Politics & Policy

Reining In the Consumer Financial Protection Bureau

Congress cannot delegate its legislative powers to others, including the CFPB.

Elizabeth Warren was slated to be the first head of the Consumer Financial Protection Bureau. Senate Republicans stopped her confirmation, so now she is leading the charge to confirm Richard Cordray to that office.

But nobody should be the head of this monstrous Dodd-Frankenstein by-product. The structure and powers of the CFPB, as created by Congress, put it outside our constitutional system. Most significantly, Congress allotted the bureau an independent source of revenue, guaranteed its insulation from legislative or executive oversight, and gave it the power to define and punish “abusive” practices.

In years past, the Supreme Court has tried to impose some limits on such reckless delegations of authority. Congress’s initial response to the Great Depression was to enact the National Industrial Recovery Act. The NIRA allowed industries to adopt “codes of fair competition,” and the government could impose fines on firms and imprison individuals who produced more or charged less than the codes provided. In most cases, the president allowed business leaders to write their own codes.

Fortunately, the Supreme Court prevented this effort, which appeared to establish nothing less than an American-style dirigiste or fascist political economy, and struck down the code for the petroleum industry. In 1934, the United States was the world’s largest producer and exporter of oil, and was producing so much that prices were ruinously low. Section 9(c) of the NIRA, known as the “hot oil” provision, allowed the president to prohibit the interstate shipment of oil that had been produced in excess of state production quotas. The Panama Refining Company was prosecuted for violating this “hot oil” code — though, notably, the oilmen who wrote their own code of fair competition had neglected to include Section 9(c). The company therefore sued to prohibit enforcement of 9(c). Technically, because the petroleum code did not include 9(c), the Court did not rule on the NIRA codes overall. Instead, in January 1935, the Court held that 9(c) itself was an unconstitutional delegation — from Congress to the president — but not yet that it was an unconstitutional delegation from the president to a private interest group (that came in Schechter). Thus the Court upheld the principle of non-delegation.

Non-delegation derives from two of the most fundamental constitutional principles: the separation of powers and popular sovereignty. As John Locke put it, “the legislative [body] cannot transfer the power of making laws to any other hands: for it being but a delegated power from the people, they who have it cannot pass it over to others.” In this vein, Article I of the Constitution states, “All legislative powers herein granted shall be vested in a Congress of the United States” — the powers that Congress has (and they are limited) cannot be delegated to others. The omission of Section 9(c) in the code by which the Panama Refining Company was being prosecuted illustrated the related principle that the legislature must act, as Locke said, by “standing laws, promulgated and known to the people, and not by extemporary decrees.” In other words, it’s unconstitutional to prosecute a company for a law — in this case, Section 9(c) — that’s not on the books.

With this decision in 1935, the Court for the first time held that Congress had exceeded its power to delegate. The Court concluded: “Section 9(c) does not state whether or in what circumstances or under what conditions the President is to prohibit the transportation of petroleum . . . in excess of the state’s permission.” Though it did not precisely define the boundary between legitimate and illegitimate delegation, the Court held that this act was over the line. “The Congress manifestly is not permitted to abdicate or to transfer to others the essential legislative functions with which it is thus vested,” Chief Justice Hughes concluded. He noted that every time the Court had upheld delegations, it had done so while recognizing “that there are limits of delegation which there is no constitutional authority to transcend,” and he pointed out that most previously upheld delegations had to do with foreign relations.

Eight justices — from the extremely conservative to the ardently liberal — agreed. Only Justice Cardozo dissented; stressing the economic emergency, he chided the majority for turning the separation of powers into “a doctrinaire concept to be made use of with pedantic rigor.”

Five months later, the Court unanimously invalidated the entire NIRA. As with the “hot oil” provision, the entire act unconstitutionally delegated legislative powers to the president, who in turn delegated them to private interest groups. “Such a delegation of legislative power is unknown to our law and is utterly inconsistent with the constitutional prerogatives and duties of Congress,” Hughes wrote. “[The act] supplies no standards for any trade, industry or activity. . . . Instead of prescribing rules of conduct, it authorizes the making of codes to prescribe them.” Even Justice Cardozo concurred in this case, calling the act an instance of “delegation running riot,” and one that threatened “an end to our federal system.”

FDR responded by threatening to “pack” the Supreme Court with six additional seats. Two months later, the Court did a dramatic about-face and upheld the Wagner Act, which nearly everyone — including many congressmen who voted for it — expected it to strike down.

The Court has never since invalidated legislation using the non-delegation principle. But no legislation since the NIRA has delegated as wantonly as Dodd-Frank does. It would be a good time for the Court to revive the non-delegation doctrine. But it would be even better if Congress controlled itself.

— Paul Moreno is the director of academic programs at Hillsdale College’s Kirby Center for Constitutional Studies and Citizenship.

Paul Moreno holds the William and Berniece Grewcock Chair in Constitutional History at Hillsdale College, where he is a professor of history and dean of social sciences.


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