Justice Frankfurter and His Frankenstein

Chidem Kurdas

There’s nothing new under the regulatory sun—so far, anyway. An innate corruption was built into the financial supervisory system just about from its inception. As the symptoms emerged over time, certain distinguished thinkers who had been votaries of government interventionism in the 1930s changed their view.

Felix Frankfurter – law professor and adviser to President Franklin D. Roosevelt, later appointed to the Supreme Court by him – was among these.

Quote from Ponzi Regulation:

“From the outset it was clear that lawyers could quickly change sides. As regulators they oversaw businesses and subsequently as defense counsel objected to the results of the oversight of those same businesses. Almost as soon as the rules were written, regulators started to deal with their former colleagues who moved to the other side.

A dramatic instance of this happened among the first generation of agency officials. The first general counsel of the Securities and Exchange Commission, John Burns, another Harvard law professor and friend of Frankfurter, became general counsel of United Corp., a utility holding company.

The SEC had the task of implementing a utility holding company law that mandated the breakup of utility systems, at least those that did not benefit from economies of scale. United Corp., armed with the former SEC counsel as its legal strategist and a former assistant director of the SEC Public Utilities Division as its president, successfully fought the agency.

Not every member of the profession accepted that legal skills should rightly be fungible—easily transformed from public to private servant, and possibly back again. Frankfurter, for one, was scandalized by the spectacle of lawyer-regulators switching sides. He wanted to prevent SEC employees from using their inside knowledge for private gain and recommended that former staffers not be allowed to defend their clients against the agency for two years.”

Much later such rules were instituted, but to this day the restrictions have only cosmetic effect.

Frankfurter had helped create and justify the regulatory Frankenstein that he later watched with growing apprehension. This may have been part of the reason he changed his mind about expansive government. Supreme Court Justice Frankfurter disappointed left-liberals and wrote conservative opinions.

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