constitutional cover for this reversal of more than 100 years’ precedent, the Court began to redefine what an “intelligible principle” is, indeed counting broad, general purposes as constitutionally permitted bases for saying that no delegation was going on. [1] One scholar has listed half a dozen of these: the power to determine “excessive profits”; “unfair and inequitable” commodities rates; “just and reasonable” rates”; and the “public interest, convenience or necessity” respecting the regulation of broadcast licenses. Such broad grants of authority from Congress effectively permit administrative lawmaking—an unconstitutional delegation of power. In still another step, agencies established administrative law courts which adjudicate cases under the laws the agency executives make and execute—the combination of the legislative, executive, and judicial powers in one set of hands, which is what Thomas Jefferson called the definition of tyranny and what (among other things) the Declaration of Independence condemns George III for having done.

Whatever the motives of the Supreme Court justices may have been in acquiescing to the delegation of such substantial powers to what’s now called ‘the administrative state,’ it’s important to understand the rationale behind this delegation as it was advocated by its proponents. For that, the best writer I know is James M. Landis, whose book, The Administrative Process, was published three years after the Panama Refining and Schechter decisions, and only a year after a commission appointed by President Roosevelt condemned independent administrative agencies in a report calling for the reorganization of the executive branch in order to give the President firmer control over the now-sprawling federal bureaucracy. The head of that commission, Louis Brownlow—himself an ardent Progressive —denounced the independent agencies as “miniature independent governments” that “do violence to the basic theory of the American Constitution that there should be three branches in Government and only three.” The report continued, “The Congress has found no effective way of supervising” these agencies, “they cannot be controlled by the President, and they are answerable to the courts only in respect to the legality of their decisions.” They do indeed combine legislative, executive, and judicial powers, leaving the President “with responsibility” for their decisions in the eyes of the public but inadequate power over them and hence no little real responsibility at all. “Power without responsibility has no place in a government based on the theory of democratic control, for responsibility is the people’s only weapon their only insurance against the abuse of power.” Moreover, when “the same men are obliged to serve both as prosecutors and as judges,” this “undermines judicial fairness” and “public confidence in that fairness.” The Commission called for a consolidation of administrative power under the President—music to FDR’s ears.

Landis entered the lists against both the Hughes Court and the Brownlee Commission—in effect against President Roosevelt and his adversaries on the judicial bench. In this battle, the administrative state found a sincere and enthusiastic champion. Years later, in a 1961 speech before the American Bar Association, Landis said: “For me, to have watched the growth of the administrative process has been perhaps the most rewarding chapter of my life.” There was something about modern bureaucracy that stirred the man’s blood. It wasn’t so much the structure of bureaucracy but the administrative process, and his role in originating it in America, which galvanized him. Landis understands administration not as a mere instrument of government or of regulation but as a dynamic force, the ‘cutting edge of History.’ In his own way, James M. Landis too could claim to be an American Founder. 

In Landis’s account, modern administration originated neither in American nor in English law but in the French droit administratif. The administrative process took hold in the United States due to the “inadequacy of a simple tripartite form of government to deal with modern problems.” In the U.S. the constitutional separation of the three governmental powers has been “elevated to the constitutional level and embroidered by pontifical phrases,” while criticism of the administrative process “abounds with fulmination.” But with the rise of powerful and complex modern industrial corporations simultaneously with the democratic sentiment of humanitarianism, the people have increasingly demanded that their government protect and care for them. Since in organizing themselves the corporations do not separate their powers but concentrate them in a board of directors, government needs to organize itself to imitate these rivals for power, continuing to exercise its policing powers but adding to them the powers of planning and publicity—taken together, “management.”

To the critics’ complaint that this managerial revolution entails the combination of legislative, executive, and judicial authority, Landis cheerfully agrees, saying that that’s a good thing, too. To those who charge that there are too many administrative agencies, on the contrary, “efficiency in the processes of governmental regulation is best served by the creation of more rather than less [sic] agencies.” Although he doesn’t use the term, what is needed is a new form of aristocracy, one based not on military valor or political prudence, much less on gentility and bloodlines, but on empirical knowledge, on expertise. The administrative process will be conducted by what he calls “a select, compact group of individuals”—later advocates would call it a ‘meritocracy’— trained in the social sciences who possess sufficient technical knowledge of political, social, and economic forces to manage the new, corporatist economy.

Judges lack that expertise. Their so-called “legal principles” have no reality outside of the “economic and social opinions” of the time in which those principles are formulated. All ideas are “historically molded,” having nothing to do with such fictions as the law of Nature and of Nature’s God. Judges “suffer from that finely spun logomachy”—battles of mere words—heard in courtrooms. They fail to get their minds around the facts discovered by empirical social science, the real drivers of ‘History.’ As for legislators who operate “by the democratic method,” the elected representatives Madison praised, their work is sloppy and compromised. They should indeed delegate their powers, in “the very broadest terms,” to the experts, who can transform their vaporings into precise, coherent policy. Administrators can do this because “the comparative quiet of the conference room,” relieved of “the turmoil of a legislative chamber or committee room,” “gives some assurance against the entry of impertinent considerations” and relieves the ruling process “from the play of political and economic pressures” even as it guides that process by knowledge of the much larger political, social, and economic forces which push ‘History’ forward.

Landis recommends that the legislative branch take on a new role, one consisting more of reviewing administrative actions rather than of making laws. As for the judiciary, it will have a much diminished role, one that allows no more judicial review, inasmuch as the judges’ claim to expertise, while true, is a claim to the wrong kind of expertise, expertise in the manipulation of words and of abstract ideas, not expertise in empirical realities.

Landis says little about rights, whether natural or civil. He begins, cautiously, to reveal why this is so in giving a short history of administrative rule in the United States. It began not with the battle against corporations, which initially would have been a lost cause, but with immigration control. “The exclusion and expulsion of aliens” produced “the pressure of innumerable cases,” a pressure “too great for the ordinary machinery of government,” especially for the elephantine ‘due process’ of the courts. Since aliens had no rights enforceable in U.S. courts, anyway, and indeed no legal right to enter the country, there was no need for any formal court proceedings in dealing with them. “The fusion of prosecution and adjudication in a single administrative agency” made sense. That is where the administrative process cut its teeth, in America.

Thus incised, the administrative process then appeared in the newly formed Federal Trade Commission, established in 1914 to enforce the Clayton Act, one of the major antitrust laws and a key element of the Progressive movement’s agenda under President Wilson. Supreme Court Justice Louis Brandeis remarked at the time that the FTC Act establishes an administrative tribunal, using Marshall’s term for one of the several bodies Congress isn’t entitled to delegate power to. But for his part, Landis elegantly ignores the fact that this now meant citizens not aliens were now being ruled administratively. Indeed, as far as he is concerned, “political dogmas” and “righteous abstractions” such as natural and civil rights have no fit place in law. Only the administrative process can, as he puts it, lift the rule of law “to new heights, where the great judge [i.e., the administrative process itself], like the conductor of a many-tongued symphony, from which would otherwise be discord, makes know the voice of many instruments, the vision that has been given him of man’s destiny upon this earth.” The concrete, empirical, scientific, historical process of administration stands, “in essence, [as] our generation’s answer to the inadequacy of the judicial and legislative process,” which liberated our great-grandfathers but now shackles us. By supplementing these now incompetent older processes undertaken by now incompetent judges, legislators, and executives, who are now rightly and progressively delegating their powers to the administrators whose expertise gives them the authority to push society forward on ‘History’s’ cutting edge, Americans redeem the true content of separation and balance of governmental power, realizing the promised harmony of American life. [2]

Almost exactly a century earlier, Alexis de Tocqueville took a different view. Considering the prospect of exactly the combination of social equality or “democracy” and centralized administrative states that Landis would come to champion, he warned his readers of what Landis would name the administrative process:

“The kind of oppression with which democratic peoples are threatened will resemble nothing that has preceded it in the world; our contemporaries would not find its image in their memories”—memories that still included the French Revolution and the Napoleonic Empire. “The thing is new, therefore I must try to define it, since I cannot name it. 

“I see an innumerable crowd of like and equal men who revolve on themselves without repose, procuring the small and vulgar pleasures with which they fill their souls. Each of them withdrawn and apart, is like a stranger to the destiny of all the others: his children and his particular friends form the whole of the human species for him; as for dwelling with his fellow citizens he is beside them, but he does not see them; he touches them and does not feel them; he exists only in himself and for himself alone, and if a family still remains for him, one can at least say that he no longer has a native country.

“Above these an immense tutelary power is elevated, which alone takes charge of assuring their enjoyments and watching over their fate. It is absolute, detailed, far-seeing, and mild. It would resemble paternal power if, like that, it had for its object to prepare men for manhood; but on the contrary, it seeks only to keep them irrevocably fixed in childhood; it likes citizens to enjoy themselves provided that they think only of enjoying themselves. It willingly works for their happiness; but it wants to be the unique agent and sole arbiter of that; it provides for their security, foresees and secures their needs, facilitates their pleasures, conducts their principal affairs, directs their industry, regulates their estates, divides their inheritances; can it not take away from them entirely the trouble of thinking and the pain of living?

“So it is that every day it renders the employment of free will less useful and more rare; it confines the action of the will in a smaller space and little by little steals the very use of it from each citizens. Equality has prepared men for all these things: it has disposed men to tolerate them and often even to regard them as a benefit.

“Thus, by taking each individual by turns by its powerful hands and kneading him as it likes, the sovereign extends its arms over society as a whole; it covers its surface with a network of small, complicated, painstaking, uniform rules through which the most original minds and the most vigorous souls cannot clear a way to surpass the crowd; it does not break wills, but it softens them, bends them and directs them; it rarely forces one to act, but it constantly opposes itself to one’s acting; it does not destroy, it prevents things from being born; it does not tyrannize, it hinders, compromises, enervates, extinguishes, dazes, and finally reduces each nation to being nothing more than a herd of timid and industrious animals of which the government is the shepherd.

“I have always believed that this sort of regulated, mild, and peaceful servitude whose picture I have just painted, could be combined better than one imagines with some of the external forms of freedom and that it would not be impossible for it to be established in the very shadow of the sovereignty of the people.”

To bring the themes of representation and delegation of powers together, you see how that delegating powers from elected and appointed officials to unelected and tenured ones drains real authority from the people, making civic engagement seem useless and thereby dissolving the spirit of self-government which enables citizens to defend the unalienable rights set down the Declaration of Independence. The “administrative process” thus becomes an undeclared testament to dependency.

And that is why representation and the delegation of power matter not only to lawyers and judges and political science professors, but to your students. That is how the design, the structure, of the ruling offices in the American regime affect the kind of representatives we elect, whether we are governed by elected representatives and persons appointed by them, what our way of life will be, and what purposes we aim at when we aim at governing ourselves. [2]

 

Notes

1. The first such case appears to be Lichter v. United States, decided in 1948 on the grounds that the relevant delegation provided the “intelligible principle” of “excessive profits.” However, this was an unusual case because it ruled on the constitutionality of the 1942 Renegotiation Act, a wartime measure intended to prevent price gouging by privately-owned contractors in the military defense industry. Writing for the majority, Justice Burton emphasized that the alternative was a government takeover of those industries along the lines of the “totalitarian model” the United States was resisting in the war. Further, the national emergency justified a much broader than usual use of state power, under Congress’s war powers. That being so, “It is not necessary that Congress supply administrative officials with a specific formula for their guidance in a field where flexibility and the adaptation of congressional policy to infinitely variable conditions constitute the essence of the program.” The subsequent question then became, does that need for flexibility and adaptation apply in peacetime? Subsequent Supreme Court rulings in effect have answered ‘yes.’
2. That Landis’s convictions have continued to prevail among many administrative officials may be seen in an October 2021 memo written by the chair of the Federal Trade Commission, Lina Khan. In her memo, Khan defines the FTC as a “body whose work shapes the distribution of power and opportunity across our economy.”
3. In 2019, some members of the Court indicated that the question of delegation of powers may be revisited. In Gundy v. United States, the plaintiff, a convicted sex offender, challenged his conviction for failing to register under the provisions of the Sex Offender Registration and Notification Act, which Congress enacted in 1994. The plaintiff had been convicted of a sex offense and had served his jail sentence before the Act went into effect, arguing that the Act gave too much regulatory discretion to the U.S. Attorney General respecting the registration of pre-Act offenders. In a 5-3 decision (the recently-appointed Justice Kavanaugh did not vote), the Court upheld the constitutionality of the Act. Writing for the majority, Justice Elena Kagan held that the SORNA satisfied the requirements of the “intelligible purpose” standard, namely, “to protect the public” against convicted sex offenders by “establishing a comprehensive national system for the registration” of such persons. “The Court has over and over upheld even very broad delegations” of power from Congress to the executive branch; ergo, “the delegation in SORNA easily passes muster. Justice Kagan went so far as to assert that “if SORNA’s delegation is unconstitutional, then most of the government is unconstitutional—dependent as Congress is on the need to give discretion to executive officials to implement its programs.” Writing for the minority, Justice James Gorsuch observed that “the Constitution promises that only the people’s elected representatives may adopt new federal laws restricting liberty. Yet the statute before us scrambles that design. It purports to endow the nation’s chief prosecutor with the power to write his own criminal code governing the lives of a half-million citizens,” authorizing him to “‘prescribe the rules by which the duties and rights’ of citizens are determined a quintessentially legislative power.” Such administrative codes often prove mutable, depending on the policies of a given administration, and in any event vest legislative powers in the hands of unelected officials, by definition not responsible to the sovereign people. The purpose of separation of powers “is a procedural guarantee that requires Congress to assemble a social consensus before choosing our nation’s course on policy questions like those implicated by SORNA.” With respect to the registration of pre-Act offenders, no such consensus had been established, given Congress’s inability to specify a procedure for dealing with those offenders—a difficulty it evaded by passing on that piece of lawmaking to the Attorney General, who should be enforcing laws, not making them. In his opinion concurring with the majority, however, Justice Samuel Alito acknowledged that “since 1935, the Court has uniformly rejected nondelegation arguments and has upheld provisions that authorized agencies to adopt important rules pursuant to extraordinarily capacious standards.” Since “I cannot say that the statute lacks a discernable standard that is adequate under the approach this Court has taken for many years,” Alito affirmed the majority decision while inviting another more clear-cut case that would better enable the Court “to reconsider the approach we have taken for the past 84 years,” i.e., since the Panama Refining and Schechter cases.