Landmark Supreme Court Case: Steward Machine v. Davis (1937)

by Kwaisi France · August 4, 2020

Steward Machine v. Davis (1937) is the 69th landmark Supreme Court case, the 31st in the Economics module, featured in the KTB Prep American Government and Civics series designed to acquaint users with the origins, concepts, organizations, and policies of the United States government and political system. The goal is greater familiarization with the rights and obligations of citizenship at the local, state, national, and global levels and the history of our nation as a democracy. While there is overlap, these landmark cases are separated into cases addressing:

The Supreme Court

The Supreme Court is the highest court in the United States. Article III of the U.S. Constitution created the Supreme Court and authorized Congress to pass laws establishing a system of lower courts. The Constitution elaborated neither the exact powers and prerogatives of the Supreme Court nor the organization of the Judicial Branch as a whole. Thus, it has been left to Congress and to the Justices of the Court through their decisions to develop the Federal Judiciary and a body of Federal law.

The number of Justices on the Supreme Court changed six times before settling at the present total of nine in 1869. Since the formation of the Court in 1790, there have been only 17 Chief Justices* and 102 Associate Justices, with Justices serving for an average of 16 years. On average a new Justice joins the Court almost every two years.

The Supreme Court of the United States hears about 100 to 150 appeals of the more than 7,000 cases it is asked to review every year. That means the decisions made by the 12 Circuit Courts of Appeals across the country and the Federal Circuit Court are the last word in thousands of cases.

Court of Appeals

In the federal court system’s present form, 94 district level trial courts and 13 courts of appeals sit below the Supreme Court. The 94 federal judicial districts are organized into 12 regional circuits, each of which has a court of appeals. The appellate court’s task is to determine whether or not the law was applied correctly in the trial court. Appeals courts consist of three judges and do not use a jury.

The appellate courts do not retry cases or hear new evidence. They do not hear witnesses testify. There is no jury. Appellate courts review the procedures and the decisions in the trial court to make sure that the proceedings were fair and that the proper law was applied correctly.

A court of appeals hears challenges to district court decisions from courts located within its circuit, as well as appeals from decisions of federal administrative agencies. In addition, the Court of Appeals for the Federal Circuit has nationwide jurisdiction to hear appeals in specialized cases, such as those involving patent laws, and cases decided by the U.S. Court of International Trade and the U.S. Court of Federal Claims.

District Courts

The nation’s 94 trial courts are called U.S. District Courts. At a trial in a U.S. District Court, witnesses give testimony and a judge or jury decides who is guilty or not guilty — or who is liable or not liable. District courts resolve disputes by determining the facts and applying legal principles to decide who is right.

Trial courts include the district judge who tries the case and a jury that decides the case. Magistrate judges assist district judges in preparing cases for trial. They may also conduct trials in misdemeanor cases.

There is at least one district court in each state, and the District of Columbia. Each district includes a U.S. bankruptcy court as a unit of the district court.

Bankruptcy Courts

Federal courts have exclusive jurisdiction over bankruptcy cases involving personal, business, or farm bankruptcy. This means a bankruptcy case cannot be filed in state court. Bankruptcy Appellate Panels (BAPs) are 3-judge panels authorized to hear appeals of bankruptcy court decisions. These panels are a unit of the federal courts of appeals, and must be established by that circuit. Five circuits have established panels: First Circuit, Sixth Circuit, Eighth Circuit, Ninth Circuit, and Tenth Circuit.

Steward Machine v. Davis (1937)

Steward Machine Facts:

The unemployment compensation provisions of the Social Security Act of 1935 established a tax on employers. If, however, a state has established an approved unemployment compensation plan, the taxpayer is allowed to credit up to 90% of the federal tax paid to the state unemployment fund.

In effect, the Act established a taxing structure designed to induce states to adopt consistent laws for funding and payment of unemployment compensation. Steward argued that with the Act, Congress surpassed its powers outlined in the Tenth Amendment.

Steward Machine Legal Questions and Answers

Q: Did the Act arbitrarily impose taxes in violation of the Fifth Amendment or subvert principles of federalism?

A: No. The tax under the Social Security Act was a constitutional exercise of congressional power.

Steward Machine Conclusion

5-4 decision holding the unemployment compensation sections of the Social Security Act are constitutional. The tax did not coerce the states in contravention of the Tenth Amendment. The high rate of unemployment and poorly performing economy led to a conclusion by the Court that the tax would benefit the general welfare benefitting both the states and the federal government.

By 1937, it had been well established that regulatory taxes controlling commercial economic actions were within the power of Congress. In JW Hampton (1928), the Court had held that a regulatory tax is valid even if the revenue purpose of the tax may be secondary. The Supreme Court had also held that a tax statute does not necessarily fail because it touches on activities that Congress might not otherwise regulate, and a tax does not cease to be valid merely because it regulates, discourages, or even definitely deters the activities taxed.

In Butler (1936), the Court held that the “tax” provision in question in the Agricultural Adjustment Act of 1933 was not a true tax because the payments to farmers were coupled with unlawful and oppressive coercive contracts, and the proceeds were earmarked for the benefit of farmers complying with the prescribed conditions. Making the payment of a government subsidy to a farmer conditional on the reduction of his planned crops went beyond the powers of the federal government. Although it struck down the Act, the Court dealt positively with expenditure of funds to advance the general welfare as specified in Section 8 of Article I of the U.S. Constitution.

The decision signaled the Court’s acceptance of a broad interpretation of Congressional power to influence state laws. This made sense as the nation was in the midst of the Great Depression. In its decision, the Court noted:

During the years 1929 to 1936, when the country was passing through a cyclical depression, the number of the unemployed mounted to unprecedented heights. Often the average was more than 10 million; at times a peak was attained of 16 million or more.

State of Louisiana Infomercial from 1937 on Social Security Act of 1935 upheld by Steward Machine v. Davis (1937)

Next Economics Case: NLRB v. Jones & Laughlin (1937)

Previous Economics Case: West Coast Hotel v. Parrish (1937)

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