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COMPARATIVE EFFICIENCY OF VARIOUS CLASSES OF STATUTES.
While this study of the laws affecting corporations makes it apparent that many of the evils of the present situation have been created by statute and can be remedied by statute, yet it is necessary to recog nize frankly the limits within which statute law can affect economic conditions, and to admit that there is a very large area of business within which legislation is not only inefficient but productive of positive evil, however well intended. A review of the history of legislation on economic questions seems to show two classes of such statutes, the one effective and the other the reverse. Examples of the first are "factory acts," compulsory education, forms of business, regulation of corporate organization and management, safety appliances, prevention of fraud, etc., all of which have worked well. Examples of the other class are usury laws, absolute regulation of prices, antitrust laws as heretofore explained, and anti-speculation laws, all of which have been essentially unenforceable (with some marked exceptions) and have, in the case of the usury laws and regulation of prices, actually accomplished results the reverse of those intended.
In dealing with the remedial force of statutes, it must be remembered that the law is merely, in the final analysis, a crystallization of public opinion, and a statute which too far precedes or diverges from public opinion will be ineffective. The use of the two forces must therefore proceed together.
Furthermore, it is necessary to consider the varying degrees of efficiency of given laws as dependent upon their form. Certain statutes are easily enforced-are practically self-enforcing-and owe their efficiency merely to their form, while others directed to the same end are unenforceable. The most important reason for this difference probably lies in the "sanction" of the given e., whether the impelling force thereof is a criminal penalty or a private right of the individual. It may be stated conclusively, as a general rule, that that statute which relies for its enforcement upon the interest of private individuals will be much more effective than that which is based purely upon a criminal penalty. This distinction has a very important bearing upon the form of corporation law.
CONSTITUTIONAL POWERS OF CONGRESS OVER CORPORATE BUSINESS.
The Federal powers which are available to meet the conditions above outlined and to carry out the purposes above indicated are based almost wholly on the "Commerce Clause" of the Constitution, as follows:
Article 1, section 8. "To regulate commerce with foreign nations, and among the several States, and with the Indian tribes."
Subordinate powers which may be sometimes available for the same purposes are the power to establish post-offices and post-roads, to lay and collect taxes, etc., and to coin money and regulate the value thereof. It may be considered as established that under these powers Con gress may
(1) Create corporations as a means of regulating interstate com
(2) Give to such corporations the power to engage in interstate or foreign commerce.
(3) Prohibit any other corporations or individuals from engaging in the same.
(4) As a condition precedent to the grant of such corporate powers, lay any restrictions it chooses upon the organization, conduct, or management of such corporation.
(5) Tax interstate commerce at will and the instrumentalities and corporations engaged therein.
(6) Provide regulations for the carrying on of interstate commerce generally and in such local affairs as are now left to the States in the "silence of Congress" under the principle established in Cooley v. Port Wardens (12 How., 299), and in the carrying out of such powers it may use any or all means "which are appropriate, which are plainly adapted to that end, which are not prohibited, but consistent with the letter and spirit of the Constitution."
Furthermore, the individual States are restrained by the Federal Constitution from laying any burdens upon interstate or foreign commerce or from regulating or controlling the same, except in the case of local matters and in the "silence of Congress" aforesaid. This does not exclude the rights of the States to exercise their ordinary police power as applied to the persons engaged in, or the instrumentalities used for, interstate commerce so long as the exercise of such powers does not constitute a direct interference with that commerce itself, but is applied only indirectly, and is appropriate for the general purposes of local police regulation.
As a corollary from the above, the States can lay no tax upon interstate commerce as such, or upon the subject-matter thereof as such, nor can any State discriminate against interstate commerce as such, nor can it lay any burdens upon the exercise of a constitutional Federal franchise or impose taxes thereon, except by direct permission of Congress.
Briefly, as to interstate and foreign commerce, the United States is one country, one legislative area, and when Federal regulation of such commerce enters any given State for the purpose of operating on such commerce it enters it not as foreign territory but as a part of its own jurisdiction.
REMEDIAL LEGISLATION SUGGESTED BY THE ABOVE-DESCRIBED WORK OF THE BUREAU.
1. ADDITIONAL STATE ACTION.
This is wholly inadequate. The same objections apply to this suggestion on general principles as have already been made to the present condition of State corporation laws. There is now a strong positive motive leading the State legislatures toward lax and improper corporation laws, and even if all the States were actuated by most correct motives, nevertheless, it is obviously impossible that forty-five different jurisdictions should agree on anything like a uniform system in so important a matter as corporation law.
2. DELEGATION BY THE UNITED STATES TO THE INDIVIDUAL STATES OF THE CONTROL OF INTERSTATE COMMERCE.
Two objections, each conclusive in itself, can be made to this suggestion:
(a) Such action is believed to be unconstitutional. Congress has no power to divest itself of its constitutional powers or to delegate the same to any other legislative body.
(b) Even supposing that this could be legally done, the results would be open to the same objections as have been referred to just above.
3. FEDERAL INCORPORATION.
This is one of the two more practical methods suggested. It assumes the passage by Congress of a complete corporation law with the compulsory requirement that all corporations engaged in interstate commerce shall be organized under such law. It contemplates that such corporation law shall be so drawn as to embody all the necessary and proper features to provide an efficient form for the carrying on of corporate business, and at the same time to safeguard properly all the interests involved therein. Such a law should have three principal features.
(a) The creation by Congress of corporations with power to engage in interstate commerce.
(b) The prohibition upon all other corporations from engaging in such commerce.
(c) The granting to such Federal corporations of the right to manuacture and produce within the several States.
The first two powers are subject to no vital legal objections, nor can a State make any essential opposition to them even by the right of taxation. The chief difficulty in the Federal corporation law, as above indicated, arises in connection with the third of the foregoing essential features, to-wit., the question: Can Congress give to
an "interstate commerce corporation" the additional power to produce or manufacture in any State so that that grant of power shall be valid as against the States or individuals? In the absence of direct judicial decision on this point, it is impossible now to determine this question conclusively, and the answer to it must be made by reasoning from inference and on general principles.
Furthermore, there would be the practical difficulty of giving to the States power of taxation over such corporations in such manner as to permit the States to obtain the amount of revenue which they now collect from corporations domestic and foreign. The suggestion that the Federal incorporation law be made optional fails to meet the difficulties, for the reason that it would not be taken advantage of unless its conditions were more satisfactory to the corporations, and especially their promoters, than offered by existing State laws; and if such were the conditions, there would be no benefit to the public and no remedy of existing evils.
A more complete discussion of the power of Congress to grant to Federal corporations the right to manufacture and produce within the several States is contained in Appendix A, hereinafter.
4. FEDERAL FRANCHISE OR LICENSE SYSTEM FOR INTERSTATE COMMERCE.
The principal features of such a system would be:
(a) The granting of a Federal franchise or license to engage in interstate commerce.
(b) The imposition of all necessary requirements as to corporate organization and management as a condition precedent to the grant of such franchise or license.
(c) The requirement of such reports and returns as may be desired, as a condition of the retention of such franchise or license.
(d) The prohibition of all corporations and corporate agencies from engaging in interstate and foreign commerce without such Federal franchise or license.
(e) The full protection of the grantees of such franchise or license who obey the laws applicable thereto.
(f) The right to refuse or withdraw such franchise or license in case of violation of law, with appropriate right of judicial appeal to prevent the abuse of power by the administrative officer.
No fundamental legal difficulty can be discovered in this plan. Congress would grant to corporations that meet the proper conditions power to engage in interstate commerce; would fix the conditions under which their business should be done in such manner as to remedy the present defects in the State corporation law, and would require all corporations and corporate agencies engaged in interstate commerce to make returns to a Federal bureau, showing the amount
and nature of the business done, and such other facts as may be desired. Furthermore, this plan obviates the difficulty regarding State taxation. Inasmuch as practically all the important corporations of the present time are engaged in interstate commerce, and as the United States has the right to fix conditions to this license to engage in interstate commerce, this system would enable the Federal Government to reform the present condition of corporate business in all its important features.
A discussion of the details of the franchise or license system is contained in Appendix B; and a comparison of this system with that of compulsory Federal incorporation is contained in Appendix C, hereinafter.
As shown by this report, the work of the Bureau has thus been almost entirely the laying of a foundation of accurate knowledge of the legal and general business conditions with which it must deal and a clear definition of the problems for the consideration of which it was created.
The result of the work may be thus summarized:
1. Commercial and industrial conditions present the foremost problems of to-day. There exists a deep-rooted general feeling of dissatisfaction with existing conditions. Some causes of dissatisfaction are apparent, and the evils very real and great.
2. The present legal conditions under which corporate business is carried on are extremely unsatisfactory. They admit of, and invite, extreme abuse. They are the result of forced growth under divergent pressures, and in their present anomalous state represent the needs or demands of special interests, and are not a permanent body of law adapted to provide properly for all the interests involved.
Furthermore, the "State system," applied to interstate businesses, has developed additional and peculiar evils; a diversity so great as to amount in operation to anarchy; an inevitable tendency toward the lowest level of lax regulation, and the unequal and disastrous contest between State legislatures and commercial forces of national size and power.
3. No satisfactory reform is to be expected under the "State system" of incorporation.
4. The Federal Government has at its command sufficient power to remedy these conditions in its control of interstate commerce, supplemented by subsidiary and incidental powers.
5. So far the commerce clause of the Constitution has had a negative development only, both under Congress and by judicial interpretation. With the exception of the interstate-commerce act-the force of which has been seriously weakened by judicial interpretation-and the navigation laws, there has been no really affirmative attempt to