The question upon which there is controversy is whether governmental regulation may be exercised by Congress or must be left to the States. The authority of Congress, as has been stated above, rests upon its power over interstate commerce, over the mails and other means of communication, over the fiscal operations of the Federal Government, and over the activities and instrumentalities of the Government. These powers will be considered in order, and thereafter attention will be given to other incidental problems of constitutionality, including the validity of particular provisions and the validity of the delegation of power to the Federal Trade Commission.

I. THE COMMERCE POWER

The bill rests upon the power of Congress to regulate, among other things, activities which materially affect interstate commerce. The interstate commerce affected is both commerce in securities themselves and commerce or trade generally. The issues upon this point are:

A. To what extent may Congress regulate activities which are not themselves interstate commerce, but which affect such commerce?

B. Do the practices which are regulated materially affect interstate commerce?

C. Are securities articles of commerce in the sense that their movement may be regulated by Congress?

A. May Congress regulate activities which are not themselves interstate commerce, but which affect interstate commerce? This power is not open to question. Upon it rests the whole theory of the Sherman Act. Contracts and conspiracies which are not themselves transactions in interstate commerce are prohibited where they restrain such commerce. Thus the Sherman Act has been applied to make unlawful a corner in cotton on the New York Cotton Exchange. United States v. Patten (228 U.S. 525). The Sherman Act has likewise been applied to combinations of workers within a single State where such combinations were found to burden interstate commerce. Bedford Cut Stone Co. v. Journeymen Stone Cutters Association (274 U.S. 37). Similarly, the Federal Trade Commission regulates, among other things, false and misleading advertising where such practices affect interestate commerce, although advertising itself has not been regarded by the courts as interstate commerce. So, too, intrastate railroad rates may be regulated by the Interstate Commerce Commission where such rates adversely affect interstate rates. Houston, E. & W. T. R. R. v. United States (254 U.S. 342). The principle underlying these cases has been succinctly stated in United Mine Workers v. Coronado Coal Co. (259 U.S. 344, 408):

"It is clear * * * that if Congress deems certain recurrent practices, though not really part of interstate commerce, likely to obstruct, restrain or burden it, it has the power to subject them to national supervision and restraint." Probably the two most striking examples of Federal regulation of local practices in the interest of interstate commerce are the Packers and Stockyards Act and the Grain Futures Act.

The constitutionality of the Packers and Stockyards Act was sustained in Stafford v. Wallace, (258 U.S. 495). As described in that case, the act was aimed at monopoly, which had enabled packers to lower prices to the shipper and increase them to the consumer. The act was directed against practices which affected prices on a national scale and were for that reason deemed to be a burden on interstate commerce. The emphasis on the price element appears in the following extract from the court's opinion:

66* * * exorbitant charges, duplication of commissions, deceptive practices in respect of prices, in the passage of live stock through the stockyards, all made possible by collusion between the stockyards management and the commission men on the one hand, and the packers and dealers on the other. Expenses incurred in the passage through the stockyards necessarily reduced the price received by the shipper, and increased the price to be paid by the consumer. If they be exorbitant or unreasonable, they are an undue burden on the commerce which the stockyards are intended to facilitate. Any unjust or deceptive practice or combination that unduly and directly enhances them is an unjust obstruction to that commerce.'

The court was not influenced by the fact that the transactions regulated were, taken in isolation, local in nature, and involved a local transfer of title. The court pointed out, at page 516:

"Such transactions cannot be separated from the movement to which they contribute and necessarily take on its character. The commission men are essential in making sales without which the flow of the current would be obstructed,

and this, whether they are made to packers or dealers. The dealers are essential to the sales to the stock farmers and feeders. The sales are not in this respect merely local transactions. They create a local change of title, it is true, but they do not stop the flow; they merely change the private interests in the subject of the current, not interfering with, but, on the contrary, being indispensable to its continuity.'

The court placed great reliance upon the opinion of Mr. Justice Holmes in Swift & Co. v. United States (196 U.S. 375), which sustained a suit under the Sherman Act against a combination of packers formed to raise and fix prices by agreement. In speaking of the Swift case the court in the Stafford case pointed out the necessity of viewing interstate commerce in a practical rather than an abstract sense:

"The application of the commerce clause of the Constitution in the Swift case was the result of the natural development of interstate commerce under modern conditions. It was the inevitable recognition of the great central fact that such streams of commerce from one part of the country to another which are ever flowing, are in their very essence the commerce among the States and with foreign nations, which historically it was one of the chief purposes of the Constitution to bring under national protection and control. This court declined to defeat this purpose in respect of such a stream and take it out of complete national regulation by nice and technical inquiry into the noninterstate character of some of its necessary incidents and facilities when considered alone and without reference to their association with the movement of which they were an essential but subordinate part.'

It is significant that prior to Stafford v. Wallace, the Supreme Court had held in Hopkins v. United States (171 U.S. 578), that members of the Kansas City Live Stock Exchange could not be enjoined under the Sherman Act, since they were neither engaged in interstate commerce nor acting in restraint of such commerce. The court in the Stafford case distinguishes the Hopkins case on the ground that there it did not sufficiently appear that the prices of livestock were affected by the practices complained of. The court said at page 525:

"Again, if the result of the combination of the commission men in the Hopkins case had been to impose exorbitant charges on the passage of livestock through the stockyards from one State to another, the case would have been different, as the court suggests."

The Grain Futures Act was sustained in Chicago Board of Trade v. Olsen (262 U.S. 1). Again the Court placed great emphasis upon the effect which the practices regulated had on prices of grain. The court said at pages 39-40:

"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."

As in the Stafford case, the court pointed to the Swift case as a guide to the proper conception of interstate commerce under modern business conditions:

"That case was a milestone in the interpretation of the commerce clause of the Constitution. It recognized the great changes and development in the business of this vast country and drew again the dividing line between interstate and intrastate commerce where the Constitution intended it to be. It refused to permit local incidents of great interstate movement, which taken alone were intrastate, to characterize the movement as such. The Swift case merely fitted the commerce clause to the real and practical essence of modern business growth."

The application of these principles to the proposed measure is clear. Securities are transmitted from State to State as the result of transactions upon exchanges, and the prices of securities are affected by the practices which the bill would regulate. It would thus be a natural and logical application of the Olsen and Stafford cases to rest the power of Congress over stock exchange practices upon the commerce clause. The argument that the securities themselves are not articles of commerce will be considered later.

B. Do the practices which the act regulates materially affect interstate commerce in securities and in commodities other than securities?—The Court itself has said, as already quoted, that sales of an article which affect the country-wide price of the article directly affect the country-wide commerce in it. The present bill, moreover, contains findings, based upon extensive investigation and hearings, that the practices regulated do affect interstate commerce. In resolving this question

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 C.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 exchange 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 U.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

cases.

(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.

(b) 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 commerce. 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