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The irony of liberty of contract: normalizing federal intervention

“Liberty of contract” had originally been envisioned as a means of protecting individual rights from government interference, but decisions implementing it ended up justifying federal government intervention.

By Kristopher A. Nelson in

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Socialists in Union Square May 1912In 1905, the Supreme Court held that the Fourteenth Amendment — originally intended to overturn decisions like Dred Scott and to restrict so-called “Black Codes” — “the general right to make a contract in relation to his business is part of the liberty of the individual protected by the … Federal Constitution.” In other words, the right to buy and sell labor through contract was a “liberty of the individual,” and was thus constitutionally protected from state interference.

“Liberty of contract” had originally been envisioned as a means of protecting individual rights from government interference, but decisions implementing it ended up justifying federal government intervention — initially by the federal judiciary — in what had formerly been matters left to state governments.

Liberty of contract was successfully overturned during the Depression, in West Coast Hotel v. Parrish, 300 U.S. 379 (1937), which finally allowed for a general minimum wage in Washington State — and thus overturned the maximalist version of freedom of contract as represented by decisions like Allgeyer and Lochner. Even though this decision permitted action by the State of Washington, similar logic would be used by courts to approve Roosevelt’s federal New Deal programs. Thus, the Court upheld the National Labor Relations Act (N.L.R.B. v. Jones & Laughlin Steel Co. [1937]) and the Social Security Act (Helvering v. Davis [1937]).

In other words, liberty of contract established a precedent of government intervention at the national level, a precedent that survived the demise of the liberty-of-contract rule in the late 1930s. Ironically, then, in the twentieth century federal interventions based on liberty of contract helped normalize and spread federal; power; instead of protecting individual liberty, liberty-as-contract came to enable government intervention.

Whether this federal intervention to establish and protect liberty helps America maintain the tradition of classical liberalism or undermines it is still subject to intense, and acrimonious, political debate, and in many ways separates modern American conservatives from modern American liberals. It also illustrates some of the challenges of our federal system.