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powers between the Nation and the States, but as investing Congress with the primary power and responsibility to do two things; first, to determine, from a national estimate of interstate commerce as a whole, the respective fields of action by the Nation and the States, and second, to use its powers within the national field for advancing the general welfare.

The second is clearly established and so well known that the citation of authority is unnecessary. Under the first, however, a greater power than is commonly understood is ascribed to Congress for the purpose of coordinating and harmonize ing State and national action. The discernment by Congress of national needs and its initiative (as well as its ingenuity) in moving to meet them by means of the power exercisable under the commerce clause have produced the vast expansion of Federal regulation in part pictured in the cases cited herein.

But, an aspect of the matter not so frequently noted, Congress has also moved in the opposite direction when the general interests so required. It has restricted the effect of the commerce clause in the furtherance of State action. Witness, the Wilson Act (sustained In Re Rahrer, 140 U.S. 545) and the Webb-Kenyon Act (sustained in Clark Dist. Co. v. Western Md. Ry. Co., 242 U.S. 311) to enable the States to deal with the interstate aspects of the prohibition problem, and the Hawes-Cooper Act (validity not yet passed on) to enable the States to deal with interstate traffic in convict-made goods.

The truth of the matter is that Congress has the power to expand or contract the area of national action under the commerce clause. Over against this power is set, of course, the function of the Supreme Court to check the expansion (and possibly also the contraction) if Congress should become arbitrary in dealing with the facts and attempt to go too far.

The check is a real one. But that the responsibility is after all upon the Congress is shown by the fact that in the course of the expansion above indicated only three statutes have been held invalid. As far as two of those statutes are concerned, it may well be doubted whether they would be held invalid on de novo proceedings today. The Employers' Liability cases (207 U.S. 463) (holding the Federal Liability Act unconstitutional because it included employees injured in intrastate commerce) and Adair v. United States (208 U.S. 161) (invalidating the Federal statute aimed at so-called “yellow-dog' contracts). Cf. Teras & N.O. R. Co. v. Brotherhood, etc. (281 U.S. 548). Hammer v. Dagenhart (247 U.S. 251), generally known as the Child Labor case, remains. Whatever may be thought of the soundness of that case and the theory on which it was decided, it may at least be distinguished on the facts from the present proposal as well as on the objectives which Congress seeks now to attain.

It will be noted that the foregoing discussion is directed, not to what may be done in “emergencies”, but to the normal powers of Congress. But since, as shown in part II hereof, the expanded range of congressional action is dependent upon fact foundations, there is ample room for the play of forces of an emergency character. Indeed, an enlarging function of government to meet new needs is indicated in a passage from the opinion by Mr. Chief Justice Hughes in the recent case sustaining the Minnesota mortgage moratorium law (Home B. & L. Association v. Blaisdell, 54 Sup. Ct. 231). Speaking particularly of the contract clause, but possibly with wider implications, he said (at 239):

“The policy of protecting contracts against impairment presupposes the maintenance of a government by virtue of which contractual relations are worth whilea government which retains adequate authority to secure the peace and good order of society. This principle of harmonizing the constitutional prohibition with the necessary residiuum of State power has had progressive recognition in the decisions of this Court."

In view of the national character of the problem here involved and the method of solving such problems on the facts, on the basis of the expansion of power described in this memorandum and on the recognized function of Congress to adjust National and State relationships, it is my opinion that Congress may establish and maintain its regulatory power over security exchanges. It may go further, though how far it may go in the regulation of related and collateral activities will depend on the fact foundation laid therefor, in the hearings and otherwise, and on the considered judgment of Congress concerning the public needs.

Prof. Walter Gellhorn, of the Faculty of Law of Columbia University, joins me in the opinions herein expressed. We have been assisted in the preparatico of this memorandum by Messrs. W. W. Gardner and T. E. Jenks, both of the Legislative Drafting Research Fund of Columbia University.

NOEL T. DOWLING New York, March 23, 1934.

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SUPPORT OF CONSTITUTIONALITY OF Stock Exchange Bill The underlying principle of the bill is that Federal regulation is necessary in the public interest to control manipulation and excessive speculation in securities and thus to secure and maintain a fair and honest market. The economic effects of manipulation and excessive speculation have been elaborately set forth through the investigation of the committee and the hearings upon the present bill. This memorandum is concerned with the constitutional aspects of the proposed measure. The constitutional authority upon which the bill is predicated rests upon several powers granted to Congress: The power over interstate commerce; the power over the mails and other means of communication; the fiscal power; and the power to exercise necessary and proper control over practices which affect the activities and instrumentalities of the Federal Government itself.

The problem of constitutionality is one of applying the words of that document to a situation which could not have been envisaged in 1789. Therefore the answer to the problem must be sought in the cevelopment of constitutional doctrine by the Supreme Court. In resolving such questions the Court has recognized that the interpretation and application of the Constitution are not mechanical processes, but the adaptation of an organic law to the changing conditions and needs of a nation. Mr. Justice Holmes has stated this principle with characteristic incisiveness:

"With regard to that, we say add that when we are dealing with words that also are a constituent act, like the Constitution of the United States, we must realize that they have called into life a being the development of which could not have been foreseen completely by the most gifted of its begetters. It was enough for them to realize or to hope that they had created an organism; it has taken a century and has cost their successors much sweat and blood to prove that they created a nation. The case before us must be considered in the light of our whole experience, and not merely in that of what was said a hundred years ago.' Missouri v. Holland (252 U.S. 416, 433).

"The provisions of the Constitution are not mathematical formulae having their essence in their form; they are organic, living institutions transplanted from English soil. Their significance is vital, not formal; it is to be gathered not simply by taking the words and a dictionary, but by considering their origin and the line of their growth." Gompers v. United States (233 U.S. 604, 610).

The same thought has been eloquently expressed by Chief Justice Hughes in the recent Minnesota Moratorium case, Home Building and Loan Association v. Blaisdell (78 L. ed. 255, 271).

“It is no answer to say that this public need was not apprehended a century ago, or to insist that what the provision of the Constitution meant to the vision of that day it must mean to the vision of our time. If by the statement that what the Constitution meant at the time of its adoption it means today, it is intended to say that the great clauses of the Constitution must be confined to the interpretation which the framers, with the conditions and outlook of their time, would have placed upon them, the statement carried its own refutation. It was to guard against such a narrow conception that Chief Justice Marshall uttered the memorable warning—'We must never forget that it is a constitution we are expounding' (M'Culloch v. Maryland, 4 Wheat. 316, 407, 4 L. ed. 579, 601)-'a constitution intended to endure for ages to come, and, consequently, to be adapted to the various crises of human affairs.'! (Id., p. 415.)

Even were it true, as it is not, that the precedents leave in doubt the power of Congress to regulate the practices of stock exchanges and stock exchange firms, the principles just discussed would justify the passage of the present bill in the expectation that the Supreme Court would find the Constitution adequate to support it. But there is nothing in the precedents which stands in the way. They point clearly, in fact, to the validity of the proposed measure.

It can hardly be doubted that the business of the stock exchange and its members is one which it is within the power of government to regulate. In the traditional classification the business is one affected with a public interest. The decisions clearly recognize this fact. Thus, for example, the Supreme Court has held that it was within the power of a State to prohibit absolutely dealings in futures. Olis v. Parker (187 U.S. 606). It can hardly be suggested that the activities of the exchange and its members are less affected with a public interest than those of commission men at a livestock exchange, the fees of whom have been subjected to regulation by the Secretary of Agriculture. This regulation was upheld in Tagg Bros. & Moorehead v. United States (280 U.S. 420).

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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 there after attention will be given to other incidental problems of constitutiona including the validity of particular provisions and the validity of the delegation of power to the Federal Trade Commission,




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 com

merce? 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 combingtions of workers within a single State where such combinations were found to burden interstate commerce. Bedford Cut Stone Co. v. Journeymen Stone Cutlers 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 Nine 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:

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 in curred 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 V.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. Saies 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 à 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 conmerce 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, discouragra 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 overproduótion 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 0.8

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