Author granted license

Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International

Document Type


Publication Date



Boston University School of Law




This is a case study of the Supreme Court’s classic decision in Smith v. K.C. Title & Trust Co. A stockholder challenged the constitutionality of the Farm Loan Act of 1916, which authorized federal banks to issue tax-exempt bonds to raise funds for loans to farmers. The case is best known for its holding that a federal court could entertain the suit because it arose “under the Constitution” and for Justice Holmes’ argument, in dissent, that federal jurisdiction was not established because state law created the “cause of action.”

This study is the first to go beyond the jurisdictional issue in Smith. This old case provides a snapshot of a time in American history when both political parties cooperated in the creation of public institutions to foster credit in a vital sector of the economy. Private companies asked the courts to protect their businesses in the name of the Constitution. The courts fashioned a framework for entertaining the challenge. And the Supreme Court easily validated the economic policy forged by Congress.

Smith was a classic test case. The real interests backing the shareholder’s action were private mortgage lenders anxious that federal banks would drive them out of business. Some of the greatest lawyers of the day participated, including Charles Evans Hughes (later to be named Chief Justice). This article describes the 1916 Act and the conditions that gave rise to it, explores the development of the test case, and critiques the modern Court’s understanding of the jurisdictional question.


Published as: "Federal Banks and Federal Jurisdiction in the Progressive Era," 62 University of Kansas Law Review 255 (2013).

Find on SSRN

Included in

Jurisdiction Commons



To view the content in your browser, please download Adobe Reader or, alternately,
you may Download the file to your hard drive.

NOTE: The latest versions of Adobe Reader do not support viewing PDF files within Firefox on Mac OS and if you are using a modern (Intel) Mac, there is no official plugin for viewing PDF files within the browser window.