The power of the Congress to control the use of the mails may not be exercised in such manner as to deny or destroy rights, either guaranteed by other provisions of the Constitution, or expressly reserved to the people by the tenth amendment. In Ex Parte Jackson (96 U.S. 727), the court said at page 732:

"The right to designate what shall be carried necessarily involves the right to determine what shall be excluded. The difficulty attending the subject arises, not from the want of power in Congress to prescribe regulations as to what shall constitute mail matter, but from the necessity of enforcing them consistently with rights reserved to the people, of far greater importance than the transportation of the mail." (Italics supplied.)

Nothing in the opinion of the court in Milwaukee Publishing Co. v. Burleson (255 U.S. 407), is at variance with this doctrine as stated in the dissenting opinion of Mr. Justice Brandeis, at page 430:

"The power to police the mails is an incident of the postal power. Congress may, of course, exclude from the mails matter which is dangerous or which carries on its face immoral expressions, threats, or libels. It may go further and through its power of exclusion exercise, within limits, general police power over the material which it carries, even though its regulations are quite unrelated to the business of transporting mails. In re Rapier (143 U.S. 110); Lewis Publishing Co. v. Morgan (229 U.S. 288). As stated in Ex Parte Jackson (96 U.S. 727, 732): 'The difficulty attending the subject arises, not from the want of power in Congress to prescribe regulations as to what shall constitute mail matter, but from the necessity of enforcing them consistently with rights reserved to the people, of far greater importance than the transportation of the mail.' In other words, the postal power, like all its other powers, is subject to the limitations of the Bill of Rights. Burton v. United States (202 U.S. 344, 371). Compare Adair v. United States (208 U.S. 161)." (Italics supplied.)

The power of the Congress to control the use of the mails may not, therefore, be constitutionally exercised so as to generally prohibit their use in connection with the buying and selling of securities through the medium of stock exchanges or in over-the-counter markets. Such power may be properly exercised only for the purpose of prohibiting specific transactions or methods of trading in securities when expressly declared to be contrary to public policy.

The only specific transactions and practices condemned in the bill are those which occur in connection with trading in securities "registered on a National Securities Exchange", which, of course, presupposes the power of the Congress to require such exchanges to register because engaged in interstate commerce. If the power to require registration does not exist, and the transactions and practices condemned in the bill are not, therefore, in securities "registered on a national securities exchange", they would not fall within the inhibited use.

There is, however, a general inhibition in the bill against the use of the mails for making or creating over-the-counter markets in unlisted securities without complying with such rules and regulations as the Federal Trade Commission may prescribe as appropriate in the public interest. So broad a delegation of power must, if constitutional, be exercised by the Commission in the same manner and with the same regard to other rights guaranteed by or reserved to the people under the Constitution, as would be required of the Congress under like circumstances.

It is not believed, therefore, that the Commission could, under color of the power thus conferred, prescribe rules and regulations destructive of the constitutional rights of those engaged in the buying and selling of unlisted securities in over-the-counter markets. To hold otherwise would concede to the Commission a power which the Congress does not possess and which might be exercised in such manner as to hinder and delay, if not in fact render impossible of transaction, important business of a purely private nature, the conduct of which is as much in the public interest as is the correction of the economic conditions which the bill is designed to remedy.

CONCLUSION

The following conclusions are fully justified from what has been shown: First. The Government of the United States is not National but Federal in character, and may not exercise through the Congress powers not expressly granted, or by implication necessarily conferred, by the Constitution.

Second. The power of the Congress to regulate interstate commerce, broad though it is, must be exercised in relation to transactions or businesses essentially interstate in character, or so directly related to interstate commerce as to be fairly comprehended within the power of the Congress to regulate such commerce.

The business of stock exchanges and that of their members may consist of purley local transactions between buyers and sellers residents of the same State. It may also involve transactions between residents of different States, either with or without the actual shipment of securities between the States. Interstate communications may be employed in the conduct of such business but interstate communication is not interstate commerce. The nature of the business of stock exchanges and that of their members does not provide for, not does it necessarily contemplate, the shipment of securities between the States. If interstate shipments are actually made, it is not because of anything growing out of the making of the contract of purchase and sale of securities. The necessity for any such shipment is not implicit in the transaction. There is no flow of securities through channels of interstate transportation such as that made the subject of regulation in the Stockyard and Grain Futures Acts, nor are securities commodities in a commercial sense. Under the decisions of the Supreme Court of the United States in fairly analogous cases, the business of stock exchanges and that of their members is intrastate in character and not interstate, and, therefore, not subject to regulation or control by the Congress as interstate commerce.

Third. The power of the Congress to control the use of the mails, like all other Federal power, is subject to the limitation of the Bill of Rights. Broad though it is, this power has never thus far been, nor may it now be, constitutionally exercised through the medium of the Federal Trade Commission or directly by the Congress, as is proposed in the bill, in such manner as to hinder or delay, if not in fact render impossible of transaction, important business of a purely private nature, the conduct of which is of far greater importance to the general public than the correction of the economic conditions which the bill is designed to remedy. Fourth. The bill as a whole is clearly unconstitutional. Respectfully submitted.

HUNTON, WILLIAMS, ANDERSON, GAY & MOORE,
Electric Building, Richmond, Va.,

THOMAS B. GAY, of counsel.

MARCH 1, 1934.

Counsel for New York Stock Exchange.

(Thereupon, at 11:48 a.m., the committee adjourned to meet the following morning, Thursday, Mar. 8, 1934, at 10 a.m.)

NATIONAL SECURITIES EXCHANGES-H.R. 7852

THURSDAY, MARCH 8, 1934

HOUSE OF REPRESENTATIVES,

COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE,

Washington, D.C.

The committee met, pursuant to adjournment, at 10 a.m., in the committee room, New House Office Building, Hon. Sam Rayburn (chairman) presiding.

The CHAIRMAN. The committee will come to order.

STATEMENT OF FRANKLIN W. FORT

The CHAIRMAN. We will today hear from Mr. Franklin W. Fort, who was one of our colleagues for quite a while. In talking to me the other day he expressed some ideas that I thought the committee might be interested in listening to, and so I asked him to come down. Mr. Fort, you may proceed as you desire.

Mr. FORT. Mr. Chairman and gentlemen of the committee: I have no interest whatever, of a personal nature, in this legislation, except insofar as it affects the regulation of banking-none insofar as it affects the regulation of securities exchanges.

The effort to regulate adequately, in the public interest, securities exchanges, if we are going generally into the regulation of business of various types, it seems to me is a proper and perhaps a necessary part of the general program; but this bill attempts also to regulate banking as a part and as though banking were a part of the speculative machinery of the country.

It seems to me that banking has been too close in many cases to the speculative machinery of the country to have that relationship definitely ingrafted into the law.

Most of the evils in banking in the past 6 or 7 years, most of the troubles in banking, have come from the fact that banking psychology has become distorted until it has approached broker psychology in the handling of loans, and unless the line of cleavage between sound banking and speculation is made absolutely clear, the evils of the past 5 or 6 years are going to be perpetuated and repeated.

Personally, as a banker, I do not want to have to operate in terms of the stock-market ticker. I do not want to have my judgment as a banker controlled and influenced, by law or otherwise, by considerations of speculative values, and this bill attempts to do that thing. Not only does it attempt to do it, by making the price on the stock exchange the measure of my lending capacity to my customer, but it attempts to do it in a far more serious and a far more dangerous way, because it divides the authority and the control over banking now lodged in the Federal Reserve Bank Board and the Comptroller of

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the Currency, in the Federal Trade Commission in its capacity as the guardian and supervisor of speculation. Sound banking, gentlemen, is only going to be fostered in America, if you place control of your banking solely in institutions and departments of the Government which have no relation to anything but banking.

The section of the bill which primarily accomplishes these things is section 6, chiefly paragraphs (c) and (d).

It may surprise you gentlemen to know that there is in the banking laws of this country today no definition whatever of the basis on which a banker may loan on collateral or other like security. The only definition is that in loans on real estate he may loan on "actual value not on price. This bill attempts to fix upon banking the yardstick of market price, and that will be as disastrous in the future as it has proven in the last 6 years, when bankers have been too much guided by market price.

In the studies which, in the period of my service on the Home Loan Bank Board, we had to make of the mortgage loan situation in America, the conclusion was inescapable that the evils of overlending which had almost wrecked the mortgage institutions of America had come from the substitution in the minds of the lenders of the factor of market price for the factor of actual value.

Mr. MAPES. Mr Chairman, may I interrupt?

Mr. FORT. Yes, sir.

The CHAIRMAN. Mr. Mapes.

Mr. MAPES. What do you say about section 6, paragraph (c), applying after the party has owned the securities after 30 days or more?

Mr. FORT. I did not quite get the question. I was trying to get my copy of the bill.

Mr. MAPES. I say, what do you say in regard to section 6, paragraph (c), having any application insofar as securities owned by the borrower for more than 30 days are concerned?

Mr. FORT. By section (d) the Commission is given power to prescribe the time and specific means by which values shall be calculated for purposes of this section. The time within which initial and subsequent payments shall be made by the customer, and the notice to be given, and the method to be followed in closing out accounts, all of which relate equally to the provisions of section (c) and the provisions of section (b), as they are both in the same section.

Mr. MAPES. You think section (d) relates to the loans by banks as well as by brokers?

Mr. FORT. I think so, sir, because it refers to the entire section. Mr. MAPES. Assuming that that is true, would not this specific provision of paragraph (c), which limits the discretion of the bank as to securities owned by the borrower for a period of less than 30 days control?

Mr. FORT. In part. I think that I am coming to a more direct connection of the 30-day provision a little bit later, but I still feel that this bill is making the first attempt here to define the capacity of banks in making a collateral loan in any respect.

Mr. MAPES. What I had in mind was leading up to this question, if the restriction is confined only to loans on securities which have been owned for 30 days or less, would that be an undue restriction in your opinion?