(b) The insurance cases involved State action which had been long established. The fact that such action is upheld does not preclude Federal regulation, as will be demonstrated presently.

(c) The only two members of the Court in the Deer Lodge County case who are members of the present Court-Justices Hughes and Van Devanter dissented. Another decision which is sometimes cited as an authority for the contention that securities are not articles of commerce is Ware & Leland v. Mobile County (209 U.S. 405). In that case a State license tax was upheld as applied to a dealer in cotton futures. The Court quoted, in the course of its decision, from the opinion in Paul v. Virginia. Whatever may be thought of the analogy between insurance contracts and contracts for cotton futures, the applicability of the case to securities is remote. The case, moreover, is not an authority on the question of Federal regulation, since it involved a State tax, and since only one stage in the business of dealing in futures was subjected to the tax. The limited application of the case is brought out in the decision in United States v. Patten (226. U.S. 525), holding the Sherman Act applicable to a corner in cotton on the New York Cotton Exchange. In the Patten case Mr. Justice Van Devanter said:

"The defendants place some reliance upon Ware & Leland v. Mobile County (209 U.S. 405), as showing that the operation of the conspiracy did not involve interstate trade or commerce, but we think the case does not go so far and is not in point. It presented only the question of the effect upon interstate trade or commerce of the taxing by a State of the business of a broker who was dealing in contracts for the future delivery of cotton, where there was no obligation to ship from one State to another; * *

If the Ware & Leland case were authority on the question of Federal regulation, it would have precluded the Grain Futures Act.

All the cases involving the validity of State, as distinguished from Federal, control must be read in the light of the accepted doctrine that the State may tax and regulate activities which Congress has not regulated, but which Congress might constitutionally regulate if it should see fit.

The sharp distinction between the power of the State to tax and regulate, and the power of Congress to regulate, has been expressed in numerous cases. See, for example, Binderup v. Pathe Exchange (263 U.S. 291, 311):

"It does not follow that because a thing is subject to State taxation, it is also immune from Federal regulation under the commerce clause."

Swift v. U.S. (196 U.S. 375, 400).

"But we do not mean to imply that the rule which marks the point at which State taxation or regulation become permissible necessarily is beyond the scope or interference by Congress in cases where such interference is deemed necessary for the protection of commerce among the States."

See also the very recent case of Minnesota v. Blasius (290 U.S., 1), decided November 6, 1933, in which Chief Justice Hughes said:

"But because there is a flow of interstate commerce which is subject to the regulating power of the Congress, it does not necessarily follow, in the absence of a conflict with the exercise of that power, a State may not lay a nondiscriminatory tax upon property which, although connected with that flow as a general course of business, has come to rest and has acquired a situs within the State."

This last case is interesting because the Supreme Court of Minnesota had held certain cattle nontaxable by the State, on the ground that the Packers and Stockyards Act placed such cattle under Federal control as property in interstate commerce. The United States Supreme Court reversed the Minnesota court for failure to distinguish between the question of State power to tax and Federal power to regulate, in their relation to the nature of interstate commerce.

The well-known doctrine of "occupation of the field" by Congress rests on the principle that Congress may regulate what was once within the proper sphere of State control. Thus, for example, Congress has set up in the Federal Employers Liability Act a system of compensation for injured railroad workers a field which was theretofore under State control. So, too, in the recent case of Dickson v. Uhlmann Crain Co. (288 U.S., 188), the question was raised whether State bucket-shop laws were superseded by the Grain Futures Act. In this case the Court held that both the State and Federal legislation might be given effect, since the latter was not interfered with by the former.

Thus the cases involving State action do not demonstrate that the articles involved in those cases, much less securities dealt in on an exchange, are not articles of commerce whose flow Congress may regulate. Indeed, in a case involving State regulation of dealers in securities, in which the principle of the State "blue-sky" law was sustained, the Supreme Court has indicated that the

movement of securities constitutes interstate commerce. Jones Co. (242 U.S. 539).

See Hall v. Geiger

The questions are pertinent, the answers to them one way or the other, of consequence; but we may pass them, for, regarding the securities as still in interstate commerce after their transportation to the State is ended and they have reached the hands of dealers in them, their interstate character is only incidentally affected by the statute" (p. 559).

II. POWER OVER THE MAILS AND OTHER INSTRUMENTS OF INTERSTATE COMMERCE

An independent ground upon which the constitutionality of many provisions of the bill may rest is the power of Congress over the mails and other means of communication and transportation. Several sections of the bill are expressly limited in their application to persons using the mails or any means or instrumentality of interstate commerce or any facility of a national securities exchange. So far as use of exchange facilities is concerned, the power of Congress rests on the fact that an exchange is an institution upon which and by means of which activities are carried on that affect both interstate commerce and, as will be shown later, activities and functions of the Federal Government. But aside from the use of exchange facilities, the use of the mails or other means of interstate commerce is adequate, in view of the decisions, to sustain regulation. Among the sections whose application rests in part upon such use are section 8, prohibiting manipulation of security prices, section 13, dealing with proxies, and section 14, authorizing the Commission to regulate over-the-counter markets.

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The power of Congress over the mails has frequently been exercised and sustained in regulating practices which, but for the use of the mails, would not be within the authority of Congress to control. Thus, although the Federal Government has no power to enact criminal laws except in aid of the express powers of Congress, cases of fraud have been brought within the sphere of Federal crimes where the mails have been used in furtherance of the fraudulent purpose. "fraud orders" of the Post Office Department have gone so far as to prohibit the receipt of mail by anyone declared to be engaged in such a fraudulent scheme; and this prohibition has been sustained. Public Clearing House v. Coyne (194 U.S. 497). Although Congress has no power to suppress lotteries as such, it may, in effect, do so by prohibiting and making criminal the transportation of lottery tickets through the mails. Ex parte Jackson (96 U.S. 727); In re Rapier (143 U.S. 110). The power of Congress with respect to undesirable activities in which the mails are used has been summed up by Mr. Justice Holmes, speaking with reference to the deposit of letters in the mails, in Badders v. U.S. (240 U.S. 391, 393):

"Congress may forbid any such acts done in furtherance of a scheme that it regards as contrary to public policy, whether it can forbid the scheme or not.” But the element of improper practices is not essential to Federal regulation. Although Congress has no power over the business of publishing as such, it may require that those enjoying the privilege of second-class mail shall make regular statements of the ownership of the periodical, the names of its editors, and the amount of its circulation. Lewis Publishing Co. v. Morgan (229 U.S. 288).

Similar to its power over the mails is the power of Congress over the means and instrumentalities of interstate commerce. The Federal attack on lotteries has been carried out through prohibition of the sending of lottery tickets in interstate commerce as well as merely through the mails. Lottery case (188 U.S. 521). Although Congress has no power over immorality as such, it may, in effect, exercise control where there is interstate transportation for immoral purposes, as in the Mann Act. Hoke v. United States (227 U.S. 308). Similarly, although Congress has no power over theft as such, it may, in effect, extend the Federal criminal law to such offenses where interstate transportation is utilized, as in the Federal Stolen-Automobile Act.

The power of Congress over the mails and instruments of commerce was described 20 years ago by Louis D. Brandeis, shortly before his appointment to the bench. He was writing with reference to the recommendations of the Pujo committee against interlocking directorates:

"The question may be asked: Has Congress the power to impose these limitations upon the conduct of any business other than national banks: And if the power of Congress is so limited, will not the dominant financiers, upon the enactment of such a law, convert their national banks into State banks or trust companies, and thus escape from Congressional control?

"The answer to both questions is clear. Congress has ample power to impose such prohibitions upon practically all corporations, including State banks, trust companies and life insurance companies; and evasion may be made impossible. While Congress has not been granted power to regulate directly State banks, and trust or life insurance companies, or railroad, public-service and industrial corporations, except in respect to interstate commerce, it may do so indirectly by virtue either of its control of the mail privilege or through the taxing power.

"Practically no business in the United States can be conducted without use of the mails; and Congress may in its reasonable discretion deny the use of the mail to any business which is conducted under conditions deemed by Congress to be injurious to the public welfare. Thus, Congress has no power directly to suppress lotteries; but it has indirectly suppressed them by denying under heavy penalty, the use of the mail to lottery enterprises. Congress has no power to suppress directly business frauds; but it is constantly doing so indirectly by is suing fraud-orders denying the mail privilege. Congress has no direct power to require a newspaper to publish a list of its proprietors and the amount of its circulation, or to require it to mark paid-matter distinctly as advertising; but it has thus regulated the press, by denying the second-class mail privilege, to all publications which fail to comply with the requirements prescribed.

"The power of Congress over interstate commerce has been similarly utilized. Congress cannot ordinarily provide compensation for accidents to employees or undertake directly to suppress prostitution; but it has, as an incident of regulating interstate commerce, enacted the Railroad Employers' Liability law and the White Slave Law; and it has full power over the instrumentalities of commerce, like the telegraph and the telephone.

'As such exercise of congressional power has been common for, at least, half a century, Congress should not hesitate now to employ it where its exercise is urgently needed. For a comprehensive prohibition of interlocking directorates is an essential condition of our attaining the New Freedom." Other People's Money, chapter IV.

III. THE FISCAL POWER

The constitutional authority of the Federal Government to regulate the securities exchanges may be rested upon specific grants of power to the Federal Government other than the power to regulate interstate commerce and the mails. Congress has been granted the power "to coin money and regulate the value thereof " and "to borrow money upon the credit of the United States." These powers, together with the power to levy and collect taxes, are the bases of all financial operations of the Government. That the existence of the power to finance its activities is a vital need of the Federal Government cannot be denied.

In developing its interpretations of the limitations upon the power of Congress to exercise its fiscal prerogatives, the United States Supreme Court has resolved all doubts in favor of the power of Congress to take such action as it might deem necessary or desirable for the purpose of strengthening the financial position of the Federal Government. The Supreme Court unanimously ruled in McCulloch v. Maryland (4 Wheat. 416), that Congress had not transcended its powers in creating the United States bank and in subscribing to one fifth of its stock on behalf of the Federal Government, although the bank was a private corporation doing business for its own profit. Chief Justice Marshall based his opinion upon the power of Congress to enact such legislation as might be "necessary and proper" to carry out the general purposes of the Government, since the bank was used as fiscal agent by the Government. The Chief Justice pointed out that the necessity spoken of in the Constitution is not to be understood as an absolute one. "Let the end be legitimate; let it be within the scope of the Constitution, and all means which are appropriate, which are primarily adopted to that end, which are not prohibited, but consistent with the letter and spirit of the Constitution, are constitutional.'

In Fisher v. Blight (2 Cranch 358), the Supreme Court upheld the power of Congress to declare debts due to the United States to be entitled to priority of payment over debts due to other creditors. The justification for such legislation was found in the inherent power of the Federal Government to pay its debts and to safeguard its financial operations from risk of loss, even though in doing so the Government created safeguards for itself which private individuals similarly situated could not obtain, and which were in fact adverse to the interests of such private individuals. But that inherent power was based upon the general fiscal power of the Federal Government granted by the clauses authorizing Congress to levy taxes, to coin money, and to borrow.

In Vessie Bank v. Fenne (8 Wall. 533), the Supreme Court held valid a Federal statute which required every national and State bank to pay a tax of 10 percent on the amount of notes of any person, State bank, or State banking association used for circulation and paid out after the first day of August 1866. This tax had been devised for the purpose of driving out of circulation all paper money issued by State banks in order to encourage the free use and circulation of notes issued by the Federal Government. This case is most significant in that it demonstrates that the power of Congress to protect its currency is virtually absolute and may be used to destroy, through a prohibitive tax, competing currencies issued by the States. It affords proof that the power of Congress to protect the currency and credit of the Federal Government will not be circumstanced by a balancing of power between the Federal Government and the States or private individuals. In this realm the Federal power is supreme.

A further illustration of the paramount authority of Congress to legislate concerning Federal credit and currency may be found in the Legal Tender cases (12 Wall. 457), where the Supreme Court upheld the power of Congress to make legal tender Treasury notes issued by the Federal Government.

The most compelling illustration of the Supreme Court's conception of the fiscal power of the Federal Government may be found in the recent case of Smith v. The Kansas City Title and Trust Co. (255 U.S. 180), in which the constitutionality of the Federal Farm Loan Act was in question. Under that statute Congress had provided for the creation of 12 Federal land banks and an indefinite number of joint-stock land banks to make loans to private individuals upon farm mortgages. The capital of the Federal land banks was subscribed in part by the United States Treasury, and the Secretary of the Treasury was authorized to purchase bonds issued by the banks. The joint-stock land banks were capitalized solely with private funds. The Farm Loan Act provided for a Federal Farm Loan Board to supervise the system, with members appointed by the President of the United States, with the advice and consent of the Senate.

Congress had made both the Federal land banks and the joint-stock land banks depositaries of public moneys, except customs receipts, and had authorized the employment of these banks as financial agents of the Government and had required them to perform such duties. Up to the time of the Smith case the banks had not in fact been used as depositaries by the Federal Government, and it was argued in the Supreme Court that the fact that the banks were made fiscal agents and public depositaries for the Government was but a pretext. The manifest purpose of the new system of banks had not been to create banking facilities for the Government, which existed in ample degree through the Federal Reserve System and the national banking system.

The banks had been established for the purpose of facilitating the making of loans to farmers at low rates of interest and for long terms. But the Supreme Court based the validity of the entire land-bank system upon the power of Congress to coin money and regulate the value thereof and to borrow money upon the credit of the United States, and the incidental power to create depositaries and fiscal agents.

In view of these precedents it would be unthinkable that the Supreme Court would deny the authority of Congress to make reasonable regulations of the securities markets of the country through which the Government borrows money, upon which the prices of its securities are quoted from day to day, and in the soundness and honesty of which the Government must be vitally interested.

It is clear that the fiscal system of the Government is profoundly affected by the activities of investors and speculators upon the securities exchanges of the country. Government bonds are freely dealt in and the prices of all issues are quoted hourly upon the principal securities exchanges. Such trading affects the very credit of the Government and should be kept free from artificail speculative influences.

The Government's ability to float new issues of bonds or short term notes is profoundly affected by conditions in the securities markets. When money is being absorbed in exchange cities to finance the stock-exchange activities, and investors are being lured by the hope of speculative gains, the Government must sell its bonds at a price which will insure a high yield to the purchaser. The Government must compete directly with all securities listed upon the exchanges. It is true that the conservative investor will pay a high price for the safety of a Government obligation, but during a speculative boom conservative investors

are rare.

In a similar way the National Banking System and the Federal Reserve System, both of which are very closely connected with the Federal Treasury, are

directly and substantially affected by the activities of the securities exchanges. The securities markets compete with the banks for the funds of the investors. If those investors are lured by the hope of speculative gains, the banks will not have sufficient means with which to finance the needs of industry and their usefulness in this respect will be seriously impaired. The solvency of the banks is directly affected by fluctuations in the market values of the securities which they hold. In the very recent past many banks have been forced into receivership by depreciation in their bond accounts, although their other assets have not depreciated to any extent whatever. Furthermore, in times of speculative activity in the securities markets the funds of banks throughout the country are drawn to the exchange cities, to be invested in "call loans" at rates of interest so high that the borrowers could only hope to pay them with the profits of speculation. This accumulation of funds in the exchange cities is inconsistent with sound banking and has aggravated the seriousness of all financial crises in the past. The decentralized plan of the Federal Reserve System itself was devised for the purpose of preventing the concentration of the wealth of the Nation in a few financial centers. That sin of the Federal Reserve System has not been fully achieved and the call money market in the years prior to the depression attracted to the exchange cities the funds of banks throughut the country. If the securities exchanges of the country are so regulated as to check speculative activity; then the financial resources of the Nation will not be absorbed in the exchange cities and the banking system will be stronger.

The effectiveness of control by the Federal Reserve Board over the lending policies of the member banks is seriously affected by the activities of the securities exchanges. A change in the rediscount rate has little effect where the banks can lend money on call loans at high rates of interest to finance stock market speculation. Similarly the open-market operations of the Federal Reserve banks may also be made ineffective by conditions in the securities markets. The selling of Government bonds in order to contract credit cannot check credit inflation during a speculative boom in the securities market.

We have demonstrated above the extent to which Congress can act to safeguard and make effective its power to coin money and to borrow. It can establish a semiprivate commercial bank and subscribe to a portion of its stock. It can assert a prior right upon the assets of an insolvent to satisfy its own claims. It can tax out of existence competing currencies issued under the authority of State governments. It can establish a land bank system if the banks forming that system are merely granted power to act as fiscal agents of the Government. That the great securities exchanges of the country are intimately connected with the fiscal system of the Government and the credit of the Government can hardly be denied. this ground alone, it would therefore seem clear that the Congress has ample authority to regulate the securities exchanges, to check the flow of credit to the securities exchanges and away from industry, and to eliminate the evils of speculation.

IV. ADDITIONAL BASES FOR REGULATION

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Regulation of the securities exchanges by the Federal Government may be justified as a means of protecting the taxing power of the Government. The quotations of the prices of securities upon the exchanges of the country are used as bases for determining taxes due to the Government. Capital gains and losses for income-tax purposes are computed according to securities market prices. In the same way the value of assets for inheritance-tax purposes is computed on the basis of current quotations for securities. It is important to the Government that prices quoted upon securities exchanges reflect true values rather than artificial values affected by speculation. Legislation to achieve this result would seem to be justified as a 'necessary and proper" means of protecting the taxing

power.

The effect of securities market speculations upon the transportation system of the Nation may be disastrous. Market conditions, as a result of speculative activity, may be such that a railroad is forced to pay a high rate of interest for money which it borrows. As a result rates must be raised and the flow of interstate commerce impeded. If is is impossible for a railroad, because of adverse market conditions, to float a refinancing bond issue, it may be forced into receivership. The securities markets also afford opportunities for small groups to acquire control of a railroad or to consolidate a whole system of railroads against the interest of the general public.

The securities markets afford similar opportunities for small groups to acquire control of a public utility or consolidate a whole system of such utilities against