of $254 on December 20, 1929 to $41% on May 1, 1930.

But during this period, the Securities Company's market purchases exceeded its total sales through all distribution channels. A market decline set in, in May, 1930, during which the sales exceeded 1,000,000 shares and exceeded the market purchases by nearly 279,000 shares; and a fluctuating decline continued throughout the remainder of that year, the market price at the very end being $14% per share.

On January 17, 1930, Cities Service Company provided the Securities Company with 600.000 common shares with which to make deliveries to customers. Although the market price at the time was about $28 per share, the gross proceeds available from accumulated sales averaged only $15.91 per share to be provided; and the price to the Securities Company for these shares was $12.50, which left the latter a margin of about $3.41 per share with which to cover commissions and expenses. As of December 31, 1930, Cities Service Company provided the Securities Company with another 633,879,206 shares at $10 per share. This price left the Securities Company with a margin of about 53.82 cents per share with which to cover commissions and expenses. The Securities Company's accounts represented that company as selling, to the holders of Cities Service Company debentures, the common shares that were issued to them when they exercised the warrant options carried by their debentures, and as obtaining the requisite shares from the issuing company at prices from $5.50 to $7 per non-par share less than the prices paid by the debenture holders. As the Securities Company had no function to perform in the issuance of these shares, this resulted in counting for it a gross profit of $18,429,723.23 for which it did not render service. However, this made no difference in the ultimate proceeds to Cities Service Company because the Securities Company's net deficits from these operations were charged back to it.

As of December 31, 1929, the Securities Company wrote down the book cost of its "Trading Purchases" of Cities Service Company common stock, $21,121,097.98. This was not an inventory adjustment, as the company had no unsold shares, its aggregate sales up to that time having exceeded its aggregate purchases by 1,946,941 shares. Such bookkeeping enabled the Securities Company a year later to count on certain classes of sales of this stock a gross profit of $99,642.39 instead of an actual gross loss of $21,021,455.29. Profits and losses made by trading in securities are not, however, taken into earnings but are treated as more or less capital proceeds from the securities of new original issue, which treatment is represented on the company's bocks by carrying them, not to Surplus, but to an account called "Reserve for Cost of Distribution ".

After counting profits and losses on December 31, 1930, the Securities Company emerged with a deficit in its "Reserve for Cost of Distribution" of $1,956,775.71. This was charged back to Cities Service Company, as also was $12,518,998.55 of uncollectible balances of breached partial payment contracts.

MEMORANDUM CONCERNING THE POWER OF CONGRESS, UNDER THE COMMERCE CLAUSE, TO REGULATE SECURITY EXCHANGES

This memorandum is concerned with the basic question whether Congress, by virtue of the commerce clause, has power to regulate security exchanges. Its purpose is to show that a constitutional foundation exists upon which may be built a statutory structure for the regulation of such exchanges. For if this power can be established, as in my opinion it can, then it becomes largely a question of fact and of administrative judgment whether and how far the regulation shall be extended beyond the exchanges themselves and applied to related and collateral activities.

I. REGULATION OF SECURITY EXCHANGES IS A NATIONAL PROBLEM

The national character of the problem of the regulation of security exchanges is shown by the facts. Some of them are subject to judicial notice. Others have been brought out by the Congressional investigations or have been gathered as a result of independent studies. A few of the broader aspects may be noted here as bearing on the national interest.

Transactions upon the security exchanges may have a direct effect upon the ability of the instrumentalities of interstate commerce to perform their functions. New security flotation is difficult if, because of manipulation or loss of public confidence, existing securities have shrunk to abnormally low

values. With this should be considered the frequent refunding operations made necessary for the American railways by virtue of their heavy funded debt. The other carriers (air and motor transport, pipe lines) have in general a small funded debt but their stock distribution is more limited, making speculative movements more severe. No reason appears why the burden which may thus be imposed upon the efficient functioning of the interstate transportation system is any less direct or real than that of low intrastate passenger fares, Railroad Commission of Wisconsin v. Chicago, B. & Q. R. Co., 257 U.S. 563. Interstate commerce in largest part consists of the movement of goods financed by credit. Without adequate credit facilities the physical instrumentalities of interstate commerce are near to useless. An unrestrained speculative activity absorbing, at times, billions of dollars of credit, at high interest rates, of necessity increases the cost of financing and, to a significant extent, diminishes the volume of credit available for the interstate transaction. An even more serious impediment to the continued functioning of this interstate shipment is found in the vulnerability of the commercial banking system to extreme fluctuations in the quoted values of securities. Through direct investment and through collateral required of the borrower, the commercial banks are so circumstanced that an abrupt decline from a speculative peak must reap a heavy toll in insolvency, with consequent attrition of the interstate movement of commodities. A Congressional power which can reach the purchase of stock in competing businesses, Northern Securities Co. v. United States, 193 U.S. 197, the charging of discriminatory prices, Van Camp & Sons v. American Can Co., 278 U.S. 235, and the publication of an "unfair" list, Loewe v. Lawler, 208 U.S. 274, because of a possible diminution of interstate commerce, hardly can be said to fall short of protecting the essential credit foundation from the dangers presented by an unrestrained speculative market for securities.

Since "commerce among the states is not a technical legal conception, but a practical one, drawn from the course of business," (Swift & Co. v. United States, 196 U.S. 375, 399) one must take a practical view of the nature of interstate commerce. In commercial realty it is, in the largest part, the result of orders placed by business hoping to resell at a profit. If their predictions of their markets fluctuate, so will fluctuate the volume of interstate commerce. The movement of securities on organized exchanges is an important matter in shaping the judgment of business men as to the future. It seems clear that a power to regulate interstate commerce is incomplete if it cannot serve to guard the exchanges from manipulated movements and speculative hysteria. The words of Woolsey, J. are peculiarly appropriate in this regard (United States v. Brown, 5 F. Supp. 81, 85, (D.C., S.D.N.Y. 1933)):

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When an outsider, a member of the public, reads the price quotations of a stock listed on an exchange, he is justified in supposing that the quoted price is an appraisal of the value of that stock due to a series of actual sales between various persons dealing at arms length in a free and open market on the exchange, and so represents a true chancering of the market value of that stock thereon under the process of attrition due to supply operating against demand."

None but the brave could say that interstate commerce is more directly burdened by the exclusion of cooperative marketing associations from grain exchanges, Board of Trade v. Olsen, 262 U.S. 1, than by speculative upheavals on the securities markets.

The marketing of securities in interstate commerce has recently been subjected to a large measure of Congressional control. See, The Securities Act of 1933, 33 Columbia Law Review 1220. This control is incomplete without control of the securities exchanges. "Market support" is an almost invariable corollary of security distribution and, in the case of stocks, is often accompanied by additional sales on the exchange made by the sponsoring banking house or syndicate.

The strength of the national interest in the proper functioning of the securities exchanges hardly can be questioned. Ours is a credit economy, dependent upon the exchanges for the liquidity of its fixed assets and for the solvency of its financial institutions. This national interest is a factor which of necessity colors any judicial consideration of the implications of the commerce clause. As Holmes, J. writing for the Court in Missouri v. Holland, 252 U.S. 416, 433, 435, (sustaining an Act of Congress to carry out a treaty relating to the protection of migratory birds) said:

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*

it is not lightly to be assumed that, in matters requiring national action, a power which must belong to and somewhere reside in every civilized government' is not to be found * * Here a national interest of very nearly the first magnitude is involved * * * We see nothing in the Constitution that compels the government to sit by while a food supply is cut off and the protectors of our forests and of our crops are destroyed. It is not sufficient to rely upon the states. The reliance is vain, and were it otherwise, the question is whether the United States is forbidden to act."

While the existence of a national problem does not prove the existence of a national power, it does at least provide a good place to begin the inquiry. In the same case from which we have just quoted and in answer to the contention that the Migratory Bird Act constituted an invasion of power reserved to the States by the Tenth Amendment, Mr. Justice Holmes said (at 434):

"We must consider what this country has become in deciding what that Amendment has reserved."

II. The scope of the commerce clause is largely a question of fact.

That the scope of the commerce clause is commensurate with the national interest and that in proper circumstances Congress may control situations normally considered intrastate, is a doctrine announced by John Marshall more than a century ago. In discussing the power of Congress in Gibbons v. Ogden, 9 Wheaton 1, he attempted to indicate something of its range by suggesting what it could not reach :

"The genius and character of the whole government seem to be, that its action is to be applied to all the external concerns of the nation, and to those internal concerns which affect the States generally; but not to those which are completely within a particular State, which do not affect other States, and with which it is not necessary to interfere, for the purpose of executing some of the general powers of the government." (at 195).

Thus was the matter put in 1824. And it should not be forgotten that this case, with its wide suggestion concerning the extent to which the delegated power over commerce may reach intrastate came shortly after M'Culloch v. Maryland, 4 Wheaton 316, with its doctrine of implied powers written into the theory of delegated powers, and constitutes part of Marshall's general development of constitutional interpretation. Under the affirmative implications of the words just quoted, it is permissible for Congress to regulate the internal concerns of a State if they affect other States and if it is necessary to interfere with them for the purpose of executing some of the general powers of the Nation.

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As a corollary of the general rule that Congress has the implied power to take such steps as may be necessary to make effective its exercise of an express power, the Supreme Court has established the authority of Congress to enact whatever legislation is appropriate to foster, protect, control, and restrain" interstate commerce. Second Employers' Liability Cases, 223 U.S. 1; Mobile County v. Kimball, 102 U.S. 691, 697; The Daniel Ball, 10 Wall. 557, 564. This power, when need arises, extends not only to strictly interstate matters, but also to intrastate matters whenever the two are so intertwined or related as to effect interstate commerce or its successful regulation by the Federal Government. This exertion of Congressional power is not restricted in niggardly fashion, but is recognized to be a governmental necessity and a beneficent adjunct of Federal authority.

But before examining the method by which the power may be extended to embrace intrastate affairs, it is well to note that, for the regulation of security exchanges, there is a core of interstate transactions around which the power of Congress may be built. For considerable proportions of the sales on the larger exchanges are made by interstate communication or contemplate physical delivery across state lines. That the transportation occurs before or after the sale does not serve to remove the transaction from the power of Congress to regulate under the commerce clause. Dahnke-Walker Milling Co. v. Bondurant, 257 U.S. 282; McDermott v. Wisconsin, 228 U.S. 115. That the thing sold is not tangible property but rather the evidence of indebtedness or of ownership does not serve to remove the transaction from the scope of the commerce clause. United States v. Ferger, 250 U.S. 199; Champion v. Ames, 188 U.S. 321.

Interstate Commerce Commission v. Goodrich T. Co., 224 U.S. 194, is illustrative. In that case the Commission, acting under a Congressional mandate, ordered the Goodrich Transit Company and a number of other Great Lakes water carriers to file with the Commission on prescribed forms a statement of their operating revenues and expenses, their corporate organization and financial condition, and other desired data. The required statements were to contain information not only concerning joint rail and water business, which was the portion of the carriers' business subject to Federal regulation under the then applicable statute, but also concerning other aspects of the carriers' operations, both intrastate and interstate. The Supreme Court held that the Commission's orders were valid. Separation of the total business of the carriers into its component parts seemed impracticable, and the accounting instructions were needed in order that the Commission could inform itself so as to enable it properly to regulate the matters within its authority. The decision is especially noticeable in view of the fact that, in the case of one of the objecting carriers, the revenue derived from joint rail and water traffic was less than one percent of its entire revenue.

Review of the decided cases indicates that the scope of Congressional power is ascertainable only by reference to the facts surrounding each application of it. The problem and its treatment are strikingly similar to the procedure in cases involving the due process clause. For example, in Stafford v. Wallace, 258 U.S. 495, the Supreme Court sustained the Packers and Stockyards Act against attack under the commerce clause, noting that the business regulated was interstate commerce or so associated with it as to be within the Federal powers. The late Chief Justice Taft there said (at 513):

"It was for Congress to decide from its general information and from such special evidence as was brought before it, the nature of the evils actually present or threatening, and to take such steps by legislation within its power as it deemed proper to remedy them.'

Some years later, in Tagg Brothers & Moorehead v. United States, 280 U.S. 420, the Court had before it a case arising under the same statute; in this instance complaint was made that the act, in permitting the fixing of permissible charges of market agencies, violated the due process clause. The Court again upheld the act, saying (at 439) that fixing the commission merchants' fees was reasonable because "the purpose of the regulation attacked is to prevent their (the merchants') service from thus becoming an undue burden upon, and obstruction of that (interstate) commerce." In each case, the ultimate question was whether there was a reasonable connection between the means adopted by Congress and a permissible end. In each case the question was answered affirmatively.

The Supreme Court has often indicated its adherence to the doctrine that a declaration of a legislative body, charged with the duty of knowing public conditions, is of great weight in determining whether a particular statute is a reasonable and necessary exercise of power. This rule, while originally applied in due process cases (see, for example, Block v. Hirsh, 256 U.S. 135) has also been utilized by the Court in commerce clause cases.

Of the latter class, Chicago Board of Trade v. Olsen, 262 U.S. 1, sustaining the Grain Futures Act, is of special significance. And its significance becomes clear when the case is compared with Hill v. Wallace, 259 U.S. 44, holding the Future Trading Act (a tax measure) unconstitutional. After the decision in the Hill case Congress, as a result of an investigation, concluded that regulation of boards of trade was necessary because trading in grain futures involved, or tended to involve, a burden upon interstate commerce; and passed the Grain Futures Act. Measured in terms of their objectives, there was no essential difference between the two statutes. But the tax statute was invalidated, the commerce one sustained. The difference in result turned on the finding by Congress as to the effect of futures trading upon interstate commerce.

It is apparent, then, that regulation of intrastate transactions may be embraced within the Congressional authority over interstate and and foreign commerce, if the fact is that such regulation is related to regulation of interstate commerce and implements or perfects the latter. A declaration by Congress, such as the declaration in an introductory section of the proposed act to regulate security exchanges, is affirmative evidence of the existence of the required relationship; the Supreme Court will not lightly disregard it.

III. ON FOUNDATIONS OF FACT, A WIDE EXPANSION OF THE COMMERCE POWER HAS BEEN ESTABLISHED

The application and results of the doctrine described in Part II of this memorandum are illustrated by a long line of cases in the Supreme Court of the United States. They show a steady and significant expansion of the acknowledged power of Congress "to foster, protect, control, and restrain" where interstate or foreign commerce is concerned. They make manifest, in particular, the reach of Congressional power to remove or to prevent interferences with or burdens upon interstate commerce. Such interferences or burdens may arise from the violent actions of individuals (In re Debs, 158 U.S. 574), or the peaceful activities of state corporations (Northern Securities Co. v. United States, 193 U.S. 197), or the duties imposed on public officers by state laws (Shreveport Rate Cases, 234 U.S. 342). Whatever may be the source and whatever the kind of interference or obstruction, the subject matter is one for the consideration of Congress.

The cases have arisen under various statutes: the Interstate Commerce Act, Anti-Trust Laws, Federal Trade Commission Act, and others. They have covered a wide range. Aside from differences on the facts, however, all of them stand together on a common ground, namely, that they are concerned with the development and expansion of the auxiliary power of Congress to reach as far into the States as may be necessary effectively to foster and protect interstate commerce. They make an elaborate array of authority for the exercise of the power of Congress over affairs normally considered intrastate. In addition to those already cited, and sometimes by way of repetition in order to emphasize the development, the most significant cases follow.

Earliest in point of time, as the first important national development, are the railroad cases. In re Debs, 158 U.S. 564, (removal of obstructions to interstate commerce caused by strikers); Southern Ry. vs. United States, 222 U.S. 20 (Federal Safety Appliance Act applied to intrastate equipment of interstate railroad); Shreveport Rate Cases, 234 U.S. 342 and the Wisconsin Rate Case, 257 U.S. 563 (discontinuance of intrastate rates discriminating_against interstate commerce); Colorado v. United States, 271 U.S. 153, and Transit Comm. of N.Y. v. United States, 284 U.S. 360 (discontinuance of intrastate branches under orders from Interstate Commerce Commission); and Texas & N.O.R. Co. v. Brotherhood, 281 U.S. 548 (compelling employers to grant free choice of arbitrators to employees.

Paralleling this expansion of federal power over transportation facilities, has been the growth of supervision over commercial corporations. Powerful combinations threatening the welfare of commerce led successively to the Sherman Anti-Trust Act, the Clayton Act, and the Federal Trade Commission Act. Within the scope of these statutes, practices have been deemed restraints which concerned the organization and security structure of the corporation, not of themselves interstate commerce. Northern Securities Co. v. United States, 193 U.S. 197 (consolidation of competing railroads by stock transfer to a holding company); Federal Trade Commission v. Western Meat Co., 272 U.S. 554 (acquiring stock in a competitor); Standard Oil Co. v. United States, 221 U.S. 1 (formation of holding company out of stock of various petroleum corporatins); United States v. Union Pac. R. Co., 226 U.S. 61 (purchase by one railroad of dominating stock interest in another); United States v. American Tobacco Co., 221 U. S. 106 (monopolizing tobacco industry by stock acquisition); United States v. Reading Co., 253 U.S. 26 (holding company controlling coal companies and their railroad facilities).

As coming closer to the present problem the following may be noted: Swift & Co. v. United States, 196 U.S. 375 (combination of livestock commission merchants violates the Sherman Act); United States v. Patten, 226 U.S. 525 (corner of the N. Y. cotton market a restraint of trade); Stafford v. Wallace, supra (sustaining the Packers and Stockyards Act); Chicago Board of Trade v. Olsen, supra (upholding the grain Futures Act); Binderup v. Pathe Exchange, 263 U.S. 291 (" exchange receiving interstate shipments of films and redistributing them to local exhibitors in the same state held to be a restraint on interstate commerce).

In the light of these cases alone, it is no longer open to question that Congress may reach and control intrastate affairs whenever such control is necessary to the effective exercise of its power over interstate commerce. Ample power exists; and, as the Supreme Court has said in Florida v. United States, 282 U.S. 194, it becomes only a question as to the "propriety of the exertion" of the power.