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The Impact of the U.S. Constitution and Federal Law on Business

In American commerce, both the U.S. Constitution and the American legal system have had major influence upon American businesses. The constitutional provision which allows Congress to regulate interstate commerce has an especially great impact upon American business. Nowhere has that impact been felt more sharply than in the recent economic circumstances, where the economic bailout that the government has offered many industries has afforded it the right to dictate business policy and action, and  wherein the U.S. Government took the nearly unprecedented step of demanding the ouster of the company’s general manager.

            The constitution expressly allows Congress to regulate commerce. (Mallaby,

 2003)  It further permits Congress to pass any law necessary and proper for the enforcement of their right to regulate commerce. (Mallaby,  2003) It has been the policy of Congress to be relatively hands-off with respect to business practices except in the time of various economic crises. (Mallaby,  2003) The first time the government passed significant regulation of business practices was with the Sherman Anti-Trust Act, which prohibited the business practice of monopolizing the market in certain goods or services in order to fix prices and eliminate competition. (Mallaby,  2003)  These laws, and others like it, were largely enforced in a manner that did little to curtail these practices on the part of businesses. (Mallaby,  2003)  In particular, the regulatory agencies responsible for enforcing business limits were composed of business insiders who tended to interpret the circumstances and rules in their own favor. (Mallaby,  2003)  From the time of the passage of the first anti-trust legislation, in 1872, and the turn of the 20th century, such legislation was weakly enforced and largely ignored. (Mallaby,  2003)  With the beginning of the progressive era, and the corresponding rise of union and other labor practices, existing legislation was enforced more stringently, and more legislation was added as journalists and writers began to publicize the abuses of various industries. (Mallaby,  2003)  The passage of the Pure Food and Drug Act of 1906 was a clear example of Congress exerting control over the practices of large businesses. (Mallaby,  2003) The establishment of an executive agency, the Food and Drug Administration, for the purpose of regulation of these industries, was a major stepping stone of government involvement. (Mallaby,  2003)  As the 20th century progressed, the desire of the government to actively involve itself in business matters waned. (Mallaby,  2003)

            As existing regulatory agencies reverted to the pre-progressive-era stance of passively allowing business to proceed unimpeded, the various industries, particularly in the area of banking and commodities trade began to take advantage of this lack of oversight. (Mallaby,  2003) Throughout the 1920s, banks and stock traders abused the lack of governmental oversight to extent credit against margin calls and artificially inflate the stock market, while, at the same time, overextending the banks, leaving them unable to weather the run on deposits that followed the crash of 1929. The result of this crash, and the subsequent economic depression, was a new spate of federal regulation, known as the New Deal. (Mallaby,  2003) This series of laws, championed by President Roosevelt and passed by a compliant congress, placed unprecedented oversight on certain business enterprises, particularly in the area of banking. (Mallaby,  2003)  The stock trading business saw similar regulation. The creation of the Security and Exchange Commission was one such agency, created with the mission of preventing the abuses that led to the markets overvalue, and subsequent implosion. (Mallaby,  2003)  The FDIC (Federal Deposit Security Commission) gave the government a vested interest in bank loaning practices by ensuring the solvency of depositor’s assets. (Mallaby,  2003)

            Since the time of the New Deal, government regulation, control and oversight of businesses has waxed and waned largely based upon the political leanings of lawmakers and presidents. (Mallaby,  2003) The exercise of the Commerce Clause and the Elastic clause in the Constitution has been a handy tool by which Congress, and through them, the executive, could place controls on businesses as they saw fit. (Mallaby,  2003) In the recent past, Congress has exercised its constitutional right to regulate commerce in a unique manner. After the collapse of the housing market, and consequent stock market adjustment, combined with abrupt increases in layoffs and a credit crunch, congress passed a series of laws to inject money into financial institutions and the auto industry. These loans came with strings attached, as the businesses accepting them had to produce recovery plans that satisfied both the Congress and the president.

            As a recent article in the L.A. Times pointed out, the current administration took an unprecedented step into the realm of business regulation by demanding the resignation of the CEO of General Motors, and rejecting the company’s plan for responding to the economic crisis. (Wallsten & Tankersly 2009)  Critics of the actions of the administration claim that it was an unprecedented expansion of executive power, while supporters pointed out that the President’s actions fell within the bounds of what former presidents, such as FDR, Nixon, and Reagan have done in order to respond to various economic crises. (Wallsten & Tankersly 2009)

            With respect to the Constitution, the President has no explicit power to do things such as regulate prices, fire executives of private corporations, or fix prices (Wallsten & Tankersly 2009)  . He does, however, have the legal standard to exercise significant discretion during times of crisis. (Wallsten & Tankersly 2009)  As in the cases when the United States have gone to war, in times of economic strain, the President has, as has his predecessors, exercised authority that the Constitution, while not explicitly granting, does not deny the President and his agencies. (Wallsten & Tankersly 2009)

Work Cited

Mallaby, S. (2003) “The Place of Government: Setting the Terms to Promote Competition”, Policy Review, 2003.

Wallsten, P. & Tankersly, J. (2009) “Obama Takes Step Over The Line That Separates Government From Private Industry” Los Angeles Times Online, March 31st, 2009.

http://www.latimes.com/business/la-fi-gm-policy31-2009mar31,0,6371904.story