Roscoe C. Filburn was a lawbreaker.
His offense? He grew wheat on his own land, tended it by his own hand, and consumed it for his own satisfaction, rather than purchasing it from another, in violation of the Agricultural Adjustment Act of 1938 [PDF], as amended.
Before Filburn’s death in 1987, he would play a pivotal role in what may be the most important court case in U.S. history: Wickard v. Filburn, 317 U.S. 111 (1942).
As described by the Supreme Court in Wickard, “The general scheme of the Agricultural Adjustment Act of 1938 as related to wheat is to control the volume moving in interstate and foreign commerce in order to avoid surpluses and shortages and the consequent abnormally low or high wheat prices and obstructions to commerce.”
The court noted, but not ruefully, that since it had already sustained the federal power to regulate production of goods for commerce in United States v. Darby, 312 U.S. 100 (1941), the question before it in Wickard “would merit little consideration…except for the fact that this Act extends federal regulation to production not intended in any part for commerce, but wholly for consumption on the farm.” It pleased the court, in plain language, to have the opportunity to decide the question whether the federal government may regulate purely private activity under the Commerce Clause (U.S. Constitution, Article I, section 8, clause 3), even though the activity did not constitute commerce.
Life sometimes gives us elemental evidence that we have gone astray. Imagine it is our fervent desire to have that sublime experience of seeing the sun set into the ocean. Placing either our ardor or sense of convenience ahead of due regard for first principles – in which direction must we travel in order to attain our goal, and why? – we head for the nearest beach, which happens to sit at the western edge of the mighty Atlantic. Soon enough, the error borne of our impulsive conduct is manifest. Though the ensuing sunrise may diminish our frustration, it cannot erase our mistake. As cognitive dissonance works its magic, we may convince ourselves that we prefer sunrises to sunsets anyway. But our original desire remains unfulfilled nonetheless.
As Bastiat instructed us in The Law [PDF]:
It is not true that the mission of the law is to regulate our consciences, our ideas, our will, our education, our sentiments, our works, our exchanges, our gifts, our enjoyments. Its mission is to prevent the rights of one from interfering with those of another, in any one of these things.
When acts as natural as harvesting and consuming our own food on our own property are adjudged illegal under the supreme law of the land, as a society we stand guilty of malign neglect of the most basic principles for peaceful, harmonious, beneficial society. The discovery of such perversion of the law should alarm and mortify us, and we should resolve to retrace our steps to the source of our error at the earliest, so that we may correct our ways. To continue such neglect indefinitely works only to our detriment.
Whether our present mode of government is one of delegated or assumed powers – whether, in other words, we empowered the government or it usurped its powers – by virtue of Supreme Court interpretations of the Commerce Clause in Wickard and other cases we now have, for all practical purposes, a government of unlimited powers. Nothing could be more dangerous.
The government argued in Wickard that if Filburn needed more wheat than it had permitted him to grow on his own property, he should have purchased this wheat from another farmer. By not purchasing this wheat on the market, Filburn withheld his quantum of demand, thereby affecting the price of wheat and the government’s ability to control its price. Further, the additional quantum of supply that remained on the market as a result of Filburn’s insistence on growing his own wheat affected virtually everything else on the market. The additional wheat required storage and transportation, thereby congesting grain elevators and railroads. This congestion in turn affected the ability to store and transport other goods and accordingly, the prices of these other goods.
This official line of reasoning in Wickard constituted “a huge and dangerous leap of logic, in a world where all sorts of things have some effect on all sorts of other things,” wrote economist Thomas Sowell. “Since virtually everything affects virtually everything else, however remotely, ‘interstate commerce’ can justify virtually any expansion of government power, by this kind of sophistry.”
The U.S. government presumes to know what should be the prices of various commodities within specific frames of time, and the precise levels of supply and demand – and the intersections of same – that will produce these prices. It presumes to know substantially all of the factors that may influence these prices and all of those that these prices may in turn influence, and to what extent. It then proceeds to dictate, under penalty of “law,” the actions that putatively free individuals may, shall, or must take in order to produce these prices and to bring about the conditions precedent or subsequent that the government desires.
This government presumes to know, too, what should be the rate of interest at every point and for every conceivable type of liability in the term structure, and whether the prices of various widely-held assets, including dwellings and ownership interests in business enterprises, are too low or too high. It forces us to accept monopoly money of its creation under “legal tender” laws and then counterfeits that money to create “wealth effects” – greater levels of consumer spending borne of the perception, but not the reality, of greater wealth. And it presumes to speak for every person as to what is “fair” in business dealings with others, even if the parties should aver otherwise, to know when the rate or magnitude of change in prices of any good transits from “orderly” to disorderly, and to require licenses for the exercise of natural rights.
Has any god in any religion in the history of mankind ever flattered itself to hold such omniscience and omnipotence, or held private action and property in such contempt? Even the gods in the Epic of Gilgamesh [PDF] showed more respect for individual prerogative.
Is it any wonder, then, that we careen from crisis to crisis, each followed by political carnivals contrived to obscure the truth? That thereafter, in due and predictable course, our government buries us under new laws, regulations, rules, and bureaucracies that solve nothing, remove us even further from the essential truths and principles that formed the very basis of our society, and establish the predicates for the next, even worse crisis?
But none of these developments is worse than that now manifest in this latest crisis: the destruction of the principle of equality under the law. We have institutionalized the practice that great risks may be taken for private gain, with the profits to be enjoyed by the few, the losses to be borne by the many. And we have federal prosecutors admitting that size matters in ways none of us heretofore imagined: if one sits atop a bank of sufficient “systemic importance,” otherwise criminal acts that would land executives of smaller banks in the dock may be forgiven.
Meanwhile, we argue endlessly and stupidly about what are or should be private matters, while ignoring the root causes of problems and first principles that should guide all of our actions: What caused the “flash crash?” Should we ban “high-frequency trading?” Should we allow “locked markets?” Should we have a “consolidated audit trail?” Should we force the swaps market to adopt a central-clearing model? Should we fall off the “fiscal cliff?” Should we have a “national market system?” Should banks engage in “proprietary trading?”
These debates evade or ignore how we arrived at this moment wherein private institutions are deemed too big to fail; of executives considered too important to prosecute; of revolving doors and regulatory capture; of massive, long-running frauds undetected by the very people who are supposed to prevent and detect them; and, worst of all, of the willingness of sentient adults alive today to incur trillions of dollars of debt they will never repay and that will someday fall on the shoulders of children not yet born, to parents who have yet to meet.
We arrived at this moment of dysfunctional markets and destructive law not by accident, or all of a sudden, but deliberately, in step-by-step fashion according to a clear design, over many decades. At every step along the way, our antagonists did of calculated necessity what we have for too long failed to do: they argued from first principles. They argued fallaciously, but too few of us rose up to object to their absurd contentions. And so they predicated their laws, their hearings, their legal briefs and rulings on axiomatic arguments of Fairness, and Equity, and National Public Interest, and Delegated Powers, and Economic Efficiency, and so on, ad nauseum. And when the federal legislators got it wrong, such as when they first attempted to regulate commodity exchanges, federal judges at the highest level stepped forward with relish and drew them maps for future legislation that would survive legal challenge from those their laws oppressed. But I will save Hill v. Wallace, 259 U.S. 44 (1922) for discussion at a later date.
Financial and monetary laws and regulations are the cornerstone of the whole wretched mess – they always have been. Were it not for such laws, particularly laws concerning the redemption of war bonds that I will explicate in a later essay, we would never have abandoned the first United States of America – that union established under the Articles of Confederation – for the second, established under the Constitution. As a people we have achieved great things despite, not because of, these laws. But we have diddled too long. We have neglected the machinery of healthy society for too long. We have exhausted ourselves in trivial debates, while eschewing the ones that matter.
If we are to have a good, peaceful, sustainable society – that is, a society that respects natural, individual rights to life, liberty, and property – then sooner or later, we must revert to first principles. We must take a break from ceaseless, mind-numbing, policy debates and hold philosophy debates in their stead. We must realize that the right question is not should we audit trading algorithms? – whoever we are – but whose business is it to decide, and why? Do we really want to have a society that rewards failure and excuses criminal conduct? Should malum prohibitum trump malum in se as the organizing principle for our laws? Did we really mean to have a society that made it illegal for Roscoe Wilburn to grow and use his own wheat as he saw fit?
In a sense, we must now go back and have the debates that the great mass of us skipped and still ignore. We could start any number of places, and in due course we will cover the true causes of Shays’s Rebellion, Alexander Hamilton’s perfidy, several of the Supreme Court’s follies in service of unlimited federal powers under the Commerce Clause, and the madness of Dodd-Frank [PDF]. But there is no better place to start than with the imposition of the Securities Exchange Act of 1934 [PDF], as amended (the “Exchange Act”). In this legislation and the rules and regulations promulgated thereafter, we have the template for creation of the modern, bureaucratic state under which we now live – the phony “hearings” destined for a pre-ordained outcome, the political puppet show, and the use of false premises to justify anti-competitive laws, all of which solve nothing but make matters worse.
Writing in the California Law Review less than six months after the Exchange Act’s passage, Columbia law professor John Hanna said approvingly, “The venerable and once esteemed policy of laissez faire has received many assaults in all countries since the War, but scarcely ever has it sustained more comprehensive and conclusive repudiation than by the security legislation of the present Administration.”
Indeed. So let us end our neglect of first principles, starting – in my case – with a discussion of the false premise on which the Exchange Act rests, the subject of my next essay.
TabbForum published this essay earlier today, with modest differences in editing and formatting, under the heading “The Root of Dysfunctional Markets, and Worse” (free registration required). This version contains different hyperlinks to source material.