THE YALE REVIEW. AUGUST, 1907. COMMENT. The Limits of Federal Control; Some Difficulties of Government Commissions; Proposals for the Abolition of Nominal Capital. TH HE notable address of Senator Knox at the Commencement exercises of the Yale Law School last June is one of the most clarifying statements that have been made on the vexed question of federal control over commerce. The seeming extension of that control has led to a widespread opinion that the powers granted to the Federal Government are themselves capable of indefinite extension and that, by the simple device of delimiting the kinds of goods that may be permitted to enter inter-state commerce, Congress may impose such regulations as to industrial organization within the separate States as it sees fit. "The new proposition," says Senator Knox, "is this: Congress has power to regulate commerce, including its instrumentalities, and likewise power to regulate the persons by whom articles of commerce are produced in respect to matters disconnected with commerce." To the latter part of this proposition he takes serious and timely exception. Neither the new legislation which has seemed necessary, nor the increased activity of the department of justice, with its various victories in the courts, has in any way enlarged the power of the Federal Government. That power has remained what it was defined to be by the Supreme Court one hundred years ago. The subject matter over which this power is exercised has extended with the growth of the nation, but the principles of control remain the same. It has been definitely settled that Congress may prohibit interstate commerce in articles hurtful to public health, safety or morals; and it has been settled that "the operations of a monopolistic combination within a State may be so connected with those between the States as to bring the whole under the regulative power of Congress." But from neither of these principles, nor from both together, can it be deduced that Congress has the power to deny the privilege of inter-state commerce to producers of innocuous articles who carry on their business of production pursuant to the laws of the domicile State, and in a way not in itself interfering with inter-state commerce. "There is no authority," says Senator Knox, "for any such proposition. The power of prohibition has never been sustained except as against articles noxious or dangerous in themselves. It is not possible to find even a suggestion that in respect to natural products which are prime necessities, Congress can prohibit commerce in them between the States in order to enforce its conception of what would be a wise police regulation of a State." The powers of Congress then are great, and much desirable regulation may still be effected under them, but they apply only to commerce and its instrumentalities, not to the persons by whom articles of commerce are produced, save as such persons enter into commerce themselves. These powers can be enlarged only by amendments to the Constitution. Suggestion has already been made in the YALE REVIEW that the increasing complexity of social and industrial life is making the demand for some change in the organic law more pressing. The regulation of corporations is only one of the problems involved, but the above clear-cut distinction, if valid, indicates that at present any fundamental control of corporations in general, even of those whose products enter into inter-state commerce, involving the questions of capitalization and combination, remains outside the sphere of the federal powers. If constitutional amendments are impossible or undesirable, the matter must rest indefinitely in the hands of the separate States. In the meantime the program of publicity from which so much has been anticipated is being rapidly carried out, and with results that already tend to give us pause. President Hadley, in his recent volume on "Standards of Public Morality," pays a high tribute to the work of Mr. Charles Francis Adams in connection with the first Massachusetts Railroad Commission, a commission which had no powers except the power to report, and which consequently, as Mr. Hadley points out, was thrown back on "the power of common-sense." The possible influence for good of such a body was admirably illustrated in that case, but such influence depends first on the presence of a strong man, and second, on a careful restraint in the matter of reporting. The more numerous the reports made, the less is likely to be the influence of each one. At the present time there seems to be danger that even the reports of the federal agencies, to say nothing of State and private agencies, may be seriously affected from this cause. It is to be hoped that a government report will not cease to be an event of first-class importance, and come to be looked upon as a mere cry of "wolf." Far from being easy, it is one of the most difficult things imaginable to make a report which gives merely an accurate and impartial statement of fact. It is notorious that when conclusions come to be drawn, different investigators will come to entirely different results from exactly the same set of facts. Much has been anticipated from the commission of the Civic Federation which was sent abroad to investigate the problems of municipal ownership. It would not be fair to judge its results until the report is published in full, but from such parts as have yet been made public, it would seem to be a repetition of the old experience, arguments pro and con by men who had the same facts before them. Where definite conclusions are avoided, reports tend to become as vague and unsatisfactory as the recent Harriman report by the Interstate Commerce Commission. In any case, as reports become numerous, the authority which at first attaches to a government investigation ceases, and their only authority lies in their own inherent character. The report becomes an expression of opinion by one man, or one body of men, and however efficient our commissioners may be, there is no one to-day who can speak so authoritatively but that his interpretation of facts may be challenged by men of equal authority, who will also receive as free a hearing on the part of the public. An example is furnished by one of the articles below, dealing with the report on pipe lines and the oil industry. What has been said is not meant as a criticism either of the present government officials or of the value of the "commission idea" in general. But the former should guard with jealous care the influence they now wield; and from the "commission idea" should not be expected more than it is capable of. There has been a tendency to confound the powers of commissions and the powers of the courts, and to exaggerate the influence of the former at the expense of the latter. The courts, however, will remain what they have always been, the great engine for discovering truth and accomplishing results. The relation of the two is not unlike that between the bishop and the judge in the old story. It was claimed that the bishop was the greater of the two because he could say "You be damned," whereas the judge could only say "You be hanged." To which the reply was, "But when the judge says you be hanged, you are hanged.” A commission can say that conditions are unlawful, or immoral or anything else. A court can say only that they are unlawful, but when it does say so, they are unlawful,-and something is done about it. New prominence has been given to one method of dealing with the problem of capitalization by Mr. E. M. Shepard's recent address before the Illinois Bar Association. This is the proposal to abolish the nominal capitalization of a corporation altogether, that is, to have no "par value" to the shares. The scheme is one which naturally appeals to the economist because it is in line, in some respects, with the most scientific economic concepts. Any person at all trained in economic thinking cannot fail to be amazed at the general acceptance of the crude fallacy regarding the effects of so-called over-capitalization. Nothing is more common among a certain class of magazine writers or politicians than the statement that a corporation which is nominally capitalized at three times its actual value, must charge prices three times as high as they would otherwise do in order to earn dividends on the watered stock. Consequently over-capitalization is supposed to be a cause of high prices for goods or services. The man of ordinary common sense ought to be able to see that a corporation, like an individual, will sell its goods at the highest price at which it can dispose of its output and that the nominal capitalization has no more to do with its price policy than the number of buttons on the waistcoat of its president. The scientific form of statement is that the capital-value of any individual thing or of any concern is simply its annual income-yielding power capitalized at the current rate of interest, with due allowance of course for the duration and certainty of that income. The market-value of the shares of course reflects this earning capacity, and is an estimate of the real "capital value." Since the market value may be one-tenth of the par value, or ten times the par value, it would seem simpler and more scientific to abolish par value altogether and issue simply a given number of shares, which would represent in name, what they now do in fact, merely ownership in a given part of the property with the right to a proportional share of the dividends declared. Let a company issue 100,000 shares without any nominal value. Then the individual owning 100 shares would not think of himself as holding $10,000 of the stock, but of owning one-thousandth of the property, which is what he actually does. Since capital-value is nothing but the present value of future recurring incomes, to fix the capitalization at the start before the earning power is known is scientifically to put the cart before the horse. And here as always what is good science is good common sense. On the other hand, it would be a grave mistake to suppose that the whole problem of capitalization can be disposed of in such summary fashion. Both our scientific analysis and our every-day understanding are made clearer by beginning at this starting point. But the public is quite correct in believing that the relation between the actual "capital paid in," and the incomes subsequently derived by stockholders is a matter of real concern. Where a private individual erects a plant and proceeds to make |