Forgotten Man, The

by Amity Shlaes

  As it turned out, the Court did not overturn the administration’s gold policy. After all, Congress had the power to regulate the currency, and it, in turn, had given Roosevelt the authority to manage the money. Roosevelt was satisfied, writing to Joe Kennedy, “With you I think Monday, February eighteenth was a historic day. As a lawyer, it seems to me that the Supreme Court has at last definitely put human values ahead of the ‘pound of flesh’ called for by a contract.” But Justice James McReynolds delivered a soliloquy: the New Deal’s “flippant approach to currency manipulation” was dangerous. Congress had no power to destroy the gold-clause commitment. Roosevelt was like a tyrant. “This is Nero at his worst. As for the Constitution, it does not seem too much to say that it is gone.” The meaning of the news was something the country found hard to grasp. Clearly it affected all private contracts. The Christian Science Monitor noted that it cut the value of “$75,000,000,000” in contracts—nine consecutive zeros being, at that time, something Americans were not accustomed to seeing. Railroad bonds were hurt, but so were Liberty Bonds, which seemed, to McReynolds, especially bitter. Utility bond holders’ losses were also now assured. The Dow moved up to 107—it had been 105 the day before—in the hours after the news, but the movement this time was more one of relief that a decision had been made than cheer at the news. The next day the index settled down and hung around 100 for the better part of a month. The gold issue, at heart, was one that was applicable to all contracts and property. Clearly McReynolds would react the same way if it came to the Schechters—to their right of contract with employees, to the right of the consumer to pick his chicken, to the general intrusiveness of the NRA.

  The cases against Mellon—there were three now—were also not progressing quite the way the government had hoped. Robert Jackson, the general counsel for the Bureau of Internal Revenue, spent the spring before the Board of Tax Appeals seeking to prove that Mellon wrongly claimed deductions for losses on his 1931 returns, committing tax fraud.

  The preceding year, Mellon had fought back with a letter. Now the seventy-nine-year-old fought back from the witness stand, and, like Insull, made his impression. He repeated the points that were now becoming familiar in such defenses: It was wrong to assail a man for doing what was legal. When it came to his own case, Mellon had not claimed too many deductions, he had claimed too few.

  Mellon’s son and daughter had grown up watching their parents experience legal trouble from time to time—legal trouble was something that affected all wealthy families. Still, Mellon’s son Paul was shocked at the persistence and aggressiveness of Morgenthau and Jackson. The week that Paul Mellon planned to marry and head off for a honeymoon in Egypt, he received a subpoena requiring that he appear in court. Rather than allow the prosecution to interrupt his honeymoon, Paul climbed out a window of the Mellon Bank that led to an inner courtyard, climbed in another window, and escaped in an unobserved elevator. The younger Mellon and his bride made away safely without being disturbed by Treasury lawyers again.

  In late March, Mellon turned eighty, and he took the opportunity to speak out. The Dow stood about where it had in the fall of 1921. When reporters approached him for birthday thoughts on the state of the world, he did not argue his own case but rather chose to make a philosophical point that was both devastating and optimistic. Mellon commented that “present conditions, however distressing, especially in terms of human suffering, reflect on a passing phase in our history.” In the context of American progress, Mellon said, the Depression was a “bad quarter of an hour.” The summary shocked not so much because it seemed so wrong, though it did—it was the equivalent of predicting a stock’s rise at its lowest point, going long at the bottom of a seemingly bottomless market. But the larger audacity in the statement was that it dared to question the premise of the New Deal—that crisis was somehow permanent.

  In April, Jackson persisted, attacking a trust that Mellon had created for his paintings. The charity did not meet the conditions it claimed to meet and therefore represented illegal tax evasion; Mellon’s charity was a “mask” for selfishness. Mellon’s art was becoming a theme in the prosecutions, evidence of wealth and greed. His attorney, Frank Hogan, was mocked as a criminal lawyer representing one more criminal. At the annual banquet of the Washington press, the Gridiron dinner, on April 13, one of the skits mocked Mellon and Hogan. The Hogan character, played by a journalist, announced the opening of the Andrew W. Mellon National Gallery—and displayed an art collection that included an image of the district jail, with the title Right up Hogan’s Alley.

  On April 29, Jackson suffered an embarrassment when the Board of Appeals rejected a 4,500-word document he had submitted asking for access to certain Mellon letters. The board judges called his memorandum “false, ill-tempered and not useful.” Jackson, insulted, moved to withdraw himself from the case—and win time for the government lawyers to regroup in Washington. As for the matter of tax rates themselves, some in Washington and on Wall Street believed that they could not go higher. The U.S. tax schedule had high thresholds—the top rate began to be applied at an income of $5 million. But federal rates were high and there were state taxes. Benjamin Anderson of Chase noted that the total rate for the wealthy New Yorker, 69.9 percent, was the highest in the world. Why would capital want to come to the United States when it could invest elsewhere? In order to come back, Anderson would argue that summer, America had to remember the importance of being relatively competitive in tax terms. Death duties on large estates were especially important, and here the United States was losing out to Britain.

  Lilienthal for his part was feeling more confident. Early that year he had had a chance to show up Willkie in public when James Warburg’s New York Economic Club hosted them both at the Hotel Astor. Warburg presided, and the guest of honor was James Bryant Conant, Harvard’s president. Lilienthal called the holding company structure a “financial tapeworm. The patient always seems hungry and the more he eats the thinner he seems to get. The patient thinks he ought to have more food.” Lilienthal’s conclusion: “The doctor may decide that what the patient needs most of all is to get rid of the tapeworm.”

  Later that spring, testifying before Congress, Willkie would come up with a successful counterargument. He read aloud from a letter that FDR had written in the 1920s around the time of his purchase of his center at Warm Springs. Roosevelt wanted to link Warm Springs to a high-tension power line nearby, and complained that Warm Springs suffered from the “high cost and inefficient service of small local power plants.” Holding companies were the remedy to that, yet now, for some reason, Roosevelt’s team was vilifying them.

  That spring, Willkie and other power executives pointed out three angles from which the Roosevelt administration was attacking them. The first was now old history: the government was spending public capital to enable the TVA to outcompete the private companies. It was also, through Ickes, wooing towns by subsidizing construction of their own power plants on the understanding that they would then purchase directly from TVA. The second was now old history too—the prosecution of figures like Insull. Though Insull had won his case, his business was annihilated. From time to time the grand old man made statements about a new chapter in his life, but there was little reality to the boast.

  But it was now a third angle of attack that was the greatest threat. Frankfurter had assigned Corcoran and Cohen to the New Dealers. Corcoran had joined the White House staff in March. There had long been public utilities legislation in the works, but the pair were now drafting an aggressive version, and Roosevelt’s strengthened majority in Congress meant that it might become law. This version planned to kill off all but a few holding companies by 1940. The act’s official name was the Public Utilities Holding Company Act. Willkie called it the “death sentence act.” The government’s argument that only it or the TVA could provide modern-scale power had been wrong. “Think it over, Uncle Sam,” a desperate advertisement by United Gas Improvement Co., the oldest holding company, read.


  On Commonwealth and Southern letterhead, Willkie penned a letter to all 200,000 shareholders of Commonwealth and Southern, pointing out that the PUHCA endangered their holdings mortally. Much of the destruction, he noted, had already happened. The value of utilities securities had dropped $3.5 billion since Roosevelt gave his inaugural address. Utility holding companies were near death, and PUHCA would finish off the job.

  Another power executive, F. S. Burroughs, vice president of the Associated Gas and Electric Company, told Congress in April that his firm’s securities had lost more than $500 million in market value due to earnings lost “from acts of governmental agencies during the past six years.” That was a figure that matched the scale of destruction by Insull’s empire that the anti-Insull crowd always cited. The new Liberty League added its voice on the TVA, stating: “Never have the dreams of bureaucrats flowered so perfectly as in the Tennessee Valley.”

  The most important suit for Lilienthal and Willkie was Ashwander, brought by shareowners in Alabama Power, a subsidiary of Commonwealth and Southern. The shareholders argued that Commonwealth and Southern had no right to contract with the TVA. In February, a federal district judge found that the plaintiffs were right. “Because there are generators at Wilson Dam that doesn’t give the TVA or the U.S. government the right to sell as a private agency in Alabama,” Judge W. I. Grubb—the same justice who had found for Belcher—ruled in Birmingham. Judge Grubb now told the towns that taking government loans in exchange for giving its business to the TVA—Ickes’s program—was illegal. Across the country various lower courts were blocking David Lilienthal’s projects on similar grounds. Willkie was not visibly pushing Ashwander—indeed, he was actually, as party to the contract, still on the defendants’ side. But news of Ashwander was heartening, for it might mean that the Supreme Court might find the TVA unconstitutional.

  At the Justice Department, the lawyers who originally wanted to use Belcher to test the NRA were now casting about for a new case. Seeing the Schechters defeated twice, they decided this would be the case they would ask the Supreme Court to hear. Felix Frankfurter, who had opposed Belcher as a test case, also argued against taking on Schechter. As a student and friend of Louis Brandeis, he knew that the author of The Curse of Bigness would not be sympathetic to so big a project as the NRA. FF SUGGESTS MOST IMPOLITIC AND DANGEROUS, Tommy Corcoran telegrammed to President Roosevelt of Schechter after speaking with Frankfurter. Frankfurter further suggested that Roosevelt “hold whole situation on NRA appeals in abeyance.”

  But events did not go Frankfurter’s way. Many of the other New Dealers, especially Donald Richberg, believed that with Schechter, unlike Belcher, they stood a good chance of ramming the case through and vindicating the New Deal. After all, the Schechters had lost in the lower court. And while the New Deal might not have the support of all the country, or many of its judges, it still had powerful allies. It also appealed to nationwide prejudices.

  Evidence of this showed up in the work of Washington’s leading columnist team, Drew Pearson and Robert Allen, who tended also to emphasize Rice’s unarticulated theme—that ghetto traders could not be in the right. The pro-Roosevelt columnists would later title their lengthy account of the Schechter case, “Joseph and His Brethren.” Playing the Jewish aspect for all it was worth, they would write of the Schechters that “where the kosher butchers of the city work in filth, blood and chicken feathers, they operated jointly a prosperous pair of smelly chicken companies.”

  THE ORAL ARGUMENTS OF Schechter Poultry Corp. v. United States, docket number 854, began at 3:47 p.m. on May 2, 1935, in the old Supreme Court at the Capitol. Donald Richberg, the NRA’s lawyer, presented the argument that this, like other NRA cases, was a case about the national emergency of the Depression and therefore required a special kind of law. The NRA, he said, was part of a “national problem, which cannot be considered wholly dissociated from the condition which brought about the act.” The government had been asked to “protect against the evils of this unparalleled depression.” If it didn’t, and defended liberty in the abstract, it was merely protecting “the liberty to starve.” The case as Richberg and the new solicitor general, Stanley Reed, presented it was about grander things: the desolation of the Depression generally, the authority of government to reach down and determine little outcomes. Their deductive argument had the advantage of conveying the urgency of crisis, but it also risked appearing grandiose or vague. Brandeis asked a sharp question in regard to the Commerce Clause matter: “From where do the slaughterers buy their chickens?”

  Later came Joseph Heller’s turn. And he argued inductively, from the bottom up. The Schechters’ business, he began by pointing out, was indeed not really interstate commerce, for the Schechters purchased almost all their chickens in the New York area, from “commission men” who in turn purchased them as they were shipped in. In the language of the Commerce Clause debate, the chickens “came to rest” in New York; they were no longer part of the greater chain of interstate commerce, at least not at the stage in which the Schechter brothers were actors.

  Then Heller moved on to the issue that had generated ten of the seventeen sustained counts in the indictments against the Schechters’: “straight killing.” Here he argued not the legality of the code but its practicality, making an effort to translate the Jewish poultry market into the general American culture. “And let us say that John Jones”—not Sam Tanowitz—“for example comes in and says, ‘I would like to buy three chickens weighing five pounds apiece.’ Under this straight killing provision of the Code, we could not sell them to him in that way.”

  Heller also emphasized what he and the Schechters had come to recognize as an important part of the case, the insult that the code delivered to small business: “My client has never assented to this code, and he was put out of business by this code.” Heller, finally, pointed out the cost that the code exacted from the consumer: his essential right to choose what he was buying. “He would be prohibited from making that selection. We would have to pick out the first three chickens that came to our hands.”

  The Schechter lawyers expected sympathy from James Clark McReynolds, the judge who had declared the Constitution “gone” in the gold case. And they were not disappointed. McReynolds wanted to probe the meaning of straight killing, and he started with the chickens.

  “How many are there in a coop?” There were thirty to forty, according to the size of the coops. “Then when the commission man delivers them to the slaughterhouse, they are in coops?” They were in coops. “And if he undertakes to sell them, he must have straight killing?” He must have straight killing, yes. As Heller put it: “His customer is not permitted to select the ones he wants. He must put his hand in the coop when he buys from the slaughterhouse and take the first chicken that comes to hand. He has to take that.”

  At this point there was laughter in the court.

  Then Justice McReynolds asked: “Irrespective of the quality of the chicken?”

  Irrespective of the quality of the chicken, Heller replied.

  Later on, Justice Sutherland asked, “Well suppose however that all the chickens have gone over to one end of the coop?” (More laughter.)

  Late in the game a big Wall Street law firm, Cravath, DeGersdorff, Swaine and Wood had joined Heller as the Schechters’ counsel. Now Frederick Wood tried to point out the gravity of the widening of the government’s powers. He argued that it might be all right to go the way of Mussolini or Hitler, but a constitutional amendment was necessary for that, not merely an act of Congress.

  BUT IT WAS THE MERRIMENT in the courtroom over Heller and his chicken crates, and not the Mussolini analogy, that seemed to matter. The laughter showed that the NRA was a shaky house and, as Heller then put it, “The whole Code must fall.”

  Throughout May the criticism of New Deal agencies grew. In the middle of the month another Liberty League leader went on to assail the New Deal, saying that the country was now wrongly “mesmerized by alphabetical white
rabbits.”

  Sensing potential for a show, crowds packed the old Capitol courtroom May 27, the day the opinion was to be delivered. Two other cases were announced before Schechter. The first was a unanimous opinion finding that Roosevelt had acted wrongly when removing William Humphrey, the FTC commissioner. Next, the Court overruled the Frazier-Lemke Act. This was a blow for property rights—the act had limited the ability of banks to repossess property. The Court ruled that this violated the takings clause of the Constitution. Contracts between private individuals were important after all, the majority opinion said. Even a contract between a starving farmer and a nasty bank had to be honored, and the government did not have the power to intervene.

  It was Justice Hughes who read the Schechter finding. It too was unanimous. “Defendants do not sell poultry in interstate commerce,” he said early on, thereby rejecting the authority of the NRA. “Extraordinary conditions may call for extraordinary remedies. But the argument necessarily stops short of an attempt to justify action which lies outside the sphere of constitutional authority. Extraordinary conditions do not create or enlarge constitutional power.” The NRA had abused the Schechters, and other businesses, through unconstitutional “coercive exercise of the law-making power.”

  In a separate opinion, Justice Cardozo used language more biting to speak about the doctrine of delegation, the Constitution’s limitation of Congress’s power to let regulators write law. “Here, in the case before us, is an attempted delegation not confined to any single act nor to any class or group of acts identified or described by reference to a standard. Here, in effect is a roving commission to inquire into evils and upon discovery correct them.” This, he summed up that day, was “delegation running riot.” Cardozo concluded that the wage and hours provisions of the codes were not legal if the industries they regulated were local in character; the codes must be thrown out. In a final—and perhaps unconscious—reference to the work of the Schechters, Justice Cardozo concluded with a butcher-block metaphor: “Wages and the hours of labor are essential features of the plan, its very bone and sinew. There is no opportunity in such circumstances for the severance of the infected parts in the hope of saving the remainder. A code collapses utterly with bone and sinew gone.” The Supreme Court justices were sending a message to business. McReynolds believed that an unmistakable signal such as Schechter would hearten investors and employers.