II. THE BREAKDOWN OF GENERAL AND LOCAL LAW
In the decades following Swift, the evolving Swift doctrine became increasingly inconsistent with the constitutional structure and acts of Congress. As discussed below, states increasingly exercised their regulatory power to localize matters they were previously content to have governed by general commercial law. At the same time, federal courts improperly expanded their conception of general law beyond commercial law to include matters traditionally subject to local law. These two developments ultimately led the Supreme Court to declare the Swift doctrine unconstitutional in Erie Railroad Co. v. Tompkins.
A. State Efforts to Localize General Law
After Swift, states increasingly localized matters previously subject to general law, abandoning "reliance on the general law merchant in favor of localized commercial doctrines." (161) Both state legislatures and state courts participated in this shift.(162) State legislatures enacted commercial statutes to replace general commercial law, and state courts increasingly regarded commercial law as local law rather than general law.
First, state legislatures steadily subjected commercial transactions to state legislation, eventually including uniform commercial laws. By the late nineteenth century, commercial transactions in the United States were subjected to various and often contradictory state statutory requirements. (163) At this time, "statutes grew and increased like weeds in all the forty-eight states and territories." (164) Indeed, "every state ... had one or more statutes attempting to regulate in whole, or in part, the law of commercial paper." (165) Because "[b]ills and notes were the oil for running the American business machine .... [c]ourts were clogged with questions of negotiability and transfer." (166) Disuniformity in state law necessitated the development of uniform commercial statutes,(167) including the Uniform Negotiable Instruments Act. (168) Such laws were designed to perform the function historically performed by the law merchant--that is, to encourage trade by subjecting commercial transactions to uniform rules across state lines. (169) By adopting the Negotiable Instruments Act, which codified many law merchant rules, states incorporated much of general commercial law into their local enacted laws.
State legislation, however, did not entirely displace general commercial law. The Negotiable Instruments Act itself expressly stated that "[i]n any case not provided for in this act the rules of ... the law merchant shall govern." (170) Nonetheless, over time, general law grew less uniform as state and federal courts increasingly defined it differently. (171) Moreover, state courts increasingly came to describe their distinctive interpretations of the law merchant as local state law, not general commercial law. In particular, state courts began to dispute whether, in applying the law merchant, they were bound to follow the law of the forum or the law of the place of the contract. State courts thus began to describe general commercial law not as a transnational law over which they exercised independent judgment but rather as the local law of a particular sovereign. Eventually, state courts no longer characterized even the question involved in Swift v. Tyson--whether a negotiable instrument invalid in the hands of the original holder was enforceable by a bona fide holder in due course--as a question of general law, but rather characterized it as one of local law. (172) Under this view, local law governed the content of commercial law. By the turn of the twentieth century,
the rule adopted in a large majority of the state courts, and
announced by text-writers, is that when it becomes necessary to
determine the common law of another state, the decisions of the
courts of final resort of that state will be followed, regardless
of precedents to the contrary in the state where the trial is held,
and that this rule applies to the law merchant, as well as to other
branches of the common law. …