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The right to designate what shall be carried necessarily involves the right to determine what shall be excluded.

Mr. KENNEY. Will you give me the date of that decision?

Mr. Gay. It is found in 96 U.S., 727. I will put the date in. I cannot give it to you.

Mr. KENNEY. That is a good many years ago.
Mr. Gay. Oh, yes; probably 20 years ago.

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 regulation as to what shall constitute mail matter, but from the necessity of enforcing then consistently, with rights reserved to the people of far greater importance than the transportation of the mails.

Rights which we respectfully submit in this case and as embodied in this bill are essentially of a private nature and reserved to the States for exclusive regulation and control under our dual system of government.

Mr. KENNEY. And, matter with regard to lotteries were prohibited. Mr. Gay. Yes.

Mr. KENNEY. They were not Government conducted lotteries, such as we have in other countries, and which are spoken of very highly by the representatives of foreign countries, Mr. Gay. That is absolutely true.

Mr. PETTENGILL, Mr. Gay, does not Congress have the right to include or exclude anything from the mails whether malum in se or anything else?

Mr. Gay. I do not believe so. If that is true, then this statement is absolutely meaningless.

Mr. PETTENGILL. Is Congress obliged to exercise its constitutional power and have any mail system whatever?

Mr. Gay. Well, that involves inaction rather than action. It is difficult for me to answer a question predicated upon the assumption of inaction, but I would say in this case, I have tried to make plain, and the court said in this Jackson case, that the power of Congress over the control of the mails must be read in the light of the whole Constitution and it does not and cannot be construed as abrogating the Bill of Rights, and insofar as the Bill of Rights protects the business, it is still a part of the Constitution.

Mr. HUDDLESTON. May I suggest that, assuming the power to exclude from the mails or forbid

from the use of the mails, that does not imply the power to regulate a market that has nothing to do with the mails, does it?

Mr. Gay. If you are permitted to manage and control a market, I quite agree, because I think that that is what this bill does.

Mr. KENNEY. Mr. Chairman-
The Chairman. We have to close now. Go ahead, Mr. Kenney.

Mr. KENNEY. There is nothing in the Constitution, which prohibits the Federal Government from conducting a national lottery; is that not so?

Mr. Gay. I think that is undoubtedly true, because it would involve a matter of so-called "police powers", and one of policy.

Mr. KENNEY. I have introduced a bill for a national lottery, and I wanted to have your opinion.

The CHAIRMAN. The committee will now
Mr. COLE. May I ask a question?

The CHAIRMAN. Let us have order. The Chair has not yet adjourned the committee, Mr. Cole.

Mr. COLE. Mr. Whitney in submitting his views or his ideas as to what form this legislation should take, said in the first paragraph of his prepared statement—"it is all naturally subject to the question of the constitutional power of Congress to enact legislation to regulate the business of stock exchanges.

Mr. Gay. Yes, sir.

Mr. COLE. I am unable to reconcile your argument here as to the unconstitutionality of the bill before us and the recommendations Mr. Whitney made in this way. Is the committee to understand that, if they adopt the suggestions made by Mr. Whitney, the constitutionality of that act would be tested? In other words, if one member of the coordinating board, as suggested by Mr. Whitney, would be a member designated by the New York Stock Exchange, is it your idea that they would refuse to comply with such law because it was unconstitutional?

Mr. Gay. I think, Mr. Cole, the only possible answer that could be made to that is in the light of Mr. Whitney's statement, which I think was very frank and very clear that these suggestions are naturally subject to the question of the constitutional power of Congress to enact legislation to regulate the business of stock exchanges, and their members, and I did not understand him to either say or intend to imply, by anything he later said, an intention to waive the rights of the exchange or any member of the exchange to their rights under the Constitution.

Mr. PETTENGILL. Mr. Gay, if the New York Stock Exchange, suppose that we enacted a law along the lines suggested, and they selected a member of that exchange and participated in the execution of the organization necessary to administer the act, would not they then be estopped to raise constitutional objections?

Mr. Gay. I cannot see how it would be possible, under the explanations that have been made to the committee.

The CHAIRMAN. Just a moment. Let the Chair say that I want to make a suggestion, that Mr. Whitney answer your question, Mr. Pettengill.

Mr. PETTENGILL. I think I know what his answer is, and he has not answered the question.

Mr. Gay. I would not like to leave the floor, Mr. Chairman, with that statement unanswered.

Mr. PETTENGILL. Would you agree that a person may be estopped from not raising even a constitutiunal question?

Mr. Gay. Maybe?
Mr. PETTENGILL. Yes, sir.

Mr. Gay. Why, of course, he can agree that he might not raise it. But, the representative of an organization prefacing his suggestions with a statement that he did not waive it, I do not see how the question of estoppel can possibly arise.

Mr. KENNEY. In answer to my question, Mr. Whitney said that he would have no objection to Federal regulation of stock exchanges under certain conditions. I wonder if we could learn what these conditions are sometime during the hearing?

Mr. Gay. That, Mr. Whitney would have to reply to, answer for himself, Mr. Kenney.

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The CHAIRMAN. Mr. Whitney, may I make this suggestion to you? Mr. WHITNEY. Yes, sir.

The CHAIRMAN. I see here in your suggestions your remark about that coordinating authority, say that it should be given plenary powers to do certain things.

There are three things to do with pools. One is that you can prohibit them. One is that you can have no regulation whatsoever and the other is that they shall be regulated.

I would certainly like to have you expand in your testimony on what you think should be a regulation as to pools.

Mr. WHITNEY. You mean over and above what is said in my suggestions.

The CHAIRMAN. On making the suggestions you say that that coordinating authority should be given plenary powers over certain things, and one is over the control of pools. Now, I would like to know what suggestions you have to make as to the control of pools. I think it would be very enlightening to the committee.

Mr. WHITNEY. I am sorry, but I do not understand.
The CHAIRMAN. All right. Let me read it, then.
You say in the fifth paragraph of this suggestion of yours here.
Mr. WHITNEY. Of yesterday?
The CHAIRMAN. Yes.

We suggest that this coordinating authority be given plenary power to control the amount of margins which members of the exchanges must require and maintain on customers' accounts.

Without attempting to define, at this time, the scope of these powers, we believe that they should include the power to fix the requirements for the listing of securities; the control of pools.

Now, I want to know what you mean by "control of pools", and what suggestions you have for the control of pools.

Mr. WHITNEY. Well, it is a very broad word, always been so interpreted.

The CHAIRMAN. I am not asking you to answer the question now. I would like for you to put it somewhere in your remarks, because as I say there are only three things to do. One is to do nothing, the other is we can prohibit them, and the other is that we can control them. Now, you are suggesting control, and I would like to know what kind of control.

Mr. WOLVERTON. Mr. Chairman, in line with what you have just stated, I understood yesterday Mr. Whitney volunteered in answer to a suggestion made by a member of the committee that he would be willing to submit'a bill on behalf of the stock exchange embodying their thoughts and I am wondering if the suggestions subsequently presented took the place of that bill or does Mr. Whitney intend to present a bill that would be in conformity with the suggestions made.

Mr. MERRITT. He said that he would present suggestions, and he did.

Mr. WOLVERTON. That is what I am asking, if such suggestions take the place of a proposed bill embodying such thoughts.

Mr. MERRITT. I think it was first agreed that he was to make suggestions, and then something was said about a bill.

Mr. WOLVERTON. Yes, he was asked if he would submit a bill. Mr. WHITNEY. What I had in my mind was these suggestions. Mr. WOLVERTON. That is all.

Mr. WHITNEY. I think it would be quite presumptuous on the part of the exchange to try to draft a bill. We are not bill drafters.

The CHAIRMAN. We will not take: a recess until 2 o'clock this afternoon. At that time, we will hear the Associated Exchanges.

(Thereupon, at 11:50 a.m., a recess was taken until 2 p.m., of the same day.)

AFTERNOON SESSION

The committee reassembled, at 2 p.m., pursuant to the taking the recess, Hon. Sam Rayburn (chairman) presiding.

The CHAIRMAN. The committee will come to order.

This session has been set aside to hear from the Associated Stock Exchanges.

Mr. Ğay. Mr. Chairman, would you recognize me for just a moment?

The CHAIRMAN. I will.

Mr. Gay. At the conclusion of the morning session, I had intended to leave for the record a copy of Commissioner Landis' opinion, to which I referred and from which I quoted as I thought it would be fair to Mr. Landis to leave the whole opinion so that it might be put into the record of the committee, and I ask leave to make it a part of the record.

The CHAIRMAN. It will be incorporated. (The matter referred to is as follows:)

Law School OF HARVARD UNIVERSITY,

Cambridge, Mass., February 22, 1932. CARTER, LEDYARD & MILBURN,

New York, N.Y. (Attention of Mr. W. H. Jackson.) Dear Sirs: I am enclosing herewith, in accordance with your request, my opinion on the constitutionality of H.R. 4, the LaGuardia bill, to regulate the short selling of securities on exchanges.

I have confined myself to a consideration of the constitutionality of the LaGuardia bill, for I am as yet unconvinced that a bill could not be drafted to regulate security transactions on stock exchanges which would be constitutional. The La Guardia bill, however, bottoms itself upon a theory and conception of interstate commerce that I am not prepared to accept.

Naturally the pressure of time has prevented my giving as thorough a consideration to the subject as I should have liked. I believe, however, that I have considered all the pertinent authorities and given them their due weight. Subsidiary matters I have neglected inasmuch as they fall within the category of details whose validity will hinge upon the central question. Faithfully yours,

J. M. LANDIS.

CAMBRIDGE, Mass., February 22, 1932. CARTER, LADYARD & MILBURN, 41 Broad Street,

New York, N.Y.

(Attention of Mr. W. H. Jackson.). DEAR SIRs: In reply to your request for my opinion as to the constitutionality of House bill no. 4, a bill to protect banking and commerce against short sales of securities issued by corporations engaged therein, I beg to summarize my conclusions in the following manner:

THE NATURE OF THE BILL

The bill deals with the short sales upon stock exchanges of the securities of banks organized under the laws of the United States and/or members of the Federal Reserve System, and of corporations engaged in interstate or foreign commerce. It acts upon the conception that the practice of short selling is a means of manipulating the market values of such securities, which, by producing arbitrary and abnormal declines, induces their needless liquidation. This manipulation of market values, assumed not to reflect those that would be produced by the normal operation of the law of supply and demand, is considered as a means whereby credit extended upon the face of such securities is destroyed, thereby imperiling the general credit structure necessary to the adequate functioning of commerce and banking, producing hoarding, and making it more difficult for such corporations whose securities have been depressed by short selling to finance operations pursuant to carrying on interstate commerce and banking.

To the end of controlling the practice of short selling, the bill seeks to attach a certain degree of publicity to the making of short sales. Further provisions of the bill seek by drastic methods to enforce these requirements.

THE CHARACTER OF STOCK EXCHANGE TRANSACTIONS

An understanding of the constitutional problems raised by the bill requires a working conception of the nature of transactions upon stock exchanges. The central fact of a stock exchange is that it is, in essence, a market for a particular thing, the security. Persons desirous of buying and selling securities are here assembled more readily to facilitate their aims. In the modern exchange the number of such persons admitted to the market and privileged actually to buy and sell upon that market is limited to a defined group. These members of the exchange, in the main, act as brokers or agents for other persons. Between themselves, however, they deal as principals. Contracts of sale are made only between members upon the floor of the exchange, and the delivery of the securities, whether or not cleared through some form of clearing house, is made only between members. The fact that many transactions on stock exchanges concern marginal purchases or sales by customers does not alter these essential characteristics. Delivery of the security and transfer of the purchase price follows in either event.

The transactions on the exchange are thus not only geographically limited to the locality where the exchange is located, but they do not concern an article moving in interstate commerce. Such movement in interstate commerce as results from stock exchange transactions occurs from the fact that either subsequently to a purchase of securities by a broker, the securities may actually be delivered to a customer in some other State directly by that broker or through the medium of a corresponding broker, or that preparatory to a sale securities may be forwarded to the broker negotiating such sale. Furthermore, instrumentalities of interstate commerce, such as the telegraph, the telephone and the mails, are employed by brokers on the exchange in the effectuation of sales and purchases, and in the wide dissemination of market prices of securities in order to inform their own customers or customers of corresponding brokers of the prices at which securities can be bought and sold on the exchange. Such wide dissemination of market quotations is obviously necessary in order that purchasers and sellers may know the prices which securities are commanding on the exchange and thus be induced either to buy or sell securities upon the exchange.

Since the existence of a well-organized market has the economic 'effect of centering sales and purchases at such a market, the major portion of security buying and selling takes place on stock exchanges. Uniformity in security prices throughout a wide geographical area is thus secured. But the process by which this is achieved is the interchange of securities in a local and limited geographical area.

THE THEORY OF THE BILL The bill (H.R. 4) recognizes the local characteristics of actual exchange transactions. It does not seek to attach to them an interstate character arising from the interstate nature of the devices used to facilitate transactions on the exchange or from the fact that the physical certificates actually bought and sold are thereby transferred from State to State. Instead, it seeks to attach an interstate character to transactions in securities arising out of the fact that such securities represent either obligations of or aliquot shares in businesses engaged in interstate commerce, or incorporated under national banking laws or possessing peculiar privileges as being members of the Federal Reserve System. Dealing in such obligations on exchanges is considered by the bill to be so intimately related to interstate commerce as to permit Congress to regulate it. It thus makes no effort to regulate transactions in seeurities of corporations not engaged in commerce between the States.

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