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Since then a great number of bills have been introduced into the House. Some of these bills have gone to public hearings, such as was true of H.R. 4 in the Seventy-second Congress, the bill that was commonly known as the LaGuardia bill. The Seventy-first Congress had 2 Senate bills and 6 House bills; the Seventy-second Congress had 6 Senate bills and 11 House bills, and the Seventy-third You have now, I think, Congress 2 Senate bills and 8 House bills. You have now, three or four bills that are pending on this particular matter. No action was taken on any of these bills by any committee, and this I believe is the first time that the President of the United States has expressly urged legislation on this matter.

At the threshhold of this question, there seems to me to lie the question of national power over the exchanges. I think this committee has to meet that and face that before it can go any further. The question is not free from doubt. I myself have had doubts about the constitutionality of some of the legislation that has been proposed in this House. I had grave doubts about the LaGuardia bill that was pending here in the Seventy-second Congress and which in different forms is still pending. I think to see the question of the constitutionality of this legislation, one has to first see the character of stock-market transactions. The stock-market transactions as such are purely intrastate in character. Members on the exchange buy from each other purely on the exchange-I am taking the New York Stock Exchange as an example on the exchange, right in the building. Deliveries of securities are made in New York; payments are made in New York; members of the exchange are required by the rules to have a New York office. Not only that, issuers whose securities are listed on the exchange must have transfer agents in New York. For their bonds they must have an agency in New York who will meet both principal and interest when it is due.

Furthermore, the price quotations that are sent out are not sent out by the exchange. They are sold by the exchange to the telegraph service which then disseminates them through the country.

So that if you look at these transactions independently you find that they are purely intrastate from a technical standpoint; but that does not solve our problem.

It is a commonplace of constitutional law that although the transactions viewed individually may be intrastate in character they may be so related to interstate commerce that Congress can control those transactions themselves. As an illustration, the Sherman Act can be taken. The transactions that are very often controlled by the Sherman Act are not themselves interstate in character, but they, because of their effects upon interstate commerce, come within the congressional power of control. A good illustration is a case like quarthe Bedford cut stone case, where local stonecutters in New York refused to work on stone that had been quarried in nonunion ries in Indiana, with the idea of unionizing those quarries. That was held to be a combination in restraint of interstate trade and commerce by the Supreme Court of the United States. Or, to this committee, a familiar case like the Wisconsin rate case, or the Shreveport case, where intrastate commerce is controlled because of its intimate relation to the movement and rates in interstate commerce. Another illustration, I think, is the power of the Federal Trade Commission under section 5. Advertising as such has not been held

to be interstate commerce. But the Federal Trade Commission exercises power over advertising because advertising affects sales of goods in interstate commerce.

Consequently, in order to spell out an appropriate power for Congress to deal with stock exchanges, you have to show the intimate relationship of these transactions on the exchange itself, to interstate

commerce.

I speak primarily of the interstate-commerce power, because I do not believe that legislation of this type can be based effectively upon any other power than the congressional power over interstate com

merce.

The first question I think that one has to ask is this: Is this commerce, in securities, interstate commerce of the type that comes within the control of Congress? I think that if one builds up the appropriate picture of the exchange that there is not much difficulty of answering that question. As an illustration, supposing a person in Louisiana, we will say, sells a thousand shares of steel common. That sale order is transmitted to the exchange, meets a buy order from somebody, we will say, in Massachusetts, and the result of that transaction moving through the exchange is to transfer an interest from Louisiana to Massachusetts. True the interest is in the steel properties, but an interest represented by a security in Louisiana, now becomes represented by a security held in Massachusetts. In other words, the exchange itself, if I may use a graphic description, is a sort of a throat through which the commodity, the security, is moved.

It is true that right in the throat, the transactions or purchases are intrastate in character, but that particular movement on the exchange is essential for the free movement in interstate commerce of these streams of securities. I think if one gets that idea firmly in one's mind, that the difficulty with reference to the constitutional regulation of exchange transactions largely disappear. If one can see this exchange as I see it, as a throat controlling this movement, perhaps burdening interstate commerce because of what happens in that throat, raising prices of securities to artificial levels because of the transactions that take place in that throat, then surely this stream of securities moving in intrastate commerce is something over which Congress has concern and control.

One objection that is immediately raised to any analysis of the situation from that standpoint is this: Securities are not commodities which move in interstate commerce. That is the contention, the contention basing itself upon several decisions of the Supreme Court of the United States. It bases itself very largely upon insurance cases, beginning with Paul v. Virginia (8 Wall. 168), which has continued to be a line of decisions by the Supreme Court of the United States.

Those cases have held that the writing of insurance is not interstate, commerce in the sense that it is immune from State control.

These cases, I do not think, can be regarded as determinative of this proposition, because of these reasons:

Firstly, an insurance contract is hard to regard as a commodity in the way that a security is. It is not traded in in the way securities, It is true it is pledged as any property is pledged, but there is no trade in insurance contracts. There is no stream of these inter

are.

changeable insurance contracts moving in interstate commerce in the way that securities move.

Secondly: It must be remembered that these cases do not establish the proposition that the Federal Government has no power to regulate insurance. They simply establish this proposition, that if the Federal Government has not acted, transactions in insurance are not immune from State control. That is a very common principle, such, for example, as is illustrated by the Federal Employers Liability Act. There the State can, until the Federal Government intervenes, control the liabilities of carriers in interstate commerce, of the employees in interstate commerce; but when the Federal Government intervenes, its constitutional right to do that has been sustained.

Thirdly, and I think that this fact is not without interest in connection with the insurance cases: There is a series of these cases ending with the case of the New York Life Insurance Company v. Deer Lodge, 231 U.S. 495, where the question was again urged before the court, I think, in the ablest fashion that it was ever argued before that court. The two members of that court who are now members of that court who dissented are Mr. Justice Hughes and Mr. Justice Van Devanter. It is not that that means these cases are no longer law, but I think that represents an attitude of mind, a realization, that perhaps the problem of insurance is one of national concern and therefore subject to national control.

Two cases in this field, I think are the cases upon which reliance must be placed for regulation of the exchange. The first of those two cases is Stafford v. Wallace, 258 U.S. 495. That case upheld the constitutionality of the Packers and Stockyards Act of 1921. That act sought to control transactions in the Chicago Stockyards which were purely intrastate in character, as well as some transactions that were interstate; but the issue as to whether or not Congress should control those transactions in the Chicago Livestock Exchange or stockyards, was raised by that case.

Mr. Chief Justice Taft in deciding that case used this graphic expression of the throat; namely, he saw how through the Chicago Stockyards moved this vast stream of commerce in cattle from the far West through those stockyards, perhaps to be slaughtered there and then to move in the form of products to the East and to other parts of the country. He recognized that the markets for livestock were very much affected by the transactions that took place on the Chicago Stock Exchange. He recognized that there was a power and a duty on the part of Congress to protect that flow of commerce from burdens. which might be imposed of this nature, which might be imposed by purely intrastate transactions.

The second case is the case of the Chicago Board of Trade v. Olsen (262 U.S. 1), which upheld the constitutionality of the Grain Futures Act.

There again, the transactions that were sought to be controlled by that act were intrastate transactions. The control was being exercised over future contracts in grain. That, in itself, was not an interstate transaction, except in so far as the court did relate that transaction to the flow in commerce of grain. It recognized specifically that the price of grain was largely affected by transactions of the Chicago Board of Trade.

I think if I might just give you one quotation therefrom the Chicago Board of Trade against Olsen, which I think puts the case in a nut shell, this intimate tying up of the intrastate and interstate streams of commerce will become clear.

Chief Justice Taft again delivering the opinion in this case said:

If a corner and the enhancement of prices produced by buying futures directly burden interstate commerce in the article whose price is enhanced, it would seem to follow that manipulations of futures which unduly depress prices of grain in interstate commerce and directly influence consignment in that commerce are equally direct. The question of price dominates trade between the states. Sales of an article which affect the country-wide price of the article directly affect the country-wide commerce in it." (Chicago Board of Trade v. Olsen, 262 U.S. 1, at 39-40.)

I think it is upon the basis of conceptions of that type that the constitutionality of legislation such as is proposed here in H. R. 7852 must be sustained.

The bill itself in section 2 sets forth that in the judgment of Congress, that the activities on the exchanges intimately related to the movement of securities in interstate commerce. It sets forth other relationships as well, and I think some of these other relationships might well be adverted to in order to show how much of the problem of control over the market is a problem not of State concern, but of national concern, and therefore, one within the powers of Congress to regulate.

That section sets forth that there is a distinct relationship between the price of securities and the price of commodities. I think that that can be demonstrated, namely, that a depreciation in the stock market is frequently followed-sometimes preceded by depression in the commodity market.

Secondly, this section also sets forth the conception that there is likely to be a great curtailment of industrial activity as a consequence of movement, of a depressing character, on the stock exchange.

I think that can be demonstrated by a more or less homely illustration. Namely, people, when the market goes up, do buy their wives fur coats, and so on. This stimulates a demand which may be an unhealthy demand, if it does not truly reflect the business conditions in the country. In other words, business men are likely to make commitments in times of a rising market, whereas there is a tendency to curtail otherwise.

There are other features set forth too. The first is the relationship of these prices to the exercise of the taxing power by Congress. Market value is an important thing in determining just what taxes should be. The capital gains and loss tax, for example, depends entirely upon the value of the securities. It is important for the Government that those values reflect real values and not artifically stimulated values, or artificially depressed values.

Again, there is an intimate relationship between these transactions and the credit movement in this country. The stock market has a tendency, on occasions, to absorb credit into the market which perhaps might otherwise move into new activities unrelated to speculative purposes, or again, the solvency of the banking structure may be regarded as depending largely upon the problem of the proper working of the market. Banks after all, their solvency, is dependent largely upon the market, and a depression in the value of securities,

or an artificial condition in the market produces an unhealthy situation in the banking system.

All of these considerations, I think, point to the main thing, namely, that the regulation of exchanges is a matter of national concern and being that it lies within the power of Congress. I do not want to trespass upon your time with reference to this argument. I simply would like to call your attention to some of the writing there has been on this problem. Perhaps the best statement of the case against the constitutionality of regulation of stock exchanges is a recent brief published by Mr. Raoule Desvernine, of Hornblower, Miller, Miller & Boston, a New York firm of considerable experience in stock market transactions, which I am sure would be supplied to you upon request.

The best statement of the case from the other side is an argument by Mr. Hanna in the University of Southern California Law Review and there is also here a monograph on the subject presented by the Library of Congress, which I think is very worthy of consideration. The main thoughts are set forth in those articles.

Now, the second question to which I would like to address your attention is the general question of the relationship of administration to this legislation.

I think it is the general viewpoint of nearly all persons that have dealt with stock market legislation that two aims are desirable:

One is flexibility of administration. The problem is very complex, very delicate, very technical. Moreover, our knowledge about many of these things is quite inadequate. So, the flexibility and the opportunity to move rapidly, to experiment, as the exchange itself experiments, in pushing through a regulation or trying something for a time, to see what its effects are, is imperative in legislation of this type.

The second thing, and I think that every one is agreed about this, is that that being so, what is needed is to intrust the administration of an act of this type to the best possible administrative agency that can be conceived for that purpose.

I think the best way in which I can bring out the way in which this bill meets that objective of flexibility of administration is by trying to give you a picture of what flexibility it contains, what powers it gives to the Commission that it intrusts with the administration of this act. I think if I can go through the thing, not section by section, in any detailed sense, but just taking the various sections to show the kind of administrative powers that are deputed to the administrative authority:

Section 5 of the bill deals primarily with the registration of exchanges. In a large measure the conditions which will surround the registration of exchanges are to be governed by rules and regulations set forth by the Commission. The main principles are set forth in the bill, but the working out of those details is entrusted to the Commission.

In section 6, which deals with margin requirements, there is a flat rule laid down below which there shall be no margin accounts, but there is a power in the Commission to increase the margin requirements if it deems such a thing wise, with reference to the objectives that are set forth there: The protection of investors, and the public interest.