Legal Tender Acts In 1862 and 1863, Congress passed three Legal Tender Acts, each authorizing the issuance of paper currency to serve as legal tender for the payment of debts. Creditors challenged the measures, seeking the enforcement of preexisting agreements to pay debts in gold and silver. In Hepburn v. Griswold (1869), the Supreme Court invalidated the Legal Tender Acts by a 5–3 vote on the ground that they denied creditors of property without due process of law in violation of the Fifth Amendment. But with over $400 million of paper legal tender in circulation, the Court came under pressure to overturn the Hepburn ruling. President Grant’s new appointments to the Court set the stage for a reversal. In Knox v. Lee and Parker v. Davis (1871), the Court upheld the constitutionality of the acts by a 5–4 vote as a valid exercise of congressional power during the war emergency. The case did not uphold the power of Congress to issue paper money under any circumstances; that would come thirteen years later in Juilliard v. Greenman (1884) when the Court held that Congress has the power to do so in peacetime as well as wartime.

Towards Substantive Due Process State regulation of railway and warehouse charges raised due process issues under the Fourteenth Amendment. An Illinois regulation of grain elevators was challenged in Munn v. Illinois (1877) on the ground that it deprived the owners of property without due process of law. Chief Justice Waite upheld the law on the ground that property affected with a public interest is subject to public regulation. By making the power to regulate contingent on the existence of a public interest, the Court imposed a substantive limitation on the regulatory power of the states. It would be up to the courts to decide whether a public interest existed, while it would be up to the legislative branch to determine the reasonableness of the regulations.

Triumph of Substantive Due Process Leaving the reasonableness of public regulations to the discretion of elected legislatures subject to the pressures of majoritarian politics increasingly fell into disfavor in the courts and among conservative members of the legal profession. The publication of Thomas M. Cooley’s influential Treatise on Constitutional Limitations went far to promote the view that the reasonableness issue was properly a subject for judicial review based on substantive standards of fairness with respect to due process of law. The first significant step toward judicial acceptance of substantive due process came in Stone v. Farmers’ Loan and Trust Company (1886), where the Court upheld a Mississippi statute under the public interest doctrine on the ground that the law was a reasonable regulation of private property. In St. Paul Railway Company v. Minnesota (1890) and Reagan v. Farmers’ Loan and Trust Company (1894), the Court went even further, ruling that reasonableness was ultimately a judicial question, making the Court an essential part of the regulatory process.

The “Fair Return” Doctrine The Court invalidated a rate schedule as unreasonable for the first time in Smyth v. Ames (1898) on the ground that the mandated rate did not provide owners with a fair return on the fair value of their property. The notion of “fair return” was essentially a policy matter that transferred to the courts determinations previously made by the legislative branch of government.

The Origins of Federal Regulation Following the decision of the Court in Wabash v. Illinois (1886) that the interstate operations of railroads were not subject to state regulation, Congress in 1887 brought them under federal regulation by passing the Interstate Commerce Act. The act established the first federal regulatory agency: the Interstate Commerce Commission (ICC). The ICC had authority to hear complaints and disallow rates that it found unreasonable. The Court was hostile to the ICC from its inception, narrowly construing its authority and subjecting its findings to judicial review. By the end of the century the ICC had been reduced to little more than a fact-finding agency.

Regulating Monopolies Both Democrats and Republicans agreed on the need to address the problem of monopolies that controlled key industries in the United States. In 1890, Congress passed the Sherman Antitrust Act, which outlawed combinations and conspiracies in restraint of interstate or foreign commerce. The Court virtually nullified the act in United States v. E.C. Knight Company (1895) by holding that it applied only to commerce and not to manufacture, thereby leaving the latter free of federal regulation.

Organized Labor and the Courts Companies threatened by labor strikes found a powerful weapon in the strike injunction. Where it appeared that irreparable harm would result from a strike, employers could obtain a temporary injunction against it without notice or hearing. The constitutionality of such injunctions was challenged by In re Debs (1895), a case arising from the Pullman strike of 1894. The injunction had been obtained by the Cleveland administration on the ground that the strike disrupted interstate commerce. The Supreme Court upheld the injunction, dealing organized labor a significant setback.

Proposals for a Federal Income Tax In the late nineteenth century, proposals for an income tax became part of reformers’ campaign for social change. Excise taxes and tariffs were borne disproportionately by the poor while enormous incomes went untaxed. But many conservatives argued that such a tax would be the opening wedge of an attack on property rights and a redistribution of wealth that would ultimately lead to socialism. In Springer v. United States (1881), the Supreme Court upheld the constitutionality of an income tax enacted by Congress during the Civil War. Reassured by that precedent, Congress passed a 2% income tax on all income over $4,000 a year. The tax was immediately challenged in Pollock v. Farmers’ Loan and Trust Company (1895). The Court not only ignored Springer but distorted the traditional understanding of the Article I constraints on direct taxes to invalidate the entire law.

Substantive Due Process and the Bill of Rights The triumph of substantive due process with respect to the Court’s regulatory jurisprudence facilitated the incorporation of federal Bill of Rights guarantees into the Due Process Clause of the Fourteenth Amendment. A federal guarantee identified as an essential part of due process would therefore apply against the states as well as against the federal government. The process began in Chicago, Burlington & Quincy Railroad Company v. Chicago (1897) when, for the first time, the Court held that the states are bound under the Fourteenth Amendment by the just compensation guarantee of the Fifth Amendment. The process would be slow and uneven but eventually most of the federal guarantees would extend to the states through the Fourteenth Amendment.

Freedom of Contract The reasonableness standard for public regulation had a tortured history in the hands of the Court. In Holden v. Hardy (1898), the Court held labor regulations applicable to mines, smelters, and ore refineries reasonable and constitutional, but in Lochner v. New York (1905) the Court struck down similar regulations for workers in commercial bakeries as unreasonable and therefore unconstitutional. The judicial vagaries of the reasonableness standard prompted lawyers to change the way they argued cases. Their briefs now included not only legal arguments and case precedents, but masses of medical, social, and statistical data on the reasonableness of the regulation at issue. Such arguments were effective in upholding regulatory legislation in Muller v. Bunting (1908) and Bunting v. Oregon (1917) as reasonable exercises of state police powers.