It therefore appears that the power to produce-the franchise to produce-accompanies naturally, and as a part of this appropriate means, the power-and the franchise to exchange; that this subordinate power to produce is a natural and prima facie corollary of the power to exchange, and a natural part of this constitutional machinery for the regulation of commerce, and that any one who contests this subordinate power to produce has upon him the burden of proof of its unconstitutionalty; that prima facie this subordinate power is constitutional.

In short, the power or franchise to produce seems at least one of the appropriate means that Congress, in its wisdom and discretion, may consider as fairly a part of the powers of an interstate-commerce corporation chartered by Congress.

As an illustration of the way in which Congress has already granted special powers to its corporations, incidental to their main powers, the case of the national banks merits consideration. These banks have been chartered under the general fiscal powers derived from those sections of the Constitution which provide as follows: The Congress shall have power

To lay and collect taxes, duties, imposts, and excises, to pay the debts and provide for the common defense and general welfare of the United States; but all duties, imposts, and excises shall be uniform throughout the United States.

To regulate commerce with foreign nations and among the several States, and with the Indian tribes.

To coin money, regulate the value thereof, and of foreign coin.

And as incidental to the banking system thus developed, national banks have been also granted additional powers (Rev. Stats., U. S., 5136-5137) as follows:

(1) All such incidental powers as shall be necessary to carry on the business of banking.

Under this, and evidently regarded as such incidental and necessary powers, are the following:


* * * notes, drafts, bills of exchange, "Receiving deposits."

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Buying and selling exchange, coin, and bullion." "Loaning money on personal security."

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'Obtaining, issuing, and circulating notes

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(2) General formal powers constituting the peculiar characteristics of a corporation.

(3) Holding land for debts as well as for actual use.

(4) Right of taking interest.

Is it not obvious that many of these powers are no more necessary to the carrying out of the aforesaid constitutional powers than production is necessary for the carrying on of interstate commerce?

A banking business might easily be carried on without "buying and selling exchange, coin, and bullion"; without holding land for debts; without the full power of "discounting notes, drafts, and bills of exchange.'

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And yet all these powers have been upheld or have never been contested.

There is no question of the power of Congress to create and use the corporate form or machine as a means of carrying out constitutional powers, and when a particular means is constitutional, the powers of Congress relating to that means are plenary. Once granting the propriety of the general power to regulate interstate commerce by the corporate form, it then follows necessarily that the discretion of Congress in the matter is very broad, reaching to every means, form, incidental, and detail not plainly prohibited.


It is submitted that the power to produce to be granted by Congress to a particular interstate-commerce corporation is also an absolute essential to the powers of such corporation for the purpose of regulating interstate commerce.

The decision that apparently stands most opposed to this proposition is of course the Knight case. The Knight case involved a very important question as to the relation of the United States with the States. If that case had been decided in a way contrary to that in which it really was decided it would have gone far toward establishing the principle that the United States had control of all State business, whether domestic or foreign, on the ground that the same might, in the ordinary course of trade, involve the subjects of interstate commerce, and that the articles produced by State manufacturing concerns might have become the subjects of such commerce. The court probably must have considered that a decision of such nature would have swept all important domestic manufacturing business under Federal control, because any business may have an interstate feature or may at any time develop one. In the case of Kidd v. Pearson (128 U. S., 1), the court actually gave this reason at length. It is probable that this point had a strong influence on the decision in the Knight case. A decision for the United States in that case would have gone a long way in breaking down State power. The remarks of Mr. Justice Lamar in Kidd v. Pearson, supra, indicate the views of the court on this point. This latter case involved the refusal by the State to allow the manufacture within that State of certain goods, even though they might be intended for interstate commerce. The refusal was held valid on the ground that the intent did not govern. But it seems a fair assumption that if the United States in the Knight case could have shown positively that the domestic production of sugar there in question must necessarily and inevitably have involved interstate commerce the decision would have been the opposite of what it was, for the connection between such commerce and such production would then have been absolute and not contingent-a necessity instead of a mere possibility or probability.

In other words, the force of the Knight case must not be extended beyond the actual facts therein involved. This case established the principle that production does not imply interstate commerce (no matter what the intent of the producer may be or the probability as to the future use of the goods produced).

But this is a very different thing from saying that interstate commerce does not imply production. On the contrary, it is submitted that it does imply production to such an extent that the power to produce is a necessary constitutional incidental of the powers of such proposed "interstate-commerce corporations."

Production is an indispensable prerequisite of commerce, whether interstate or otherwise. Production may exist without commerce, certainly without a specified form of commerce, such as interstate commerce. All the articles produced by a manufacturer within a given State may be sold or consumed within that State, and no interstate commerce need be the result of such production. On the other hand, interstate commerce can not exist without production. The existence of commerce implies necessarily the existence of production. Commerce is, in point of time, a secondary act; it is the doing of certain acts and the engaging in certain transactions which relate to certain articles, to-wit, the subjects of commerce, and unless such articles exist such acts and transactions and such commerce can not exist. Production is necessary for the existence of the subjects of commerce. Commerce depends upon production. All the powers for the transaction of commerce might be granted by Federal franchise, and yet they would be wholly null, valueless, and inoperative unless there were also means of bringing into existence the subjects upon which such powers shall act.

Production, therefore, being a necessary prerequisite of commerce, the right to carry on interstate commerce must ultimately involve the right to produce the subjects thereof, not only as a proper and usual incidental, but as an absolutely necessary one. As Congress has, for the purpose of regulating interstate commerce, the unquestioned right to create a corporation, and to that end can grant it a franchise to

carry on such commerce, it must also, therefore, be able to grant a franchise to produce the necessary subjects of such commerce. Otherwise the first franchise is useless, and Congress would therefore be unable to so regulate commerce and so exercise one of its constitutional powers by means of interstate-commerce corporations.

For example, let it be assumed that Congress should incorporate companies with power to carry on interstate commerce; let it be also assumed that there should exist legal power to prohibit such corporations from producing within the States; let it be also assumed that all the States should thereupon prohibit all domestic producers from selling to such Federal corporations (the legal status of this latter prohibition against sales to Federal corporations is discussed below); then obviously the Federal franchise so granted to engage in interstate commerce would be wholly inoperative and useless, because of the practical lack of the subjects of commerce, and the States would continue to control interstate commerce.

Of course Congress, as a retaliatory measure, might then prohibit State corporations from engaging in interstate commerce, but the result of this would then be a mere negative situation, a deadlock, in which neither set of corporations could carry on interstate commerce, and neither power could regulate it thereby. If such were the case, we should have to admit the possibility of such a deadlock as well as the legal fact that each of the two powers may absolutely debar the other from the effective administration of interstate commerce, and that no power exists anywhere to effectively, and in the final conclusion, regulate such commerce by means of corporations. It cannot be granted as a legal proposition that this power does not exist somewhere, either in the States or in the United States; and if it exists somewhere, as it must to make our governmental system complete, it should be held to exist in the United States, to which is given the power by its Constitution to regulate interstate commerce. Unquestionably the founders of the Constitution meant that the National, rather than the State governments, should control national commerce, and if this complete power exists anywhere, as it must, it must have been their intention to have it exist in the Federal Government.

It seems, therefore, that Congress must have this power to grant producing franchises, as otherwise an absolute deadlock as to interstate commerce might result. It is said that the power to produce the subjects of commerce is an absolute essential and prerequisite to the carrying on of interstate commerce.

The opponents to the fundamental proposition might reply thereto by saying that such power to produce is not a necessary prerequisite to the power to carry on interstate commerce, because such "interstate-commerce corporations" might obtain their subjects of commerce by purchasing them from State corporations or individuals producing within the State, and accordingly would not be obliged to produce them themselves. But this power to purchase from State producers stands in the same legal relation to the power of the State as does the proposed power to produce. The transaction of purchase and sale between a State vendor and an "interstate-commerce corporation" purchaser is purely a domestic transaction. The "interstate-commerce corporation" is not engaged in interstate commerce when making that purchase. It might presumably use the purchased articles in domestic commerce, aǹd, reasoning from the Knight case, neither the intent of the said Federal corporation nor the extreme probability that such articles will be used in interstate commerce is sufficient to make them legally the subjects of interstate commerce, and thus to make the transaction a part of interstate commerce.

Reasoning on this ground, it therefore appears that the State has as much right to prohibit purchases by such Federal corporations within the State as it has to prohibit production; and if it can do both, obviously it has the power to wholly annihilate any possibility of interstate commerce by such Federal corporations. Any such legal position can not, of course, be admitted. It is a flat denial of one of the great constitutional powers. We are therefore forced to the conclusion that the State can not

prohibit production by such Federal corporations because it is one of the two possible alternatives that would enable such corporations to carry on their business. These alternatives stand on the same legal footing as regards the power of the State. If the State can prohibit one it can prohibit both. Obviously it can not prohibit both. Therefore it can prohibit neither.

A test of this validity of the entire Federal franchise to produce would probably first and most naturally arise in a private suit on the ground of ultra vires. The action would probably be brought, or defense made by, individuals against such corporation to set aside a contract made by said corporation under such "producing" power on the ground that the contract was ultra vires, thus raising the fundamental question whether the franchise to produce given by Congress was a valid franchise and whether the exercise of such power could be properly had in making a purely manufacturing or producing contract. Until the Supreme Court shall have rendered a decision involving the questions thus to be raised it is impossible to say, as a matter of definite law, whether or not this franchise can be constitutionally given by Congress, and its validity must be argued, as above, by inference and analogy.



It is not desired to definitely put forward in this appendix any specific detailed outline of such system as being the particular means of carrying out the general conclusions set forth in the body of the report. The particular object is rather to develop as far as possible the legal questions that will be raised, in general, by such a system, and it is obvious that that purpose can best be obtained by outlining in a tentative way the possible features of such system and observing the legal propositions that would be involved therein.


Briefly, its object would be to remedy, so far as is possible by legislation, those corporate evils the existence of which this Bureau is considering. A full statement in detail of those evils is not necessary here, and the matter has already been treated in some detail in the body of this report.

In general, however, it is sufficient to maintain the distinction established in the case of Cooley v. Board of Port Wardens (12 Howard, 299), namely, that while Congress has complete control over interstate commerce it practically exercises this power only over its national features, leaving local matters to the regulation of the States. Applying this rule to corporate business, the system in question should deal with the following features of that business.

(a) Where the organization or management of the corporation affects persons or interests in more than one State, as, for instance, in the furnishing of public-service facilitates or necessaries between two or more States; in the offering of securities to the general public; in the seeking of credit or loans from the general public; in affecting labor conditions in two or more States; in affecting prices of goods or raw materials in two or more States, and in the controlling or coordinating, by merger or otherwise, of businesses in different States.

(b) Where such corporate conditions affect strictly the governmental agencies of the United States and the operation thereof.

(c) Where such conditions affect business wholly outside of State control-for instance, navigation and foreign commerce.

(d) Where the existing State incorporation laws are essentially an abuse of the comity of States and have, as their primary object, the chartering of corporations whose two chief characteristics shall be (1) the power to do business in other States and (2) the duty to pay taxes to the chartering State.

(e) Where the legislative power of a given State has been so far misused under the present tendency toward lax corporation laws that it has resulted in a distinct degeneration in standards of commercial ethics and wholly insufficient protection is given thereby to large classes of its citizens.


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