By Smith out of Jones

Smith and Jones are common, in this case generic, surnames used as examples to suggest that the Eugenists are only interested in the genetic/family background of a person much as a horse breeder is interested in the bloodlines of a race horse. 'By Smith out of Jones' sounds likes the notes in racing guide which give the horse's parentage.

A horse's father is called its sire, and the mother is the dam. A foal is said to be by (or sired by) the sire out of the dam. E.g. By Arab Prince out of Black Beauty.