Contemporary American History, 1877-1913

by Charles A. Beard

Another holding of great importance in the Gas case was that the company was entitled to a fair return on the value of real estate used in the business, that value having appreciated very greatly since the original purchase of the real estate, and there being no evidence to show that real estate of so great value was essential to the conduct of the business.

The importance of these two holdings is exemplified by the fact that in this particular case the combined value attributed to the franchises and the appreciation of real estate was over $15,000,000—more than one fourth of the total valuation arrived at by the Supreme Court. It will readily be seen that if these two items had been struck from the valuation by the Court, it would be possible for the state to make a still further substantial reduction in the rate charged for gas in New York City without violating the Court's own canon of reasonableness—a six per cent return.

The steps in the evolution of the doctrine of judicial review may be summarized in the following manner:

The Supreme Court first declared that the legislative determination of what was a "reasonable" rate was not subject to review by the courts.

The first departure from this view was an intimation, confirmed with increasing emphasis in several cases, that a rate so low as to make any return whatever impossible was confiscatory and would be set aside by the Court as violating the Fourteenth Amendment. For a time, however, the Court took the position (steadily undermined in subsequent decisions) that a rate which allowed some, even though an "unreasonably low" return, was not prohibited by the Fourteenth Amendment and could not be set aside by the Court.

Next in order came the holding that the determination of a commission as to what was reasonable could not be made conclusive upon the courts, at least when the commission had acted without the forms and safeguards of judicial procedure, and, probably, even when it had acted with them.

In the same decision appeared an intimation, which in subsequent decisions became crystallized into "settled law," that not only were totally confiscatory rates prohibited by the Fourteenth Amendment, but also any rates which deprived the owners of the property regulated of a return equal to what was "customary" in private enterprises.

This rule was applied by the Court for the first time against a rate fixed by a commission, and where the rate was admitted by the pleadings to be confiscatory. But it was shortly thereafter applied to a rate fixed by a legislature, and where the "reasonableness" (not the confiscatory character) of the rate was a direct issue on the facts and evidence.

Finally, the principle that what is a "fair" or "reasonable" rate is to be measured by the customary return in private enterprises under similar conditions, has been applied in several cases to warrant the requirement of a definite rate of interest; but no precise rules have been laid down for the determination of such rate in all cases.

The most striking feature, perhaps, of the development of the doctrine of judicial review here traced, as seen in the opinions of the Supreme Court, is the brevity and almost fortuitous character of the reasoning given in support of the most important and novel holdings. A comparison of the reasoning in Smyth v. Ames, for example, with that in Marbury v. Madison, in which Chief Justice Marshall first held a law of Congress unconstitutional, will forcibly exemplify this. The explanation is to be found largely in the fact that each step in advance in the building up of the doctrine had been foreshadowed in dictum before it was established as decision. It was thus possible for the judge writing the opinion in a case when a new rule was actually established, to quote, as "settled law," a mere dictum from a previous opinion. Justice Gray's citation, in this fashion, in the Dow case, of Chief Justice Waite's dictum in the Ruggles case (although he might, with equal cogency, have cited the Chief Justice's contrary dictum in the Munn or Peik cases), is a good instance of this curious use of "precedent"; and parallel instances could be adduced from virtually every one of the important subsequent cases on this subject.[22]