Board of Trade of City of Chicago v. Olsen
[Syllabus from pages 1-3 intentionally omitted]
This is an appeal from a decree of the District Court for Northern Illinois, dismissing a bill in equity. The appeal is under section 238 of the Judicial Code (as amended Act January 28, 1915, c. 22, § 2, 38 Stat. 803, 804 [Comp. St. § 1215]), the case being one in which the constitutionality of the Grain Futures Act (enacted by Congress September 21, 1922 (42 Stat. 998, c. 369), is drawn in question.
The bill was brought by the Board of Trade of the city of Chicago, and a number of its members representing each class of traders on the exchange of the Board, to enjoin the United States district attorney at Chicago, the Secretary of Agriculture, and the United States postmaster at Chicago from taking steps to enforce the provisions of the act against them, on the ground that it violates their rights under the federal Constitution.
The purpose of the act is expressed in its title to be for the prevention of obstructions and burdens upon interstate commerce in grain by regulating transactions on grain future exchanges and for other purposes. Its second section, par. (a), is one of definitions. Its definition of interstate commerce, in the sense of the act, is as follows:
'The words 'interstate commerce' shall be construed to mean commerce between any state, territory, or possession, or the District of Columbia, and any place outside thereof; or between points within the same state, territory, or possession, or the District of Columbia, but through any place outside thereof, or within any territory or possession, or the District of Columbia.'
Paragraph (b) contains the following addition to the foregoing definition:
'(b) For the purposes of this act (but not in any wise limiting the foregoing definition of interstate commerce) a transaction in respect to any article shall be considered to be in interstate commerce if such article is part of that current of commerce usual in the grain trade whereby grain and grain products and by-products thereof are sent from one state with the expectation that they will end their transit, after purchase, in another, including, in addition to cases within the above general description, all cases where purchase or sale is either for shipment to another state, or for manufacture within the state and the shipment outside the state of the products resulting from § ch manufacture. Articles normally in such current of commerce shall not be considered out of such commerce through resort being had to any means or device intended to remove transactions in respect thereto from the provisions of this act. For the purpose of this paragraph the word 'state' includes territory, the District of Columbia, possession of the United States, and foreign nation.'
Section 3 is in the nature of a recital and finding as follows:
'Sec. 3. Transactions in grain involving the sale thereof for future delivery as commonly conducted on Boards of Trade and known as 'futures' are affected with a national public interest; that such transactions are carried on in large volume by the public generally and by persons engaged in the business of buying and selling grain and the products and by-products thereof in interstate commerce; that the prices involved in such transactions are generally quoted and disseminated throughout the United States and in foreign countries as a basis for determining the prices to the producer and the consumer of grain and the products and by-products thereof and to facilitate the movements thereof in interstate commerce; that such transactions are utilized by shippers, dealers, millers, and others engaged in handling grain and the products and by-products thereof in interstate commerce as a means of hedging themselves against possible loss through fluctuations in price; that the transactions and prices of grain on such boards of trade are susceptible to speculation, manipulation, and control, and sudden or unreasonable fluctuations in the prices thereof frequently occur as a result of such speculation, manipulation, or control, which are detrimental to the producer or the consumer and the persons handling grain and products and by-products thereof in interstate commerce, and that such fluctuations in prices are an obstruction to and a burden upon interstate commerce in grain and the products and by-products thereof and render regulation imperative for the protection of such commerce and the national public interest therein.'
The act in section 4 forbids all persons to use mails or interstate telephone, telegraphic, wireless, or other communication, in offering or accepting sales of grain for future delivery or to disseminate prices or quotations thereof, excepting the man who holds the grain he is offering for sale, and the owner or renter of land on which the grain offered for sale is to be grown, and excepting also members of Boards of Trade located at a terminal market on which cash sales occur in sufficient volume and under such conditions as to reflect the general value of grain and its different grades, and which have been designated by the Secretary of Agriculture as 'contract markets.'
The act puts these boards of trade under supervision of the Secretary of Agriculture and imposes conditions precedent and subsequent on his power to designate or continue them as 'contract markets.'
The conditions are:
(a) The keeping of a record with prescribed details of every transaction of cash and future sales of grain of the Board or its member in permanent form for three years, open to inspection of representatives of the Departments of Agriculture and of Justice.
(b) The prevention of the dissemination by the Board or any member of misleading prices.
(c) The prevention of manipulation of prices or the cornering of grain by the dealers or operators on the Board.
(d) The adoption of a rule permitting the admission as members of authorized representatives of lawfully formed co-operative associations of producers having adequate responsibility engaged in the cash grain business, complying with and agreeing to comply with, the rules of the Board applicable to other members, provided that no rule shall prevent the return to its members on a pro rata patronage basis the money collected by such association in the business, less expenses.
The Secretary of Agriculture, the Secretary of Commerce, and the Attorney General are made a commission to hear and determine after due notice, whether any board of trade has failed or is failing by rule to do the things required above, and, if found in default, to suspend its functions as a contract market for a period not to exceed six months, or to revoke its designation as such, with an appeal on the record to the Circuit Court of Appeals within the circuit where the board is situate. Such commission, too, is to hear appeals from the Secretary's action in refusing to designate any Board of Trade as a contract market.
There is a further provision for excluding from all contract markets and trading privileges any person violating the provisions of the act or the regulations in pursuance thereof.
Section 9 declares any one trading in futures in violation of section 4, or sending intentionally or carelessly false or misleading quotations or information as to the prices of grain, guilty of a misdemeanor.
The bill of the plaintiffs describes the organization of the Chicago, Board of Trade as a corporation under a special act of the Legislature of Illinois, passed in 1859 (Priv. Laws 1859, p. 13), with a membership of 1,600 and a board of 18 directors, of whom one is president. It avers that the Board does no business in selling or buying grain, but only furnishes an exchange and offices where such business can be done by its members; that it does not deliver any market quotation through interstate means, but it does cause to be collected the first price and each change of price on its exchange in cash and future sales during the regular hours in the exchange hall, and delivers them to certain telegraph companies, who pay the Board for this information.
The bill further avers that it is sustained only by the initiation fees and dues of its members, the former being $25,000 for each member, and the latter being in the form of annual assessments; that it has from these sources accumulated funds with which to provide a large building and offices for the exchange, from some of which it receives rental and so has property worth $2,000,000 or more; that its existence depends on keeping its memberships valuable; that it does this by requiring character and financial responsibility as qualifications for its membership and by a requirement that a member shall charge for every sale a fixed minimum commission to a nonmember principal, and a less minimum to a member who shall be his principal; that corporations are not permitted to be members, but that, when two of the stockholders and officers are members, the corporation is permitted as a member to make contracts on the exchange. The bill further avers that, if the Board were required to admit representatives of co-operative associations of producers, with the privilege of dividing with their members the proceeds of commissions, less expenses, it would greatly impair the value of its memberships to other members.
The bill further avers that the members of its exchange engage only in three kinds of trading:
(1) Many act as commission merchants, and receive from producers and country grain dealers grain in cars and boats consigned to them, which as agents they sell for immediate delivery and account to their principals for the proceeds of such sales, less their commissions and other expenses, and many members, as principals or agents, purchase and sell grain in Chicago which is in cars or elevators for immediate delivery, and all of these transactions are known as 'cash sales.'
(2) Many members send out in the afternoons, whenever market conditions are favorable, telegrams or letters to country grain dealers offering to buy grain, or to millers and other nonresidents of Chicago, probable buyers, offering to sell grain at released prices and to be shipped within a certain time, on condition that these offers be accepted before regular market hours the next morning. These are known as 'cash sales for deferred shipment,' or as 'sales to arrive.'
(3) Many of the members engage either as principals or agents in making on the exchange contracts with other members for the purchase and sale of grain for future delivery by which the seller agrees to deliver in Chicago the grain covered by the contract upon any day of the named month that he shall select. More than 75 per cent. of the volume of all trading in the exchange is for future delivery, and under the rules it must be done in the exchange hall and between regular fixed hours; that both buyers and sellers in all such contracts are personally present when the contracts are made.
The bill further avers that all contracts for future delivery are under the rules of the Board fulfilled only by delivery of warehouse receipts for the grain issued by twelve warehouses in Chicago, selected by the Board and having a capacity of 13,000,000 bushels and licensed by the state of Illinois to do a public warehouse business; that the grain is mixed with other grain, so that the receipt holder never gets the grain deposited when the receipt was issued; that, while a rule of the exchange makes grain in railroad cars deliverable in future cars the last three days of the month, the transaction is not fully completed till the grain in those cars is deposited in a regular warehouse and receipt issued; that in the trading for future delivery more than three-quarters of the many millions of bushels contracted to be delivered are settled for without delivery by offsetting purchases; that a large part of the future trading is done by grain merchants, millers, and others only for the purpose of insuring themselves against price fluctuations in respect of like grain owned by them and held for sale, shipment, or manufacture, and is settled by offsetting.
The bill further avers that another large part of future trading is done by speculators, so called, who make a study of market conditions affecting prices, and try to profit by their judgment as to future prices; that few of such speculators have capital enough to make large single purchases in any way affecting the market; that six-sevenths of all the trading in futures in the country take place in Chicago; that no corners have been run on the exchange for 15 years, due to the enforcement of rules against them by the Board and 'perhaps to the Sherman Anti-Trust Act'; that manipulation has never been successfully resorted to, to depress prices; that the selling of futures has no such effect; that the law of supply and demand regulates prices and prevents violent fluctuations; and that before hedging was made possible by this future trading the cost of the middleman between producer and consumer was much greater.
The defendants filed an answer admitting much of the bill, but specifically denying the averments included in the last foregoing paragraph.
The plaintiffs submitted a large number of affidavits in support of a motion for a temporary injunction. These contained opinions of many professors of political economy in the colleges of the country to the effect that trading in futures in the long run did not depress prices, but stabilized them.
The court denied the motion for a temporary injunction and of its own motion dismissed the bill for want of equity.
The conclusions of Congress expressed in the recital of section 3 as to the detriment to interstate commerce from constantly recurring manipulation of sales for future delivery were reached after many years of investigation and examination of witnesses, including the advocates of regulation and those opposed, and men intimately advised in respect to the grain markets of the country.
The Senate Committee on Agriculture and Forestry reported to the Senate as follows:
'Every member of a grain exchange who testified before this committee acknowledged that there is at times excessive speculation and undesirable speculation in the futures market. Furthermore, it was brought out that a few big traders at times influence prices-manipulate the market-by the great volume of their operations. Also it was shown that a continually fluctuating, and not a stable, market is the desire of speculators. Such a market is against the interests of the producer; he must have stable prices in order to market his crop to best advantage. A market without wide and frequent price fluctuations would greatly benefit the producer. The reason for this is that rapidly fluctuating prices can not be fully reflected in the prices paid at country stations, so an additional margin must be allowed for buying in the country.' Sen. Report No. 212, 67th Congress, 1st Sess.
Witnesses testified before the committee that a calculation based on commissions showed the total bushels of grain sold for future delivery on the Chicago Board of Trade in a year reach nearly 20,000,000,000 and that the amount of grain actually delivered under such contracts is not 1 per cent. of this. Objectors to furture trading insisted at first that future trading put in the hands of desperate speculators an easy opportunity to corner the market and to promote great and rapid fluctuations in value, and was wholly vicious and should be forbidden. Further investigation and consideration have satisfied many that the law of supply and demand operated on futures as on cash sales and that futures are very useful in certain respects, notably in offering a means by which, through 'hedging,' owners of grain can, to some extent, protect themselves against the danger of losses by fluctuation.
The government did not, in this hearing and argument, maintain that by manipulation the operators can permanently depress the prices of grain, but insisted and cited the actual quotations from time to time, some as late as the summer of 1922, showing violent fluctuations through 'deals' of large operators engaged in manipulating the futures market at intervals since 1900, before which corners were ever recurring but since which they have been infrequent. Much evidence was adduced before congressional committees that the sales of futures on the Chicago Board dominated the prices of wheat in this country and the world. The injurious effect of these recurring fluctuations in such futures upon the consignment of grain by owners and producers was asserted by witnesses. Mr. Herbert Hoover, whose experience as Food Administrator gave his opinion weight, said to the House Committee on Agriculture (Future Trading Hearings-66th Congress, 3d Session, pp. 909, 910):
'The second form of manipulation, and the one that I feel does at times take place, is the making of a drive on the price by either the sale or the purchase of such quantities as will affect the price by the volume of material coming to the market at that particular time. I would regard those transactions as an attempt to dislocate the normal flow of the law of supply and demand, and any attempt of any individual to dislocate a free market must be against public interest. I feel it is also against the interest of the individual producer, because a drive on the market that depresses the price must find a considerable number of farmers who, through the fall in price and their outside obligations, are compelled to liquidate, and they have been done an injury. Incidentally the commodity has been brought into the market, and an acceleration to depression has been created.'
Mr. Julius H. Barnes, the head of the United States Grain Corporation during the war, and of widest experience in the grain markets of the world, at the same hearing, after explaining that future dealing stabilizes prices and helps legitimate hedging, and that a drive on prices worked its own cure in the long run, as did the distinguished economists whose affidavits were exhibited in this case, said (pages 839, 840):
'But it is also true that, even though such a price depression must be temporary in character it may, during its period of effectiveness, do substantial injustice by forcing the liquidation of grain held on margins, or by the price tendency thus displayed, frightening owners otherwise confident of the ultimate value of their goods.'
The Federal Trade Commission in its report on wheat prices to the President, December 13, 1920, said (page 8): 'Price of wheat futures, the decline of which has been especially the subject of criticism, are susceptible of manipulation. Wide fluctuations in prices and large discounts of the future price below the cost price have prevailed. This has made it unsatisfactory for 'hedging,' and hedging sales may also appear to be manipulation, because, if they are large, they may cause sharp depressions. Wheat futures are not functioning well, even according to the standards of their advocates.'
Mr. Julius H. Barnes, in his evidence before the Federal Trade Commission, in October, 1922, describes the effect upon interstate commerce of a 'deal' in May, 1922, wheat on the Chicago Board of Trade, when the price of futures rose rapidly. Large operators collected cash wheat all over the country and headed it for Chicago for delivery at the attractive prices. This took wheat away from all the other wheat centers of the country, where it normally would have remained for consumption, and accumulated it in almost unsalable quantity in Chicago, greatly disturbing the normal and useful flow of wheat in its ordinary and proper distribution and precipitating a crash in prices. 
It was charged before the congressional committees that the limitation of deliveries under contracts for futures to warehouse receipts of 12 regular warehouses aggregating but 13,000,000 bushels capacity, with the privilege of a tender of grain in cars on the last three days of the delivery month and a power in the board of directors to enlarge the privilege in case of an emergency, casts another element of speculative doubt into the prices of futures and puts too much control in the board of directors. In view of the fact that the total capacity of Chicago for storing grain in public and private warehouses is 45,000,000, it is urged that this rule of the futures market is sinister and dangerous in affecting the prices of a market that are worldwide in their influence by such a narrow limitation of deliveries subject to arbitrary and uncertain change at the discretion of the Board, and that it is a factor in frightening shippers and lawful hedgers in making opportunity for speculative manipulation and burdening the flow of grain in normal interstate channels. 
Mr. Henry S. Robbins, of Chicago, Ill., for appellant.
[Argument of Counsel from pages 16-31 intentionally omitted]
Mr. Solicitor General Beck, of Washington, D. C., for appellees.
Mr. Chief Justice TAFT, after stating the case as above, delivered the opinion of the Court.
^1 In response to Senate Resolution 133 the Federal Trade Commission prepared to make a report by conducting in October, 1922, an inquiry into the market manipulation of grain. Mr. Julius H. Barnes was a witness, and in the course of his examination said (pages 74-76):
'Now, in May, 1922, we had the same spectacular gyrations in prices, starting earlier in the month and falling into a complete collapse in price. Why?
'Commissioner Murdock: In the middle of the month this time?
'Mr. Barnes: Yes, starting early in the month, rising to a peak and then falling to an early collapse. Without knowing the facts, because these things are detected by commission merchants, it seems quite clear that there were two or three large lines of wheat bought in Chicago for delivery in May, 1922; that at least one of those, on popular report, was a man who could easily pay for 5,000,000 bushels of wheat; that he intended to take the wheat as a merchant; that he was going to pay cash for it and not squeeze somebody to make a settlement. He expected to get delivery of that, did not buy it in anticipation that it could not be delivered, and therefore he could force a settlement, and he was going to act as a merchant on the belief that wheat was worth more in the world's markets than the prices then ruling in Chicago; but on top of that there developed that two or three other men, who were evidently clear speculators, not acting with that conception, had also lines of wheat, and the aggregate of those made a shortage in Chicago exceeding the stock of wheat in Chicago or naturally tributary thereto.
'The result of that was that as this sit ation developed, the buyer, miller or exporter began to get afraid about the Chicago market, that he might have to buy his hedges in higher, and began to buy in those hedges and the market advanced under that kind of apprehensive buying, the buying of legitimate merchants who were frightened to leave their hedges in that month any longer. That helped make the peak, plus perhaps some buying by interested people who wanted to see the price marked up, and those large cash interests in Chicago began to collect all over the country wheat and head it to Chicago
for delivery at these attractive prices, which by this time had reached a relation in respect to all of the markets which attracted wheat from every direction to Chicago.
'The result of that was that by the end of the month there was accumulated in Chicago a stock of 10,000,000 or 12,000,000 bushels of wheat, which was beyond the normal absorbing capacity of the consumption trade that rests on Chicago, and that wheat had been lifted by the incentive of these apprehensively made prices from centers where it should have remained for the consumption which normally overtakes it from those centers-Omaha, Kansas City, Minneapolis, all these other points. So that the country stocks which should normally supply mills west of Chicago or south of Chicago were lifted out of their natural place and directed to Chicago by these apprehensively made prices, and there was collected in Chicago an almost un salable quantity of wheat which could only press in one direction, could not go back.
'Commissioner Murdock: So that we had a price collapse by that?'
See, also, letter of J. H. Barnes to Chicago Board of Trade, p. 69, Grain Future Hearings before Committee on Agriculture and Forestry, U.S. Senate, 67th Congress, 2d Session, on H. R. 11843, containing the following:
'Present conditions lay an economic burden on distribution cost by drawing wheat to Chicago out of its accustomed channels and from points of supply needed shortly for actual consumption elsewhere. These evil effects are solely from apprehension of a forced settlement at artificial prices on hedges properly used as insurance against price level fluctuations.'
^2 Evidence of Julius H. Barnes before Federal Trade Commission in October, 1922 (page 77), on inquiry in response to Senate Res. No. 133:
'Mr. Barnes: In the demonstration for several years that the chief abuses of the trade were deliberate manipulation and congestion, the deliberate forcing of settlement by artificial prices, the trade step by step tried to make it more difficult for any one to obtain that control of the market. They made No. 1, 2, 3 wheat, and on all varieties deliverable. That was not sufficient, as demonstrated in Chicago two years ago to the market committee of 1917. I suggested to them that the trade ought to seriously consider a widening of the contract basis once more, so as to make wheat at Omaha and Kansas City and Minneapolis, at points of accumulation on the normal flow. So that there was not any substantial injustice done a buyer; deliverable at a freight cost difference and a small penalty, so that it would not be abused, and I stand to-day for that as being the one real constructive thing left for the Chicago market to-day, if Chicago is to be the liquid grain future trading market of America, as it should be, if there is a natural advantage in concentrating all the trading of the country in one market, so that you can send an order through and get 100,000 or 500,000 bushels in a minute, to answer a cable from abroad or a milling order, because the volume of trade there is liquid all the time, and I believe that is in the public interest.
'If it is to do that, then Chicago ought to widen this wedge against these shippers, and it can be done by taking into contract delivery the wheats in these other markets. The effect last May would have been that that wheat would have been delivered, but the wheat itself would have physically been in Omaha and Kansas City and available for milling in June and July, when it was n eded, and it would not have been in Chicago to press direct on East and the world's market and cause a further decline in price.
'Mr. Watkins: Mr. Barnes, what you would include for delivery at Chicago markets you would include for delivery at seaboard markets, would you not?
'Mr. Barnes: No. I would not, because as I say, on the natural flow, a buyer in Chicago for actual delivery of wheat must in the normal process of trade move that what east. His consumption both for export and milling is east of Chicago. Therefore, for him to take delivery west of Chicago at a freight difference and a small penalty is no substantial injustice; but to force him to take wheat at the seaboard at the transportation cost when maybe he is buying in Chicago to supply a mill in Omaha, might be a very substantial injustice.'