As thus defined, interstate communication would constitute interstate commerce. Indeed, it is declared to exist upon a mere expectation. Such, of course, is not the law. In United States Fidelity Co. v. Kentucky (231 U.S. 394), in which the constitutionality of a Kentucky license tax upon commercial agencies was upheld, the court said:

The circumstance that in a substantial number of cases—even if in the greater number—there is correspondence, by letter or otherwise, from State to State, which may perhaps have an affect upon the conduct of other parties about entering or not entering into transactions of interstate commerce, is not controlling" (p. 398).

In New York Life Insurance Company v. Deer Lodge County (231 U.S. 495), the Supreme Court upheld the validity of a Montana statute imposing a tax upon insurance premiums collected in that State, and in disposing of the contention of the insurance company that its business was interstate because conducted in large measure through the use of the mails, it was said at page 509:

"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."

(Italics supplied.) In Graniteville Manufacturing Co. v. Query, (44 Fed. (2d) 64) (affirmed 283 U.S. 476), it is said that the “sending of notes by mail or otherwise from one State to another does not constitute interstate commerce. See also Blumenstock Bros. v. Curtis Publishing Co. (252 U.S. 436); Engel v. O'Malley (219 U.S. 128).

The above decisions clearly demonstrate that interstate communication is not interstate commerce. It is the character of a business and not the fact that the mails, or other means of communication may be employed in its conduct, that determines whether such business constitutes interstate commerce. The mere use of the mails, or other means of communication, for the purpose of effecting the purchase or sale of securities between citizens of different States through the facilities of the New York Stock Exchange, where no actual shipment of securities takes place is not, therefore, interstate commerce and cannot be made so by mere legislative fiat.

Third: Transactions where buyer and seller are residents of different States and the transaction of sale and purchase results in actual shipment of securities between the States. Transactions of this character involve the question whether stocks and bonds are commodities in the sense that they may be the subject of commerce between the States.

It is believed that they are not in view of the decisions of the Supreme Court of the United States in respect to substantially similar businesses.

A closely related series of cases are those setting forth the doctrine that insurance, in all its forms, 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 v. 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 Insurance Co. v. Deer Lodge County (231 U.S. 495).

In the latter case, it was urged with great ability upon the Supreme Court that the enormous importance of insurance to interstate commerce, particularly its relationship to the interstate shipment of goods, justified the reversal of its earlier decisions holding that insurance was not interstate commerce. The court, however, affirmed the doctrine announced in Hooper v. California, supra, where it was said:

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 exclude 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




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intercourse, and in this respect there is no difference whatever between insurance against fire and insurance against 'the perils of the sea'.”

These decisions establish that the business of insurance is not immune from State regulation as being interstate commerce. The corollary, that the business of insurance cannot be regulated by the Federal Government because it is not interstate commerce, would seem to follow. Indeed a committee on the judiciary of the United States Senate unanimously reported that insurance was not subject to Federal regulation as interstate commerce. (S. Rpt. No. 4406, 59th Cong., 1st sess.)

In Nathan v. Louisiana (8 How. 73), it was held that a broker engaged in the use of the mails in buying and selling foreign bills of exchange "in not engaged in commerce, but in supplying an instrument of commerce."

In Hemphill v. Orloff (277 U.S. 537), a “Massachusetts trust," doing a business of buying and selling negotiable notes in various States, was held not engaged in interstate commerce in respect to the ownership of notes of a resident of Michigan where it undertook to enforce them without having first complied with local law requiring domestication of corporations. The court said:

“Upon the facts disclosed the court below held the trust was carrying on a business of dealing in negotiable notes within the State of Michigan; and we find no reason for rejecting that conclusion. Such business is not interstate commerce. Nathan v. Louisiana (8 How. 73); Paul v. Virginia (8 Wall. 168); Hatch v. Reardon (204 U.S. 152, 162); Blumenstock Bros. v. Curtis Publishing Co. (252 U.S. 436, 444).

In Graniteville Manufacturing Co. v. Query (44 Fed. (20) 64), the validity of a South Carolina stamp tax was upheld as not imposing a burden on interstate commerce in respect of a series of notes executed by the plaintiff over a period of years—between 1923 and 1930—and sent by it to banks outside of the State for discount. The District Court of the Eastern District of South Carolina said:

“The plaintiff contends also that the laying of the tax in question is a burden upon interstate commerce. But under the decisions of the Supreme Court it is plain that the notes in question did not constitute interstate commerce. They are mere personal contracts. The making of such a contract is a mere incident of commercial intercourse, and sending the notes by mail or otherwise from one State to another does not constitute interstate commerce. See New York Life Ins. Co. v. Deer Lodge County (231 U.S. 495, 34 S.Ct. 167, 58 L.Ed. 332), where the subject is fully discussed and the decisions reviewed."

The foregoing decision was affirmed in 283 U.S. 376.

These authorities determine that the negotiation of insurance contracts, the buying and selling of foreign bills of exchange and of negotiable notes through the medium of the mails, or other means of interstate communication, is not interstate commerce, and it would seem to follow by analogy that the buying and selling of securities in similar manner is likewise not interstate commerce, and, therefore, not subject to Federal regulation or control.

The basis of congressional control over interstate commerce, as distinguished from its control over the instrumentalities of commerce such as railroads, telegraph, telephone, etc., arises from the power which the Federal Government possesses to insure the free movement of commodities, or subjects of such commerce, between the States. To this extent direct and substantial interference by the States is prohibited.

These principles have found application in the Packers and Stock Yards Act and the Grain Futures Act, the constitutionality of which have been upheld, exercising Federal control over certain practices on livestock and grain exchanges. The transactions made the subject of Federal regulation by these acts were not themselves regarded as interstate commerce, although the livestock or grain to which they related necessarily moved in interstate commerce. In fact, the Supreme Court has repeatedly held that transactions upon commodity exchanges do not constitute interstate commerce. Hopkins v. United States (171 U.S. 578); Hill v. Wallace (259 U.S. 44); Moore v. New York Cotton Exchange (270 U.S. 593). It is the effect of such transactions upon the stream of commodities moving in interstate commerce that makes them subject to Federal regulation. Srrift & Co. v. United States (196 U.S. 375); United States v. Patton (226 U.S. 525); 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. and Marshall v. United States (280 U.S. 520). This is made manifest by the statement of Chief Justice Taft in Board of Trade v. Olsen, supra, when he said:

“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 points of

Landis says:



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."

In the foregoing cases Congress undertook the regulation of transactions in commodities raised or produced with the expectation that they would move through instruments of commerce, the railroads, and become a part of the flow of such commerce between the States. Consumption of such commodities within the State of their origin, except to a very limited extent would be impossible. Their production, marketing, and sale to the ultimate consumer necessarily constitutes an interstate business. It is constant in its relation to the law of supply and demand and any interruption of that relationship through transactions of the character prohibited by the acts referred to, would necessarily constitute an interruption of and burden upon interstate commerce. The transportation and terminal facilities of the railroads are likewise dependent upon continuity in the flow of such commodities in interstate commerce.

None of these conditions obtain in respect to the business of buying and selling securities. There are no circumstances requiring securities to move from State to State in order to be dealt with in stock-exchange transactions. They may find a ready market on exchanges, or in over-the-counter trading, in the State of their issue. Nor are the facilities of the railroads in any sense dependent upon the movement of securities between the States.

In a letter of February 22, 1932, from Commissioner Landis, then a professor in the law school of Harvard University, to Messrs. Carter, Ledyard, and Milburn, counsel for New York Stock Exchange, a copy of which letter has been made part of the record in the hearings upon this bill before the Senate Committee on Banking and Currency and the House Committee on Interstate Commerce, Mr.

"The recognization 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 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." (Italics supplied.)

This reasoning is logical and sound. Coming from one of the persons largely responsible for the drafting of the Fletcher-Rayburn bill it should be highly persuasive in support of the view that the decisions of the Supreme Court in the stockyard and grain futures cases constitute no authority for the contention that the buying and selling of securities through the medium of stock exchanges constitute interstate commerce.

The fact that dealing in securities through the medium of the New York Stock Exchange, or in over-the-counter trading, may consist of purely local transactions where both buyer and seller are residents of the same State, or involve transactions between residents of different States, either with or without the actual shipment of securities from State to State, demonstrates that such transactions of purchase and sale do not provide for, nor do they necessarily contemplate, the shipment of securities between the States. If interstate shipments are actually made, it is not because of anything growing out of the making of the contract of purchase and sale on the New York Stock Exchange. The necessity for any such shipment is not implicit in the transaction. Under such circumstances the Supreme Court has repeatedly held that trading, even upon commodity exchanges, does not constitute interstate commerce.

In Hopkins v. United States (171 U.S. 578), transactions on the Kansas City Live Stock Exchange, an unincorporated association, having to do with the purchase and sale of cattle, hogs, and other livestock, were held not interstate, the court saying:

"The selling of an article at its destination, which has been sent from another state, while it may be regarded as an interstate sale and one which the importer was entitled to make, yet the services of the individual employed at the place where the article is sold are not so connected with the subject sold as to make them a portion of interstate commerce, and a combination in regard to the amount to be charged for such service is not, therefore, a combination in restraint of that trade or commerce. (Italics supplied.)

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In Hatch v. Reardon (204 U.S. 152), an act of the State of New York imposing a stamp tax of 2 cents on the $100 of face value of shares of stock, when sold in New York by a resident of Connecticut to a resident of the latter State doing business in New York, was held not a burden on interstate commerce, the court saying: “The fact that the property sold is outside of the State and the seller and buyer foreigners are not enough to make a sale commerce with foreign nations or among the several States, and that is all that there is here."

In Ware & Leland v. Mobile County (209 U.S. 405), a statute of Alabama imposing a license tax on stock and cotton exchanges and the persons trading thereon for the purpose of buying and selling futures, was held not a regulation of interstate commerce although such purchases or sales were executed through the medium of an agent in Mobile, Ala., on the New York or New Orleans Cotton Exchanges. The court said:

“The appellants are brokers who take orders and transmit them to other States for the purchase and sale of grain or cotton upon speculation. They are, in no just sense, common carriers of messages, as are the telegraph companies For that part of the transactions, merely speculative and followed by no actual delivery, it cannot be fairly contended that such contracts are the subject of interstate commerce; and concerning such of the contracts for purchases for future delivery, as result in actual delivery of the grain or cotton, the stipulated facts show that when the orders transmitted are received in the foreign State the property is bought in that State and there held for the purchaser. The transaction was thus closed by a contract completed and executed in the foreign State, although the orders were received from another state. When the delivery was upon a contract of sale made by the broker, the seller was at liberty to acquire the cotton in the market where delivery was required or elsewhere. He did not contract to ship it from one State to the place of delivery in another State. And though it is stipulated that shipments were made from Alabama to the foreign State in some instances, that was not because of any contractual obligation so to do. In neither class of contracts, for sale or purchase, was there necessarily any movement of commodities in interstate traffic, because of the contracts made by the brokers.

“These contracts are not, therefore, the subjects of interstate commerce, any more than in the insurance cases, where the policies are ordered and delivered in another State than that of the residence and office of the company. The delivery, when one was made, was not because of any contract obliging an interstate shipment, and the fact that the purchaser might ihereafter transmit the subject matter of purchase by means of interstate carriage did not make the contracts as made and executed the subjects of interstate commerce.". (Italics supplied.)

In Moore v. New York Cotton Exchange (270 U.S. 593), it was said:

“The New York exchange is engaged in a local business. Transactions between its members are purely local in their inception and in their execution. They consist of agreements made on the spot for the purchase and sale of cotton for future delivery, with a provision that such cotton must be represented by a warehouse receipt issued by a licensed warehouse in the Port of New York and be deliverable from such warehouse. Such agreements do not provide for, nor does it appear that they contemplate, the shipment of cotton from one State to another. If interstate shipments are actually made, it is not because of any contractual obligation to that effect; but it is a chance happening which cannot have the effect of converting these purely local agreements or the transactions to which they relate into subjects of interstate commerce. Ware & Leland v. Mobile County (209 U.S. 405, 412-413). The most that can be said is that the agreements are likely to give rise to interstate shipments. This is not enough. Engel v. O'Malley (219 U.S. 128, 139). See also Hopkins v. United States (171 U.S. 578, 588, 590); Anderson v. United States (171 U.S. 604, 615–616).” (Italics supplied.)

These authorities determine the unconstitutionality of the bill as an attempted regulation of the business of buying and selling securities, whether conducted through the medium of stock exchanges or in over-the-counter markets. Such business is essentially local in character. The fact that the mails, or other means of communication or transportation, may be employed in its conduct does not give it a different character. Interstate communication is not interstate commerce. Nor does the fact that transactions in securities on stock exchanges, or in over-the-counter markets, may give rise to shipment of securities from one State to another constitute such transactions interstate commerce, since there is nothing in the transactions of purchase and sale that necessitates or requires such shipments.



Section 4 of the bill prohibits the use of the mails "in interstate commerce" for the purpose of using the facilities of any securities exchange unless such exchange is registered as a national securities exchange under the provisions of the bill. Section 14 of the bill prohibits the use of the mails "in interstate commerce” for the purpose of making or creating a market for any security whether or not listed on any national securities exchange except upon compliance with such rules and regulations as the Federal Trade Commission may prescribe as appropriate in the public interest, or for the protection of investors.

Both inhibitions are, therefore, against use of the mails "in interstate commerce.” If trading in securities listed upon securities exchanges, or whether or not so listed, is not interstate commerce the use of the mails for such purposes would not seem to constitute an inhibited use.

Furthermore, as the prohibition against the use of the mails for the purpose of using the facilities of any securities exchange is predicated upon the assumption that there exists in the Congress power to require such exchanges to register under the provisions of the bill because engaged in interstate commerce, it would seem to follow that if such business is not interstate commerce and that power to require registration does not, therefore, exist, the inhibition against the use of the mails for the purpose of making use of the facilities of any such securities exchange is ineffective.

Assuming, however, for the sake of discussion, an assumption which we have shown to be contrary to the facts, that the business of stock exchanges and that of their members, as well as dealing in over-the-counter markets, is interstate commerce, and that because of this fact the proposed bill undertakes to prohibit the use of the mails in connection with the transaction of such business, does the control of the Congress over the use of the mails warrant the exercise of that power in the manner proposed?

Article I, section 8, of the Constitution confers upon the Congress power to establish post offices and post roads."

The power thus conferred has been held to comprehend the right to regulate the postal system of the United States and generally to determine what may or may not be carried in the mails. Ex Parte Jackson (96 U.S. 727).

Cases in which this power of the Congress has been upheld have very generally related to matter which might be excluded because properly considered contrary to public policy or inimical of the public welfare, such as matter concerning the lotteries, Ex Parte Jackson, supra; matter involving schemes to defraud, Public Clearing House v. Coyne (194 U.S. 497); matter of a scurrilous or defamatory nature, Warren v. United States (183 Fed. 718); matter tending to incite treason or forcible resistance to the laws of the United States, Milwaukee Publishing Co. v. Burleson (255 U.S. 407); and matter of an obscene or indecent nature, Coomer v. United States (213 Fed. 1); Tyomies Publishing Co. v. United States (211 Fed. 385); United States v. Journal Co. (197 Fed. 415).

The provisions of the bill attempting to exclude from the mails corresp nce, or other matter relating to the business of buying and selling securities, would, therefore, involve an extension of this power of the Congress in a manner not heretofore attempted, and, it is respectfully submitted, without warrant under the Constitution.

The provisions of the bill in this respect would seem to be founded upon some such assumption of power as that contended for by the Government in Lewis Publishing Co. v. Morgan (229 U.S. 288), which, as paraphrased in the opinion of the court, was said to constitute:

an exertion by Congress of its power to establish post offices and post roads, a power which conveys an absolute right of legislative selection as to what shall be carried in the mails and which therefore is not in anywise subject to judicial control even although in a given case it may be manifest that a particular exclusion is but arbitrary because resting on no discernible distinction nor coming within any discoverable principle of justice or public policy.”

In refusing to adopt the view that the power of the Congress to control the use of the mails involved any such unlimited application, the court said at page 316:

because there has developed no necessity of passing on the question, we do not wish even by the remotest implication to be regarded as assenting to the broad contentions concerning the existence of arbitrary power through the classification of the mails, or by way of condition embodied in the proposition of the Government which we have previously stated.”




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