Securities and Exchange Commission Historical Society

Chasing the Devil Around the Stump: Securities Regulation, the SEC and the Courts

Limits of Federal Regulation

National Corporations and Interstate Commerce

“The decision in O’Neil v. Vermont and the opinion of the court are, in my judgment, destined to an unenviable notoriety, greater than has followed any previous decision of the Supreme Court. The American people are not going to sit quietly and see one of their countrymen condemned to a life of imprisonment at hard labor for engaging in acts of interstate commerce, although the commodities transported were spirituous liquors.”

May 19, 1892 Letter from Associate Justice Stephen J. Field to Chief Justice Melville W. Fuller on O’Neil v. Vermont

Adopting the legalistic rhetoric from earlier cases, large national corporations with national economic connections began arguing that, under the interstate commerce clause of the U.S. Constitution, Congress and not the states had exclusive authority to regulate activities that crossed state lines.5

For state regulators, the problem with this argument was that many of the activities that states regulated had traditionally been understood to be areas appropriate for state, not national, regulation. There was not then, nor is there now, a national corporation code. Every state has its own rules and regulations controlling corporate behavior within its boundaries.

In the context of emerging national markets, this quandary of federalism bedeviled state and national legislators alike. Certain industries, such as insurance, liquor, and the issuance and marketing of securities, were traditionally considered to be areas of state, not national, regulation.6 But the Grainger case and its public interest exception appeared to permit regulation of individual and corporate property rights. What the national corporations needed was a sympathetic ear. In the late 1800s, they found two attached to the brilliant, acerbic head of Supreme Court Justice Stephen Field.7

An appointee of President Lincoln and a veteran of the Civil War, Justice Field believed that liberty was inextricably intertwined with the right to earn a living. Despite defeats in a series of early cases, he continued to dissent and advocate for his position. Field argued that due process, initially limited to ensuring proper and fair procedures, should be regarded as more substantive protection for property. Once that legal leap had been made, Field exhorted his Court colleagues to accept the philosophy that the right to earn a living and to contract for that right was a paramount, substantive liberty that neither man nor the state could easily abrogate.

In 1897, Field succeeded in persuading the Court to adopt the principle of substantive due process in Allgeyer v. Louisiana. That case involved the legality of a Louisiana law that prohibited residents of the state from doing business with out-of-state marine insurance companies. The unanimous Court ruled the law unconstitutional, finding that “the liberty mentioned in the (14th) amendment means, not only the right of the citizen to be free from the physical restraint of his person…but to be free to use (his faculties) in all lawful ways; to live and work where he will; to earn his livelihood by any lawful calling; to pursue any livelihood and avocation; and for that purpose to enter into all contracts which may be proper, necessary, and essential to his carrying out to a successful conclusion the purposes above mentioned.”8 The effect of this doctrine on advocates of reforms of the securities markets would be to impose severe, although not absolute, due process limits on proposed regulations of property rights.

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(5) U.S. Constitution, Article I, Section 8, Clause 3 states that Congress has the power to “regulate commerce with foreign nations, and among the states and with the Indian tribes.”

(6) Parrish, Securities Regulation, 5-7

(7) For a consideration of the Supreme Court’s role in capital development, see Max Lerner, “The Supreme Court and American Capitalism,” 42 The Yale Law Journal (March 1933: 668-701).

(8) Allgeyer v. Louisiana, 165 US 578 (1897).

Related Museum Resources


May 19, 1892
image pdf (Melville W. Fuller Papers, courtesy of Library of Congress)
May 17, 1895
transcript pdf (Melville W. Fuller Papers, courtesy Library of Congress)
May 1, 1897
transcript pdf (Melville W. Fuller Papers, courtesy Library of Congress)

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