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of fact the declaration of Congress will be given well-nigh conclusive weight. It was the absence of a finding by Congress that caused the court to hold invalid the Future Trading Act in Hill v. Wallace (259 U.S. 44, 69), in which the Court said that sales for future dealing “cannot come within the regulatory power of Congress as such, unless they are regarded by Congress, from the evidence before it, as directly interfering with interstate commerce so as to be an obstruction or a burden thereon.” The presence of such a finding in the Grain Futures Act served to distinguish the earlier case. In the Olsen case the Court thus deferred to the judgment of Congress:
“By reason and authority, therefore, in determining the validity of this act, we are prevented from questioning the conclusion of Congress that manipulation of the market for futures on the Chicago Board of Trade may, and from time to time does, directly burden and obstruct commerce between the States in grains, and that it recurs and is a constantly possible danger. For this reason, Congress has the power to provide the appropriate means adopted in this act by which this abuse may be restrained and avoided” (p. 40).
In the Stafford case the Court took a similar position with respect to the Packers and Stockyards Act:
“Whatever amounts to more or less constant practice, and threatens to obstruct or unduly to burden the freedom of interstate commerce, is within the regulatory power of Congress under the commerce clause, and it is primarily for Congress to consider and decide the fact of the danger and meet it. This Court will certainly not substitute its judgment for that of Congress in such a matter, unless the relation of the subject to interstate commerce and its effect upon it are clearly nonexistent." P. 521.
In the light of these declarations by the Court it would be anomalous for Congress to question the effect of its own findings, supported as they are by abundant evidence.
The results of stock-exchange practices are not confined, it must be remembered, to commerce in the securities themselves. As the bill declares in section 2, the effects are wide-spread. Many of these effects are so well known that a court might well take judicial notice of them. Some of the more notable effects may be referred to briefly, by way of confirming the findings in the bill:
(1) Prices of commodities which flow in interstate commerce are affected indirectly by fluctuations in the prices of securities quoted upon the exchange. It can easily be demonstrated that prices upon commodities exchanges fluctuate from day to day, in sympathy with fluctuations in prices of securities. Probably on 9 days out of 10 commodity prices fluctuate to the same extent proportionately and in the same direction as securities prices. Over a long period a definite relationship can be shown between trends in the prices of securities and in wholesale and retail prices of commodities in general. The power of Congress to regulate factors affecting the interstate flow of commodities dealt in on exchanges was established in the case of the Grain Futures Act.
(2) An artificial or undue rise in security values greatly increases the value of collateral for loans and so augments the volume of available credit. The effect of this easy credit is an unsound inflation, an undue amount of indebtedness, followed by forced liquidation when values decline. This instability of credit and purchasing power are important factors tending toward instability of trade. The bearing of these conditions upon the credit control of the Federal Reserve System will be discussed later.
(3) The market prices of securities are frequently taken as the basis for fixing the value of securities where mergers and consolidations are effected. Where such prices are involved, the reorganized company may be overcapitalized just as if it had watered its stock. The reorganized company will seek to maintain its dividends and will be forced to raise its prices or effect a combination with its competitors. As a result, prices of goods in interstate commerce will be affected and combinations and mergers of companies dealing in interstate commerce will be encouraged with a resultant restraint of trade.
(4) The effect of fluctuations in the market and rapid changes in prices upon the morale of the business community is most acute. Business men, discouraged in a period of falling prices, will not increase their activity. On the other hand, rapidly rising prices encourage feverish and unhealthy business activity with the hope that greater profits can be realized. As a result a condition of overproduction is reached and leads to an inevitable collapse.
These facts place the present measure upon an entirely different footing than the law regulating the transportation of goods produced in factories employing child labor, which was held unconstitutional in Hammer v. Dagenhart (247 U.S.
251). That case did not involve the power of Congress to regulate activities which affect interstate commerce. The question upon which the court divided 5 to 4 in that case was whether Congress could, in effect, regulare conditions of employment merely because of its power over the transportation of goods which were the products of such employment. Whether the court will adhere to the principle in that case we need not consider. It may be remarked, in passing, that the decision was not thought to be an obstacle to those parts of the recovery legislation which regulate local activities that have only a remote effect upon interstate commerce. That the stock exchange and the practices of its members have a clear and substantial effect upon such commerce, the country has become acutely aware.
C. Do the securities themselves constitute articles of commerce such that Congress may regulate practices which affect their flow?- Even if it could be demonstrated that securities are not articles of commerce in the view of the Supreme Court, the effect of the regulated practices upon commerce in other commodities would be adequate to support the regulation. But it cannot be demonstrated that the Supreme Court has held, or is likely to hold, that securities are not articles of commerce whose movement Congress may regulate.
From the point of view of the ordinary person, it is beyond question that securities dealt in on an ex partake as much of the nature of commodities as do any other kinds of property: Securities pass readily from hand to hand, they are dealt in as property, and they are taxed as such. It would be surprising if the courts were to take a position inconsistent with general business usage by holding that such securities are not articles of commerce in the same sense as other personal property:
Certain decisions of the Supreme Court have been advanced to support the view that securities are not articles of commerce. Upon examination, however, none of these cases will be found to lend any support to that assertion. The principal line of cases relied upon in this connection is that dealing with insurance. These cases are alike in that each of them involved an attempt by a State to tax or regulate some phase of the insurance business. The Supreme Court has upheld such State action in an unbroken line of cases beginning with Paul v. Virginia (8 Wall. 168), and culminating in New York Life Insurance Co. v. Deer Lodge County (231 C.S. 495). The reasoning in these cases is indicated by the following quotation from Paul v. Virginia, with respect to insurance contracts:
“They are not subjects of trade and barter offered in the market as something having an existence and value independent to the parties to them. They are not commodities to be shipped or forwarded from one State to another, and then put up for sale. They are like other personal contracts between parties which are completed by their signature and the transfer of the consideration."
When it was argued in the Deer Lodge County case that the nature of insurance and insurance policies had undergone a change, the Court pointed out that to overrule its prior decisions would mean that a host of State regulatory and taxing laws would be overthrown. The Court said:
“This we specially emphasize, for all of the cases concerned, as the case at bar does, the validity of State legislation, and under varying circumstances the same principle was applied in all of them. For over 45 years they have been the legal justification of such legislation. To reverse the cases, therefore, would require us to promulgate a new rule of constitutional inhibition upon the States and which would compel a change of their policy and a readjustment of their laws. Such result necessarily urges against a change of decision."
The Court reverted to the doctrine that insurance policies are mere personal contracts, not the subject of sale and transfer:
“They, the Lottery and the Pigg cases, were concerned with transactions which involved the transportation of property and were not mere personal contracts” (p. 511).
Three significant features should be noted in connection with the insurance
(a) Insurance policies have been regarded as personal contracts to be distinguished from items of property which are subject to sale and transfer. Stocks and bonds, on the contrary, can be traded, negotiated, and used as a medium of exchange infinitely more readily than insurance policies, because stocks and bonds acquire a definite market value uniform for each unit of an issue. One share of stock or one bond of an issue is like any other of that issue. . They are in no sense “mere personal contracts.” Indeed, shares of stock are not so much contracts at all as they are proportionate equities in property.
(6) The insurance cases involved State action which had been long established. The fact that such action is upheld does not preclude Federal regulation, as will be demonstrated presently.
(c) The only two members of the Court in the Deer Lodge County case who are members of the present Court-Justices Hughes and Van Devanter-dissented.
Another decision which is sometimes cited as an authority for the contention that securities are not articles of commerce is Ware & Leland v. Mobile County (209 U.S. 405). In that case a State license tax was upheld as applied to a dealer in cotton futures. The Court quoted, in the course of its decision, from the opinion in Paul v. Virginia. Whatever may be thought of the analogy between insurance contracts and contracts for cotton futures, the applicability of the case to securities is remote. The case, moreover, is not an authority on the question of Federal regulation, since it involved a State tax, and since only one stage in the business of dealing in futures was subjected to the tax. The limited application of the case is brought out in the decision in United States v. Patten (226. U.S. 525), holding the Sherman Act applicable to a corner in cotton on the New York Cotton Exchange. In the Patten case Mr. Justice Van Devanter said:
“The defendants place some reliance upon Ware & Leland v. Mobile County (209 U.S. 405), as showing that the operation of the conspiracy did not involve interstate trade or commerce, but we think the case does not go so far and is not in point. It presented only the question of the effect upon interstate trade or commerce of the taxing by a State of the business of a broker who was dealing in contracts for the future delivery of cotton, where there was no obligation to ship from one State to another;
If the Ware & Leland case were authority on the question of Federal regulation, it would have precluded the Grain Futures Act.
All the cases involving the validity of State, as distinguished from Federal, control must be read in the light of the accepted doctrine that the State may tax and regulate activities which Congress has not regulated, but which Congress might constitutionally regulate if it should see fit.
The sharp distinction between the power of the State to tax and regulate, and the power of Congress to regulate, has been expressed in numerous cases. See, for example, Binderup v. Pathe Exchange (263 U.S. 291, 311):
"It does not follow that because a thing is subject to State taxation, it is also immune from Federal regulation under the commerce clause."
Swift v. U.S. (196 U.S. 375, 400).
“But we do not mean to imply that the rule which marks the point at which State taxation or regulation become permissible necessarily is beyond the scope or interference by Congress in cases where such interference is deemed necessary for the protection of commerce among the States.".
See also the very recent case of Minnesota v. Blasius (290 U.S., 1), decided November 6, 1933, in which Chief Justice Hughes said:
“But because there is a flow of interstate commerce which is subject to the regulating power of the Congress, it does not necessarily follow, in the absence of a conflict with the exercise of that power, a State may not lay a nondiscriminatory tax upon property which, although connected with that flow as a general course of business, has come to rest and has acquired a situs within the State."
This last case is interesting because the Supreme Court of Minnesota had held certain cattle nontaxable by the State, on the ground that the Packers and Stockyards Act placed such cattle under Federal control as property in interstate com
The United States Supreme Court reversed the Minnesota court for failure to distinguish between the question of State power to tax and Federal power to regulate, in their relation to the nature of interstate commerce.
The well-known doctrine of “occupation of the field” by Congress rests on the principle that Congress may regulate what was once within the proper sphere of State control. Thus, for example, Congress has set up in the Federal Employers' Liability Act a system of compensation for injured railroad workers--a field which was theretofore under State control. So, too, in the recent case of Dickson v. Uhlmann Crain Co. (288 U.S., 188), the question was raised whether State bucket-shop laws were superseded by the Grain Futures Act. In this case the Court held that both the State and Federal legislation might be given effect, since the latter was not interfered with by the former.
Thus the cases involving State action do not demonstrate that the articles involved in those cases, much less securities dealt in on an exchange, are not articles of commerce whose flow Congress may regulate. Indeed, in a case involving State regulation of dealers in securities, in which the principle of the State “blue-sky” law was sustained, the Supreme Court has indicated that the
movement of securities constitutes interstate commerce. See Hall v. GeigerJones Co. (242 U.S. 539).
The questions are pertinent, the answers to them one way or the other, of consequence; but we may pass them, for, regarding the securities as still in interstate commerce after their transportation to the State is ended and they have reached the hands of dealers in them, their interstate character is only incidentally affected by the statute” (p. 559).
II. POWER OVER THE MAILS AND OTHER INSTRUMENTS OF INTERSTATE COMMERCE
An independent ground upon which the constitutionality of many provisions of the bill may rest is the power of Congress over the mails and other means of communication and transportation. Several sections of the bill are expressly limited in their application to persons using the mails or any means or instrumentality of interstate commerce or any facility of a national securities exchange. So far as use of exchange facilities is concerned, the power of Congress rests on the fact that an exchange is an institution upon which and by means of which activities are carried on that affect both interstate commerce and, as will be shown later, activities and functions of the Federal Government. But aside frm the use of exchange facilities, the use of the mails or other means of interstate commerce is adequate, in view of the decisions, to sustain regulation. Among the sections whose application rests in part upon such use are section 8, prohibiting manipulation of security prices, section 13, dealing with proxies, and section 14, authorizing the Commission to regulate over-the-counter markets.
The power of Congress over the mails has frequently been exercised and sustained in regulating practices which, but for the use of the mails, would not be within the authority of Congress to control. Thus, although the Federal Government has no power to enact criminal laws except in aid of the express powers of Congress, cases of fraud have been brought within the sphere of Federal crimes where the mails have been used in furtherance of the fraudulent purpose. Tle “fraud orders” of the Post Office Department have gone so far as to prohibit tle receipt of mail by anyone declared to be engaged in such a fraudulent scheme; and this prohibition has been sustained. Public Clearing House v. Coyne (194 U.S. 497). Although Congress has no power to suppress lotteries as such, it may, in effect, do so by prohibiting and making criminal the transportation of lottery tickets through the mails. Ex parte Jackson (96 U.S. 727); in re Rapier (143 U.S. 110). The power of Congress with respect to undesirable activities in which the mails are used has been summed up by Mr. Justice Holmes, speaking with reference to the deposit of letters in the mails, in Badders v. U.S. (240 U.S. 391, 393):
Congress may forbid any such acts done in furtherance of a scheme that it regards as contrary to public policy, whether it can forbid the scheme or not.”
But the element of improper practices is not essential to Federal regulation. Although Congress has no power over the business of publishing as such, it may require that those enjoying the privilege of second-class mail shall make regular statements of the ownership of the periodical, the names of its editors, and the amount of its circulation, Lewis Publishing Co. v. Morgan (229 U.S. 288).
Similar to its power over the mails is the power of Congress over the means and instrumentalities of interstate commerce. The Federal attack on lotteries has been carried out through prohibition of the sending of lottery tickets in interstate commerce as well as merely through the mails. Lottery case (188 U.S. 521). Although Congress has no power over immorality as such, it may, in effect, exercise control where there is interstate transportation for immoral purposes, as in the Mann Act. Hoke v. United States (227 U.S. 308). Similarly, although Congress has no power over theft as such, it may, in effect, extend the Federal criminal law to such offenses where interstate transportation is utilized, as in the Federal Stolen-Automobile Act.
The power of Congress over the mails and instruments of commerce was described 20 years ago by Louis D. Brandeis, shortly before his appointment to the bench. He was writing with reference to the recommendations of the Pujo committee against interlocking directorates:
“The question may be asked: Has Congress the power to impose these limitations upon the conduct of any business other than national banks: And if the power of Congress is so limited, will not the dominant financiers, upon the enactment of such a law, convert their national banks into State banks or trust companies, and thus escape from Congressional control?
“The answer to both questions is clear. Congress has ample power to impose such prohibitions upon practically all corporations, including State banks, trust companies and life insurance companies; and evasion may be made impossible. While Congress has not been granted power to regulate directly State banks, and trust or life insurance companies, or railroad, public-service and industrial corporations, except in respect to interstate commerce, it may do so indirectly by virtue either of its control of the mail privilege or through the taxing power.
“Practically no business in the United States can be conducted without use of the mails; and Congress may in its reasonable discretion deny the use of the mail to any business which is conducted under conditions deemed by Congress to be injurious to the public welfare. Thus, Congress has no power directly to suppress lotteries; but it has indirectly suppressed them by denying under heavy penalty, the use of the mail to lottery enterprises. Congress has no power to suppress directly business frauds; but it is constantly doing so indirectly by issuing fraud-orders denying the mail privilege. Congress has no direct power to require a newspaper to publish a list of its proprietors and the amount of its circulation, or to require it to mark paid-matter distinctly as advertising; but it has thus regulated the press, by denying the second-class mail privilege, to all publications which fail to comply with the requirements prescribed.
“The power of Congress over interstate commerce has been similarly utilized. Congress cannot ordinarily provide compensation for accidents to employees or undertake directly to suppress prostitution; but it has, as an incident of regulating interstate commerce, enacted the Railroad Employers' Liability law and the White Slave Law; and it has full power over the instrumentalities of commerce, like the telegraph and the telephone.
“As such exercise of congressional power has been common for, at least, half a century, Congress should not hesitate now to employ it where its exercise is urgently needed. For a comprehensive prohibition of interlocking directorates is an essential condition of our attaining the New Freedom."--Other People's Money, chapter IV.
III. THE FISCAL POWER
The constitutional authority of the Federal Government to regulate the securities exchanges may be rested upon specific grants of power to the Federal Government other than the power to regulate interstate commerce and the mails. Congress has been granted the power "to coin money and regulate the value thereof” and "to borrow money upon the credit of the United States.' These powers, together with the power to levy and collect taxes, are the bases of all finaucial operations of the Government. That the existence of the power to finance its activities is a vital need of the Federal Government cannot be denied.
In developing its interpretations of the limitations upon the power of Congress to exercise its fiscal prerogatives, the United States Supreme Court has resolved all doubts in favor of the power of Congress to take such action as it might deem necessary or desirable for the purpose of strengthening the financial position of the Federal Government. The Supreme Court unanimously ruled in McCulloch v. Maryland (4 Wheat. 416), that Congress had not transcended its powers in creating the United States bank and in subscribing to one fifth of its stock on behalf of the Federal Government, although the bank was a private corporation doing business for its own profit. Chief Justice Marshall based his opinion upon the power of Congress to enact such legislation as might be “necessary and proper" to carry out the general purposes of the Government, since the bank was used as fiscal agent by the Government. The Chief Justice pointed out that the necessity spoken of in the Constitution is not to be understood as an absolute one. "Let the end be legitimate; let it be within the scope of the Constitution, and all means which are appropriate, which are primarily adopted to that end, which are not prohibited, but consistent with the letter and spirit of the Constitution, are constitutional.'
In Fisher v. Blight (2 Cranch 358), the Supreme Court upheld the power of Congress to declare debts due to the United States to be entitled to priority of payment over debts due to other creditors. The justification for such legislation was found in the inherent power of the Federal Government to pay its debts and to safeguard its financial operations from risk of loss, even though in doing so the Government created safeguards for itself which private individuals similarly situated could not obtain, and which were in fact adverse to the interests of such private individuals. But that inherent power was based upon the general fiscal power of the Federal Government granted by the clauses authorizing Congress to
taxes, to coin money, and to borrow.