Home

     In modern times everyone is quite used to the idea of using public money to encourage economic development by private enterprise. State and local governments invest tax monies to build industrial parks, subsidize job producing industries, build stadiums to lure sports franchises, create enterprise and empowerment zones, and issue bonds to enable expansion of private business activities. This practice did not always prevail. In the period after the Civil War, states erected a "wall of separation" between the public and private sectors of the economy, and many state constitutions enacted or amended in the 1870's and thereafter prohibited public investment in the private sector.
     The Arkansas Constitution of 1874 is typical of the strict separation of the public and private sectors. In Article 16, Section 1, our Constitution provides: "Neither the State nor any city, county, town or other municipality in this State shall ever loan its credit for any purpose whatever; nor shall any county, city, town or municipality ever issue any interest-bearing evidences of indebtedness. ..." Out of this provision grew the bedrock constitutional principle that public money could not be used for private purposes, but only for public purposes. What influenced this principle was the experience in many states of the questionable practices of many railroad companies seeking public investment in the extension of their lines. Although public subsidies to railroads were common in ante-bellum decades, during the rapid expansion of local rail lines after the Civil War, many companies sent out advance men to sell railroad stock and bonds to cities and towns in exchange for promises to run the lines through those places. Often the railroads would either build elsewhere or go into receivership, and the public would be stuck with worthless bonds or stock. Municipal bankruptcies were common and many states saw their treasuries looted by the rapacious railroads.
     In most states, including Arkansas, the principle that public money could only be used for public purposes was strictly applied. In 1931, however, the Arkansas Supreme Court essentially abandoned the principle. The case was Cobb v. Parnell, 183 Ark. 429, 36 S.W.2d 388. This case represents a sharp turning point and was decided by a 4-3 vote. What was Cobb about?
     The onset of the Great Depression dealt Arkansas and the Midwest a double blow. In 1930 nearly two dozen states in the central United States suffered the most severe drought seen in many decades. Virtually all the crops failed, and the cotton crop-a crop usually resistant to drought-was less than 50 percent of the normal yield. Due to the drought and to the great stock market crash of 1929, more than 100 banks in Arkansas, including the state's largest, failed, and closed their doors during a three month period in 1930. Farmers throughout Arkansas, and many other persons were literally at the edge of starvation. The only relief available was the Red Cross, and a large number of citizens were entirely reliant on the Red Cross for subsistence. In one county 20,000 out of a population of 22,000 were on relief. Although widespread starvation was avoided, undernourishment and malnutrition prevailed throughout the state.
     When the General Assembly convened on Jan. 12, 1931, the problem of the farm distress was high on the agenda. Very quickly the legislature passed, and Governor Parnell signed, Acts 10 and 34, the acts challenged in the Cobb case. Act 10 was approved on Feb. 11, and Act 34 on Feb. 18. The statutes created a state agricultural credit board, empowered to issue $1.5 million in bonds secured by the full faith and credit of the state, for the purpose of making loans to farmers and stockmen. The acts also levied a general one-half mill tax to retire the bonds, and, in order to have immediate funds pending sale of the bonds, authorized the transfer of $1.5 million from the highway trust fund to the credit of the new board (upon sale of the bonds the proceeds would be returned to the account of the highway department). These acts were immediately challenged on constitutional grounds. The courts acted quickly. Chancellor Dodge in the Pulaski Chancery Court upheld the statutes; the case was appealed, and the Supreme Court opinions were issued on March 9, 1931, less than a month after the enactments.
     The majority opinion, written by Justice Butler, acknowledged the principle that public money could not be used for private purposes; he also discussed the leading cases from other jurisdictions that upheld the principle in factually similar circumstances. The leading case "on all fours" was from Kansas, State v. Osawkee Township, 14 Kan. 418, 19 Am.Rep. 99. The Supreme Court of Kansas held that a statute appropriating money to be loaned to farmers after a drought year to enable the purchase of seed to plant a new crop was not for a public purpose. Another seed grain case from Minnesota also held the same way. Justice Butler, however, found cases from Alabama, South Carolina and North Dakota holding that the relief of calamities following natural disasters was a public purpose. He was obviously impressed with the North Dakota case, where that state's supreme court wrote that "legislation in aid of destitute farmers will serve to illustrate the well-known fact that legislation under the pressure of a public sentiment, born of stern necessity, will adapt itself to new exigencies, even if in doing so a sanction is given to a broader application of elementary principles of government than have before been recognized and applied by the courts in adjudicated cases."
     Butler posed the issue: "The question presented for our consideration is this: Is the purpose and effect of the act now before us a loan by the state of its credit to foster individual enterprises, or is it one which has for its end the accomplishment of a purpose which will secure the state from a general threatened evil and promote the welfare of its citizens?" He concluded: "We think the need is great, and the means for its relief but a use of the credit of the state for its own protection, as, protecting its citizens from famine and disease, it protects itself, and the aid extended is for a public purpose. The protection of its citizens from danger of whatever kind is the duty of the state, and in this case the measure is but a valid exercise of the police power, and the means employed find ample justification in the maxim, 'The safety of the people is the highest law.' "
     Chief Justice Hart began his dissenting opinion with the statement: "It seems to Judge Smith, Judge Mehaffy, and me that this is a case which calls for the application of the old and often quoted maxim that hard cases make shipwreck of the symmetry of the law." The dissenters acknowledged that under the constitution the legislature "might make an appropriation of the public money for those who may now be properly classed as poor persons," but they believed that the challenged acts did not fall into the category of poor relief. Rather, it was a loan of credit to private individuals to "prevent them from becoming a charge on the public."
     Since the Cobb case in 1931, our notions of what is a public purpose have undergone a sea change. Today, we discuss whether the State of Arkansas can come up with enough financial incentives to lure an automobile assembly plant to locate in the state. All over the country public money is used to subsidize private enterprise in the name of economic development and job creation. The "wall of separation" between public and private purposes has crumbled into nothingness. Cobb v. Parnell represents the beginning of that process in Arkansas.

(All lawyers are encouraged to become members of the Society to support our efforts to promote understanding the history of courts in Arkansas. Membership is $25.00 per year and checks may be sent to the Arkansas Supreme Court Historical Society, Inc., 625 Marshall St., Little Rock, AR 72201.)