Introduction
In our daily lives all of us come into contact with hundreds of other people:
loved ones, fellow workers, casual acquaintances, total strangers. Some of these many contacts—e.g., being hit by a car, or mugged—are involuntary. But most relationships between people in the United States—with spouses, landlords, employers, lawyers, physicians—are voluntarily chosen.
To the extent that voluntarily chosen relationships create important obligations—which later may have to be clearly recalled, and perhaps even legally enforced—it is necessary to create contracts. Contracts are the cement that binds together the voluntary assent of free individuals. Without contracts, little or nothing would ever be accomplished, from “buying” dinner at McDonalds (what would you receive, or pay?) or “renting” an apartment (which one, for how long, at what cost?) to “building” a home (the many terms in a project even as relatively simple as this boggle the mind). .
Because enforceable private choices are a cornerstone of a free country,
and because contracts are indispensable to those choices, the Founding Fathers specifically provided in the Constitution’s Article I, Section 10, that state governments could enact no “law impairing the obligation of contracts.
In other words, the Constitution forbade government—expressly the states; by implication, the federal government as well— from stepping between contracting parties and rewriting their agreement, either for the government's own purposes, or for anyone else’s benefit.
Unfortunately, however, even explicit Constitutional safeguards have not been able to protect the sanctity of voluntary private choice from government’s designs.
Five famous Supreme Court cases, involving money, employment, mortgages, restrictive land covenants, and refusal to contract, eloquently answer the question of whether, in America, a contract is really worth the paper it is written on.
Legal Tender Cases[i]
From Greenbacks to Greenspan
As I begin with Part II of this book, examining thirty-five of the worst Supreme Court cases and their adverse impact on individual rights, with the category of “Contracts,” I’m going to focus on a topic not usually thought of as involving contracts, let alone individual rights: money.
Among the worst anti-contact, anti-individual rights cases in American history are three that are about small pieces of paper each of us carries every day: “greenbacks”—which are not only “money,” but, much more important, government-ordained “legal tender for all debts, public and private.” (Take a look at the fine print on any denomination bill in your wallet.)
The belief that government should have a monopoly on the creation, supply, and debasement of money was not an invention of FDR’s New Deal. As long ago as five-hundred years B.C., the Greek king Solon used his sovereign power to control and devalue his country’s coinage in order to redistribute wealth from creditors to debtors, and support his military adventures—motives, as we shall see, that animated American political leaders centuries later.
Similarly, a long succession of later Roman emperors steadily debased the coinage as an alternative to raising taxes, again to support military adventures.
Eventually, a landmark 1604 English case—the Case of Mixed Money—offered an unambiguous statement of the relationship of government to money:
And so it is manifest, that the kings of England have always had and exercised this prerogative of coining and changing the form, and when they found it expedient of enhancing and abasing the value of money within their dominion: and this prerogative is allowed and approved not only by the common law, but also by the rules of the imperial law.
In 1787, however, the people of the United States, in Article I, Section 8, Clause 5, of the Constitution, gave Congress only the power to “borrow money on the credit of the United States” and to “coin Money [and] regulate the Value thereof.”
The road from “borrow,” “coin,” and “regulate the value” of money, to the Fed’s hand on the money spigot with all that implies for the American economic and political system, is too long and torturous to travel here.[ii] Indeed, in Part I, Republican Institutions, I have written critically of Chief Justice Marshall’s indefensible decisions in M’Culloch v. Maryland and Gibbons v. Ogden and the toll those decisions have taken on federalism.
So I’ll now skip a half-century to the Civil War.
Hard as it may be to believe in this day of paper currency, prior to the Civil War the only lawful money in the United States was gold and silver coin. When coin was loaned, repayment by the debtor was expected in kind.
Early in 1862, in order to finance the Civil War, which was proving costly not only in lives but also in treasure, Congress created paper money. By law, the “greenbacks”—essentially ink-stained paper, colored green on the back side—were made “legal tender, for all debts public and private.” That meant that the ink-stained paper had to be accepted by creditors in payment of the debts owed them, regardless of whether the creditor wanted them and regardless of how much the paper was then worth.
Although loan contracts (in the form of promissory notes or mortgages) had been expressed by the parties in terms of gold and/or silver coin, by means of the Legal Tender Act the government had rewritten private debt contracts, forcing paper money of dubious value on creditors to the very great advantage of debtors.
However, as usual, reality intervened. The more ink-stained paper the government printed, the less the existing supply was worth. Simple arithmetic illustrates the point: If the government printed and put into circulation $1,000,000 of ink-stained paper, it was worth whatever it was worth at that time. If a week later the government printed and put into circulation another $1,000,000 of ink-stained paper, the total $2,000,000 would be worth half of the week-earlier value because there was twice as much of it. And so on.
This exercise in Economics 101 was not lost on creditors, who had loaned full-value dollars but were now forced by law to accept depreciated ink-stained paper in payment of notes and mortgages instead of gold and/or silver.
Enter the Supreme Court of the United States.
The first Legal Tender Case, Hepburn v. Griswold,[iii] involved a promissory note given in 1860, payable in 1862. At both times, the only lawful money in the United States was gold and silver coin. Five days after maturity in February 1862, the Legal Tender Act became law.
Two years later, the creditor of the still-unpaid note sued to collect it. The debtor tried to pay in greenbacks. Why? Because by then war-time inflation had caused the paper money to depreciate to roughly half its face value. A good deal for the debtor, but a very bad deal for the creditor who in good faith had loaned coin at a fixed value.
So the obvious legal question was whether the creditor had to accept the greenbacks as “legal tender for all debts, public and private” as Congress had ordained. The underlying question, of course, was whether the Legal Tender Act was constitutional.
A narrowly divided Court dodged the latter question, ruling only that the Legal Tender Act could not be applied to the debt contract which had been made prior to its enactment.
As to the Act’s constitutionality—which, though discussed, was not expressly ruled on by the Court— the majority believed the legal tender law to be unconstitutional; the minority thought otherwise.
Significantly, however, the Justices' disagreement was only on the facts. Each side agreed that John Marshall’s decision in M'Culloch v. Maryland established the test to be applied: Was the Legal Tender Act “necessary and proper”? The justices’ only disagreement concerned how “necessary” legal tender was to the war effort. Unfortunately, but predictably, there was no concern over whether, in constitutional terms, the Act was “proper.”
The ink was hardly dry on the Hepburn opinion when, slightly more than a year later, the Supreme Court took another look at the constitutionality of the Legal Tender Act. This time, in Knox v. Lee,[iv] two of the Hepburn Justices had been replaced by two new members of the Court. They teamed up with the three Hepburn dissenters and reversed the earlier decision. The Legal Tender Act, they held, did apply to contracts made prior to its passage, as well as to those made afterwards. In other words, the Legal Tender Act was constitutional.
Basically, the new majority asserted, and the new minority denied, that the Legal Tender Act was indeed necessary for fighting the war, and thus violated no one's rights. In addition, the majority drew on the notion that since every other nation in the so-called civilized world had the power to create legal tender, so must the United States—especially, the majority found, since the American Constitution did not prohibit the power. If Justice Strong's elaboration of this “not prohibited” theme for the Court's majority sounds familiar, no one should be surprised. Think M’Culloch and Gibbons.
Justice Bradley's concurring opinion and the three dissents (by Justices Chase, Clifford, and Field) similarly elaborated earlier themes.
More than any other modern case, Knox is the linchpin of the federal government's contemporary monetary powers. After M'Cullvch v. Maryland, Knox is the most important monetary powers case in Supreme Court history—and one of the worst examples of government power running roughshod over individual rights, in this case the creditors who had loaned money in good faith only to repaid with depreciated paper currency.
Justice Field had fought bravely against legal tender in both Hepburn and Knox, but his battle against it did not end with his comprehensive and eloquent dissent in Knox. Thirteen years later, in Julliard v. Greenman,[v] Justice Field was back at the barricades, all alone this time, in his continuing but futile dissent against legal tender.
In 1878 a statute had been enacted which, in effect, amounted to a peacetime issuance of legal tender. A creditor sued and the question eventually to be decided by the Supreme Court was: “. . . whether notes of the United States, issued in time of war, under acts of Congress declaring them to be a legal tender in payment of private debts, and afterwards in time of peace redeemed and paid in gold coin at the treasury, and then reissued under the act of 1878, can, under the Constitution of the United, States, be a legal tender in payment of such debts.”
Although the answer to this question was a foregone conclusion, how the Court reached that conclusion, and what it was based on, was somewhat surprising.
A strong emphasis of the Court in Hepburn was the emergency nature of the legal tender issuance. The war, the Court stressed, made the legal tender “necessary” in the Gibbons v. Ogden sense. In Knox v. Lee, certainly the war had not been far from the minds of the majority Justices. Indeed, conceding the principle of legal tender in Juilliard the plaintiff himself agreed that during time of war Congress could create legal tender currency. Having thus conceded the principle that Congress did, after all, possess the legal tender power, the plaintiff was very nearly inviting the Court to apply that principle to peacetime, thereby erasing the always tenuous war-peace distinction. The Court accepted the invitation, and did so with ease.
With Juilliard, legal tender had become a permanent feature of the American monetary system. The Supreme Court had effectively rewritten the constitutional monetary powers of Congress, and simultaneously rewritten the creditor-debtor contract—to the everlasting shame of the Court and to the detriment of a core individual right, that of free contract.
[i] There were three “Legal Tender Cases,” which are discussed in this chapter under the one title: Hepburn v. Griswold , 75 U.S. (8 Wall.) 603 (1870), Knox v. Lee, 79 U. S. (12 Wall.) 457 (1871), and Julliard v. Greenman, 110 U.S. 421 (1884).
[ii] For an extended chronological examination of the subject—beginning with monetary debasement in early times and ending with President Franklin Delano Roosevelt’s theft of private gold and his illegalization of the contractual gold clause device—see Henry Mark Holzer, Government’s Money Monopoly, available at www.amazon.com.
[iii] 75 U.S. 8 Wall.) 603 (1870).
[iv] 79 U.S. (12 Wall.) 457 (1871).
[v] 110 U.S. 421 (1884).
Muller v. Oregon[i]
Ladies, Laundries, and The Third Reich
In today’s nanny culture, where individuals are deemed incapable of looking out for their own interests and government is supposedly looking our for everyone’s welfare, wage and hour legislation is an accepted commonplace. But this was not always so.
Back in 1903, the enlightened State of Oregon enacted a law regulating the working hours of women, a supposedly noble endeavor designed to protect the “weaker sex” from exploitation.
The statute provided that “. . . no female [shall] be employed in any mechanical establishment, or factory, or laundry in this state more than ten hours during any one day.”
One September day in 1905, Mrs. E. Gotcher (yes, that was really her name) did the unthinkable: in one day she worked more than ten hours at the Grand Laundry. The laundry’s owner was charged with violation of the statute, a misdemeanor, and convicted.
Not surprisingly, his conviction was upheld by the Oregon courts, which made short shrift of his argument that the law was unconstitutional. Next stop, the Supreme Court of the United States.
There, the question for the justices was whether an adult woman in the Twentieth Century United States could freely choose to work more than ten hours a day at the proscribed activities, whatever her reasons (e.g., money, learning, advancement, satisfaction) or whether the State of Oregon knew better what was good for Mrs. Gotcher and could impose its values on her and the laundry’s owner.
The Court upheld the Oregon statute, to the loud cheers of liberals who applauded that body’s enlightened concern for working women who apparently either did not know or could not protect their own interests.
But if the decision’s partisans (especially women) had paid attention to the Court’s reasons for its decision in Muller v. Oregon, they probably would not have cheered so loudly, if at all. Indeed, if they really understood the decision, they should have been appalled.
Muller v. Oregon was a unanimous decision—one that today’s feminists should take no comfort from. To quote the Court:
That woman’s physical structure and the performance of material functions places her at a disadvantage in the struggle for subsistence is obvious. This is especially true when the burdens of motherhood are upon her. Even when they are not . . . continuance for a long time on her feet at work . . . tends to injurious effects upon the body, and, as healthy mothers are essential to vigorous offspring, the physical wellbeing of women becomes an object of public interest and care in order to preserve the strength of the race. (My emphasis.)
This patronizing, collectivist view of American working women was not all the Court had to say about the weakness of women and their relationship to a paternalistic state.
Still again, history discloses the fact that woman has always been dependent upon man. He established his control at the outset by superior physical strength, and this control in various forms . . . has continued to the present. * * * It is still true that in the struggle for subsistence she is not an equal competitor with her brother [meaning, any man]. Though limitations upon personal and contractual rights may be removed by legislation there is that in her disposition and habits of life which will operate against a full assertion of those rights. (My emphasis.)
It was bad enough that in upholding the statute the Court, allegedly worried about subsistence, was limiting the working hours of those trying to subsist. Much worse was the Court’s view of working women as weak, timid, and dependent—even cowardly, in being unable or unwilling to assert their “rights.” Lest there be any doubt that that’s what the unanimous Court was saying:
[Woman] is so constituted that she will rest upon and look to [man] for protection; that her physical structure and a proper discharge of her maternal functions—having in view not merely her own health, but the well-being of the race—justify legislation to protect her from the greed as well as the passion of man. The limitations which this statute places upon her contractual powers, upon her right to agree with her employer as to the time she shall labor, are not imposed solely for her benefit, but for the benefit of all. (My emphasis.)
This is nothing short of collectivism squared, and is the same rationale that underlay the monstrous program that would come later in Nazi Germany: “Hitler’s Children.”
On March 20, 2000, Joshua Hammer, an experienced journalist, wrote an article for Newsweek International entitled “Hitler’s Children,” whose subtitled read: “They were the offspring of a Nazi program to create a racially pure ‘Master Race’.”
He wrote of a woman named Helga Kahrau:
Her parents barely knew one another. An ardent Nazi, her mother met Helga's father, a German Army officer, in Berlin at a party celebrating Hitler's conquest of France in June 1940. They had a one-night stand, and nine months later Mathilde gave birth in a “Lebensborn,” or “Source of Life,” home outside Munich. The home was one of several set up by Heinrich Himmler's dreaded SS [chief] to care for unmarried pregnant women whose racial characteristics, blond hair, blue eyes, no Jewish ancestry, fit the Nazis’ Aryan ideal. At birth, Helga was anointed as one of the Fuhrer's elect, part of a generation of “racially pure” children who would populate the German Empire as it ruled a conquered Europe for the life of the 1,000-year Reich. (My emphasis.)
No doubt some will say that the connection between the Supreme Court’s rationale in Muller v. Oregon and the Nazi “master race” program is, at best, tenuous.
They are mistaken.
To hold women’s “physical well-being” and their production of “vigorous offspring” to be matters of “public interest” so as to “preserve the strength and vigor of the race” is to consider women, as did the Nazis, as a mere state resource—important to the state for their procreational capacity, to be nurtured much like livestock, and for the same reason.
The rationale underlying the Supreme Court’s decision in Muller v. Oregon transcends mere collectivism and even statism, “isms” that deny and negate any possibility of individual rights. In Muller the Supreme Court, perhaps knowingly, perhaps not, gave voice to a doctrine evil in its intent and murderous in its application: the belief that human beings, in that case women, were mere resources to be used, abused, and ultimately disposed of by those holding political power.
Muller v. Oregon was decided by the Supreme Court of the United States in 1908. Less than three decades later, the case’s rationale was on display in Hitler’s Nazi Germany.
Blaisdell v. Home Building & Loan Association
_______Mortgages in Name Only____________
Recent months have seen both sides of the federal aisle, and their candidates for the presidency, trying to outdo each other in providing relief for the “victims” of “predatory” lending practices by banks and other lenders.
We’ll put aside for the time being the several fascinating issues that arise from the tulip craze real estate buying binge of the past several years—e.g., fraudulent applications, blind-eye lending decisions, indefensible leverage, the true definitions of “victim” and “predatory”—and focus instead on what may come next, after the government’s jawboning and arm-twisting of mortgage holders proves unavailing and foreclosures continue unabated.
That focus takes us to August 1, 1928.
Mr. and Mrs. John H. Blaisdell sat down with the Home Building & Loan Association and mortgaged a two-story residential building in Minneapolis, Minnesota.
A mortgage is simply another name for a certain kind of contract. The owner (or would-be) owner of real property (the “mortgagor”) pledges it to a lender (the “mortgagee”) as security for a loan. Usually, the proceeds of the loan are used to purchase the property. A common example is the financing arrangement for the purchase of a home. (There can be “chattel” mortgages in personal property, as with financed purchases of automobiles.)
The Blaisdell’s mortgage (i.e., contract) with their lender contained customary, rather simple terms.
In return for putting up their property as collateral, the lender loaned the Blaisdells money. The Blaisdells agreed to repay it in regular monthly installments of principal and interest.
If the Blaisdells didn’t make the payments—if they defaulted on the contractual loan—the lender could protect its creditor position by foreclosing on the property and selling it at auction.
This is exactly what’s happening today across the country: loan contracts are being breached because of non-payment, and lenders are availing themselves of the legal remedy of foreclosure in order to protect, at least to some extent, the money they loaned.
If the foreclosure sale netted more than the amount Home Building & Loan Association was owed, the excess proceeds would go to the Blaisdells. If it netted less, the borrowing Blaisdells would owe the lender the difference (a “deficiency”).
Another provision of the mortgage contract—inserted there by operation of Minnesota law—was a one-year redemption period following a foreclosure sale, during which the Blaisdells could reacquire the property for the price at which it had been sold.
The buyer at the foreclosure sale could get good title only if the one-year redemption period had expired without the Blaisdells having exercised their statutory right of redemption. (Let’s also put aside for now a consideration of by what right the Minnesota legislature had a right to enact a law requiring private contracts to include a right of redemption—a power whose source is far from clear or defensible.)
For a few years the Blaisdells made their regular mortgage payments. Then they stopped.
A foreclosure sale followed, and the lender “bought” the property for exactly the amount then owed on the mortgage. The sale yielded no excess proceeds for the Blaisdells, and no deficiency was owed by them to Home Building & Loan Association which now owned the property subject to the Blaisdell’s one-year statutory right of redemption.
Because the foreclosure sale had occurred on May 2, 1932 the Blaisdells would have had until May 2, 1933 to redeem the property.
But then, a few weeks before that date, providence, in the guise of the State of Minnesota Legislature, intervened. On April 18, 1933, a mere fourteen days before the one-year redemption period was set to expire, the state enacted the “Minnesota Mortgage Moratorium Law”.
The state—not the parties, the Blaisdells and Home Building & Loan Association—had rewritten their mortgage contract.
Why?
As the Minnesota legislature explained,
Whereas, the severe financial and economic depression existing for several years past has resulted in extremely low prices for the products of the farms and the factories, a great amount of unemployment, an almost complete lack of credit for farmers, business men and property owners and a general and extreme stagnation of business, agriculture and industry, and
Whereas, many owners of real property, by reason of said conditions, are unable, and it is believed, will for some time be unable to meet all payments as they come due of taxes, interest and principal of mortgages on their properties and are, therefore, threatened with loss of such properties through mortgage foreclosure and judicial sales thereof, and
Whereas, many such properties have been and are being bid in at mortgage foreclosure . . . sales for prices much below what is believed to be their real values and often for much less than the mortgage or . . . indebtedness, thus entailing deficienc[ies] . . . against the mortgage[es] . . . and
Whereas, it is believed, and the Legislature of Minnesota hereby declares its belief, that the conditions existing as hereinbefore set forth has created an emergency of such nature that justifies and validates legislation for the extension of the time of redemption from mortgage foreclosure and execution sales and other relief of a like character; and
Whereas, The State of Minnesota possesses the right under its police power to declare a state of emergency to exist, and
Whereas, the inherent and fundamental purposes of our government is to safeguard the public and promote the general welfare of the people; and
Whereas, Under existing conditions the foreclosure of many real estate mortgages by advertisement would prevent fair, open and competitive bidding . . . and
Whereas, it is believed, and the Legislature of Minnesota hereby declares its belief, that the conditions existing as hereinbefore set forth have created an emergency of such a nature that justifies and validates changes in legislation providing for the temporary manner, method, terms and conditions upon which mortgage foreclosure sales may be had or postponed and jurisdiction to administer equitable relief in connection therewith may be conferred upon the District Court, and
* * *
Section 1. Emergency Declared to Exist.-In view of the situation . . . the Legislature of the State of Minnesota hereby declares that a public economic emergency does exist in the State of Minnesota.
Sound familiar? Just substitute for the Minnesota legislature the Congress (and President) of the United States, and these words could have been written today.
In order to implement the state’s newly declared mortgagor/debtor-relief policy, the Minnesota Mortgage Moratorium Law mandated that foreclosure sales could be postponed, and the redemption period extended until May 1, 1935—two years after the Blaisdells could have redeemed under the law that existed when they made their contract with the lender.
Taking advantage of the Moratorium Act, the Blaisdells asked a Minnesota court to enter an order extending their redemption period.
The court—apparently recognizing that Article I, Section 10, of the federal Constitution expressly prohibits a state from enacting any law “impairing the obligation of contracts,” and realizing that the Moratorium Act did just that—refused to grant the extension.
So the Blaisdells appealed.
The Minnesota Supreme Court reversed the lower court and granted the two year extension (conditioned on the Blaisdells paying $40.00 “rent” each month).
Consider what had happened. The Blaisdells had put up their real estate as security for a loan from Home Building & Loan Association. The loan had been defaulted. The lender had to repurchase the property, and then wait almost a year while the statutory redemption period ran out before it could have clear title. Near the end of that period, the Minnesota Legislature rewrote the mortgage contract, the net result being that the lender would have to wait a minimum of another two years before obtaining the property—all the while receiving “rent” instead of the contractually-agreed mortgage payments.
We know why the legislature enacted the Moratorium Act.
What was the Supreme Court of Minnesota’s rationale for upholding it? According to the Supreme Court of the United States, which we will get to in a moment, it was upheld because the act was
. . . an emergency measure. Although conceding that the obligations of the mortgage contract were impaired [despite the prohibition of Article 1, Section 10], the [Minnesota Supreme Court] decided that what it thus described as an impairment was, notwithstanding the contract clause of the federal Constitution, within the police power of the state as that power was called into execution by the public economic emergency which the Legislature had found to exist.”
Actually, the Supreme Court of Minnesota had been even more explicit, and arrogant, about what had motivated its decision:
In addition to the weight to be given the determination of the Legislature that an economic emergency exists which demands relief, the court must take notice of other considerations. The members of the Legislature come from every community of the state and from all the walks of life. They are familiar with conditions generally in every calling, occupation, profession, and business in the state. Not only they, but the courts must be guided by what is common knowledge. It is common knowledge that in the last few years land values have shrunk enormously. Loans made a few years ago upon the basis of the then going values cannot possibly be replaced on the basis of present values.
Justice Olsen of the Minnesota Supreme Court, in a concurring opinion, added the following:
The present nation wide and world wide business and financial crisis has the same results as if it were caused by flood, earthquake, or disturbance in nature. It has deprived millions of persons in this nation of their employment and means of earning a living for themselves and their families; it has destroyed the value of and the income from all property on which thousands of people depended for a living; it actually has resulted in the loss of their homes by a number of our people, and threatens to result in the loss of their homes by many other people in this state; it has resulted in such widespread want and suffering among our people that private, state and municipal agencies are unable to adequately relieve the want and suffering, and Congress has found it necessary to step in and attempt to remedy the situation by federal aid. Millions of the people’s money were and are yet tied up in closed banks and in business enterprises.
In other words, by “common knowledge” things were rough for mortgagors—just as they are today for some, especially those who tried to game the system by purchasing homes without adequate means to pay for them in the expectation that the bubble would everlastingly get bigger and bigger and never burst.
But times were tough for Home Building & Loan Association (and other lenders) too, so it took the case to the Supreme Court of the United States to protect itself and its depositors.
There, Chief Justice Charles Evans Hughes authored the Court’s majority opinion upholding the constitutionality of the Minnesota Mortgage Moratorium Law.
A signification portion of his opinion consists of a survey of some of the Court’s previous cases, on the basis of which Hughes enunciated a startlingly candid conclusion:
It is manifest from this review of our decisions that there has been a growing appreciation of public needs and of the necessity of finding ground for a rational compromise between individual rights and public welfare. The settlement and consequent contraction of the public domain, the pressure of a constantly increasing density of population, the interrelation of the activities of our people and the complexity of our economic interests, have inevitably led to an increased use of the organization of society in order to protect the very bases of individual opportunity. Where, in earlier days, it was thought that only the concerns of individuals or of classes were involved, and that those of the state itself were touched only remotely, it has later been found that the fundamental interests of the state are directly affected; and that the question is no longer merely that of one party to a contract as against another, but of the use of reasonable means to safeguard the economic structure upon which the good of all depends.
What Chief Justice Hughes was saying couldn’t be clearer. Postulating an ever-increasingly complicated social environment in which “the good of all” was the standard of value, Hughes held that “public needs,” “public welfare” and “fundamental interests of the state” trumped, and had to be protected from, something perniciously antithetical: “individual rights.” Necessary, according to Hughes and the Court’s majority, was a “rational compromise between individual rights and public welfare.”
Since the nature of a compromise is “a settlement in which each side gives up some demands or makes concessions,” the concept can have no application to individual rights, which are either absolute or nonexistent.
Indeed the majority’s idea of a compromise—between the sanctity of contracts supposedly guaranteed against government impairment by the Constitution, and the “public welfare” that allegedly required a two-year mortgage moratorium—was to allow Minnesota to rewrite the central provision of the Blaisdells’s contract with their lender (repayment of the loan).
So much for compromise—and contracts, and individual rights.
Shelley v. Kraemer[i]
Private Property, Liberty Of Contract, And Racially Restrictive Covenants
In 1963, the United States Supreme Court decided a group of civil rights cases, causing some newspapers to headline that desegregation “sit-ins” had been legalized.
The Court’s ruling came as a shock to those who naively believed that Americans still retained the private right to discriminate racially regarding the use of their own property. But there should have been no surprise about the sit-in decisions. They added nothing new. That right had been destroyed by the United States Supreme Court fifteen years earlier, in 1948.
The principle of equality under the law is expressed in the Fourteenth Amendment to the Constitution : “No State shall . . . deny to any person . . . the equal protection of the laws.” (My emphasis.)
The Constitution’s Equal Protection Clause was designed to prevent (1) the enactment of government legislation that discriminated between persons in similar circumstances, and (2) the discriminatory application by government of otherwise neutral legislation. In other words, each individual was to be equal before the law both as it was written, and as it was applied.
For example, held unconstitutional as violations of the Equal Protection Clause have been the denial of equal access to the courts, inequality of treatment in the courts, systematic exclusion of Negroes from jury lists, suppression of a prisoner’s appeal papers, “separate but equal” public school systems, sterilization of persons convicted of larceny but not those convicted of embezzlement, withholding permission from two hundred Chinese to operate laundries while granting it to eighty non-Chinese.
Unfortunately, however, the Equal Protection Clause has been used by the Supreme Court not only to do justice, but to perpetrate injustice.
One example is the seminal 1948 case of Shelly v. Kraemer, which involved a racially restrictive covenant.
A “covenant” is simply a contractual agreement between two or more individuals or entities to do, or refrain from doing, a given thing. A racially restrictive covenant was a property deed provision prohibiting all subsequent owners from selling to specified classes of persons, or a contract between adjoining property owners agreeing not to sell to members of an excluded class. The prohibitions generally extended to Negroes, Chinese, Indians, Mexicans and Jews.
The purpose of racially restrictive covenants was to regulate the racial, ethnic, or religious composition of a neighborhood by excluding those whom the covenantors regarded as undesirable.
That some Americans discriminated in this manner was morally reprehensible, but if the principles of private property and liberty of contract meant anything the covenantors should have had a constitutional right to withhold their property from anyone they wanted, for whatever reason or no reason at all.
The Shelley case involved some thirty landowners in a St. Louis, Missouri, neighborhood who in 1911 voluntarily entered into a restrictive covenant with each other concerning their own property. They mutually and voluntarily agreed that for fifty years their property could be owned and occupied only by Caucasians.
The covenant was duly recorded, just like a deed, so it would “run with the land,” providing record notice to, and being effective against, future purchasers of any of the property. They would buy subject to, and be bound by, the covenant their predecessors-in-interest had consented to.
Putting aside the unacceptable racist motive for the covenant, it was simply a real estate transaction not unlike, for example, an easement given by one property owner to another providing access to a beach.
Thirty-five years later, Negroes were sold one of the properties, in prima facie violation of the covenant. A court battle followed, in which non-selling covenantors sought an injunction to prevent the Negro purchasers from taking possession of the property and to divest them of title.
Historically, it had not been long after the adoption of the Fourteenth Amendment in 1868 that legal questions arose for the first time about the constitutionality of private racially restrictive covenants, like the one in Shelley v. Kraemer. The constitutional question in the post-Fourteenth Amendment 1800swas whether they violated the newly-enacted Fourteenth Amendment’s Equal Protection Clause.
A plain reading of that clause, with its clear prohibition of state denial of equal protection, made such an interpretation absurd. Indeed, in 1884 the Civil Rights Cases would rule that the entire Fourteenth Amendment (including the Due Process and Equal Protection Clauses, and more) proscribed only state action. As intended and written, the Fourteenth Amendment had no application to the conduct of private citizens.
The first reported case dealing specifically with racially restrictive covenants came before a lower federal court in 1892. The ruling was that judicial enforcement of a private racially restrictive covenant would constitute denial by the state of equal protection of the laws. However, the case never reached the Supreme Court for a definitive constitutional ruling (the losing party never appealed), nor was that lower court decision followed by any other court. The lower federal court decision was totally ignored by other courts because it was inconsistent with established interpretations of the Equal Protection Clause. Worse, the lower court decision stood for the untenable proposition that the courts must abdicate their duty to enforce valid contracts pertaining to private property.
For that reason, state court enforcement of restrictive covenants was upheld constitutionally by every court that considered them in the eighty years between approval of the Fourteenth Amendment in 1868 and the Supreme Court’s Shelly v. Kraemer decision in 1948.
During those years, courts concentrated on the proper application of the Equal Protection Clause, confining it to instances where the state, acting through a legislative, executive or judicial agent, officially perpetrated a discriminatory act.
One example is the 1917 case of Buchanan v. Warley. There, the Supreme Court struck down a city ordinance that reglated the character of neighborhoods on the basis of race. This was an appropriate application of the Equal Protection Clause, because the “state action” resulting in racial discrimination emanated from the city council itself in the exercise of its legislative function.
Some thirty years later, the Supreme Court finally agreed in Shelley v. Kraemer to examine the constitutionality of a racially restrictive covenant against a challenge based on the Equal Protection Clause of the Fourteenth Amendment.
The Supreme Court of Missouri had enforced the restrictive covenant, finding no violation of equal protection because the discrimination had been by private individuals, not the state.
In the Supreme Court of the United States, the argument was that while the racially restrictive covenant might be legal and even constitutional by themselves, judicial enforcement of the covenants was unconstitutional.
Before turning to the Shelly decision itself, it’s important to note who lined up on each side for the ensuing battle. Thurgood Marshall of the NAACP appeared for petitioner McGhee. By special leave of the Court, both the Solicitor General and the Attorney General of the United States appeared as “Friends of the Court” and filed a joint brief in support of the Negro purchasers. Other “Friend of the Court” briefs were filed in support of them by the Grand Lodge of Elks; Protestant Council of New York City; Non-Sectarian Anti-Nazi League to Champion Human Rights, Inc.; General Council of Congregational Christian Churches; National Lawyers Guild; A.F.L.; C.I.O. ; American Veterans Committee; American Jewish Congress; American Jewish Committee; American Indians Citizens League of California, Inc.; American Civil Liberties Union; National Bar Association; American Unitarian Association; and even the American Association for the United Nations.
Against this array of legal and organizational talent, the property seller’s side was supported by only three “Friend of the Court” briefs: National Association of Real Estate Boards, the Arlington Heights Property Owners Association, and the Mount Royal Protective Association, Inc.
Why did self-appointed guardians of civil liberties—e.g., NAACP, National Lawyers Guild, ACLU, National Bar Association—support those who sought to achieve “equality” at the expense of someone else’s supposedly unalienable right to judicial protection of property and contract rights?
Why did none of the purchasers “friends” realize that pitted against an actual property/contract right was a mere desire—the latter deserving of understandable sympathy, but a goal to be achieved through education or economic boycott rather than by the violation of legitimate rights and corruption of the patently clear meaning of the Equal Protection Clause?
One reason why so few paid any attention to the civil liberties of the covenantors was doubtless rooted in the belief that the coercive power of the state should be used in support of those perceived as weak. Indeed, the Supreme Court briefs and oral argument of the Negro purchaser laid great stress on such emotional concerns as “destruction of human and economic values” and the housing plight of Negroes in large cities. A related explanation is that the NAACP and their allies simply refused to accept the difference between private rights and constitutional restraints on government.
Only six Justices (Vinson, Frankfurter, Murphy, Burton, Black and Douglas) participated in the decision. Chief Justice Vinson delivered the unanimous opinion of the Court.
