A Brief History of the Liberty of Contract

. . . And Its Philosophic Meaning

As we saw in “Contracts and the Birth of a Free Society,” “Two Views of Justice in the American Founding,” and “American Schism: The Hamilton-Jefferson Debate on the Moral Obligations of Treaties,” America’s Founding Fathers and the earliest interpreters of the Constitution viewed contracts not simply or solely as artificial or conventional agreements but as natural and necessary moral-legal mechanisms for advancing peaceful social relations and human flourishing. More specifically, the Founders understood that contracts have philosophic causes and consequences that are integral to the functioning of a free and just society. To that end, they created the world’s first society grounded in and held together by contracts, which they viewed as the ligaments of a free society.

The Founding Fathers understood that contracts have causes and consequences. On the causal front side, the Founders’ viewed contracts as logical and natural extensions of the moral rights of nature. They saw the right to form contracts as an addendum to the more fundamental rights to liberty and property, which are, of course, derivations from the right to life (i.e., man’s vested rights). On the consequential back side, the Founders viewed contracts as basic moral and social values that unite free people for limited purposes. They saw contracts as reinforcing individual morality and social trust, which in turn promoted a vibrant market economy. In sum, then, contracts are the consequence of deeper moral causes, and they are also the cause of various social and economic consequences.

Contracts, Constitutions, and the Moral Ligaments of a Free Society

During most of the nineteenth century, the U.S. Constitution’s explicit prohibition on any state legislature from “impairing the Obligation of Contracts” (Article I, section 10) was a major restraint on government economic regulation, particularly against state paper-money laws, debtor-relief measures, and acts that attempted to regulate private contractual relations between employers and employees.

The contract clause was the major textual basis for the Court’s protection of so-called “vested” rights for next seventy years or so. The idea of vested rights held that certain moral rights of nature were so fundamental to human wellbeing and dignity that they transcended government control. The American idea of justice was synonymous with the protection of man’s vested rights. Thus, the Founders’ doctrine of vested rights implied that it was a central responsibility of America’s court system to invalidate those state laws that violate the nation’s fundamental moral laws that are embedded in word and spirit in the Constitution. From the 1790s up through the 1830s, both the Supreme Court of the United States and state courts frequently used the doctrine of vested rights as a means to restrict state legislative power.

To that end, America’s Founding Fathers created a constitution and a political system, the two primary purposes of which were to ensure the individual’s right to be secure in his possession of private property and to uphold and enforce the sanctity of contracts between autonomous individuals. The Founders understood that there is a necessary relationship between private property and contracts. Contracts serve to define and give value to property.

A political system that protects private property and upholds the inviolability of contracts is one that places constitutional and legal limitations on government power, but it also provides various legal procedures, instruments, and mechanisms that establish a framework of rational expectations in which men and women can make intelligent decisions about the use and disposition of their property in the future and at a distance. In this way, private decision-making is aided by the legal enforcement of promises between two or more people. Thus, the Founders’ laissez-faire constitutional framework created and maintained a legal-economic environment in which men and women could rationally assume and morally expect that their fellow citizens would act in predictable and socially useful ways. In other words, upholding the sanctity of contracts legally rationalized and institutionalized the law of causation in human relations. Contracts define the parameters of specific cause-and-effect relationships between two or more people. And only in such an environment could men and women act in bold, inventive, energetic and entrepreneurial ways.

Additionally, the Founders viewed contracts as a moral-legal ligament that binds the actions of individuals in a free, productive, and competitive society. They bring people together. Contracts are at the very heart of the moral and economic interactions between individuals in a free society. They make the use, exchange, and disposition of private property possible and salutary. The Founders very intentionally and purposefully added the Constitution’s contract clause (i.e., “No State . . . pass . . . Law impairing the Obligation of Contracts.”) to prevent state legislatures from having arbitrary power to interfere with private property and the free interactions of men and women. The development of contract law in America’s post-Founding world resulted in expanding the scope of individual freedom and initiative in economic production and trade. It sparked the circuit of productive energy in the American economy. Market relations in nineteenth-century America were dramatically expanded by the institutionalization of the Founders’ contractual regime.

The Founding generation also understood that a society that venerates, upholds, and sanctifies contracts necessarily produces certain moral virtues in its citizenry (e.g., rationality, honesty, integrity, justice, and productiveness), and it also produces a certain kind of society—a free, just, virtuous, and prosperous society. A society based on the protection of private property and upholding the inviolability of contracts is one that requires men to deal with the nature of reality in a direct, first-handed way, which means they must use their rational faculties to assess, plan, and determine a course of action necessary to improve the state of their lives. Consequently, men must think, choose, act and interact. By the nature of reality, they must work and produce goods and services for themselves and their families, and if they live in a civil society (which virtually all men and women do to one degree or another), they may choose to work and trade with others. In addition to the virtues of rationality and productiveness, civil society also requires of men and women that they be honest, have integrity, and be just to others. A free society can only function if its members have reasonable expectations about the conduct of others. Honesty, integrity, and justice are therefore social virtues that are necessary to the well-functioning of a free society. They grease the wheels of social interaction. In addition to creating a free society, the Founders also intended to create a virtuous society when they drafted their laissez-faire Constitution (and the various state constitutions) based on the protection private property and sanctity of contracts.

But what precisely did the Founders’ progeny do to uphold the standards of justice and morality established by their revolutionary and founding fathers? How did subsequent generations of Americans put into practice the Constitution’s principles? What kind of moral society did the Founders and their progeny expect to issue from a regime dedicated to protecting private property and upholding the sanctity of contracts?

Liberty of Contract in the 1790s

In this section, I shall present a few representative examples of how the post-Founding generation via Supreme Court opinions and the views of some of America’s leading legal scholars understood and implemented the Founders’ understanding of justice and its relationship to contracts and the obligation to honor them in a free society. My treatment of how post-Founding Americans understood the Constitution’s contract clause will be relatively superficial, but it will give you a clear sense of how contracts were treated in nineteenth-century America.

In 1793, the Supreme Court of the United States heard the case, Chisholm v. Georgia. The case arose in 1792, when Alexander Chisholm from South Carolina sued the State of Georgia for payments due to him on behalf of the now deceased Robert Farquhar, a Charleston merchant who had contracted with the state of Georgia to supply various goods during the American Revolutionary War. The state of Georgia refused to recognize the right of Chisholm to sue. The constitutional question raised by the case was this: can a citizen of one state sue a different state government in federal court? More specifically, the question was: if a state is a party to a contract, who should adjudicate the contract if the government fails to satisfy its part of a promise? Since the state of Georgia should not be a judge in its own cause, who should hear the complaint?

Though this case was not strictly speaking a contracts case (it went to the Supreme Court as a case of jurisdiction), it does indicate how the post-Founding generation understood the relationship of governments to the enforcement of contracts. Writing in the majority, James Wilson, Founding Father and Associate Justice on the Supreme Court, declared that governments are, in effect, artificial persons capable of making and being “bound by contracts, and for damages arising from the breach of those contracts.” Wilson made it clear that governments—any government for that matter—does not stand above the natural laws of justice.

A state, like a merchant, makes a contract. A dishonest state, like a dishonest merchant, wilfully refuses to discharge it. The latter is amenable to a court of justice. Upon general principles of right, shall the former, when summoned to answer the fair demands of its creditor, be permitted, Proteus-like, to assume a new appearance, and to insult him and justice by declaring “I am a Sovereign state?” Surely not. Before a claim so contrary, in its first appearance to the general principles of right and equality be sustained by a just and impartial tribunal, the person, natural or artificial, entitled to make such claim should certainly be well known and authenticated. 

Wilson’s statement is remarkable for its denigration of the claims of government power. Implicit in Wilson’s claim is the assumption that the rights of individuals trump the pretensions of government authority and power. Wilson determined that the Chisholm case was a clear example of how and why the Framers of the Constitution added the contract clause to the Constitution.

[W]hen we view this object in conjunction with the declaration, “that no state shall pass a law impairing the obligation of contracts,” we shall probably think that this object points, in a particular manner, to the jurisdiction of the court over the several states. What good purpose could this constitutional provision secure if a state might pass a law impairing the obligation of its own contracts, and be amenable, for such a violation of right to no controuling judiciary power? We have seen that on the principles of general jurisprudence, a state, for the breach of a contract, may be liable for damages. 

The Supreme Court ruled for the plaintiff. The meaning of the Chisholm case was that plaintiffs could seek relief from the Supreme Court of the United States when state governments violated duly made contracts with citizens from other states. In other words, the Supreme Court elevated the justice of contracts above and beyond the power of state governments.

Two years after the Court’s decision in Chisholm, Justice William Paterson (an influential member of the Constitutional Convention) took a circuit court case in Pennsylvania known as Van Horne’s Lesee v. Dorrance. The case involved a complicated issue of property and contract rights and whether a state can violate either. The central question in the case involved the constitutionality of an act of the Pennsylvania legislature, which had transferred the ownership of contested land to one party after the land had been originally awarded on another party.

Little noted nor long remembered, the case was notable because of Justice Paterson’s instructions to the jury, which explicitly grounded property and contractual rights in the moral rights and laws of nature, and which declared that a state could not impair its own contractual obligations. Paterson summed up his instructions by telling the jurors, “the right of acquiring and possessing property and having it protected, is one of the natural inherent and unalienable rights of man. . . . The legislature, therefore, had no authority to make an act divesting one citizen of his freehold, and vesting it in another, without a just compensation.” Drilling down, Paterson’s instructions invoked “reason, justice, and moral rectitude,” “the principles of social alliance in every free government, and the “letter and spirit of the constitution” to announce that the divestment of a citizen’s property via legislation without providing a just recompense in value would be “an outrage,” a “dangerous” spectacle of an unlimited, despotic abuse of power, “a monster in legislation” that would “shock all mankind.” Paterson reminded his jurors that the Constitution “encircles, and renders [a vested right] an holy thing. . . . It is a right not ex gratia [i.e., out of grace] from the legislature, but ex debito [i.e., out of debt] from the constitution.” The right to form contracts and to not have one’s property stolen by men or governments is, he wrote, “sacred.” Unlike in Great Britain, Paterson continued, the Constitution of the United States “is the origin and measure of legislative authority.” The Constitution provides the moral, legal, and political standard by which to judge the justice of legislation:

It says to legislators, thus far ye shall go and no further. Not a particle of it should be shaken; not a pebble of it should be removed. Innovation is dangerous. One incroachment leads to another; precedent gives birth to precedent; what has been done may be done again; thus radical principles are generally broken in upon, and the constitution eventually destroyed.

Paterson and the other Justices of the Supreme Court believed that the Constitution stands above legislation, and that moral laws and rights of nature—of which the right to and sanctity of contract is one—stand above the Constitution. In other words, the protection of individual rights provides the standard by which government action is to be judged.

In 1796, Robert Goodloe Harper from South Carolina delivered what is surely one of the strongest statements on the nature and morality of contracts and the effects of their abandonment on society as a whole:

It is an invariable maxim of law, and of natural justice, that one of the parties to a contract cannot by his own act, exempt himself, from its obligations. A contrary principle would break down all the ramparts of right, dissolve the bonds of property, and render good faith, to enforce the observance of which, is the great object of civil institutions, subservient to the partiality, the selfishness, and unjust caprices of every individual.

For the entire Founding generation, contracts were simply a logical extension and social corollary of the moral rights of nature. This meant that any legitimate government and certainly America’s laissez-faire Constitution had as one of its primary functions the protection of contracts from their violation by the same said government. Contracts are an existential consequence of liberty and property, and they are the moral-legal cause that binds a free society together.

Two years after Harper’s powerful statement on contracts, Justice Samuel Chase (a signer of the Declaration of Independence) declared in the influential case of Calder v. Bull (1798) that he could not “subscribe to the omnipotence of a State Legislature, or that it is absolute and without control” even if “its authority should not be expressly restrained by the Constitution, or fundamental law, of the State.” Chase—like Wilson, Paterson, and Harper before him—grounded America’s revolutionary constitutions and governments in the moral laws and rights of nature, which meant that no government had the authority to violate its underlying moral principles. “There are certain vital principles in our free republican governments” he averred, “which, will determine and overrule an apparent and flagrant abuse of legislative powers.” Among the several examples of unjust legislative power, Chase insisted that state legislatures must not “violate the right of an antecedent lawful private contract; or the right of private property.” In other words, Chase viewed the Constitution’s contract clause as an extension of the moral rights of nature. “An act of the Legislature (for I cannot call it a law) contrary to the great first principles of the social compact,” he asserted, “cannot be considered a rightful exercise of legislative authority.” This meant that the Supreme Court had the authority to overturn state legislation that impaired voluntarily agreed upon contracts between private individuals, between private individuals and state governments, and presumably between governments.

Liberty of Contract in the Marshall Court and Beyond

In 1810, Chief Justice John Marshall’s Court took on its first major contracts case, Fletcher v. Peck. In the 1790s, corrupt legislators and governors in Georgia who had taken bribes, sold land titles to the Yazoo Land Company of some thirty-five million acres of land that extended to present day Mississippi. In fact, more land was sold by dishonest state politicians than existed. By 1796, reformist legislators gained control of the state legislature and passed a law rescinding the Yazoo sales. In the meantime, one of the Yazoo land companies flipped their land by selling it to a third party from New England. After various conflicting claims were adjudicated in the courts for several years, the case eventually made its way to the Supreme Court, where Chief Justice John Marshall wrote for the majority.

Marshall’s opinion consisted of two major arguments. First, using the doctrine of vested rights, he rejected the claim that legislatures could invalidate contracts. Legislatures did not have the authority, he argued, to interfere with the property rights that come with contracts.  “When . . . a law is in its nature a contract, when absolute rights have vested under that contract,” Marshall argued, “a repeal of the law cannot devest those rights.” Second, Marshall ruled that the Constitution’s contract clause applied not only to private but to public contracts as well. The Chief Justice declared that the state of Georgia’s original sale of land to the Yazoo company was in fact an executed contract as understood by Article I, section 10, and the subsequent sale of the land to any third party was likewise a valid contract. By contrast, the 1796 repeal of the original sale impaired the obligations of the original sale and was therefore unconstitutional.

The reverberations of the Marshall Court’s Fletcher decision were far-reaching and subsequent cases worked out its implications. In 1819, the Court took up Dartmouth College v. Woodward in which the Court determined that a private corporate charter—a corporate charter granted by King George III in 1769—was a contract like any other and therefore protected by Article I, section 10 of the U.S. Constitution. Even a contract with the hated George III was held to be sacred.

The original charter granted by the King of England before New Hampshire had become a state entitled the college’s trustees to govern the institution forever and to fill vacancies at the college. In 1816, the state legislature attempted a hostile takeover of the college by altering its charter to convert it from a private to a public institution, which meant the Governor could now hire and fire the college’s administration and faculty rather than the trustees. The college’s trustees filed suit and the case made its way to the highest court in the land.

The core constitutional questions at the heart of the Dartmouth case were twofold: first, was the charter granted by the British crown to the trustees a contract within the meaning of the Constitution; and second, did the New Hampshire legislature unconstitutionally interfere with Dartmouth College’s rights under the contract clause?

Chief Justice Marshall’s opinion in the Dartmouth case is notable for its adherence to a muscular version of contractual rights and the limitations imposed on state governments to violate those rights. Marshall set the context for the Courts’ decision early in his opinion when he noted that the Constitution imposes on the Court’s justices a “high and solemn duty of protecting, from even legislative violation, those contracts which the constitution of our country has placed beyond legislative control.” Contracts between individuals or contracts between individuals and governments had an elevated moral-legal status for the Founders, the Supreme Court, and for most Americans during the years of the early republic.

In a 5-1 decision, the Marshall Court upheld the sanctity of the original charter, and the Court invalidated the act of the New Hampshire legislature, thereby keeping the college as a private institution. In Marshall’s words, “The opinion of the court . . . is, that this is a contract, the obligation of which cannot be impaired without violating the constitution of the United States.” Furthermore, the Court found that “all contracts, and rights, respecting property, remained unchanged by the revolution.” In other words, the Court found that the king’s charter with the college’s trustees was a contract between private parties that must be respected and upheld as inviolable. The state of New Hampshire’s attempt to take control of the college was an unjust abuse of power substituting the “will of the state” for the “will of the donors,” which meant that the college would become a “machine entirely subservient to the will of government.” The significance of the decision is that it strengthened the Constitution’s contract clause, thereby limiting the power of state governments to interfere with private contracts, charters, and corporations.

In 1827, the Supreme Court took up one of the most important and least understood contract clause cases in its history. In Ogden v. Saunders, the Court decided in a 4-3 decision that state bankruptcy law should be incorporated into all future contracts without impairment of the Constitution’s contract clause. The majority opinion was written by Associate Justice William Johnson, who offered a philosophic defense of what would come to be a modern interpretation of contract law. Johnson argued that “all the contracts of men receive a relative, and not a positive interpretation, for the rights of all must be held and enjoyed in subserviency to the good of the whole (emphasis added).” He continued: “The state construes them, the state applies them, the state controls them, and the state decides how far the social exercise of the rights they give us over each other can be justly asserted.” Johnson’s conversion of man’s rights from vested to “relative” and from absolute to subservient to the common good as interpreted by the State indicated a tragic shift away from the Founders’ view of rights as unalienable.

Chief Justice John Marshall’s dissenting opinion (his first and last) was pointed directly at Johnson’s view of rights. Marshall argued that the freedom to form contracts is a natural and absolute right derived from neither society nor government. The right to contract, according to the Chief Justice, “results from the right which every man retains to acquire property, to dispose of that property according to his own judgment and to pledge himself for a future act.” The Chief Justice understood that the natural right to form contracts is grounded in the more fundamental rights to liberty and property, and when individuals enter civil society, Marshall insisted, they transfer to society and government the “right to regulate contracts,” that is, “to prescribe rules by which they shall be evidenced, to prohibit such as may be deemed mischievous.”

Marshall believed that individuals in a free society must have an absolute right to form contracts under their “own exclusive management” without government interference. He understood that contracts are a critical socio-legal device that bind individuals together morally in a free society. Governments that interfere with contracts, Marshall wrote, “break in upon the ordinary course of society, and destroy all confidence between man and man.” Contracts inspire “confidence” between men and confidence inspires trust, which is the invisible hand holding a free society together. (I will have more to say about trust and the role it plays in a free society in a future essay.) Contracts are therefore one important mechanism by which free men associate with each other to mutual advantage. On the constitutional question, Marshall argued that Article I, section 10 protected all contracts (past and future) from state legislation that impaired their obligation in any way. Marshall was the single greatest defender of the Founders’ understanding of justice.

Joseph Story, Marshall’s close colleague and one of America’s greatest antebellum jurists, wrote in his Commentaries on the Constitution that upholding contracts is a moral obligation and a feature of justice: “The obligation of every contract, then, will consist of that right, or power over my will or actions, which I, by my contract, confer on another. And that right and power will be found to be measured, neither by moral law alone, nor by universal law alone, nor by the laws of society alone; but by a combination of the three; an operation in which the moral law is explained, and applied by the law of nature, and both modified and adapted to the exigencies of society by positive law.” The law of contracts was an extension of the moral law of nature applied to men associating in society.

Beyond the Marshall Court

Let’s examine a few final examples from the later nineteenth century. The volitional and objective view of contracts discussed in “Contracts and the Birth of a Free Society” reached its highest point of perfection in the last quarter of the nineteenth and first quarter of the twentieth centuries. Perhaps the best explication of the volitional theory of contracts can be found in Rufus Peckham’s 1897 decision in Allgeyer v. Louisiana in which the Justice explained the necessary relationship between liberty and contracts. Switching from the contract clause to the Fourteenth Amendment, Peckham there wrote:

The liberty mentioned in that [Fourteenth] amendment means not only the right of the citizen to be free from the mere physical restraint of his person, as by incarceration, but the term is deemed to embrace the right of the citizen to be free in the enjoyment of all his faculties; to be free to use them in all lawful ways; to live and work where he will; to earn his livelihood by any lawful calling; to pursue any livelihood or avocation, and for that purpose to enter into all contracts which may be proper, and necessary and essential to his carrying out to a successful conclusion the purposes he mentioned.

To support his position, Peckham cited Justice Bradley’s concurring opinion in Butchers' Union Company v. Crescent City Company (1884):

The right to follow any of the common occupations of life is an inalienable right. It was formulated as such under the phrase “pursuit of happiness” in the Declaration of Independence, which commenced with the fundamental proposition that “all men are created equal; that they are endowed by their Creator with certain inalienable rights; that among these are life, liberty, and the pursuit of happiness.” This right is a large ingredient in the civil liberty of the citizen. . . . I hold that the liberty of pursuit—the right to follow any of the ordinary callings of life—is one of the privileges of a citizen of the United States.

The Bradley-Peckham interpretation of the Constitution’s contract clause and the 14^th Amendment was the culmination and fulfillment of the Founders’ view of contracts and the role they must play in a free society. The implicit philosophic meaning of the Bradley-Peckham philosophy is that the individual is the primary unit of moral and political value, who has a moral right of nature to be self-owning, self-governing, self-moving, and self-determining. It also represented the final and complete rejection of the older intrinsic view of contracts and the post-feudal view of social relations. Constitutionally, the Bradley-Peckham philosophy meant that individuals and corporations could now be finally free from local and state restrictions that limited economic opportunity.

Contracts are an expression of both liberty and justice that bring two people together (often strangers) in an exchange or give-and-take agreement in which each party gives something up and in return expects to gain something. A contract is, therefore, a moral promise and therefore an obligation. Contracts involve a promise to do something in the future. The failure to carry out a promise hurts a second party that has given up something in exchange for what was promised (and in that sense it’s a rights violation). In a free society, individuals are expected to honor their agreements or suffer a penalty for not doing so. As late as 1923, Justice George Sutherland could write in Adkins v. Childrens’ Hospital that “freedom of contract is . . . the general rule and restraint the exception.”

The freedom and sanctity of contracts was viewed as both a liberating and a unifying force in American social and economic life. It resulted in an explosion of American economic production and trade the likes of which had never been seen before. The ascendency of the objective theory of contract law also brought men and women together in new and inventive ways that unleashed a groundswell of human ambition, innovation, invention, and association.

Contracts and the Bonds of a Free Society

In America’s new contract-based society, the old social adhesives that formerly held society together (i.e., tradition, Christian love, sentiment, customs, kinship, patronage, deference, status, and trust) were relegated entirely to the private sphere and were no longer to be recognized by the government or the law. Contracts were viewed by the Founders and successive generations as the socio-legal fixative binding individuals (often strangers) together in time-limited relationships, the purpose of which was for all parties to gain some sort of satisfaction or benefit, either in the form of material or spiritual values.

Written agreements in America’s impersonal market economy became a kind of proxy for the traditional forms of individual and social trust. In fact, contracts were a kind of hedge against mistrust. Contracts served to rationalize and coordinate society by providing hundreds of thousands of diverse and dispersed individuals with a mechanism by which to form reasonable expectations about the actions of others. As Herman Melville put it in his 1857 novel, The Confidence Man: “Confidence is the indispensable basis of all sorts of business transactions. Without it, commerce between man and man, as between country and country, would like a watch, run down and stop.” Legally enforced contracts encourage confidence, confidence breeds trust, and trust is what greases the wheels of commerce.

Increasingly, as we’ve seen, nineteenth-century America became a contractual society, which undercut the old forms and formalities that formerly defined social relations and knit society together. Antebellum courts spurred manufacturing and commerce in the new nation by expanding the variety of legal instruments and contractual procedures that allowed individuals to incorporate in new ways and to work with others at a distance, over extended periods of time, on credit, and with new forms of negotiable instruments, such as banknotes, bills of exchange, promissory notes, bills of lading, etc.

Mid-nineteenth-century American jurists and legal scholars took the lead in developing American contract law and therewith establishing the juridical framework in which the American economy would subsequently develop. One of the clearest statements of the critical role played by the law of contracts in a free society was offered by Theophilus Parsons, Dane Professor of Law at Harvard Law School from 1848-1870. In his influential treatise on The Law of Contracts (1855), Parsons explained how contracts order society:

The importance of a just and rational construction of every contract and every instrument, is obvious. But the importance of having this construction regulated by law, guided always by distinct principles, and in this way made uniform in practice, may not be so obvious, although we think it as certain and as great. If any one contract is properly construed, justice is done to the parties directly interested therein. But the rectitude, consistency, and uniformity of all construction enables all parties to do justice to themselves. For then all parties, before they enter into contracts, or make or accept instruments, may know the force and effect of the words they employ, of the precautions they use, and of the provisions which they make in their own behalf, or permit to be made by other parties.

Contracts were, in other words, the vehicle by which a free society becomes rational, orderly, peaceable, and trusting. Contract law was important, according to Parsons, because it grounded men’s relations with one another in principles of natural justice and because it provided an objective framework in which individuals could interact with one another in salutary ways.

Contracts promote human rationality; they require individuals to be careful, precise, and clear in their meaning. Contracts promote objectivity; they require individuals to identify the exact relationship between the ideas of two or more parties and the precise reality of what is being promised and exchanged. Finally, contracts promote orderly and peaceful relations between individuals; they build trust and make social relations predictable.

Looking back on the role played by contracts in America’s post-Founding constitutional order, Justice William Strong observed in 1878,

There is no more important provision in the Federal Constitution than the one which prohibits the states from passing laws impairing the obligation of contracts, and it is one of the highest duties of this Court to take care that the prohibition shall neither be evaded or frittered away. Complete effect must be given to it in all its spirit. The inviolability of contracts, and the duty of performing them, as made, are foundations of all well ordered society, and to prevent the removal or disturbance of these foundations was one of the great objects for which the Constitution was framed.

America’s Founders created a contract-based and hence a trust-based society that was made up of free and independent men, who formed social and economic ties with each other based on voluntary, impersonal, self-interested, mutually advantageous relationships and without regard to birth, family connections, social status, and various unchosen obligations. As the great early nineteenth-century jurist Joseph Story put it in his Commentaries on Equity Jurisprudence, “Every person who is not from his peculiar condition under disability is entitled to dispose of his property as he chooses; and whether his bargains are wise and discreet or profitable or unprofitable or otherwise are considerations not for courts of justice but for the party himself to deliberate upon.” Story identified precisely what a free society looks like.

Story’s elucidation of the role played by contracts in American society indicates just how revolutionary this new society was. It was built on the premise that individuals are self-owning, self-governing, and self-reliant. This new philosophy said that individuals (as opposed to government) are morally responsible for the choices they make; that they will reap the rewards of good choices and suffer the consequences of bad choices. In other words, this new philosophy says that individuals are morally responsible for their ideas and actions. This new society, based as it was on private property, contracts, and the rule of law, provided hitherto unknown amounts of freedom, space, and opportunity for advancement and reward. One’s place or social standing in in this burgeoning nineteenth-century society was now based not on birth, but on merit and the virtues of rationality, honesty, integrity, justice, and productivity.

Contracts therefore play a critical role in developing trust in a free society. Indeed, contract-based societies become trust-based societies. The former took hundreds of years to develop before the latter could fully emerge. Initially, contracts served as a substitute for trust. Historically, contracts arose to overcome the natural mistrust and distrust that men often have with one another. Contracts were developed to aid and abet trade and association from which trust could then be developed. They are a proxy or surrogate for trust. In other words, contracts assist and institutionalize trust. If two men who have contracted with each other fulfill their mutual obligations, trust can then be developed between them.

For the Framers of the Constitution and its best nineteenth-century interpreters, contracts were a moral-legal mechanism that provided a natural and necessary glue joining men together in peace, harmony, and productive effort, and thus they became a civilizational force. When Charles Nisbet, the Scottish immigrant to America discussed in an earlier essay on “Order from Chaos,” wrote in 1787 that America “greatly wants a principle of attraction and cohesion,” he was holding on to an older, traditional, even medieval understanding of social relationships that saw society as an organic whole held together by ties of kinship, sentiment, power, and rulers of the common good. He did not see the new contractual society that was emerging in America. He did not see that self-interest was the new principle of “attraction” bringing free and equal men together and that contracts were the new principle of “cohesion” holding society together and creating new forms of trust.

**A reminder to readers: please know that I do not use footnotes or citations in my Substack essays. I do, however, attempt to identify the author of all quotations. All of the quotations and general references that I use are fully documented in my personal drafts, which will be made public on demand or when I publish these essays in book form.