Image a commercial world where one’s neighbors get together to form a mob that goes out and burns down your home and business all because you’d attempted to get them to at least pay you the interest they owed on monies you’d loaned to them. Also imagine having a judge dismiss out of hand a lending contract you and one of your neighbors had freely entered into because he felt that you had enough money already and your borrower was his best friend who didn’t feel like paying you back. Worse, the state legislature cancels that loan and many like it simply because requiring people to honor their debts wasn’t popular.
Can’t happen? Bull. That was the situation prevailing throughout the original 13 then independent states north of the Mason-Dixon Line after the American Revolutionary War. Back then, in many counties, people felt that those who had money didn’t need to be repaid for the loans they’d extended to their neighbors to tide them over during the war because "the rich" had more than enough and no one felt like paying "them" back.
In fact, given the judicial decisions and prevailing mob rule against creditors at the time, no contractual agreement – not even those between employee and employer – was particularly enforceable and thus no one could trust anybody they did business with to pay their bills. Needless to say, this exacerbated already difficult economic conditions.
For this reason, amongst others, representatives lead by George Washington met in Philadelphia to "rewrite" the rules of the game by creating a national government removed by one layer from the state legislatures that were too prone to knuckle under to mob rule. The result was the Constitutional provision prohibiting Congress from interfering with existing contracts that were freely entered into. The objective was to prevent commercial chaos and establish a legal certainty to the validity to all existing contracts bar none except those that were the product of a legal fraud.
The second thing the framers of the Constitution did to advance this goal was to prohibit Congress from making any law retroactive. The national legislature, nor anyone else in the federal government, was allowed to rewrite the rules of the game after the fact. This meant that laws in place at the time a contract was entered into determined a contract’s legality. Because of this provision people didn’t have to write contracts in ways that anticipated public opinion in the future with provisions that would nullify the impact of any future Congressional act on the terms of a contract. No one was thus required to map out myriad ‘what if’ scenarios based on the absurd when entering an agreement. The law as it stood at the time became the only thing that mattered and without that provision no one in their right mind would have invested in any commercial enterprise.
Nor was Congress allowed to pass any bills of attainder specifically singling out individuals or entities for ‘punishment’. This Constitutional provision emanated from the colonial experience with Parliamentary laws where the Crown would legislate laws that retroactively deprived individuals of everything they owned long after the fact with the goal of taking away everything they owned – often because of public opinion.
Imagine if the Congress had that power. Over the course of American history countless Americans would have had everything they’d worked for and built arbitrarily taken away from them. If the prohibitive clause didn’t exist, Congress today could pass a law confiscating your home, retirement savings, and everything pertaining to your business and give it all to a high school drop-out who happened to be some Senator’s son-in-law.
This gets us over to today's furor over the AIG bonuses. These were based on contracts freely entered into long before AIG became a ward of the government and in many cases represented the sole source of income for the recipients – no bonus, no income. Now some in Congress want to retroactively cancel or tax the total amount away – ex post facto confiscation to appease the mood of the country through legislation specifically citing the bonus recipients by name.
Based on the above, this is unconstitutional – assuming that the exact wording in the Constitution still has the force of law, which is sometimes doubtful, but that doesn’t bother those legislators professing "progressive values." If this action against the AIG executives involved does become law, the practical result would be the retroactive enslavement, or at least the imposition of involuntary servitude, on those executives – something else that’s unconstitutional. Just as important, if Congress can get away with doing this to today’s unpopular AIG executives who’ve broken no laws, isn't it equally possible that you could be next?
Craig Boulton has written a number of books on finance, economics and political economy. He has written for Cato, and is a chartered financial analyst with more than 20 years of experience in the investment industry. He's also a combat veteran.