In the case of Knoxville Iron Company v. Harbison (183 U.S. 13) the U.S. Supreme Court upheld an 1899 Tennessee statute requiring cash redemption of store orders and other noncash payments to employees. At issue was a suit brought against the Knoxville Iron Company by a licensed securities dealer who had purchased 614 coal orders (at eighty-five cents on the dollar) from the company’s employees and unsuccessfully tried to redeem them.
The company paid its approximately two hundred employees in cash on the Saturday of each month nearest the twentieth for all work prior to that month, thus constantly keeping workers at least twenty days in arrears. The company allowed employees to collect coal orders at twelve cents a bushel in lieu of cash on any Saturday afternoon.
Knoxville Iron Company, whose case was argued by Tennessee’s Edward Sanford, a future Supreme Court justice, challenged the script law as a violation of freedom of contract and a deprivation of due process of law guaranteed by the Fourteenth Amendment to the U.S. Constitution. The chancellor of Knox County, Tennessee’s Court of Chancery Appeals, and the Tennessee Supreme Court all rejected the company’s claims before the company appealed to the U.S. Supreme Court.
Justice George Shiras authored the Court’s seven-to-two majority opinion; Justices David Brewer and Rufus Peckham dissented without recording their reasoning. Shiras quoted extensively both from the Tennessee law and the Tennessee Supreme Court opinion. Acknowledging that the law abridged contract rights, Shiras approvingly noted that it was not class-based, but applied equally to all. Shiras further concluded that the law was a legitimate exercise of state police powers equalizing the relationship between employers and employees and promoting peace and good order.
Shiras cited three precedents: Holden v. Hardy, an 1898 Utah case in which the Supreme Court had upheld state-mandated limits on the hours of underground miners; St. Louis, Iron Mountain & Railway v. Paul (1899), requiring railroads to pay employees on the dates of their discharge; and Atchison, Topeka & Santa Fe Railroad v. Matthews (1899), authorizing states to penalize railroads that allowed fires to escape from their locomotives.
In Dayton Coal and Iron Company v. Barton, a companion to Knoxville Iron, the Supreme Court rejected another challenge to Tennessee’s script law by requiring stores to pay cash on demand for store orders issued in lieu of wages. Justice Shiras rested this second decision on the reasoning in Knoxville Iron.
Scholars traditionally characterized the Fuller Court as a bastion of laissez-faire capitalism by referring to Lochner v. New York (1905), where it invalidated a New York state regulation of the hours of bakers as a violation of freedom of contract. Recent scholars have argued that this characterization was overdrawn and that the Fuller Court often upheld state exercises of police powers, especially when such laws did not have a perceived class bias. The decisions in Knoxville Iron Company and Dayton Coal and Iron Company support this newer understanding.