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THE EXTENT OF CONGRESSIONAL POWER OVER INTERSTATE COMMERCE
The essence of Congressional power over interstate commerce, apart from control over instrumentalities of such commerce as the railroads and the telegraph, resides in the control that the Federal power possesses over the free movement of commodities from State to State. To that and direct and substantial interference by the States with interstate commerce is forbidden, whether through direct regulation or taxation. Also power is possessed by Congress to remove and control obstructions to the free movement of such commodities through the accustomed channels of trade.
The application of these principles is well illustrated by reference to the control exercised by Congress over commodity exchanges. The Packers and Stockyards Act and the Grain Futures Act, whose constitutionality has been upheld, sought to control certain practices in the live stock and grain exchanges. The basis for such control did not rest upon the fact that such transactions of themselves constituted interstate commerce. Instead, the Supreme Court has repeatedly recognized that mere transactions even upon commodity exchanges do not constitute interstate commerce. (Hill v. Wallace, 259 U.S. 44; Hoplins v. United States, 171 U.S. 578.) But it is their effect upon the stream of commodities moving in interstate commerce that makes them subject to Congressional control. (Stafford v. Wallace, 258 U.S. 495; Board of Trade v. Olsen, 262 U.S. 1; United States v. Coffee Exchange, 263 U.S. 611; Tagg Bros. v. Morehead, 280 U.S. 420; United States v. Patten, 226 U.S. 525; Chamber of Commerce v. Federal Trade Commission, 13 F. (20) 673. This consideration is emphatically brought out by Chief Justice Taft in the Board of Trade case:
“The sales on the Chicago Board of Trade are just as indispensable to the continuity of the flow of wheat from the West to the mills and distributing point of the East and Europe, as are the Chicago sales of cattle to the flow of stock toward the feeding places and slaughter and packing houses of the East."— Board of Trade v. Nlsen, supra, at 36.
The recognition that this is the basic principle underlying congressional control over sales for future delivery and other practices on commodity exchanges, in my opinion distinguishes these exchanges from stock exchanges. In the former type of exchange, the thing that is bought and sold is a commodity moving in interstate commerce. The fact that for the moment, when the transaction upon the exchange actually takes place, the commodity is at rest and that no interstate delivery is required as between buyer and seller, has been regarded by the court as immaterial in the light that at bottom there is a current of interstate commerce in the commodity moving through and beyond the exchange. The stock exchange, however, presents no such aspect. Other than a physical certificate representing a chose in action, no commodity is to move in interstate commerce as a consequence of a sale on the stock exchange. Dealings upon that market will effect no additions to the cost of moving these certificates from State to State. Indeed, the parallel between a commodity exchange and a stock exchange is so absent, that I cannot regard these decisions as governing the stock exchange situation nor as establishing a principle applicable to transactions upon stock exchanges.
H.R. 4, seems implicitly to recognize this distinction. It does not proceed upon any theory that short selling on stock exchanges concerns the movement of commodities in interstate commerce. On the contrary, its restricted application to securities of corporations engaged in interstate commerce, regards transactions with reference to such securities as being sufficiently related to the interstate commerce engaged in by the corporations as to enable Congress to deal with the transactions as interstate commerce.
THE BANKING FEATURES OF THE BILL
The ground for supporting the constitutionality of the instant bill would seem to me to rest primarily upon congressional power under the interstate commerce clause, and not upon the recognized congressional power to charter and operate banks. The power of Congress to charter and operate banks is, in essence, no more than the power of any State to charter a bank. It can, of course, give its banks peculiar powers which it may deny the States to give to their banks, and its banks possess peculiar privileges arising from the fact that they are Federal instrumentalities. It can consequently command the banks that it charters to observe certain regulations with reference to the conduct of the banking business. (American Bank & Trust Co. v. Federal Reserve Bank of Atlanta, 262 U.S. 643; Raichle v. Federal Reserve Bank, 34 F. (20) 910.) But under its power
to charter banks, it is difficult to see any basis for an insistence that the securities of such banks must not be traded in a particular fashion. To derive such a power from the power to charter banks would imply that the States possessed a like power with reference to banks operating under their charters. It would also imply a like power with reference to corporations chartered by the various States. Such conclusions lead me to the opinion that the basic power upon which the instant bill must be supported is the power of Congress over interstate commerce.
RELATIONSHIP TO INTERSTATE COMMERCE AS A BASIS FOR
It is a commonplace of constitutional law that a particular activity, though not actually involving the movement of goods or commodities in interstate commerce, may have such an intimate relationship to that movement so that it becomes "interstate commerce" for the purposes of determining whether Congress can exercise control over it. But it is equally true that not every matter which concerns the movement of goods in interstate commerce is to be regarded as subject to Congressional control, for otherwise hardly any aspect of mercantile activity would be immune from Federal control. Upon the nature of this relationship, no definite pronouncement can be made. It is, in the last analysis, a question of degree which must be determined in the light of the applicable decisions. With reference to the bill under consideration, the question is thus presented whether the transactions on the exchange to which the bill is applicable have such an intimate relationship to the movement of commodities in interstate commerce by the corporations concerned as to permit such transactions to be regarded as interstate commerce.
That the relationship between the activity in question and the movement of goods in interstate commerce must be of an intimate nature is demonstrated by several decisions involving the applicability of the Sherman Antitrust Act. A restraint placed upon the production of goods which are to move in interstate commerce is of itself insufficient to make such a restraint a restraint of insterstate commerce. (United Mine Workers v. Coronado Coal Co. 459 U.S. 344; United Leather Workers v. Horkert, 265 U.S. 457; Kentucky v. Jewish Press, 288 Fed. 179.) The intent to affect the current of goods moving in interstate commerce is necessary to bring such a restraint within the limit of Congressional control. (Coronado Coal Co. v. United Mine Workers, 268 U.S. 295.) Similarly a combination designed to restrict the placing of advertising matter in a magazine circculatiag throughout the Nation is not a restraint of interstate commerce. (Blumenstock Bros. Advertising Agency v._Curtis Publishing Co., 252 U.S. 456. Compare Ward Baking Co. v. Federal Trade Commission, 264 Fed. 330.) These cases are illustrative of the closeness of the nexus that must exist between the activity concerned and the movement of goods in interstate commerce.
Further light upon this relationship is thrown by a series of cases involving the power of the States to regulate and tax activities connected with the movement of goods in interstate commerce. It is, of course, true that such cases do not necessarily in their assertions that the activity concerned is not "interstate commerce" deny that the Federal Government under the commerce clause possesses no authority to regulate them. The spheres of State and Federal regulation overlap to a certain extent. But the assertion that such activity is not immune from State regulation on the ground that it is not interstate commerce, inferentially leads to an assumption that it is not subject for Congressional regulation on the ground that it is interstate commerce. At an early date the Court held valid a license tax imposed by a State upon a broker dealing in foreign bills of exchange, despite the contention that the tax was upon foreign commerce. (Nathan v. Louisiana, 8 How. 75.) The strength of this decision is more fully appreciated when it is realized that had the tax been upon a broker dealing in foreign commodities, it would have been invalid. The principle there involved that the mere fact that certain dealings may subsequently lead to the movement of commodities in interstate or foreign commerce, does not of itself make such dealings interstate commerce, has been repeatedly affirmed by the court. (Engle V. O'Nalley, 219 U.S. 128; Williams v. Fears, 179 U.S. 270; Hemphill v. Orloff, 277 U.S. 537.) The principle found a distinct application in Ware & Leland v. Mobile County, 209 U.S. 405, where the court upheld a State tax on brokers engaged in buying cotton for future delivery on exchanges situated outside the State, despite the contention that the tax was unconstitutional as being on interstate commerce.
Perhaps, the most illuminating series of cases are those setting forth the general doctrine that insurance is not interstate commerce. (Paul v. Virginia, 8 Wall. 168; Ducat v. Chicago, 10 Wall. 410; Liverpool Ins. Co. v. Massachusetts, 10 Wall. 566; Philadelphia Fire Ass'n v. New York, 119 U.S. 110; Hooper y. California, 155 U.S. 648; Noble v. Mitchell, 164 U.S. 367; New York Life Ins. Co. v. Cravens, 178 U.S. 389; Nutting v. Massachusetts, 183 U.S. 553; New York Life Ins. Co. v. Deer Lodge County, 231 U.S. 495.) The significance of these cases is to be appreciated only after consideration of the enormous significance of insurance to interstate commerce. That it is interwoven with our whole commercial life is not even open to argument. Marine insurance in one form or another serves the purpose of promoting commercial transactions by vastly extending the use of credit. Fire insurance performs the same function. Life insurance even more so, extends out and accumulates the savings of many into large funds aggregating hundreds of millions of dollars to be loaned in turn or used as productive capital. These facts were presented to the Court with all the ability that counsel could command in a recent effort to induce the Court to overturn its earlier decisions to the effect that insurance did not constitute interstate commerce, but without success. (New York Life Ins. Co. v. Deer Lodge, supra.) The considerations leading the Court to take a contrary view are important to notice. They were pointedly set forth by Mr. Justice White:
the general rule (that insurance is not commerce) and its exceptions are based
(upon) the difference between interstate commerce or an instrumentality thereof on one side and the mere incidents which may attend the carrying on of such commerce on the other. This distinction has always been carefully observed, and is clearly defined by the authorities cited. If the power to regulate interstate commerce applied to all the incidents to which such commerce might give rise and to all contracts which might be made in the course of its transaction, that power would embrace the entire sphere of mercantile activity in any way connected with trade between the States; and would excludes State control over many contracts purely domestic in their nature. The business of insurance is not commerce. The contract of insurance is not an instrumentality of commerce. The making of such a contract is a mere incident of commercial intercourse, and in this respect there is no difference whatever between insurance against fire and insurance against the perils of the sea'." Hopper v. California, súpra, at 655.
These cases, of course, only establish that the business of insurance is not immune from State regulations as being interstate commerce. The corollary that the business of insurance cannot be regulated by the Federal Government on the ground that it is not interstate commerce would seem to follow. The question has, however, never been judicially tested. But a Senate Judiciary Committee unanimously reported that insurance was not interstate commerce so as to permit Federal regulation of it. (Senate Report No. 4406, 59th Cong., 1st sess.)
A further case deserving notice is the decision of the Court holding the Child Labor Act unconstitutional. (Hammer v. Dangenhart, 247 U.S. 251.) That like considerations there prevailed with the Court is evidenced by the Court's language when it stated: “Over interstate transportation, or its incidents, the regulatory power of Congress is ample, but the production of articles, intended for interstate commerce, is a matter of local regulation.” The distinction between such a case and the cases upholding the constitutionality of the Lottery Act (The Lottery Case, 188 U.S. 321), the White Slave Act (Hoke v. United States, 227 U.S. 308), and the Pure Food and Drug Act (Hipolite Egg Co. v. United States, 220 U.S. 45), seems to reside in a degree of differentiation as to the relationship of the movement of commodities and persons in interstate commerce to the practices sought to be reached by Congress.
The application of the principles here enunciated to the bill in question leaves in my judgment little room for dispute. The relationship between market transactions of securities of corporations engaged in interstate commerce and the actual movement of goods of those corporations in interstate commerce, certainly presents no closer bond than the relationship between means and methods of production and such transportation, nor between insurance and the movement of insured goods in interstate commerce, when insurance as an instrument of credit is practically necessary to secure any such movement. Indeed, to trace the effect of market manipulations in a security upon the movement of any particular commodity in interstate commerce would require an ingenuity far beyond the average eonomist. To see that the market value of securities has a bearing and influence upon trade generally is, of course, a matter of common understanding.
But the exact effect of the practice of short selling upon the movement of commodities in interstate commerce is not even specified in the bill. Only general allegations that the practice affects banking and commerce are contained in the bill. In the light of such uncertainty as to the effect of such practices, even assuming that the matter was within the Congressional power of regulation, doubts as to constitutionality would arise under the Fifth Amendment.
Thus far the Supreme Court has not regarded as interstate commerce, activity which does not have a clear, definable relation to the movement of particular commodities in interstate commerce. It has consistently refused to take a different attitude although urged to do so. It has declined, as Mr. Justice White stated, to extend the concept of interstate commerce so as to bring within the possible unit of exclusive Federal control such matters as insurance, banking, means and methods of production, the chartering of manufacturing corporations engaged in interstate commerce, supervision over the issuance of their securities, and the like. But such a trend of thought would be necessary to sustain the constitutionality of the bill in question. The central theory upon which it posits the existence of Congressional power, namely, the fact that because certain corporations are engaged in interstate commerce Congress can regulate transactions in their securities upon exchanges, seems to extend Congressional power over interstate commerce to a point not warranted by the decisions or expressions of the Supreme Court, nor in accord with a likely view, so far as one may judge the immediate future, that the Court would entertain.
No additional warrant for Congressional power is to be gathered from the fact that stock exchanges make use of such instrumentalities of interstate commerce as the telegraph, telephone and the mails, for the transaction of their business. Such an argument was pressed upon the Court in the insurance cases but without effect.
"To accomplish the purpose there is necessarily a great and frequent use of the mails, and this is elaborately dwelt on by the insurance company in its pleading and argument, it being contended that this and the transmission of premiums and the amounts of the policies constitute a current of commerce among the States'. This use of the mails is necessary, it may be, to the centralization of the control and supervision of the details of the business; it is not essential to its character." "New York Life Ins. Co. v. Deer Lodge County, Supra, at 509.
This is not to say that Congress may not regulate abuses in the use of instrumentalities of commerce by stock exchanges, insurance companies or any business; but it is a clear recognition of the fact that the mere use of such instrumentalities to effectuate a transaction not otherwise interstate commerce does not make it interstate commerce.
I shall not take occasion here to comment upon other features of the bill. The bill would seem to stand or fall upon the justification for its central theory, and, due to the pressure of time, I have confined 'myself to a consideration of that theory. Other features contained in the bill of doubtful constitutionality need therefore no particular attention. Respectfully yours,
J. M. LANDIS. The CHAIRMAN. We will hear Mr. Thompson.
STATEMENT OF EUGENE E. THOMPSON, PRESIDENT ASSOCI
ATED STOCK EXCHANGES, WASHINGTON, D.C.
Hartford Stock Exchange, Hartford, Conn.
Columbus Stock and Bond Exchange, Columbus, Ohio.
In addition to our membership and for purposes of these hearings, we are representing the following:
Louisville Stock Exchange, Louisville, Ky.
We have considered as carefully as the limitation of time would permit the pending legislation as covered in the at present identical bills, H.R. 7852 and S. 2693.
At the outset may I say, as reflecting the judgment of our group, that the proposed legislation, if passed by Congress without modification in several material respects, will give us a law so restrictive in the handling of securities that the market places for corporate capital, so necessary to the country's economic welfare at all times and so doubly necessary at the present time, will discover themselves so hampered and thwarted in their proper and legitimate functions that it will be impossible for them to retain their vitally important position in the industrial and economic scheme and set-up of the United States.
It hardly needs to be said here that business in this country cannot survive without market places for capital stock, and by market places I mean, of course, stock exchanges. None who is here, I assume, would willingly destroy a thing as useful and necessary in our business and industrial plan as a stock exchange conducting itself with honesty and fidelity according to well-established and wellaccepted business principles.
I have come here with no blanket defense of stock-exchange practices. The exchanges may have offended, for they, in their relationships with their members, the members in turn being in contact with the public at large, are dealing with conditions and circumstances as diverse and ramified as is human nature itself.
It is no small thing-no small responsibility-which you gentlemen in your legislative capacity have undertaken. We of our group wish to be a help and not a hindrance. Up to a certain point, we are sympathetic with the purposes suggested in the provisions of the bill under consideration, but beyond that point we cannot go, because we know, out of our experience, that there is much proposed in these measures which spells disaster not alone to stock exchanges as separate business establishments, but to stock exchanges in an institutional sense; and this means that every enterprise in the country employing capital or bonded outlay, whether listed or not upon a stock exchange, will be affected adversely.
A drastic treatment it would be indeed to cure a case of hiccup by severing the head of the patient. I doubt very much if a similar treatment to cure the so-called "evils" of stock-exchange practices