H^tt QfoUgge nf Agricalture 
 
 J^t (((arneU UntnetHttg 
 atliata, S-. % 
 
 ffiibtatg 
 
Cornell University Library 
 HD 9075.C16 
 
 Cotton future contract trading and adver 
 3 1924 013 879 725 
 
yj^jj 
 
 Cornell University 
 Library 
 
 The original of tiiis book is in 
 tine Cornell University Library. 
 
 There are no known copyright restrictions in 
 the United States on the use of the text. 
 
 http://www.archive.org/details/cu31924013879725 
 
Cotton Future Contract Trading 
 
 aNd 
 
 Adverse Legislation 
 
 Editorials From the "Union Guide" 
 
 OF 
 
 Houston, Texas. 
 
 1911-12 
 
Houston, Texas, April 2, 1912. 
 
 The question of Future Contract Trading has been agitated 
 with more or less prejudice and violence during the past several 
 years, and a great deal of misinforTaation concerning the same has 
 been exploited. Eealizing the importance of a sane and correct 
 solution of the problem, not only to the producer of cotton but to 
 the cotton trade of the South, I have made a study thereof and 
 have published my conclusions in a series of editorial articles in 
 the Union Guide. These articles have attracted the attention of 
 a good many people who are earnestly in favor of improving the 
 conditions that maintain in the great cotton industry, and in 
 response to numerous requests from these, I have re-published these 
 articles in the present form. It is my earnest hope that these 
 editorials will to some extent serve to bring about a better under- 
 standing of a subject of vital importance to the people of the South. 
 
 E. A. CALVI^T. 
 
CHAPTER I. 
 Cotton Exchanges and Prohibitory Legislation. 
 
 The threatened passage of the Scott Anti-Cotton-Puture Bill 
 at the last session of Congress aroused so vigorous a protest from 
 the bankers, business men and many farmers of the South, that the- 
 advocates of drastic legislation along these lines may well pause- 
 in order to give more mature consideration to so radical and far- 
 reaching a measure. 
 
 It is not only advisable that the members of Congress should 
 look further into the effects of such legislation before committing 
 their constituents to the trial of a possibly disastrous experiment, 
 but these constituents themselves, and especially the farmers — they 
 being most directly and to the greatest extent affected thereby — 
 should demand that measures affecting their welfare be based upon 
 intelligent and public spirited investigation and conclusions, and 
 not upon demagogic appeals to prejudice. 
 
 Economic laws are like the laws of nature — if indeed they are 
 not the laws of nature. They are unchangeable and inexorable and 
 the man or the community or the nation which undertakes to nullify 
 these laws, or to interfere with the operation thereof, or to run. 
 counter thereto, will be broken as a twig in the hand of a giant. 
 The old Dane who undertook to stay the incoming progress of the 
 tide by virtue of his royal command, was not more preposterous and 
 futile than is the latter-day legislator, who makes a demonstration in 
 Congress for the repeal of the law of cause and effect. 
 
The late Scott Bill and similar legislation pending, represents 
 Tiot only an attempt to try an experiment in legislation upon one 
 -class of citizens alone and upon one section of our country only, but 
 is the concrete expression of a reckless desire to meddle with the 
 ■complex machinery of a great trade system, upon the unhampered 
 operation of which depends the welfare of many millions of people. 
 
 It is not to be denied that the operation of the trade system 
 by which the cotton crop is moved from the fields and distributed 
 "to the four corners of the earth, is afflicted with some drawbacks, 
 some imperfections and some abuses. But this is true of all trade 
 svftems and of all human enterprises, undertakings and develop- 
 ments. These distempers of the body economic have been and will 
 be seized upon by the seeker after notoriety, emolument or power, 
 as the means whereby popular prejudice may be set ablaze and he, 
 by the light of it, see the way to the goal of his desires. But the 
 i;rue leader, the patriotic citizen and the public-spirited press 
 should approach these problems from another standpoint. The aim 
 of such teachers and workers should be first, to investigate and 
 study the problems in order that the truth may be known, and then 
 to direct their efforts to the end that the good may be appropriated, 
 preserved and expanded, and the evils eliminated and destroyed. 
 
 Approaching the Cotton Exchange and Future Trading problem 
 in this spirit, we should primarily advise ourselves definitely and 
 accurately as to the nature and functions of the Cotton Exchange 
 and of Future Trading; then we should examine into the part that 
 these institutions and this trade system play in the modern methods 
 of marketing and distributing the cotton crop ; then we should study 
 "the advantages and benefits derived from the operation of the 
 agencies in question; and then we should inquire into the evils 
 ■complained of, the nature and source thereof ; and finally, we should, 
 in the light of the information obtained, address our efEorts towards 
 
such regulation, restriction, prohibition and encouragement, as; 
 would on the one hand eliminate all that is objectionable and 
 injurious, and on the other preserve and strengthen all that operates- 
 for the interest of the great cottoH industry and for the advantage 
 of the producers of the great trade asset of the South. 
 
 Following the foregoing outline we propose in the first article- 
 to discuss the legitimate Cotton Exchange, w^at it is and what it is 
 not ; and what the results upon the cotton producer and the cotton 
 trade would be if its functions were suspended by legislative prohibi-- 
 tion. 
 
 COTTON EXCHANGE AND BUCKET SHOP 
 DIFFEEENTIATED. 
 
 In the agitation that a few years ago swept the country, the- 
 terms "Bucket Shop" and "Cotton Exchange" were used indis- 
 criminately as if — and indeed as was concluded by many — they 
 meant the same thing. At the time in question a very real evil 
 was in existence throughout the South, and very reprehensible- 
 conditions prevailed. Speculation was then rampant, not only in 
 the Southern States, but throughout the entire country as well. Men^ 
 who desired to- profit by this mania for speculation established' 
 offices or so-called "Cotton Exchanges" in a multitude of towns 
 both large and small throughout all the South. These people made • 
 it possible for men of small means, clerks, and even women and' 
 children to speculate or gamble, as they untruthfully announced,,, 
 "in cotton." These offices were not Cotton Exchanges, but Bucket 
 Shops, and the speculators in these offices were not trading in cotton 
 or in cotton contracts, but were simply betting with the proprietor - 
 upon the fluctuations in price that occurred in the cotton market. 
 It is important that the distinction between a Cotton Exchange and' 
 a Bucket Shop should be clearly understood. In a legitimate Cotton 
 Exchange binding and enforceable contracts are made for present. 
 
6 
 
 ■and future delivery of cotton, and the prices at which such cotton is 
 bought and sold, both for present and future delivery, are posted 
 upon the blackboards of the Exchange and telegraphed throughout 
 the world so that all who are interested may know what traders are 
 paying for cotton and, consequently, be apprised of the value thereof. 
 In a Bucket Shop no contracts whatever are made. Nobody buys 
 any cotton or sells any. The proprietor of the Bucket Shop, for the 
 purpose of masking his game, adopts the nomenclature of the 
 legitimate exchange and of the actual cotton trade. But in fact all 
 he does is to bet his victims that the price of cotton, as registered 
 by actual contracts and trades in the Cotton Exchange will go up or- 
 down, as the case may be ; and all the victims of tha bucket shopper 
 do, is to take the other end of the bet. The Cotton Exchange, if 
 ^:airlr and equitably conducted, is no more to be condemned and 
 •destroyed because of the practice of bucket-shopping, than is the 
 ocean liner to be condemned and prohibited from crossing the seas 
 because some individuals see fit to bet with each other on the speed 
 at which the vessel will travel. 
 
 But, as has been said, the terms "Cotton Exchange" and 
 '"Bucket Shop" were used indiscriminately, with the result that to 
 ihe many who did not understand the difference, the actual evil 
 which they observed proceeded from the Bucket Shop in their town, 
 was inaccurately attributed, and denunciation thereof applied, to 
 the Cotton Exchanges in the great markets of the world. Thus the 
 Cotton Exchanges, no matter what their faults may be, have been 
 through inaccurate and unthinking generalization, accused and con- 
 ■demned for faults in no just sense attributable to them, and for 
 -evil practices which the Exchanges have done their very best to 
 ■destroy. 
 
 THE LEGITIMATE COTTOK EXCHANGE. 
 
 The legitimate Cotton Exchange is a place where buyers and 
 ■sellers are brought together and trading conducted at less expense. 
 
TVith more facility, and in greater volume than could be done if the 
 traders were separated; it is an organization which establishes 
 ■communication with the other markets, both foreign and domestic, 
 •and collects information as to values and conditions, and statistics 
 and reports as to the progress of the crop, the state of the dry goods 
 trade, and the amount of cotton taken by spinners; it frames rules 
 for the government of its members and the trading between them, 
 among themselves, and with non-members ; and finally it establishes 
 tribunals before which disputes may be settled and punishment 
 inflicted upon offenders against honorable conduct in business. 
 
 Originally the trading in the Cotton Exchanges was limited to 
 ■"Spot" transactions, i. e., to th3 purchase and sale of cotton actually 
 in hand. But as production increased and consumption grew, it 
 was found that a need existed for trading in future contracts, or in 
 ■other words, for buying and selling cotton for delivery at some time 
 in the future. In order that such trading should be conducted with 
 satisfaction and efficiency, the Exchanges in which such trading 
 prevailed, adopted a form of binding contract which must be signed 
 by the parties thereto, and formulated rules governing the conduct 
 ■of the business. 
 
 In the course of time there came into the markets a class of 
 traders who, although they did not manufacture cotton goods them- 
 selves, were willing to buy cotton when they thought the price was 
 too low, in order that they might sell later at a profit. These traders, 
 therefore, competed with the spinners. They not only bought and 
 sold cotton for present delivery, but also bought and sold contracts' 
 for future delivery. The supply of contracts furnished by these 
 traders, as well as by those who had cotton which they wished to 
 sell, and by spinners who wished to buy to fill future consump- 
 tive needs, constituted what is known as the Future Market, and 
 made possible the very important facility of "hedging." 
 
8 
 
 The prices for future delivery made by trades in futvire con- 
 tracts represent the consensus of opinion of the traders as to the 
 probable value of cotton at such future time. If the Future Market 
 is in the producers' country where the great majority of men hope- 
 that cotton will advance in value and are by this hope influenced 
 in their opinion, then the prevaling future prices in such market 
 will be relatively high. If, on the contrary, the Future Market is. 
 located in the spinners' country where most men hope that cotton 
 will go down and, consequently, believe that it will do so, then the- 
 prevaling future prices in such market will be relatively low. In 
 order that the trade may be advised of present conditions and be 
 able to form some opinion as to prices in the future, the Exchanges 
 at a large expense collect reliable data covering all the conditions, 
 both of crop and trade, that go to make prices. This information so. 
 gathered, is by the Exchange disseminated throughout the country 
 with the result that every day and at all times during the day the- 
 farmer or the merchant, even in the small towns of the country, 
 know what cotton is worth in all the markets, are apprised of con- 
 ditions which would likely affect prices, and hence cannot be misled 
 or duped by intending buyers, into selling cotton for less than its- 
 value. 
 
 The laws of the several Southern .States have practically 
 eliminated the evil of bucket shopping heretofore referred to. Biit; 
 now the efCort is made in Congress not only to prevent betting on 
 the fluctuations in the price of future contracts, but to prohibit 
 the making of future contracts; not only to close up the Bucket 
 Shops, but to destroy the legitimate Exchanges as well. We will 
 hereafter discuss more in detail the benefits derived by the farmer 
 and all legitimate interests through the agency of future trading 
 per se, and the loss that would be occasioned if such trading were- 
 prohibited. Here we will call attention to the most obvious ill 
 results, that would follow the enactment of a law directed against, 
 the legitimate American Exchange : 
 
9 
 
 1st. If the American Future Exchange was closed, then there 
 would remain only the Liverpool and Continental Exchanges in 
 operation. These exchanges are Spinners' exchanges. No cotton is 
 produced in those countries, but there are many mills. The spinner 
 desires to buy cotton as cheaply as possible, and in any future 
 market dominated by the spinner and his friends the prices would 
 naturally and inevitably be forced down as low as possible. With 
 no resistance on the part of the producer and his friends, the 
 contest would be one-sided and unequal, and hence the price-malcing 
 power would be surrendered to foreign interests, and the farmer 
 would have to sell at the low prices fixed by the spinners, in Liver- 
 pool, Bremen and Havre. 
 
 2nd. If the American Future Exchange was closed then all 
 the information as to the price of cotton in all the markets of the 
 world and all the information as to conditions which go to make up 
 the price and the price outlook, would be no longer disseminated. 
 The buyer and spinner would know what the Liverpool Exchange 
 and the other foreign exchanges were doing, but the farmer and the 
 merchant, especially in the small towns, would be in the dark. Thus 
 the producer would be at the mercy of the buyer, and all the Amer- 
 ican cotton trade would be at the mercy of the foreign spinning 
 interests which would be intent upon buying cotton as cheaply as 
 possible. 
 
 These preliminary considerations are commended to the serious 
 thought of the farmer and of all those who are his friends. Before- 
 supporting any anti-future bill, those interested should be very 
 sui;e that the measure would not produce the results outlined above. 
 Some legislation is necessary in order that the operations of the 
 exchanges should be equitably regulated, but this question, like all 
 others of legislative agency, should be handled with discretion and 
 discrimination. 
 
10 
 
 CHAPTER II. 
 
 Anti-Option Legislation. 
 
 Extreme legislation as a general thing is like a two-edged 
 sword — it cuts both ways. Legislation not always extreme often acts 
 in the same manner if not given proper consideration. The tariff 
 question for example: Free trade is ideal. To be enabled to buy 
 in the cheapest market and sell in the dearest without let or 
 hindrance, is the sum and substance of free trade. We want free 
 bagging and ties for baling cotton, because the tariff on these is a 
 burden to the cotton producer and helps the bagging and steel trusts, 
 but we do not want free foreign raw cotton, because the Egyptian 
 cotton grown by cheap labor comes in direct competition with our 
 long staple, and its encouragement cuts profits on the home product; 
 and so on along the line. We are free traders in theory, because the 
 theory is ideal, but like all other things good on their face, it is 
 subject to numerous exceptions. 
 
 And so it is with legislation; what on its face may seem good 
 and fit, may prove on application not unmixed with evil. 
 
 Kot a few among our best thinkers among the farmers have 
 believed the only way to abate the evils that have fastened upon the 
 cotton trade is to abolish the Exchanges. To prevent the making 
 of contracts for the purchase or sale of cotton for future delivery, 
 unless coupled with conditions practically prohibitive. 
 
 This is what the so-called S'cott Bill proposes. 
 
 But are there not two sides to this matter? No one questions 
 the sincerity of the advocates of the Scott Bill; but would the 
 measure, if adopted, accomplish the ends sought? Would it abolish 
 futures ? It would in the great Exchanges of New Orleans and New 
 York as far as interstate commerce in the United States is con- 
 cerned. It would drive away millions upon millions of dollars of 
 
11 
 
 American capital which now help us to move our crops and obtain 
 cash money for them with the same facility and promptness that one 
 with money in bank can cash a check. But how about Liverpool 
 and Havre and Bremen ? They would go on the same as ever, only, 
 with our American Exchanges crippled and unable to put up a 
 fight in behalf of American cotton, the foreigners might dictate 
 prices. Is it to be supposed that they, the representatives of the 
 foreign spinners, would work in favor of the American farmer? 
 Would they pay any more for our cotton than they could help? 
 Past history does not show it. How about the future? Would the 
 leopard change his spots ? They would try to buy their raw cotton 
 as low as possible and sell their manufactured goods as high as 
 possible. The British lion makes a handsome picture as far as lions 
 go,. but it is safest to keep American heads out of his mouth. France 
 md Germany are our good friends in the way of trade for what 
 lihey can make out of us. Germany tried prohibition of futures, but 
 has changed her law and Bremen is about commencing the Future 
 business again. Bremen has already made enough on arbitrating 
 Vmerican cotton to build the handsomest Exchange in the world. 
 Is it so sure that we need such a radical change as the Scott Bill 
 would force ? Do our farmers want to be brought face to face with 
 the spinners, with none to intervene between them? We market 
 in the first six months of the year nearly twice as much cotton as 
 the spinners need in the same time. Who then is to take or carry 
 the surplus when the mills buy only as they need the cotton, if we 
 drive away the capital which has been performing that service ? 
 
 The capitalist or speculator will not consent to carry cotton 
 unless he is able to hedge against a possible decline. The average 
 buyer in the country will not buy our cotton unless at a wide margin 
 and even at that he will hesitate if there are no American future 
 markets in which he can hedge. The small buyer who now competes 
 for our cotton in country towns will be driven out altogether. 
 
12 
 
 One has only to go over the newspaper tiles before the establish- 
 ment of futures, to show what would be in store for us if we return 
 to old conditions. These are matters which require serious con- 
 sideration at the hands of farmers. 
 
 Look at the record this and last year : Last year we got for our 
 cotton crop including the seed, $902,000,000. This year we will 
 receive more than one thousand millions of dollars for the crop, 
 including the seed. ' The calculation is easy. Already up to the 
 close of March we had sold $818,000,000 and the remnant of the 
 crop which is selling at an average of $75 per bale and over will 
 bring $84,000,000. Add to this $125,000,000 for the seed and we 
 have a total of one billion and twenty-seven millions. 
 
 Xo two crops big or little ever brought near such amounts. 
 
 And yet all the time throughout these two remarkable years the 
 mills have been crying bad trade, short time. These results have 
 been obtained under a S3'stem of trade, including futures. AYould 
 that have been the case had the middleman who carried the surplus 
 been imable to hedge his purchases? Would he have been able to 
 Eay to the mills "the cotton is worth the money and if you don't 
 buy it at the price I will, and will make you pay more when you are 
 forced to buy ?" 
 
 Suppose these men who took tb.e chances had been driven out by 
 law, would we have obtained nearly two thousand millions of dollars 
 for the two crops? That is a more than serious question. Some 
 of the advocates of the Scott Bill claim -^se would have gotten more. 
 But how ? The spinners have not paid us one cent more than thej 
 were forced to. If they could have had their own way, they would 
 have paid ten to twenty dollars a bale less. Take the records of the 
 past ten years and we will find that $45 to $55 per bale has not 
 been an unusual price for cotton. What would such figures have 
 meant compared with $75 and over for the two years just ending. 
 Anywheres from four hundred millions to seven hundred millions 
 of dollars. 
 
13 
 
 We do not say that such would have been the case, but it is not 
 beyond the bounds of possibility. Would it have been conservative 
 to take the risk ? 
 
 We do know that if existing business methods are disrupted 
 the result, for a time at least will be chaos, and while a new order 
 is being established who will pay the losses ? Do not all • costs 
 incident to marketing come out of the cotton itself? 
 
 While the future system has been in force the trusts with all 
 their billions of money have not dared to interfere with cotton. 
 They have tackled Sugar and Iron and Bagging and Lumber and 
 Oil and other commodities which have no futures. In cotton every 
 man who considers cotton is cheap has- an opportunity to buy 
 through the future' market and the combined means of the many, 
 offsets even the great assets of the trusts. Even the Eothschilds have 
 always steered clear of cotton. 
 
 Would it not, therefore, be wise to exerdse some conservatism 
 in dealing with this important matter ? 
 
 If the institution of futures is of benefit we should conserve 
 the good in it. What is bad should be eliminated, but in the 
 ■elimination that which is of benefit should not be destroyed. 
 
 Bucket Shops should be prohibited throughout the United 
 States ; they are only bettors on the price of cotton as. established 
 in the Exchanges. N"o contract should be permitted that does not 
 give to the buyer the legal right to demand the cotton and none that 
 'does not give to the seller the right to deliver the actual cotton, and 
 no contract should be permitted that is not settled upon the actual 
 prices which prevail from day to day for the grades of cotton specified 
 therein. No contract should be permitted which specifies that 
 'differences between the different grades shall be arbitrarily fixed for 
 months upon months regardless of the actual market prices therefor. 
 
 The banks are under government supervision, why not cotton? 
 Why not try supervision instead of abolition ? 
 
 The United States government has through its Bureau of 
 
14 
 
 Corporations completed perhaps one of the most exhaustive investi- 
 gations of the Exchanges and the Cotton Future Business that has 
 ever been made in relation to trade matters. The report of Com- 
 missioner Herbert Knox Smith embraced every phase of future 
 contracts, their advantages and the correctives needed to bring 
 the system into line with the interests of the grower of cotton. 
 
 A measure in keeping with Commissioner Smith's recommenda- 
 tions is well worthy of trial. This with Government supervision to 
 enforce the law in letter as well as in spirit, it is claimed, will 
 remove objections now urged while retaining its advantages as an; 
 adjunct to the marketing and sale of the cotton crop. 
 
 Would not that be a better plan than risking a radical experi- 
 ment, the result of which may or may not prove doubtful? 
 
15 
 
 CHAPTER III. 
 Nature of the Future Contract; and Method of Trading. 
 
 Having in a former issue discussed the functions of a legitimate 
 Cotton Exchange with particular reference to future contract trad- 
 ing ; and having differentiated such an Exchange from the nefarious 
 institutions designated as Bucket Shops, and distinguished the 
 future transactions conducted in the former from the gambling 
 ventures undertaken in the latter; it is now in order to give some 
 more particular attention to the nature of the future contract and 
 the method of trading therein. 
 
 FUTURE CONTRACT A BINDING OBLIGATION. 
 
 Much misunderstanding has existed and much misinformation 
 has been disseminated in regard to the contract for future delivery 
 of cotton. It has been dogmatically affirmed by anti-future advocates 
 that the future contract was a sham and a mere subterfuge invented 
 for the purpose of giving apparent legitimacy to a purely gambling 
 hazard. While it is true that there is and has been and must bn 
 speculation in future contracts, it is not true that the contract for 
 future delivery under the rules of a legitimate Exchange is unreal 
 or a delusion and a sham. On the contrary, such contract to deliver 
 or to receive cotton at some specified time in the future, is a binding 
 obligation specifically .enforceable both under the rules of the 
 Exchange and in the courts of law. If any one doubts the validity 
 and reality of such contracts let him sell on the Exchange a hundreil 
 bales of cotton to be delivered in some future month, or let him buy 
 for reception at some future time, and if he does not, before the 
 maturity of the contract, dispose of the same or transfer his 
 obligation to some one else, he will find that he must deliver or 
 receive, as the case may be, or else pay the same penalty he would 
 
16 
 
 pay in the case of a breach of any other contract. Anu furthermore, 
 not only is such future contract enforceable, but it is also secured; 
 each party being required to put up collateral sufficient to protect the 
 other party from loss in the event that the one party or the other 
 fails to specifically receive or deliver according to the cbligat'on in 
 the contract. 
 
 EXECUTION AND TEANSFEK OF CONTEACTS. 
 
 Briefly the form of the future contract and the methods of 
 trading therein is as follows : A, who is a principal, gives an order 
 to B, who is a broker, to buy say 100 bales of cotton to be delivered 
 in October. Y, who is a principal, gives an order to X, who is a 
 broker, to sell, say, 100 bales of cotton for October delivery. B, the 
 broker, bids a price per pound, basis middling, for the said 100 bales. 
 X, the other broker, accepts the bid and sells for the delivery stipu- 
 lated and at the middling basis price agreed. B and X, the brokers, 
 thereupon enter into a binding contract in the form prescribed by the 
 Exchange whereby the one agrees to receive and the other to deliver 
 the actual cotton covered thereby, at the time and at the price 
 stated, and furthermore each is required to give to the other security 
 that the contract will be carried out according to the terms thereof. 
 A and Y, the principals in the premises, are responsible to B and X, 
 who are acting as agents or brokers, and B and X are representing 
 their principals A and Y. The contract is now made and signed 
 and the obligation of all parties fixed and determined. 
 
 If the principals A and Y, give no further instructions in 
 regard to the contract, when October comes, X, the broker, must 
 deliver to B, the other broker, 100 bales as per contract and B must 
 receive and pay for said cotton. In such case X delivers the cotton 
 for account of his principal Y, and B, receives the same for account 
 of his principal A. This is the simplest form of future contract 
 trading. 
 
 But suppose that after the contract has been signed and entered 
 
17 
 
 into by B and X^ the brokers; A, the principal who has bought the 
 100 bales, decides that for some reason he does not want to take 
 ■delivery in October. Perhaps he had bought the contract for the 
 purpose of hedging a sale of some specific grade or some special 
 kind of cotton which he had contracted to deliver to a spinner, not 
 having said cotton in hand at the time : When, therefore, he had 
 purchased the specialty, he would have no further need for the 
 future contract. In such case he would tell B, his broker, to sell 
 his contract, or in other words, to find some one who would take 
 his place and assume the obligation to receive the cotton in October. 
 C, an entirely new party, wants, at this time, to buy 100 bales for 
 October delivery. He, therefore, through his broker, at a price 
 assumes A's obligation as principal to the broker, B; the contract 
 between B, the broker, and X, the other broker, remaining intact. 
 In the same way, Y, the other principal in the original obliga- 
 tion, may desire to be relieved of his obligation to deliver the 100 
 bales in October, he having in the meantime disposed of the 100 
 bales of cotton in hand against which he had sold the contract as 
 a hedge. He, therefore, tells his broker X, to get some one to 
 take his, Y's, place and assume his obligation to deliver the cotton. 
 W, another new party, desires at this time to hedge some cotton 
 he has in hand, by selling the same for October delivery. He, 
 therefore, through his broker, at a price, assumes the obliga- 
 tion of Y(, the original principal in the premises. The contract 
 between B and X, the brokers, remains intact and each is bound as 
 firmly as ever, the one to receive and the other to deliver 100 bales 
 in October, but the principals, to whom both brokers look for per- 
 formance, are new. Thus the principals may change any number 
 of times before the maturity of the contract, but when it does 
 mature, it must be liquidated in accordance with the terms thereof. 
 The two brokers are responsible to each other for this performance, 
 but they discharge their obligation to each other for the account of 
 their respective ultimate principals. 
 
18 
 
 .From the foregoing it will be seen that the future contract 
 entered into under the rules of a properly organized and equitably 
 regulated exchange, is not a nefarious or dishonest subterfuge but a 
 definite and binrling obligation : and furthermore, it will appear that 
 these contracts having been once properly and validly issued, may 
 be bought or sold or transferred in the course of trade, just as a 
 promissory note, or other obligation, once issued, may be bought 
 or sold or transferred for a consideration. 
 
 LAEGE VOLUME OF TEADING LOGICAL AND 
 NECESSARY. 
 
 When the modern trade methods of moving the crop are under- 
 stood, no difficulty will be experienced in appreciating the fact that 
 from the time the farmer parts with possession to. the time when 
 the cotton reaches the ultimate consumer, it passes through many 
 different hands and is the subject of diverse and successive owner- 
 ship. The same lot of cotton passes from the farmer to the 
 merchant, and from the merchant to the buyer and from the buyer 
 to the spinner or from the buyer to another buyer or exporter, and 
 from such other buyer or exporters to still others until it reaches 
 the spinners' hands and is spun into cloth, sold to the cloth mer- 
 chant and finally to the man who wears the clothes made therefrom. 
 
 All of these intermediate owners are subject to the risk of 
 ownership or of contract with reference thereto: i. e., the risk of 
 fluctuations in the price of the cotton during the time such cotton 
 is in their possession pending disposition of the same, or before they 
 can get possession of cotton with which to fill a spot contract 
 previously made. These owners or contractors in spot cotton 
 desire to protect themselves against the risk of such fluctuations, 
 and in order to do so they send to the Exchange and sell or buy a 
 future contract, or future contracts, for the purpose of hedging their 
 specific grade transactions and contracts. This multitude of traders 
 in the future markets engaged in the non-speculative effort of pro- 
 
19 
 
 tecting themselves against price variations, necessarily inaugurate 
 a multitude of trades and thus create a volume of transactions 
 which to the uninformed observer appear to be out of proportion to 
 the amount of cotton at the time actually in existence. 
 
 One of the principal and most insistent arguments of the 
 opponents of future trading is drawn from this very fact that the 
 tolume of future transactions is largely in excess of the actual 
 crop grown. They claim that legitimate future sales and purchases 
 must be limited to the actual crop and that any over-plus of contract 
 trading is necessarily fictitious and representative of speculative 
 transactions. 
 
 APPAEENT EXCESSIVE FUTUKE TEADING EXPLAINED. 
 
 Having in mind the analysis of the future contract, and the 
 method of trading therewith, heretofore given, it will not be 
 difficult to account for this apparent excess and to explode the 
 fallacy of the argument mentioned. It is desirable that the reader 
 shall keep clearly in mind the distinction drawn, in' a preceding 
 section of this article, between the making of the future contract 
 and the buying and selling of the obligations imposed by such con- 
 tract. 
 
 In the first place each future purchase and sale made in the 
 Exchange may not, and in fact every such purchase and sale does 
 not, represent a new transaction, but a transfer to other parties of 
 a contract already made. Eor instance, A and Y, in the original 
 illustration may through their brokers enter into a contract for the 
 purchase and sale of 100 bales of cotton for October delivery. Before 
 the contract matures and is liquidated by specific and actual delivery, 
 it may have been assumed by as many other parties as there are 
 letters in the alphabet. Each of these transactions is apparently 
 new, but is in fact only the transfer of the obligations of the 
 original contract or the substitution of new parties thereto. These 
 several transfers ai-e counted by those who do not understand the 
 
20 
 
 system as cumulative contracts, when as a matter of fact they are 
 successive contracts covering the same obligation. 
 
 By way of illustration : Suppose a man had $100 in the bank. 
 He issues a check for this amount, which he delivers to the drawee. 
 This represents the original transaction. Now suppose the man in 
 whose favor the check is drawn, transfers the same to some other 
 payee, and he in turn, to another and so on. Finally the last holder 
 of the check will collect the $100 from the bank and then the 
 original contract represented by the check is specifically performed. 
 In the meantime, however, the check may have passed through a 
 number of hands and may have been the means of liquidating a 
 number of $100 obligations, although there has never at any time 
 been any more than $100 in the bank against which the check 
 was drawn. Each one of these transfers was a perfectly valid and 
 proper transaction and yet if we take the cumulative total we will 
 find that business amounting to $1,000, perhaps, had been transacted 
 on the one $100 check. The argument of the anti-future advocates, 
 if applied to this illustration, would hold that only the original 
 transaction was valid and that the transactions in excess of the $100 
 in bank were spurious and counterfeit. 
 
 The foregoing explanation accounts for some of the apparent 
 excess of future purchases and sales, but there are other important 
 explanatory phases of this seeming discrepancy, which should be 
 considered. 
 
 If the contention that the number of bales legitimately bought 
 and sold for future delivery must be limited to the number of bales 
 actually in existence, was sound, then only one man could hedge a 
 given lot of cotton and he could only hedge it once. If this 'con- 
 tention was sound, then the first owner could legitimately hedge, 
 but the second, or third, or fourth owner could not: or the ownei 
 could legitimately hedge his cotton by selling a contract against it 
 for delivery in a specified month, but if when that month came and 
 he was not ready to deliver and he transferred his contract to mature 
 
21 
 
 in another month, then such second contract, although it covered 
 the identical same bales of cotton would be a gambling contract and 
 a counterfeit. Such is the reasoning of the anti-future advocates 
 mentioned, as applied to the actual and every day transactions in 
 thd cotton business. The fact that it is not only legitimate but 
 necessary in instances that the same lot of cotton must be hedged 
 by several different owners, or by the same owner several different 
 times has a large share in explaining the apparent excess of future 
 purchases and sales complained of, and definitely exposes the fallacy 
 of the dogma that the excess of cumulative purchases and sales for 
 future delivery over the number of bales actually grown, is proof 
 of the speculative and injurious character of future contracts. 
 
 EXCHANGES' MUST BE IMPAETIAL AND CONTEACT 
 
 PAIE. 
 
 The nature of the future contract has now been explained and an 
 exposition of the system by which the same is successively trans- 
 ferred and finally liquidated has been given. It now begins to be 
 apparent how great a part the future contract and the future trading 
 facility plays in the actual spot transactions whereby the crop is 
 moved at the least expense and risk to all concerned. In the next 
 article we will show the practical application of future contract 
 trading to the actual spot business, and illustrate the dependence 
 of the non-speculative dealer, whether he be producer, merchant, 
 buyer, exporter or spinner, thereon. 
 
 These discussions, designed to impress upon the farmers and all 
 interested in cotton .the great importance of exchanges and of the 
 future trading system to the modern economy of trade, be it clearly 
 understood, presupposes honesty and fairness in the operation of the 
 system and a just and considerate attitude on the part of the 
 exchanges to the interest and rights of all, whether members thereof 
 or not, who are concerned with the commodity which is the subject 
 of trading therein. A future contract that is unfair in its terms, 
 
22 
 
 and rules that give either party to the contract an opportunity to 
 manipulate the value of the same, constitutes an eril which greatly 
 impairs the benefits of the system, and should not be tolerated. 
 An exchange which assumes the attitude that it is a private cor- 
 poration and that the dominant element of the membership have 
 the right to conduct their business in their own way, for their own 
 profit and regardless of the rights and interest of other members 
 and of outside parties, is an evil-breeding element in the body 
 economic which should be castigated into a proper disposition or 
 else eradicated from a system which it degrades. We shall 
 earnestly endeavor by appeals to the reason of our readers to em- 
 phasize the great importance of properly organized and conducted 
 exchanges, and the indispensable function of a properly regu- 
 lated system of future trading; but we are no less determined 
 to bring into bold review the delinquencies of men and institutions 
 and the drawbacks which militate against the best interests of the 
 cotton trade. It is only by a proper appreciation of the good and 
 an adequate understanding of the evils, that we shall be able to 
 arrive at a conclusion which will enable us to preserve the one and 
 destroy the other. An intimate knowledge of the healthful func- 
 tions of the body and of the distempers to which it is subject is 
 equally necessary, if we would conserve the one and cure the other, 
 or if we woxild avoid wrecking the organic constitution by a 
 bungling and brutal attack upon a local disorder. , 
 
23 
 
 CHAPTER IV. 
 
 The Application of Future Contract Trading to Spot 
 Transactions. 
 
 The spectacular and offensive incidents of future contract 
 trading are generally known and widely advertised; but the normal 
 operation thereof, and the indispensable part that such trading plays 
 in the necessary machinery of modern spot business, has not been 
 to any extent exploited; with the result that the real significance 
 of the system is by the general public, and even by the majority of 
 •cotton people themselves, either dimly appreciated or utterly mis- 
 understood. The reason for this ex parte distribution of information 
 and the explanation of this Jop-sided status, is at hand. We pay 
 little heed to the normal, every day operation of either economic or 
 natural laws or systems; and are dependent upon exceptional and 
 Ttntoward developments in order that our attention may be directed 
 thereto. We accept the even dispensation of sunshine and rain, and 
 -the customary revolutions of the seasons, as matters of course, and 
 so long as our pleasure and progress suffers no interference, we give 
 no thought to the marvelous adjustment of forces from which these 
 phenomena proceed. But let drought come, or flood, or let the 
 summer be too hot, or the winter too cold, or let the vivid accounts 
 ■of storm and disaster be published, and immediately our attention 
 Is attracted and our disapprobation of the order of things expressed. 
 We know little and think little of the manifold excellencies of the 
 laws of living and growing, but we are prone to magnify the 
 •occasional instances of miscarriage; and thus to accept the excep- 
 "tions, not as proof of the rule, but as the rule itself. 
 
 So it is with economic forces, and so with the system we are 
 :now discussing. The farmer takes his cotton to town, sells it to 
 
24 
 
 his merchant or to a cotton buyer, buys his goods, puts his balancer 
 into his pocket and goes home. To him this transaction constitutes- 
 the whole problem of marketing. Of course, he knows in a general 
 way that the buyer of the cotton must have some merchant or 
 spinner with whom he has arranged to place his purchases, or else 
 must be in a position to carry the same until such time as he can 
 dispose of them. He knows, of course, in a general way, that the- 
 buyer must make arrangements to get money with which to pay for 
 the cotton bought. He appreciates, if you call his attention to the 
 fact, that the cotton must be shipped on a long journey by rail or 
 over seas, and that pending arrival at market or destination,, 
 material changes in value may occur. He knows, also, if you mention: 
 the matter to him, that the spinner to whom the cotton goes has 
 created the necessity for it by contracting far ahead for the sale 
 of the product of his mills. He must be apprised, if he thinks of 
 it, that the vast forward and onward movement of the crop which 
 gives him practically at all times a ready and convenient market 
 for his product, is not dependent upon the haphazard and venture- 
 some disposition of buyers, but upon system and business order. He 
 may have been told that the growth of the multitude of interior 
 markets, the multiplication of the number of cotton buyers, aiid the 
 ability of the latter to pay at all times the highest competitive priee^ 
 are based upon the great protective principle of "hedging," which 
 can be securel only in the future contract markets. But so long as 
 he can bring his cotton to town, sell it to his merchant or to a 
 buyer, buy his goods, pocket his balance and go home, he takes it 
 all as a matter of course and concerns himself not with the principles 
 of the system to which he is beholden. When, however, by reason of 
 some unlocked for changes in the relation of supply and demand, 
 wide variations in the price of cotton occur; or when some bold 
 speculator, by anticipating such variations, executes a coup and 
 amasses a fortune thereby; or when some unfortunate victim of 
 weakness and folly, because of losses incurred through speculation. 
 
25 
 
 commits the crime of embezzleinent or makes an end of his life; 
 the spectacular facts are featured as news items by the press, and 
 thus attract the attention of the public, not as isolated incidents 
 of future trading, but as the flower and fruit and comprehensive end 
 of the system itself. The dramatic accidents of speculation in future 
 contracts and the human casualties associated therewith, are pub- 
 lished broadcast to the world; but the thousands and millions of 
 bales of cotton that are each day and each year bought and sold for 
 future delivery in the regular course of non-speculative business; 
 and the multitudinous transactions in contracts, by means of which 
 producers and merchants, and buyers, and spinners, and bankers, 
 are enabled to avoid becoming speculators, and are assisted in the 
 advantageous movement of the crop from iield to spindle, are 
 unheralded and to a great extent unknown. Thus becomes obvious 
 the truth of our former saying that we pay little heed to the normal 
 operation of either economic or natural laws, but attend to excep- 
 tional adverse developments. We are prone to judge an economic 
 system, as well as a natural one, not by the routine benefits of 
 operation, btit by the occasional incidents of miscarriage. While 
 it is no part of our purpose to defend or excuse what is reprehensible 
 in future trading, yet we conceive that it is not only just but neces-. 
 sary for our common good, that the normal and indispensable work- 
 ings of the system should be explained and emphasized. 
 
 HOW THE SPINlsnER USES THE FUTURE CONTRACT 
 MARKET : THE BENEFITS OP SUCH USE. 
 
 In a former article we showed how contracts were bought and 
 sold and how the protective benefits of these contracts might be 
 secured. We will now show just how the buyers and sellers and 
 spinners of actual cotton do avail themselves of this protection, and 
 will point out some of the important results that flow therefrom. 
 
 The manufacturer constitutes the ultimate market for raw cotton. 
 The more business there is for the mills, the greater will be the 
 
26 
 
 demand for cotton; and the greater such demand, the higher will be 
 the price paid for the raw material. The spinner enlarges his busi- 
 ness and increases the output of his mills and the consumption of 
 the same, by soliciting orders for his product. He, either by 
 representatives or through advertisement, traverses his own country 
 and invades foreign lands, thereby creating a wider market for 
 cotton goods and new uses for the raw material. In order that the 
 spinner may thus extend his business, and sell the output of his 
 mills in advance, he must be in a position to make contracts with 
 the merchants whose attention he secures. He must be able to 
 name a price at which he can supply the future wants of such mer- 
 chants ; as^ otherwise, the latter would not know what, or how much, 
 he could afford to buy. But the spinner cannot make this price in 
 advance, unless he knows what it will cost him to get the cotton 
 which he must spin into cloth to fill the merchant's order. If 
 he did not know this cost, he either could not make the contract 
 with the merchant at all, or else he would name a price for the 
 goods high enough to protect him against any supposable advance 
 in the price of the raw material which he must subsequently procure. 
 In the first case the great forward . business between spinner and 
 ■ merchant would be rendered impossible; and in the other case, it 
 would be materially curtailed by the high price the spinner must 
 name in order to cover the speculative risk entailed. The great 
 forward business between merchant and spinner, which provides 
 future employment for the mills and creates a demand for raw 
 cotton long before it is produced, is, therefore, dependent upon the 
 •ability of the spinner to accurately apprise himself of the future 
 cost of his supplies and to assure himself that he will be able to 
 make his purchases on the ascertained basis. The spinner is able 
 to secure this necessary information and protection in the future 
 contract markets, and in no other way: and if he was deprived of 
 this facility, all his calculations would run awry and the great 
 lultimate market for the farmer's product would be contracted and 
 
27 
 
 consumption curtailed. Let us seek a practical illustration of how 
 the spinner avails himself of this important trade agency. 
 
 The spinner, let us say, solicits orders from the cloth mer- 
 •chant — either in domestic centers of consumption or perhaps in 
 iav-avray China or Japan — to supply the wants of the latter for 
 a long period ahead. The cotton which the spinner proposes to 
 use for the order has probably not been planted. The merchant 
 asks the price at which the spinner will deliver the goods at the 
 -time stated. The spinner consults the quotations in the future 
 markets for the several future months and finds that he can buy 
 ■contracts for the desired amount of cotton at certain figures. To 
 ihese figures he adds the cost of manufacture, the expense, etc., 
 and his profit, and names the resultant price to the merchant. 
 When the contract between the spinner and the merchant is closed, 
 •the former gives his broker an order to buy for his account so 
 many bales of cotton for future delivery. When these contracts 
 .are bought, the spinner is protected in his contract with the mer- 
 •chant. It makes no difference to either what the market for cotton 
 may do in the meantime, the merchant gets his cloth at the price 
 ■stated, 'and the spinner will manufacture the cloth and realize the 
 profit upon which he had calculated. As the spinner needs the cotton 
 ior his contract with the cloth merchant, he generally goes into 
 the spot market and buys. He does this, instead of taking delivery 
 on the future contract, because it may be more convenient for him 
 to buy at or near his home instead of at the place where the future 
 contract must be performed; and for the additional reason that, 
 "by going into the spot market, he can make a selection of the 
 exact grades and particular staples desired. When the spinner has 
 ■bought the spot cotton mentioned, he has no further use for the 
 ■future contract, as it has completed its mission of insurance. He, 
 -therefore, instructs his broker to sell the contract, or, in other 
 -words, to get some one to take his place as the purchaser or re- 
 ceiver. The broker sells the contract to some one who wants the 
 «otton at the time specified, or to some other spinner who is in 
 
28 
 
 need of the same protection as the first mentioned, or to some 
 trader who is willing to buy because he believes that the price of 
 cotton will advance. 
 
 The importance of the hedging function of future contract 
 trading which the spinner employs, not only directly to the spin- 
 ner's business, but to the profit of producer and consumer alike, 
 cannot be fully appreciated unless we consider what would be the 
 situation if such trading was prohibited. In such case the spinner 
 would be placed in a position where he could not contract to sell 
 his goods until such time as he had the cotton for the manufacture 
 thereof actually in hand. This would not only curtail his business, 
 and in consequence decrease the consumptive demand, but would 
 put the spinner under the necessity of carrying large and cumber- 
 some stocks. This necessity would make his raw material cost 
 him more and would decrease the price that he or his agent could 
 pay the farmer.' Or, if the spinner, being of an enterpris- 
 ing disposition, undertook to make forward contracts with the 
 cloth merchant, in spite of the fact that he could not hedge or 
 protect such contracts ' by purchases in the future market, the 
 result would be a distinct disadvantage to all concerned. Either 
 the spinner would be obliged to talie a speculative risk which 
 eventually would end in his undoing, or else he would have to- 
 name a price for his cloth on future delivery which, if it did not 
 discourage the merchant from accepting, would necessarily curtail 
 the demand for raw cotton and increase the price of cotton goods 
 to the ultimate consumer or wearer thereof. From all this it will 
 appear that the effect of future contract trading as it is applied 
 by the spinner to his business, is to broaden and increase the con- 
 sumption of cotton, to make a wider market and a better price for 
 the producer, and at the same time decrease the cost of the manu- 
 factured cloth to the farmer and all other users of cotton goods. 
 
 Thus the farmer who comes to town, sells his cotton, buys his- 
 goods, pockets his balance and goes home, is dependent for his- 
 
29 
 
 market and for his prices to a much greater extent than he appre- 
 ciates, upon the system of trade which enables the spinners of the 
 world to increase their consumption of cotton and at the same time 
 permits them to place their manufactured product upon the market 
 at a price which does not include the speculative margin which they 
 would have to retain and which the ultimate consumer would have 
 to pay, if the protection of this system was not to be secured. 
 But this is only one phase of the practical utilization of the 
 future contract in the complex system of modern trade. There is 
 another phase, which has a more direct and intimate relation to 
 the actual markets the producer finds for his cotton and to the 
 price he obtains therefor. The discussion of this branch of the 
 subject will appear in another issue, and will show how the cotton 
 buyer uses the future contract as a protection against the specula- 
 tive risk otherwise incident to his purchases, and how this protec- 
 tion tends to multiply the number of buyers, to stimulate com- 
 petition, and finally to give the producer more numerous, more con- 
 venient and better markets, and higher prices for his product. 
 
30 
 
 CHAPTER V. 
 
 Further Discussion of Application of Future Contract Trading^ 
 to Spot Transactions. 
 
 In the preceding article we undertook to show the dependence 
 of the spinner upon the hedging, or protective, function of future 
 contract trading; and we discussed the important relation of this 
 usage to the spinners' business directly, and indirectly, to the cotton 
 producers' and consumers' markets. 
 
 We will now endeavor to explain that relation of future con- 
 tract trading which more obviously and directly affects the pro- 
 ducers' markets, but which none the less vitally, although in- 
 directly, furthers the profitable and economic operation of the 
 manufacturing industry and contributes to the profit of the ultimate 
 consumer or wearer of cotton goods. Eeference is here made ta 
 the use of the protective agency of the future contract by the buyers 
 of spot eotton, who obviously constitute the direct source of de- 
 mand, and supply the primary markets for the farmer's product. 
 
 When we have thus considered the practical benefit of future 
 trading from the spinner's standpoint, as the same affects him 
 directly, and the producer and consumer collaterally: and when 
 we have considered the practical benefits of such trading as the 
 same affects the buyer's ability to make actual purchases from the 
 farmer and to carry the same, and to supply the spinner in accord- 
 ance with the latter's needs, we will have some conception of the 
 complex system by which, in modern times, the crop is moved and 
 distributed, some understanding of the integral and essential part 
 that future trading plays in such system, and some appreciation of 
 the disturbance, disorder and loss that would follow the summary 
 elimination of such trading therefrom. 
 
31 
 
 NECESSITY FOR MAXY MARKETS AND NUMEROUS 
 SPOT BUYERS. 
 
 It is a well-noted fact that the bulk of the cotton crop passes 
 from the farmers' hands during the period of three or four months. 
 This supply ordinarily suffices for the needs of the mills during 
 the entire twelve months. The farmer markets his crop within a 
 brief period; the spinner takes a yery much longer period for 
 working this crop into cloth. If, therefore, there were no buyers 
 in the market other than the spinner or the actual manufacturer 
 of cotton, one of two results would follow : either the spinner would 
 be obliged to buy his twelve months' supply during the fall months 
 and carry the same on storage, making requisition on his stock for 
 the current needs of his mill; or else the farmer would be com- 
 pelled to carry the stock and sell to the spinner only at such time 
 and in such quantities as the latter required. 
 
 If the spinner carried the stock, he would find it necessary, 
 in the first place, to make arrangements for large financial accom- 
 modations to enable him to pay for the cotton so bought and held ; 
 and, in the second place, he would be put to very considerable ex- 
 pense in the items of interest, storage charges, insurance, etc., in 
 order that he might keep the necessary stock on hand. In this 
 event the spinner would be confronted with inevitable curtailment 
 in the volume of his output, and would in addition, if he attempted 
 to sustain such condition, be put upon a choice between two alterna- 
 tives: either he would have to reduce the price he could pay for 
 cotton to a figure which would reimburse him for his additional 
 expense and risk as above noted, or else he would refuse to buy more 
 than his current needs, thereby forcing upon the farmer the neces- 
 sity of carrying the stocks, with all the expense and risk incident 
 to such custody. In either case the burden would fall upon the 
 farmer. In a contest between the spinner and the farmer, without 
 the intervention of any third factor, it is perfectly obvious that the 
 spinner, on account of his more compact and powerful organization. 
 
32 
 
 and larger financial resources, would prove the stronger. In such 
 case, therefore, we can conclude with entire certainty that the 
 spinner would adopt the policy of graduating his purchases to his 
 current needs, and force the farmer into the assumption of the 
 burden which the stronger party had declined. 
 
 The burden thus falling upon the farmer, let us see what he 
 would do, if there were no buyers in the market other than the 
 spinner. He, like the spinner in the preceding analysis, would find 
 himself confronted by two alternatives, but unlike the spinner, he 
 would find no happy issue out of either. He would either have to 
 store, finance and insure the stock at his own expense and risk, 
 pending the call of the spinner; or else he would have to oflier his 
 cotton down and down until the bargain basis was reached at which 
 the spinner would be induced to buy and assume the expense and 
 risk aforesaid. In either case the farmer would be the loser, and 
 his unfortunate position would be aggravated by the fact that he 
 would again, unlike the spinner, have no one upon whom to shift 
 the burden. 
 
 If the farmer had large credit, inexpensive storage and insur- 
 ance facilities, and was able to borrow money at low interest rates, 
 he might be able to carry his crop and distribute it gradually and 
 profitably, but, unfortunately, under present conditions, he is not 
 so equipped. Even a superficial knowledge of the situation would 
 lead us to the conclusion that if there were no buyers but the 
 spinners, the farmer would be under the necessity of offering his 
 cotton down until a price was reached which the spinner was willing 
 to pay; or in other words, the spinner would dictate the price at 
 which the farmer would sell his crop. All of which proves with the 
 unerring certainty of a logical demonstration, that the salvation 
 of the producer depends upon the presence in the market of some 
 buying power independent of the spinner and intermediate between 
 the latter and himself. 
 
 Fortunately, there are in the market other buyers than the 
 spinners, or those who actually use cotton as manufacturers. In. 
 
33 
 
 the evolution of the cotton trade there have become established, in 
 addition to the larger port markets, hundreds and thousands of 
 smaller markets scattered throughout the interior of the entire 
 Cotton Belt, and each of these markets is supplied with its quota 
 of buyers. These buyers do not themselves manufacture cotton, 
 but stand between the producer and the spinner, buying from the 
 former when he wants to sell, and selling to the latter when he 
 wants to buy. It tlius falls out that when the farmer hauls his 
 cotton to town, he will there find buyers ready to make him bids. 
 He is, therefore, relieved from the necessity of carrying his crop, 
 or else of sacrificing it at the spinner's dictation; and if his town 
 happens to be in communication with one of the great exchanges of 
 the country, he knows what cotton is worth throughout the world, 
 and is in a position to demand value therefor. 
 
 FUTURE TRADING AS A FACTOR IIST THE EXISTENCE 
 
 OF INTERIOR MAEKETS AND COMPETITIVE 
 
 BUYING. 
 
 It cannot be denied that the greater the number of primary 
 markets there are, the more advantageous will be the situation of 
 the farmer; nor can it be questioned that the larger the number of 
 buyers and the more active the competition, the better will be the 
 price paid the farmer for his cotton. Any system, therefore, which 
 tends to increase the number of markets and buyers, is valuable; 
 and if such system makes possible the existence of numerous 
 markets, otherwise impossible; and makes feasible the activities 
 of a multitude of buyers, otherwise unfeasible, then such system 
 becomes invaluable. The farmers of the South have no more vital 
 issue confronting them than the preservation and improvement of 
 their markets and the multiplication of the sources of demand for 
 their cotton. 
 
 It is pertinent here to note that the evolution of the small 
 interior market and the growth of the competitive buying force, 
 have been co-incident with the development and utilization of the, 
 
34 
 
 protective functions of future contract trading. It is also a fact 
 worthy of attention that the era of high prices for cotton has been 
 contemporaneous with the period of increased activity in the future 
 markets. These co-incidences, although striking, prove nothing 
 unless it can be shown that the relation between future trading and 
 the important facts mentioned is sequent. Here again appeal must 
 be made to the relevant evidence supplied by flhe spot transactions 
 of the buyers and sellers in the markets described. We have here- 
 tofore made the statement that without the protective hedge afforded 
 by the future market, the spinner could not project his activities 
 into the future, and, by contracting hi-s output a-head, enlarge the 
 requirements of his mills, and in consequence increase the con- 
 sumptive demand for cotton and add to the value thereof; and we 
 endeavored to demonstrate the truth of this statement by showing 
 just how the spinner used the future market for the hedging pur- 
 pose, and by pointing out the logical effect of such use in practical 
 cases. We now make the statement that the small spot buyer is 
 enabled to compete with tJie larger; that the multitude of markets 
 and buyers is developed; that the producer is relieved from the 
 pressure of supply; and that the higher level of prices is main- 
 tained, through the instrumentality of the hedging function of 
 future trading. In support of this statement we will show how 
 spot purchases and sales are protected and encouraged by the use 
 of the future contract hedge and describe the practical detail of 
 such transactions. 
 
 HOW THE SPOT BUYEE USES THE PUTHRE CONTEACT 
 MAEKET : BENEFITS OF SUCH USE. 
 
 We will take first the case of a spot buyer who has an oppor- 
 tunity to contract with a spinner to deliver to the latter at a future 
 time a certain number of bales of cotton of specific grades and 
 staple. The buyer, we will say, has not the cotton in hand at the 
 time, and perhaps the cotton with which he would fill such con- 
 tract has not been made. If he could not protect himself, he either 
 
35 
 
 would not make the contract with the spinner, or else he would 
 name a price which in his opinion would he high enough to protect 
 him against any supposable advance in the market before he could 
 buy. In the latter case the price named would probably discourage 
 the spinner and result in failure to contract, or else the buyer 
 would become a speculator on the market. But observe the differ- 
 ence when the buyer has the advantage of a future contract market. 
 He looks to see at what figure he could buy contracts for future 
 delivery, and to this price he would add only his commission, or 
 profit, and name the resultant figure to the spinner. When the 
 offer was accepted, the said buyer would at once instruct his broker 
 to buy a future contract for a sufBlcient number of bales to protect 
 his obligation with the spinner. When this was done it would 
 make no difference to the buyer how much the market might 
 advance before he could buy his spot cotton : he would be protected 
 by his future hedge. Thus a forward demanil would be created 
 for the actual cotton. When the farmer finally braught his cotton 
 to town he would find the buyer waiting for him and prepared 
 to pay the highest market price justified by the law of supply and 
 demand. As soon as the buyer purchased the spot cotton, the need 
 of the hedge would terminate, and he would, therefore, instruct his 
 broker to sell his contracts, or in other words, to get some one 
 else to take his place as purchaser therein. The broker would make 
 this sale, or transfer, to some other buyer or spinner who needed 
 the protection which the first buyer had enjoyed, or to some trader 
 who believed that the price of cotton would advance. 
 
 Or consider the situation during the fall months when the 
 movemieht from the fields is heavy and cotton is coming to market 
 owr every road. The buyer, we will assume, has filled all orders in 
 hand and in so far as his contiracts are concerned, has no need 
 for cotton. If in such case he did not have the facility of hedging 
 in the future market, he would not buy at all, or else wbuld offer 
 the farmer a price low enough to protect him, the buyer, from any 
 supposable decline that might occur between the time he made the 
 
36 
 
 purchase and the time he could place the cotton with the mills.. 
 The situation of the farmer would, therefore, be that either he 
 would find no market at all at such times, or else he would have 
 to sell at a price low enough to induce the buyer to take a specula- 
 tive venture. But observe the difference wrought by the fact of a 
 future market, in which the buyer could hedge any purchases he 
 might make. The buyer, in the situation mentioned, would look 
 at the prices at which future contracts were being boug'ht and sold :• 
 from this figure he would deduct his commission, or profit, and 
 the resultant price would be what he could afford to bid the farmer.. 
 If the offere was accepted the buyer would immediately instruct 
 his broker to sell contracts for a sufiScient number of bales to cover- 
 his purchase; and thereafter it would make no difference how 
 much the market declined he would still be sure of his profit or- 
 commission. When in the course of business the spinner came into- 
 the market again, the buyer in question would sell his Spot hold- 
 ings at the current spot price, and then he would buy in his con- 
 tract, or in other words, find some other spot holder or spinner- 
 who desired the protection he wished to relinquish, or some trader 
 who thought prices would decline, to take his position and assume- 
 his obligation in the future contract. 
 
 Multiply the two foregoing typical transactions by the many 
 of the same kind that these two buyers would probably effect : and' 
 multiply these two buyers by the many thousands who operate upon 
 this protected basis and make their commission or profit without 
 any risk of loss : and then the reason why there are manifold markets 
 and a multitude of buyers, becomes strikingly obvious. The corollary 
 of this proposition is equally plain. Take away the protection upon 
 which the buyers and markets depend and the number of both and! 
 the activity of competition will be seriously if not hopelessly cur- 
 tailed and impaired. 
 
 The foregoing transactions represent typical instances of the 
 application of future contract trading to the spot transactions by 
 which the crop is marketed and moved. We shall hiave a few more 
 
37 
 
 observations to make concerning the general phases of the pro- 
 tective system of hedging and its fundamental importance, and 
 then we will consider the no less momentous question of the misuse 
 und abuses of future contract trading which have earned the con- 
 demnation of all right-thinking and right-acting people. 
 
38 
 
 CHAPTER VI. 
 
 Protective Function of the Future Contract. 
 
 Ownership involves- risk. All personal possessions are subject 
 to destruction or damage. Fire, water, accidents and elemental 
 disturbances incessantly threaten property. A man's possessions,, 
 whether they be great or small — whether they constitute the valuable 
 accumulations of the rich or the meager holdings o€ the poor — may 
 in a night be reduced to ashes and dissipated in smoke, or in an 
 hour flattened to the earth by wind and storm. The effort of 
 property-holders in all times has been to minimize this risk and 
 protect themselves against the consequences of this inherent 
 peril. Precaution is an important element in this undertaking, but 
 more is needed. Precaution may lessen the chance of mishap, but 
 it does not obviate the fact of loss. In order that the value of a 
 commodity or thing may be maintained at the maximum, the owner 
 must be protected against these risks of ownership. The essential 
 value of this protection lies not so much in the expectation or assur- 
 ance that the owner will take care of his property, as in the fact 
 that if it is damaged or destroyed he will be reimbursed. The 
 extent to which this protection may be secured affects the value of 
 all property subject thereto. The more complete this protection, 
 the greater will be the value of the property covered thereby. What 
 is here asserted concerning the thing protected, is also true of the 
 contracts that relate thereto. Hence, the value of destructible 
 possession, whether considered from the standpoint of utility to 
 the owner or as an item for sale, or hypothecation as collateral to a 
 loan, is enhanced by this protection. This indemnifying principle 
 is called insurance; and the agencies which assume the risks that 
 would otherwise be borne by the owner, and which, in effect, make 
 indestructible the possession insured, thereby causing ownership to 
 
39 
 
 be more profitable and adding value to the thing owned, are called 
 insurers, or in business parlance, underwriting associations or 
 insurance companies. 
 
 INSUEANCE. 
 
 It is impossible to estimate the value of the insurance prin- 
 ciple. It is inextricably interwoven with the fabric of all modern 
 industrial, commercial and domestic life. Its application is un- 
 limited and its scope universal. Eich and poor are beholden 
 to this proteetive agency; and great and small share alike in its 
 benefits. Insurance protects the prosperous and rehabilitates the 
 unfortunate. It is equally essential to the business of the small 
 storekeeper and to the operations of the greatest merchant. It is 
 at once the conservator of values and the basis of credit. It is more : 
 it is the great economic equalizer — the foundation upon which the 
 commercial democracy is built. If the insurance' principle were 
 eliminated, not only would acute shrinkage occur in the value of 
 all presently insurable commodities, and not only would the business 
 of the country be disorganized, but the poor man and the small 
 merchant would be driven to the wall, because only the rich and 
 strong could afford, themselves, to assume the risk that goes with 
 ownership of property and follows traffic therein. Although the 
 undertaking of the underwriters, or insurers, is essentially specula- 
 tive in its nature, and although there are instances in which some 
 insurance policies do not in fact supply the prote(;'ti(in they pur- 
 port to give, still it would be a rash man, and a foolish one, who 
 would, for these reasons, declare against the principle of' insurance, 
 prohibit all underwriters from assuming risks, anA 'dfepri\fe mankisd 
 of one of its moat enlightened, compireheE^iTe ' ahd , beneficent 
 
 ' I 
 economic forces. ', ''■ 'i i 
 
 ' W. C \ 
 
 INSUEANCE AGAINST PHYSICAL LOSS '0,1^ DAMAQE. 
 
 In order that we may give the foregoing gerieralizations some 
 concrete application, let us consider how the insurance principle 
 affects cotton and the trafiic therein. 
 
40 
 
 Almost from the time the cotton is made to the time it is spun 
 into cloth it is continuously covered by policies of fire or marine 
 insurance. Usually this protection is applied as soon as the •wagon 
 deposits its load of seed cotton at the gin: always the cotton is 
 covered while in the hands of the buyer or merchant or spinner, 
 whether stored in warehouse or in course of transportation by rail 
 or boat or steamship. The importance of this protection both to 
 buyer and seller can hardly be estimated. As soon as the buyer 
 purchases the cotton he takes out a policy of insurance thereon. 
 Indeed if he did not he proljaljly could not buy cotton at all, because 
 the banks would not let him have the money Avith which to finance 
 his purchases. The banks would not be willing to advance money 
 on collaterals which might in a few hours be totally destroyed. 
 Similar conditions would surround the cotton as it passed from 
 owneT" to owner on its way to the spindles. If the buyer could not, 
 insure his cotton against destruction or damage by fire or water, 
 he would be obliged to carry the risk himself. In such case he 
 would estimate what this risk would probably cost him and deduct 
 this amount from the pric^ he offered for the cotton : thus the 
 burden of this risk would fall upon the producer, and he would 
 pay for it in the reduced price that he realized for his cotton. The 
 risk to the individual buyer of small or average means is much 
 greater than it would be to the great insurance companies, with 
 their innumerable sources of recoupment, hence the amount 
 reserved by such buyers would be largely in excess of the premiums 
 charged by the insiirance companies. 
 
 But this.i^ jissuming that the buyers would be able themselves 
 to carry the risk- As. a matter of fact, tke great majority of buyers 
 would not |be sp -able. The majority of buyers are able to do 
 business because thej- qan insure, and if they could not insure they 
 would be 'iWcedout of business. The banks will lend money on 
 cotton without any additional collateral, provided that the cotton 
 is insured against loss, but without such insurance they will require 
 
41 
 
 that the borrower be able to respond out of his collateral means 
 to cover anj' loss that might occur. This would eliminate all buyers 
 ■from the market except the few whose credit was sich that they 
 could borrow without regard to the value of the cotton collateral 
 in hand. Inasmuch as the crop is practically moved on borrowed 
 capital, the elimination of insurance would drive out of business 
 the buyers of small or limited means and would turn the business 
 to the hands of a few great concerns or corporations which were 
 strong enough to carry the risk. Thus the producer would not only 
 be deprived of the high-price basis established by a multitude of 
 buyers in active competition, but he' would be compelled to accept 
 the low price fixed by an assured non-competitive combination, and 
 would in addition be required by such combination to underwrite 
 the fice and marine risks as heretofore explained. There is no 
 more important factor in all the economy of trade than this insur- 
 ance principle. It is directly instrumental in broadening the 
 market for cotton, increasing the value • thereof and establishing 
 the maximum price justified by the relation of supply and demand. 
 
 INSUEANCE AGAIlSrST PLIICTUATIONS IN VALUE. 
 
 It may seem that we have entered with unnecessary particu- 
 larity into the analysis and discussion of the function and benefits 
 of protective insurance. It is all so obvious and customary, some 
 may say, that reiteration is unnecessary and tedious. At the risk 
 of this criticism we are determined to emphasize the importance 
 of the protective function of ordinary insurance, because the pro- 
 tective function of future contract trading is identical in principle 
 with that of ordinary insurance, differing therefrom only in extent 
 or degree : and we have taken pains to set out the reasons why or- 
 dinary insurance is beneficial and essential, in order that the claim 
 of special protection supplied by future contract trading may be 
 tested by the logical precepts in the first case laid down. 
 
 Fire and marine insurance protects the owner of cotton from 
 
42 
 
 the risk of physical destruction of his property, or damage thereto. 
 But the physical hazard by no means comprehends all the risk in- 
 volved. The value of cotton and the status of contracts relating to 
 the ownership thereof, are affected by fluctuations in price. 
 Frequent and perhaps material fluctuations in the price of cotton 
 are natural and logical. The comprehensive character of 
 the demand for cotton makes such variations inevitable. Cotton 
 is a world-desired and a world-used commodity and the world it- 
 self is the field upon which is waged the contest between the forces 
 of supply and demand. Drought in Texas, too much rain in the 
 Mississippi Valley, frost in Georgia, financial stringency in New 
 York, labor troubles in Manchester, war in Eussia, dynastic trem- 
 blings in China, crop failure in Egypt or India, and innumerable 
 other contingencies all affect the value of cotton and produce 
 quickly responsive changes in the price thereof. The risk of fluc- 
 tuation in price is just as obvious and real as the risk of loss or 
 damage by fire or water, and is of very much larger significance. 
 Comparatively, only a few bales are reached by physical mishap or 
 disaster, but price fiuctuations affect every bale and pound of cotton 
 in existence. If it be important for the stability of trade condi- 
 tions and for the maintenance of competitive demand, that own- 
 ers and holders of cotton shall be protected from loss by fire and 
 water; how much more important is it, for these considsrations, 
 that such owners and holders should be protected from loss by 
 reason of fluctuatione in price? 
 
 Fire or marine policies may be purchased from insurance 
 companies whose business it is, for a consideration, to assume 
 such risks. There are no insurance companies, as such, which un- 
 derwrite the risks incident to price variations; but this invaluable 
 protection can be secured and is secured to an unlimited extent 
 and on easy terms, during every hour of every business day and 
 by any one who desires or needs the same. This insurance is avail- 
 able in the future contract markets and nowhere else, and this 
 
43 
 
 protection is available for commodities- for which there is a future 
 contract market, and for none other. In former articles we have 
 shown just how the succesive owners of cotton are affected by these 
 price fluctuations ; and have pointed out the exact method by which 
 they may obtain the required insurance, through the purchase-jand 
 sale and transfer of valid and binding contracts under the auspices 
 of legitimate Exchanges. Thus becomes apparent the momentous 
 consequence of the protective function of the future contract, and 
 with this appreciation comes conviction of the solemn duty of the 
 Exchanges to administer this function in equity and honesty. The 
 better we understand the far-reaching benefits of this protective 
 principle the more appalling appears the consequences of undis- 
 criminating assaults upon the system through which these benefits 
 are secured; and the better we appreciate the indispensable agency 
 of this system in the desired result, the more determined should we 
 be to rid it of its weaknesses and contribute to its strength. 
 
44 
 
 CHAPTER VII. 
 
 In Reference to United States Government Report on Cotton 
 
 Exchanges. 
 
 In the preceding articles we have discussed the nature and 
 functions of a legitimate Exchange, as differentiated from the 
 budget shop ; the nature of the future contract and methods of trad- 
 ing therein; the application of future trading to spot transactions; 
 and finally the protective or insurance value of the future contract 
 system. By statement of fact, by analysis, and by deduction, we 
 have endeavored to show that {he properly organized and regulated 
 Exchange is an essentially beneficial institution; that the future 
 contract sanctioned and utilized in such Exchange is an honest, 
 Talid and binding trade obligation; and that the trading on such 
 Exchange, in such contract, supplies the means whereby specula- 
 tion in spot transactions may be avoided through the medium of 
 the hedging facility thereof, to the direct and indirect, immediate 
 and ultimate advantage of buyer and spinner, producer and con- 
 sumer, and of the cotton trade at large. 
 
 We have by no means exhausted the catalogue of benefits 
 ■conferred by a fairly regulated system of future trading; we have 
 ■merely stated the fundamental principles and cited the typical 
 instances of the operation thereof. But we will not prolong the 
 ■discussion of this favorable phase of the system beyond the limits 
 of thi^ article. We have, we hope, established the fundamental 
 merit of the system, but before proceeding to the analysis of the 
 untoward features of the same and to the discussion of the remedies 
 itherefor, we think it well to cite some expert and disinterested 
 a,uthority in support of our conclusions. 
 
 Under a resolution adopted by the House of Eepresentatives in 
 Tebruary 1907, the Department of Commerce and I^abor, through 
 
45 
 
 the Bureau of Corporations, was directed to make an investigation 
 of the Cotton Exchanges dealing in future contracts. 
 
 The Commissioner of said Bureau, Hon. Herbert Knox Smith, 
 conducted during a period of more than two years a searching 
 investigation, and issued a report setting forth the facts developed, 
 and his conclusions therefrom. This report is one of the most 
 comprehensive and luminous economic treatises of modern times, 
 and will well repay the study of all who desire full and accurate 
 knowledge of this important subject. The report discusses not only 
 the evil developments of future trading, and the remedies therefor, 
 but also takes notice of the benfits thereof. 
 
 XATUEE OF COTTON EXCHANGES. 
 
 Under this head. Commissioner Smith, in Part 1, of the 
 report, pages 56-57, says : 
 
 "It should be clearly understood that whilst most of these 
 "cotton exchanges are corporations they are not engaged as such in 
 "the cotton business in any way. Instead, they are mere associations 
 "of individuals who in their financial operations are free to act 
 "as they like, subject to the general regulations of the exchange. 
 "Exchanges as such do not buy or sell cotton, and, except that 
 "occasionally some exchange derive a small income from fees for 
 "the inspection or grading of cotton, they have no direct financial 
 "interest in the product itself. Their income is derived from mem- 
 "bership dues, rents of buildings, investments, or similar sources. 
 "This characteristic of cotton exchanges should be clearly 
 "appreciated. The impression which appears to exist in some 
 "quarters that exchanges in their corporate capacity act as a unit 
 "in the cotton market is altogether erroneous. Market operations-, 
 "in cotton are wholly matters of individual concern. Moreover,, 
 "the individual members of exchanges, instead of having a com- 
 "mon interest and acting as a unit, ordinarily have market interests 
 "of the most diverse and conflicting character. It is true that from 
 "time to time certain members of exchanges act in unison by 
 
40 
 
 "means of so-called cliques or pools, but it is entirely safe to say 
 "that it has never happened that such cliques have included the 
 "entire membership of an exchange. The idea that all the members 
 "of an exchange are banded together as a unit to prey upon the 
 "outside trader is not well founded. Outsiders have undoubtedly 
 ^'suffered from the co-operative efforts of certain members of 
 "exchanges to manipulate prices, but such concerted manipulation 
 "is not conducted by an exchange, as such or by all the members 
 "acting together. Unjust rules, it is true, may have been adopted 
 "from time to time by exchanges in their official capacity, but this 
 "is a matter distinct from actual financial dealings in cotton, and 
 "one with which this report deals at some length." 
 
 BINDING NATITEE OF FUTUEE CONTRACTS. 
 
 In support of our conclusions under the above head, we quote 
 Mr. Smith, Part 1, pages 43-44 : 
 
 "In the first place, a future contract is, as its name implies, 
 "a definite agreement on the part of one party to deliver to another 
 "party, who in turn agrees to "receive, a certain quantity of mer- 
 "chandise within a fixed period of time at a fixed price. While 
 "such contracts when first made are usually confirmed merely by 
 "word, or even by a sign, such as the uplifting of a finger or a 
 "nod of the head, they • are later recorded, either in full or in the 
 "form of a memorandum of the same force and effect and are 
 "absolutely binding upon the parties entering into them. The seller 
 "of such a contract is absolutely liable for the delivery, and if 
 "called upon for such delivery by the buyer he can in no way avoid 
 "compliance with terms of his contract except under unusual 
 "conditions especially provided for. Failure to make such delivery 
 "will subject him, in all probability, to suspension, at least tem- 
 "porarily, from the- exchange with which he is connected, and render 
 "him liable to legal action on the part of the purchaser. In actual 
 "practice it is undoubtedly true that a large number, and probably 
 "a considerable majority, of buyers of future contracts on the 
 
47 
 
 "leading exchanges do not desire the delivery of actual cotton, and 
 "that a majority of sellers, on the other hand, do not contemplate 
 "making such physical delivery. Such a buyer of a contract instead 
 "of receiving the actual cotton sells out his contract to another 
 "party, or perhaps to the very man from whom he originally bought 
 "it. In other words, instead of taking the cotton he merely gains 
 "or loses the difference between the price at which he bought his 
 "contract and the price at which he sells it out. The second buyer, 
 "in turn, may have bought the contract with the same speculative 
 "intent, and, instead of receiving actual cotton, may likewise sell 
 "out the contract at any time prior to the date of maturity. 
 "Eventually, however, since the contract has a fixed date of 
 "maturity, the ultimate purchaser must, ai the stated time of 
 "delivery, receiviC the actual cotton — and this whether he desires 
 "to or not. When the time for making delivery has expired, he 
 "cannot sell out his contract. This fact and the fact that any 
 "buyer, from the first to the last, can, if he chooses, hold his 
 "contract and compel the seller to deliver the actual cotton when 
 "the date of maturity arrives give trading in futures a character 
 "entirely different, in principle at least, from that of a mere wager 
 "or bet." 
 
 ■EXTENT OF HEDGING OPERATIONS. 
 
 In a former article we explained the apparent excess of future 
 trades over the total supply of spot cotton. Commissioner Smith 
 sustains our contention, in the following extract from his report, 
 Part IV, page 368 : 
 
 "The same cotton may be hedged over and over again by 
 "different parties, thus counting several times in the total of 
 "hedging transactions. In the first place, a country merchant who 
 "buys cotton from growers and planters in small lot»3 and 
 "d'ccnmulates the cotton faster than he can sell it, frequently sells 
 "future contracts as a hedge. The buyer of cotton from such a 
 "country merchant in turn also sells a hedge, or, if he has previously 
 
48 
 
 "'sold cotton ahead to spinners, usually he has already bought a 
 "hedge. The spinner likewise may employ a hedge. Still again 
 "the dealer in dry goods, who buys from the spinner, may sell 
 "future contracts as a hedge against a stock of cotton goods which 
 "he may be carrying at a time when he anticipates a decline in its 
 "value. The bulk of hedging transactions in this country, however, 
 "comes from cotton merchants. Most cotton merchants regularly 
 "hedge by either buying or selling future contracts, as the ease 
 "may be, and aim never to be long or short of actual cotton to any 
 "extent. Frequently merchants endeavor to balance their accounts 
 "in this respect at the close of each day. 
 
 "The same cotton may be hedged repeatedly by a single owner. 
 "Thus, a merchant buying cotton in October might sell a January 
 "contract as a hedge against it; if by January he had not sold the 
 "actual cotton, he could transfer his hedge to a more distant month. 
 "This might be done over and over again until his cotton was 
 "eventually disposed of." 
 
 FUTUEE SYSTEM AS A MEANS OF INSITRANCE AGAINST 
 
 EISKS OP TEANSACTIOFS IN ACTUAL COTTON— 
 
 THE HEDGING FUNCTION. 
 
 On this important division of the subject, Mr. Smith has given 
 an exhaustive disquisition. We quote briefly from Part I, pages 
 48-49 and 53-54 : 
 
 "In using the future system to faciliate actual transactions 
 "in spot cotton it is obvious, in- the first place, that it may thus 
 "be used by either the grower of cotton or by any other seller to 
 "dispose of his cotton at a distant date by simply selling a contract 
 "maturing at that date, and, when the contract matures, completing 
 "the transaction by a physical delivery of his cotton thereon. Thus, 
 "if, say, in November, January futures — that is, contracts for the • 
 "delivery of cotton in January — are comparatively high, a grower 
 "or a holder of cotton may, through some broker on a cotton 
 "exchange, sell such January contracts, and when the month arrfvea 
 
49 
 
 "deliver or, to use the trade expression, 'tender' the actual cotton 
 "against them. 
 
 "In the same way a manufacturer of cotton goods, instead of 
 "buying his entire su;pply at the beginning of the season, might 
 "in theory distribute his purchases throughout the year by purchas- 
 "ing contracts for different months through a member of a cotton 
 "exchange and as the contracts mature receive actual cotton in 
 "fulfillment of them. Some of the reasons why in practice this 
 "system is not extensively employed by spinners in just this way 
 "will be extensively discussed in a later Part of this report. 
 
 "The above description illustrates the simplest use of the 
 "future system. The system is employed in a quite different 
 "manner, however, by buyers and sellers of actual cotton as a sort 
 "of insurance against violent fluctuations in price during the period 
 "between the original purchase or sale and the final delivery of the 
 "product. This employment of the future system, which is 
 "technically known as 'hedging' is an exceedingly important 
 "feature of modern trading, in cotton, and, unquestionably, an 
 "extremely valuable one." 
 
 "It is apparent froni even the brief illustrations given that 
 "a properly conducted future system, through this opportunity for 
 "hedging, affords a great protection to the most legitimate sort of 
 "business and one of almost incalculable value. It should be noted, 
 "however, that hedging does not absolutely gua,rantee a merchant 
 "from loss, since advances or declines in the price of his future 
 "contracts may hot exactly correspond with advances or declines 
 "in the price of spot cotton. The illustrations above given assume 
 "that absolutely correct 'methods of conducting the future business 
 "have been established. It cannot be too forcibly emphasized, there- 
 *'fore, that in practice it has happened at various times that hedges 
 "have afforded a far less perfect measure of protection than above 
 "indicated. This situation really constitutes one of the most 
 "important matters discussed in this report, and cannot be entered 
 "into 'extensively in this preliminary chapter. The hedging process 
 
50 
 
 "has been exiplained mainly to show that th« future system is 
 "something more than a device for mere speculation, afld that it 
 "presents benefits of great value to those conducting business in 
 "actual cotton. In fact, for these, as individuals, the futare system,. 
 "if properly used, may be said to largely eliminate speculation. 
 "Obviously, for a merchant, without hedging, to buy 10,000, 20,000- 
 "or 50,000 bales of a valuable commodity like cotton, which is 
 "subject to great fluctuation in price, would be a highly speculative- 
 "transaction, whereas, under a perfect working of the hedging- 
 "system, the element of speculation can be largely avoided. This 
 "opportunity for hedging is, indeed, regarded by practically all 
 "cotton merchants as almost an absolute necessity under modem' 
 "methods of conducting business. 
 
 "An idea of the value of the hedging function may be obtained 
 "when it is stated that in Great Britain banks very generally refuse- 
 "to loan money on cotton which is not hedged. Moreover, it is- 
 "almost universally conceded that, since the introduction of hedg- 
 "ing, failures in the cotton trade, which had previously been 
 "frequent, have been materially reduced as a direct result of the- 
 "greater stability with which transactions in spot cotton can be 
 "conducted." 
 
 NUMBEK OP BUYERS AND COMPETITION INCEEASED' 
 BY FUTURE TRADING. 
 
 We have endeavored to emphasize the fact that the protective 
 function of future trading made possible the multitude of small 
 markets and operations of buyers of moderate means, and thereby 
 increased the price paid the producer for his cotton. In this con- 
 nection Mr. Smith, Part IV, pages 379-280, says : 
 
 "Those who argue that the future system tends to advance the 
 "price of cotton for the grower attach much weight to the fact that 
 "the system, on account of the protection afforded by hedging, makes 
 "it possible for men of limited means to become cotton merchants, 
 "and thus to increase competition for the purchase of the product. 
 
51 
 
 "It is unquestionably true tliat the fmture system, in the main, 
 "because of the hedging fuHction — ^imperfectly as it has opesated 
 "at times — has made it possible for a. great many men of limited 
 "resources to enter the cotton business. Where years ago the busi- 
 "ness of the cotton merchant was attended by tremendous risks, 
 "making it almost essential that he should possess ample capital, at 
 "the present time a large number of cotton buyers of moderate 
 "resources are scattered throughout the cotton belt. It is a common 
 "occurrence to find several of these buyers at a small country town 
 "bidding for cotton as it is brought in from farm or plantation in 
 "wagonloads of a few bales each. While competition in the cotton 
 "business probably would have increased without the future system, 
 "there can be no question that the opportunity for reducing 
 "speculative risks afforded' by the hedging function, when properly 
 "safeguarded, has greatly stimulated such competition." 
 
 Having now outlined the essential merits of the future contract 
 system and having shown its indispensable relation to the modem 
 trade methods by which the cotton crop is marketed, moved and 
 spun into cloth, we will in the next succeeding articles discuss the 
 misuse of the system and the misbehavior of men and institutions 
 with relation thereto. 
 
52 
 
 CHAPTER VIII. 
 
 Future Contract Trading' — Injurious Developments Discussed. 
 
 In the preceding articles on Future Contract Trading we have 
 endeavored to explain the system itself, to show the practical 
 relation thereof to modern trade methods, and to demonstrate that 
 future trading is not only an important economic agency, but a 
 direct and powerful factor in the advancement of the material 
 interests of both the producer of cotton and the consumer of cotton 
 goods. In short, we have sought to demonstrate the economic value 
 of future contract trading. 
 
 In discussing this important issue we are moved by an earnest 
 desire to throw light upon both sides of a much misunderstood 
 problem. We want our readers, and particularly those who are most 
 vitally interested in a wise settlement of the question — namely the 
 cotton farmers, — to secure a clear view of the proposition in its 
 entirety. A prejudiced view of the evils, only, ©f the system, or an 
 interested view of the good, only, will not suffice for oar purpose. 
 We must he apprised of both the good and the evil if we are to 
 adopt a course of action that will be beneficial to our own material 
 interests and just to all the interests concerned. 
 
 In the furtherance of this purpose it has seemed best to 
 discuss first the benefits of future trading. Not because the 
 injurious phases are unimportant, and not Ijecause we wish to 
 relegate these phases to secondary consideration, but because it ia 
 wise to have the essential necessity of the system thoroughly 
 appreciated before indignation is aroused by a recital of the flagrant ■ 
 abuses that have been practiced in its name. This was the mistake 
 made in the early stages of the agitation against future contract 
 trading. Men were incensed by certain abuses and rushed blindly 
 toward the annihilation of a system which they did not understand, 
 
53 
 
 and the good of which had not been brought to their notice. The 
 fact that we have stated the case in favor of future trading as 
 strongly as possible, while proving our conviction of the necessity 
 for it, is by no means to be taken to indicate that we are partisans of 
 the system under any and all circumstances, nor that we think the 
 system, as it has been operated, should be continued. On the con- 
 trary, we recognize and utterly condemn the evil developments of 
 the system and the wrongs that have been inflicted through the 
 inequitable operation thereof; and we are as firmly committed to 
 the destruction of these evils and wrongs as we are to the preserva- 
 tion of the beneficial features. Indeed the more strongly we believe 
 in the good that inheres in a properly operated system of future 
 trading, the more implacable is our 'enmity against those agencies 
 which debauch such system. We have exploited the good in order 
 that it may be utilized and preserved; we will now point out the 
 bad in order that it may be excoriated and destroyed. 
 
 BUCKET SHOPPING. 
 
 The conspicuous evils that have been attributed to future 
 trading are three in number, to-wit : Bucket Shopping, Excessive 
 Speculation and Manipulation of Prices by Means of Unfair Rules 
 and Practices in the Exchange)s. In a former article it has been 
 shown that Bucket Shopping was simply and solely a gambling 
 device; that its only relation to the system of future trading was 
 that the bucket-shop keepers bet with their victims on the fluctua- 
 tions that occurred in the value of actual contracts; and that the 
 legitimate exchange and the system of future contract trading was 
 no more responsible for this pernicious practice than was the ocean 
 liner responsible for the bets that were made by its passengers on 
 its speed and daily progress. Furthermore, the Bucket Shop is a 
 specific institution and can be eradicated root and branch by direct 
 legislation without any injury to the system of future contract 
 trading, but with great benefit thereto. Laws have already been 
 passed in all of the Southern States and in practically all the States 
 
54 
 
 of the Union prohibiting Bucket Sliopping, and if the practice 
 prevails anj'where it is because the existing laws are not enforced. 
 Excessive speculation and manipulation by the means stated are, 
 therefore, the evils properly to be considered in connection withthe 
 system of future contract trading. 
 
 EXCESSIVE SPECULATION. 
 
 Speculation is in itself not an evil; on the contrary, it is the 
 vivifying principle of trade. If it were possible to eliminate 
 speculation from all business affairs and to limit the purchase and 
 sale of all commodities and things to those who had actual use for 
 such commodities and things and those who had ceased to have use 
 for the same, the value of every material asset would undergo a 
 drastic shrinkage, business would revert to the ox-cart period, 
 opportunity would be smothered, development halted, and the 
 activities of mankind limited to a struggle for actual necessities. 
 
 A man has a right to buy, or to contract to buy, a thing, 
 whether he needs it for use or not, if he thinks it is cheap and that 
 later he can dispose of it at a profit. A man has a right to sell, 
 or to contract to sell, a thing, whether he has it in possession or 
 not, if he thinks that the price is high and that he can sell at a 
 profit. This is speculation in its simplest form. The principle 
 runs through all business transactions and cannot be avoided, even 
 if avoidance was advisable. When the farmer invests his money 
 and his labor in his crop, he speculates on the seasons and on the 
 (variations of supply and demand. The merchant and the banker, 
 for the consideration of profit, or of interest, speculate upon the 
 capacity of debtors or borrowers, to pay. Insurance' companies for 
 the sake of premiums to be earned speculate upon the risks of fire 
 or water or the duration of human life. Everybody speculates. 
 Speculation is an inherent condition of th» business and of the 
 social relation. It cannot be eradicated, no matter how hard we 
 may try, and it should not be eradicated even if we had the power 
 to do so. The principle of speculation is, therefore, not only ethical, 
 
55 
 
 tut necessary ; and not only necessary, but it is the vital dynamic 
 force in trade and an ineradicable impulse of the human race. It 
 follows that the evil lies not in the principle of speculation, but in 
 the manner in which the principle is employed; not in the use of 
 the principle, but in the abuse of it. 
 
 SPECULATION MUST BE BEGULATED. 
 
 We have heretofore shown how speculation properly regulated 
 is the basis of that insurance upon which the cotton business 
 depends. The men who believe that prices will be higher in the 
 future and buy for future delivery, and the men who believe that 
 prices will be lower in the future and sell for future delivery, are 
 the people who assume the risk, thus enabling the great mass of 
 producers, merchants, bankers, spinners and consumers, to conduct 
 their business on non-speculative lines to the material advantage 
 of all concerned. A properly regulated system of future trading, 
 therefore, supplies the means whereby speculation is limited to the 
 few who are able and willing to take the risk and protection afforded 
 to the unlimited number who are unwilling and unable to assume 
 the risk. A properly regulated system of future trading thus 
 decreases the volume and extent of speculation instead of increasing 
 it. Eegulation, th»refore, becomes the issue. 
 
 EXCESSIVE SPECULATION AN INCIDENT. 
 
 Future trading, per se, no matter how fair and honest the 
 system may be, is susceptible to abuse in the matter of speculation. 
 The ease and facility with which cotton may be bought for an 
 advance, or sold for a decline, by the transfer of representative 
 contracts; the efforts made and the inducements offered by brokers 
 whose commissions or profit depend upon the volume of speculative 
 business transacted ; and the natural tendency of mankind to take 
 a chance of making quick and easy money : all tend toward induc- 
 ing people to speculate, who have no business in the market, and to- 
 
50 
 
 wards making tliose who have a legitimate use for 'the contract, 
 overtrade and take long speculative chances. There is no doubt 
 but that this facili'ty is a danger lurking in any system 
 of future trading, and thexe is no doubt but that at 
 the time the agitation against future trading began, this excessive 
 speculation was a most reprehensible fact and a flagrant evil. 
 
 But since that time nearly all ef the Southern States have put 
 anti-future-speculation laws on their statute books. These laws, 
 while unnecessarily drastic, and while they enjoin a great deal more 
 than they accomplish, still have had the effect of practically limit- 
 ing future trading to those actually engaged in the cotton business 
 and who have an actual need for the future contract; and have 
 effectually prohibited that indscriminate mania for speculation, 
 which before, had invaded' all sections of the country, all lines of 
 business and even the homes of the people. The evil of excessive 
 speculation has been, therefore, at the present time minimized, and it 
 can be controlled l;y the enforcement of proper regulations. 
 
 THE CRUX OP THE EVIL. 
 
 We have now reached the crux of our discussion. We have 
 shown that the principle of future .trading is necessary and bene- 
 ficial; we have affirmed that the system as it has been operated, 
 has been attended by harmful consequences; we have shown that 
 one of the attributed evils, that of bucket-shopping, has no 
 relation -to a properly operated future trading system, and besides 
 has already feeen largely eliminated and can be entirely destroyed; 
 we have shown that another most conspicuous hurtful development 
 of future trading, excessive speculation, was not a constitutional and 
 inevitable consequence, but an abuse which could be, and which 
 had been in recent years, kept within reasonable limits of restraint. 
 There remains yet to be considered the third evil specified, or the 
 evil of manipulation through unjust, unfair and corrupt methods of 
 operating future contract trading. 
 
ot 
 
 In the next- and the succeeding articles this abuse will be gi-ren 
 attention. We shall find in the wrongful practices specified the 
 fountain head of the trouble and the capital cause of the reproach 
 that has fallen upon the future trade. We shall find that the fault 
 lies not in the principle, nor in the system of trading per se, but 
 in unfair and dishonest methods of administering the principle 
 and manipulating the system. After these seveial abuses have 
 been pointed out and the reason for the existence and the harmful 
 effect thereof discussed, we shall endeavor to recommend the 
 remedies by means of which' the system may be shorn of the vices 
 which have been engrafted upon it, and strengthened and perfected 
 for the proper performance of its important economic purpose. 
 
 ISSUE ILLUSTBATED. 
 
 Because we are approaching the climax of our discussion, it 
 is important that we have the essential issues clearly in mind, and in 
 order that we may have no excuse for confusion in this regard, we 
 shall, even at the expense of repetition, attempt to summarize our 
 analysis by means of an illustration. 
 
 The system of navigation plays a most important part in the 
 progress and welfare of the human race. • But there are both 
 difficulties and dangers attendant upon, the practical effort to 
 navigate. These harjnful contingencies may arise from two 
 different causes — they may proceed from the very nature of the 
 undertaking; or from some extraneous overt interference. Of the 
 first class, the happening of storms may be taken as typical; of 
 the second class, piracy is an example. In order to obviate or 
 resist these adverse contingencies, it is not necessary, nor wise, to 
 pass laws prohibiting navigation. The remedy for the first class of 
 mishap, is to pi:ovide safety appliances and to enforce safe guarding 
 methods; the remedy for the second class of misfortune is to sweep 
 the pirates from the sea. 
 
 Applying this illustration to the subject in hand : 
 
58 
 
 TEANSGIJESSION, KOT TRADING, SHOULD BE 
 PROHIBITED. 
 
 Future contract trading is a system necessary and indispensable 
 to modern business. But there are certain difficulties and dangers 
 attendant upon the practical effort to operate the system. These 
 harmful contingencies may arise either from the nature of the case 
 Or from the overt machinations of selfish and designing men. Of 
 the first class the development of indiscriminate and excessive 
 speculation may be taken as typical; of the second class, the cotton 
 exchange which has no excuse for existence except as a speculative 
 convenience, and vi^hich is operated under unjust and unjustifiable 
 rules for the profit of a coterie of its members at the expense of 
 the outsider, the public, and the producer and consumer of cotton, 
 is an example. To obviate and resist these adverse contingencies, 
 it is neither wise nor necessary to pass laws prohibiting all future 
 contract trading. The remedy for the first contingency is to restrict 
 and regulate the citizen in his conduct — which has already been 
 done : the remedy for the assaults of overt dishonesty, is to 
 proceed against the transgressor. Subsequent discussion will be 
 devoted to this latter phase. 
 
59 
 
 CHAPTER IX. 
 
 Future Contract Trading — Further Discussion of Injurious 
 Developments. 
 
 A trade agency of such economic value and practical benefit 
 as we have found the future contract to be, would necessarily, if 
 employed under adequate restrictions and proper methods of opera- 
 tion, command universal appjeciation and endorsement. We find, 
 however, that the future contract, and trading therein, has been 
 assailed with vindictive bitterness and the whole system is even 
 now the subject of proposed prohibitory legislation pending in 
 Congress. It is not to be supposed that this antagonism 'proceeds 
 from wanton destructiveness. It, therefore, follows as a logical 
 necessity that the system has not in all instances been employed 
 under proper restrictions and methods. A brief analysis of the 
 anti-future agitation will strengthen this conclusion. 
 
 CAUSES' OF ANTI-PUTUEE AGITATION" ANALYZED. 
 
 The acute attention of the public was drawn to future trading 
 and a hostile disposition aroused, . several years ago by an epidemic 
 of speculation in cotton which seized all classes of our people. 
 Excited by press accounts of great fortunes made in a few days 
 or weeks ; stimulated by the tales of easy money gained in the cotton 
 market; and faciliated by the establishment of so-called cotton 
 exchanges in all of the large towns and many of the small ones 
 throughout the South, an injurious condition of affairs was brought 
 about. Farmers, doctors, lawyers, bankers, merchants, clerks and 
 even women and children caught the infection and became 
 speculators in cotton. In addition to the generally demoralizing 
 effect of such conditions, particular instances of indiscretion, 
 misfortune, dishonesty and tragic consequences, still further ag- 
 gravated the storm of protest. Such conditions were not tolerable, 
 
60 
 
 and tlie people moved by swift anger struck at the trade system 
 which made sucli developments possible, and within a brief period 
 almost all the Southern States had placed upon their statute books 
 the drastic anti-future laws aforementioned. 
 
 It is probable that this frenzy of speculation would have worn 
 itself out within a limited time, as experience has shows to be 
 the case in similar instances of hectic disorder, but it is an un- 
 deniable fact and a fortunate fact that the laws mentioned sum- 
 marily hastened the desired consummation. But, although, these 
 laws served a good purpose, they, like all laws framed in. anger and 
 truculence went too far, proposed too much and did not fit the real 
 necessities of the case. They undertook to destroy the abuses of 
 future trading by denying the citizen the right to trade in future 
 contracts at all. They proposed to deny all men the right to 
 use a necessary trade facility because some men had misused the 
 same, fortunately, those states in which the future markets were 
 located did not pass the=e drastic acts, and as no prohibitory federal 
 statute was enacted, the future markets were not destroyed. Thus 
 it was still possible to find a market in which future contracts 
 could be bought and sold; and the citizens of those states which 
 had enacted such laws, whose business and livelihood required the 
 protection afforded by the future contract, found ways to purchase 
 their hedges in spite of the prohibition. 
 
 If the future contract exchanges had been closed and the 
 future contract markets destroyed; or even if the strict mandate 
 of the state anti-future laws had been rigidly enforced and the 
 cotton buyers and sellers of such states, had been in fact pro- 
 hibited from using the future contract facility, there can be no 
 douJit but that the cotton business of those states and of the South 
 would have been demoralized and a united protest would have 
 demanded the repeal of the prohibitory statutes. 
 
61 
 
 OPPOSITION STILL IN EVIDENCE. 
 
 But, although the original cause of complaint has been to a 
 great extent removed; and although future contract markets are 
 still in existence and future contracts are available to those who 
 require them in the transaction of their business; still the voice 
 of protest has not been hushed nor the hand of opposition stayed. 
 In the agitation of the future trading question Suring the past 
 few years and from the investigation of the subject, which has been 
 instituted, the people have learned that excessive speculation and 
 the demoralizing effect thereof on the individual, does not com- 
 prise all the injury that has been inflicted or may be inflicted by 
 a wrongful use of a system of future contract trading. They 
 have learned that where the machinery of the system is in powerful, 
 unscrupulous and irresponsible hands, it may be used for the selfish 
 profit of the individuals controlling the same and to the detriment 
 of other individuals and to the injury of the trade. The cotton 
 trade has learned that the system upon which it is dependent, may 
 by unfair regulations and unjust conditions be impaired in its 
 beneficial function and prostituted to the greed of the framers of 
 these regulations and the authors of these conditions. It hass 
 been ascertained by interested students of the problem and demon- 
 strated by disinterested invtestig)ation and testimony, that one 
 future market in this country has been for years and is, in the 
 face of exposure and condemnation, still persisting in operating 
 under uncommercial, partial and inequitable rules and methods; 
 and has been and is still maintaining and proclaming the arrogant 
 assumption that the object and purpose of its organization and 
 operation is the profit of its members, without consideration for 
 the rights of producers, spinners, consumers or any outside interest 
 whatsoever. The cotton trade has learned that the code of rules 
 employed by this institution has inflicted injury upon legitimate 
 interests, has brought reproach u|pon exchanges and even threatens 
 the integrity of the great principle of future trading itself. 
 
62 
 
 IXDIGXATION- SHOULD ¥0T CLOUD JUDGMENT. 
 
 But we must not permit our indignation to cloud our judg- 
 ment, nor must we allow our resentment to lead us into any 
 extreme or destructiTe measures which will accomplish more than 
 we intend or more than the cotton trade can stand. It is not only 
 right, Ijut it is necessary that future contract exchanges shall be 
 required to deal fairly with the trading public, but it is neither 
 right nor necessary, in order to attempt this result, to destroy 
 all such exchanges or to prohibit future contract trading, either 
 by specific legislative denial or by the imposition of conditions 
 which will make such trading impracticable or impossible. We 
 must preserve the future contract exchange and perfect the future 
 contract trading system, but the exchange must admit and respect 
 its obligation, and the system must be made to subserve the 
 interests, not of the individual operator or clique of operators, but 
 of the cotton trade. That this result may be accomplished by estab- 
 lishing a standard of rule and administration to which future 
 trading must conform, or otherwise be outlawed; and by investing 
 the strong arm of the government with the authority, and imposing 
 upon it the duty, to see that the prescribed principles are observed 
 and obeyed, is at once the remedy for the abuses and the salvation 
 of this most important agency of trade. The command must be, 
 not that "you shall not trade in future contracts;" but that "you 
 shall not trade in future contracts through any exchange which 
 does not conform to certain stated principles of equity and fair 
 dealing." When the fact is appreciated that future contract 
 trading cannot be carried on in sufficient volume to develop either 
 the good or the bad features, unless a large number of tra.^ers are 
 gathered together in a market; and when it is realized that such 
 future trading market cannot be organized and the necessary facili- 
 ties afforded, except through the medium of an exchange: it 
 becomes obvious that the enforcement of the foregoing command 
 through the regulation of exchanges, will answer the imperative 
 
G3 
 
 demands of the legitimate trade and traders, and will at the same 
 time satisfy all reasonable protests against inequities in the opera- 
 tion of the system. 
 
 EXCHANGES EESPONSIBLE FOE SYSTEM OF 
 OPEEATION. 
 
 It being admitted that future trading to be effective either 
 for good or bad, or to amount to enough to entitle it to notice, 
 must be carried on through the medium of an organization or 
 exchange; it follows that the principles upon which, and the code 
 
 of rules under which, such trading is conducted in such exchanges, 
 become the issues of prime importance. 
 
 We will not here attempt any detailed discussion of the 
 technical rules and requirements that should govern future trans- 
 actions in the exchanges. We will announce a few general prin- 
 ciples, which should and must be observed, and then we shall 
 show in as plain a manner as possible how in some instances these 
 principles have been disregarded. In this discussion it will be 
 necessary for us to call attention to the rules and practices of 
 certain exchanges by name. We disclaim any prejudice or sectional 
 animosity in our arraignment of any institution. We take the 
 facts as we find them and draw our conclusions therefrom. 
 
 POINTS OF DISCUSSION SUMMAKIZED. 
 
 For the sake of unity in the arrangement of the discussion, we 
 will not in this article begin the enumeration of the general prin- 
 ciples which should govern the organization of a future contract 
 exchange and the operation of the system of future contract trading ; 
 but will devote the entire following article to the consideration of 
 this fundamental branch of the subject. 
 
 In the meantime and in order that we may not lose the 
 sequence of the argument, we will conclude this installment with 
 "the following summary. 
 
64 
 
 1st. Future contract trading utilizes an important economic 
 principle which is essential and indispensable to the modern cotton 
 trade. The proper operation of the future contract agency supplies 
 protection for all dealers in cotton, from the producers of the raw 
 material to the ultimate distributors of the manufactured goods 
 and makes possible the elimination of the element of specula- 
 tion from the transactions of each; thus increasing the number of 
 markets and buyers for the raw material and encouraging and 
 extending the cotton manufacturing industry, and thereby stimulat- 
 ing competition in both the buying of the raw material and the 
 selling of the manufactured product, with the result that the farmer 
 receives more for his product and the consumer pays less for the 
 clothes he wears. Interference with this protective principle 
 reverses, pro tanto, the foregoing consummation ; wliile the prohibi- 
 tion of the use of the principle would precipitate disorder and 
 demoralization in modern business methods, and bring wholesale 
 injury upon all concerned with the cotton industr}-. 
 
 3nd. In the utilization of this principle, injurious develop- 
 ments are evident, (a) The opportunity which future contract 
 trading oilers for speculation may be abixsed, and men who have 
 no business in the speculative market may gamble to their own hurt, 
 and men who have a legitimate use for the facility may run into 
 a course of reckless hazard, (b) Particular systems under whioii 
 the principle is operated may be faulty and may be so organized 
 and so operated as not only to impair the usefulness of the agency, 
 but make it, at times, an instrument of oppression to those whom 
 logically it should benefit, and in instances, a disturbing and in- 
 jurious element in the actual cotton trade. 
 
 3rd. As the evil mentioned under sub-head (a) may attach 
 itself to any system of future trading, no matter how fair the 
 modus operandi might be, the remedy therefor lies primarily in the 
 regulation of the conduct of the individual by the state. This 
 regulation has been applied liy several states by means of anti- 
 future trading laws, which although unnecessarily drastic, are 
 
65 
 
 eflfeetive for the purpose mentioned; and which, inasmuch as they 
 have not destroyed the future markets themselves, and have not 
 in fact prevented the legitimate use of the contract, although in 
 terms prohibiting the same, have not been followed by the dis- 
 astrous results which by universal application and logical enforce- 
 ment they would entail. 
 
 4th. As the evil mentioned under sub-head (b) is the result 
 of a faulty system of utilizing the future trading principle, and as 
 the systems, by means of which the principle is utilized, are formu- 
 lated by the several exchanges in which such trading is systematized, 
 the remedy for injurious developments in this regard, lies in 
 establishing certain principles to which the exchanges must conform 
 if they permit future trading under the rules thereof; and in order 
 that conformity to these principles may be enforced. Federal 
 Supervision of the operation of such exchanges, should be invoked. 
 
66 
 
 CHAPTER X. 
 Pundamental Principles Which Should Govern Exchanges. 
 
 We have reached the point in our discussion where the onus 
 of proper or improper utilization of the future trading principle 
 is placed fairly and squarely upon the Exchanges which formulate 
 the systems under which the same is made operative. Such ex- 
 changes have it within their power to enforce fair and equitable 
 methods, or they can employ a code of rules and practice, unjust, 
 inequitable and partisan. Whether they do the one thing or the 
 other will determine whether future trading will realize the full 
 benefit of its mission, or will be distorted into a questionable, 
 if not positively injurious, agency. It is not only our duty, but 
 we are urged by the demands of self-interest, to see that the 
 .exchanges follow the proper course in this regard. 
 
 To some who have been unwilling or unable to devote the neces- 
 sary time and thought to the solution of this problem, it has seemed 
 that the best way to prevent the future contract exchanges from 
 employing wrongful methods and practices is to destroy them all. 
 It must be admitted that some excuse for this disposition towards 
 summary prohibition and reprisal is supplied by the arrogant and 
 contemptuous attitude of one of the exchanges of this country. It 
 is difficult to submit with patience to the intolerance of an institu- 
 tion which treats with indifference the just complaints of the 
 producers and consumers of cotton and which flouts the disinterested 
 ■criticism of the government itself. But summary vengeance against 
 all future contract exchanges because of the attitude of one, is 
 a course not only unjust in principle, but productive of unfortunate 
 results. A fly on a man's head is an unwelcome and pestilential 
 visitant, but it would be a monumental error of judgment to under- 
 take to mash it with a spiked club. The welfare of the cotton 
 
67 
 
 ■trade and of all who are dependent thereon is too important and 
 too vital an issue to be jeopardized because we are angry, or because 
 we do not want to take the trouble to think. To the end that we 
 may solve the problem rationally, and with the view of securing 
 ■a net return of good from our reformatory efforts, we must give 
 some study to the question; we must ascertain what an exchange 
 ought to be and what it ought to avoid being; and then we will 
 be qualified to regulate these instrumentalities of trade by an 
 ■intelligent and effective ultimatum. 
 
 OBLIGATION OP EXCHANGES TO THE PUBLIC. 
 
 There was a time when private corporations, and other or- 
 ■ganizations of individuals joined together for specific benefits and 
 profits, assumed. the attitude, and effectively maintained it too, 
 ihat so long as they did not come into collision with the laws of ' 
 -the land they were at liberty to use their organized power for 
 -their o'vni profit and in utter disregard of the interest, welfare, and 
 -rights of all others not associated or affiliated with them. In other 
 words, it was assumed that one of the franchises of corporate 
 ■existence was the right to prey upon the public. This theory of 
 relation, repugnant alike to our organic law and to the spirit of 
 the people, and subversive of both economic and political liberty, 
 "has in recent times been challenged by a fierce denial. The people 
 are now awake and will not tolerate the assumption of sovereignty 
 loj the creatures of their clemency. These bodies corporate or 
 artificial persons invested with extraordinary power, are facing a 
 very real arraignment for the misuse of this power; and it is an 
 -over-bold advocate or else a fatuous one, who will now defend 
 corporate selfishness upon the theory of corporate right. 
 
 Every corporation, whether it be a body chartered under law, 
 •or an association of individuals without special legislative warrant, 
 is, either by express authorization or by sufferance, the creature of 
 the body politic permitting it to exist and operate. Such corpora- 
 
68 
 
 tion or association has no rights or powers which the people did not 
 give it; and hence, has no warrant either in morals or in law, to 
 use these rights or powers for the oppression of any of the people 
 who conferred them. Any denial, therefore, by any of these 
 institutions, of obligations to deal fairly with the whole body 
 politic and with all the members who constitute the same, is an 
 untenable and punishable assumption. The defense that rights' 
 have become vested, will not in such case avail, because the practice 
 of brigandage, no matter how long continued, cannot, among as 
 free people, ever become a vested right. 
 
 OBLIGATIONS OF COMMODITY EXCHAXG-ES'. 
 
 The foregoing generalizations apply with peculiar force to the- 
 so-called commodity associations or exchanges, and especially to 
 those institutions of this class which deal with the products used 
 to feed and clothe mankind. These institutions, although not 
 organized and operated for stock profit or for the purpose of declar- 
 ing money dividends to shareholders or members, nevertheless confer' 
 distinct privileges and considerable advantages upon those whcv 
 participate in membership. Furthermore, the transactions con- 
 ducted upon these exchanges and under the sanction of their rules- 
 and regulations, affect not only the interest of the members thereof,- 
 but the welfare of millions of people who have no membership 
 therein, and no voice in the framing of the code of laws and 
 practice by which the said transactions are governed. The pur- 
 chases and sales consummated in such exchanges by members there- 
 of for their own account and as agents for outside principals,, 
 establish the market value of the commodity which is the subject 
 of such transactions; and the morals of such exchange, whether 
 equitable and wise or unfair and partisan, is instrumental in 
 determining the whole state of the trade. It, therefore, becomes 
 obvious that the test of the usefulness of such exchange, and even 
 of its right to exist, is whether, or not it fully recognizes its obliga- 
 
69 
 
 •tion and responsbility to the public, and whether or not it makes 
 ■considerate application of the powerful and comprehensive forces 
 -of which it is custodian or trustee, to the interest and welfare of 
 all who are touched thereby. 
 
 When note is taken of the fact that the subject matter of the 
 transactions mentioned, constitute the necessary things of life, and 
 ihat the integrity of these transactions involve the sustenance and 
 protection of the whole family of human beings, the sense of 
 ■obligation contended for acquires a solemn emphasis, and the denial 
 thereof presupposes not only a disposition and intention to profit 
 :at the expense of the unprotected and the unwary, but a callous 
 ■disregard of the demand of public spirit and humanity. Com- 
 modity exchanges perform a most important function and indeed 
 ■constitute a necessity with which, the trade could not without 
 irretrievable loss dispense. They should, therefore, be protected and 
 "their usefulness encouraged; but whether or not a particular com- 
 modity exchange should be protected and encouraged or assailed 
 -and condemned, depends upon the fundamental consideration of 
 whether it recognizes its relation and obligation to the public or 
 ■denies the same. Foimded upon the disposition first mentioned it 
 is a potent and comprehensive agency for good and its code of 
 rules and practice will be consistent with its basic principle and 
 -consequently in accord with all interests affected thereby; based 
 upon the other principle the institution is unsound at its core and 
 is logically the breeding place of the wrongful practices which will 
 Jbe hereinafter specified and discussed. 
 
70 
 
 CHAPTER XI. 
 
 Discussion of the Rules Under Which Future Contract Trad- 
 ing Is Conducted. 
 
 It must be admitted that all exchanges, and particularly all' 
 commodity exchanges, lie under imperative obligation to employ 
 their forces of organization in the interests of trade, as contradis-- 
 tinguished from the interests of cliques or individiuds; and not only 
 to recognize the rights of all who are concerned with the commodity 
 which is the subject of the transactions in such exchanges, but to- 
 use their trade machinery for the protection of such rights. Prom 
 this admission must be deduced the ultimatum, that upon the full 
 recognition of this obligation, and upon the faithful performance- 
 of the duties entailed thereby, rests the claim of such exchanges' 
 to the virtue of usefulness, and even to the right of existence. • 
 
 These propostions are self-evident and trite. To announce- 
 them is to state what every thoughtful mind has already accepted' 
 as truth. We realize that no argument is necessary to establish these- 
 obvious principles; we have emphasized them for a collateral pur- 
 pose. The point is not so much to verify these principles, as to' 
 emphasize the fundamental importance of a recognition of the same. 
 We have called pointed attention to the right principle in order 
 that we may specify in logical detail the concrete good results- 
 which follow consistence therewith, and the evil consequences that 
 are entailed by departure therefrom. An exchange founded upon' 
 a full recognition of this obligation will naturally and logically 
 enact laws, rules and regulations fair to all concerned : an exchange - 
 based upon the contrary principle will naturally and logically con- 
 struct and operate its machinery to the end that the few shall be- 
 benefitted at the expense of the many. "A good tree cannot bring 
 forth evil fruit, neither can a corrupt tree bring forth good fruit."' 
 
 Having established the general test of moral responsibility by 
 
71 
 
 which all exchanges must be tried and judged, it is now in order 
 to give some special consideration to the instrumentalities through 
 which these institutions make their purposes effective — namely, 
 the rules and regulations prescribing and governing the transactions 
 consummated therein. 
 
 When we begin to study the machinery or the system of trad- 
 ing employed by the future-cotton-contract exchanges, logically the 
 first subject for consideration is. the future contract itself, with 
 special reference to the terms and conditions thereof. 
 
 THE' TEEMS OP THE FUTU!RE CONTEACT. 
 
 If the future contract is to be a bona fide trade agency, and 
 if it is to perform its protective office, which is its most important 
 function, it must not only be fair and just to both of the parties 
 thereto, but it must not hold any lurhmg peril, or ant; pitfall into 
 which the unwary or the uninitiated trader may stumble. 
 
 It is eacy enough to anounce these general principles, but 
 when it becomes necessary to formulate the specific contract which 
 will answer these requirements, the task is not so simple as a good 
 many disputants suppose. The proposition is a complex one and 
 cannot be disposed of by the summary and off-hand dictum of the 
 uninformed. What constitutes a fair contract as between buyer and 
 seller, must be determined by another test than that of mathemati- 
 cal division; and the safety, dependableness and utility of the con- 
 tract, depends upon other consideration than the mere enforceability 
 of its terms. We will briefly discuss these propositions separately, 
 in the hope that certain. prevalent misapprehensions may be cor- 
 rected, and that an intelligent basis may be established for 
 corrective measures. 
 
 FAIE ALIKE TO BUYEE AND SELLEE. 
 
 The future contracts used in the two American exchanges are 
 not objectionable in form or terms, but are, on the contrary, in 
 these respects substantially correct. In the discussions of this 
 
72 
 
 subject, a good deal of stress has been laid upon the fact that the 
 «aid contracts contain the sell&r's option, or in other words, provide 
 that the seller has the privilege of delivering whatever grades he 
 •desires — within certain specified limits; and furthermore has the 
 •option of delivering on any day he determines — within the limits 
 of the month and after reasonable notice. It has been contended 
 that these options give the seller an unfair advantage over the 
 buyer and that the latter should have at least an equal privilege 
 Tvith the seller in both of the above-mentioned respects. 
 
 This argument has some superficial merit, but an analysis of 
 the relative undertakings of the parties to the contract, will show 
 it to be unsound. The postulate that the division of privilege 
 between the two parties should be equal, would be correct, provided, 
 that the obligations and risks assumed by the two parties were 
 •equal. But where the undertaking of one party involves greater 
 risk of danger and loss than is involved by the undertaking of the 
 •other party, it would be manifestly unfair to enforce an equal 
 ■division of privilege. 
 
 That the selling party in a future contract undertakes the 
 more onerous obligation, and that the performance of his part of 
 the contract entails more hazard and is more subject to vicissitudes 
 than is involved in the buyer's commitment, is obvious. The seller 
 undertakes to deliver cotton (which he may yet have to purchase) 
 •at some future time, or else suffer severe penalties. The grades 
 he will find available at the time his contract matures will depend 
 aipon the character of the crop and of the stocks from which he 
 must draw his supply; and the time during the month, at which 
 fie will make delivery, depends upon the vicissitudes of transporta- 
 tion and other considerations over which he has no control; 
 whereas, the buyer has only to provide himself with the means 
 •wherewith to pay for the deliveries. If, therefore, the buyer had 
 the right to demand the delivery of specific grades on even a part 
 of the contract, he could call for those grades which he had reason 
 
73 
 
 io believe the seller did not have, or could not procure, and thus 
 force the latter into a breach of contract and the consequent penalty 
 and loss. Or, if the buyer had the right to select the time, or the 
 ■day during the month, at or on which delivery, in whole or in part, 
 must be made, he might, by his knowledge of the seller's situation, 
 ■select a particiilar time at which it would be inconvenient, or im- 
 possible for the latter to make delivery. In such case, the delay 
 of even a few days, caused by a railroad wreck or congestion, or 
 •some similar happening, might be the means of imposing a penalty 
 and loss upon the seller, which loss neither party contemplated 
 • when the contract was made. If, therefore, the terms of the con- 
 iract obliged the seller to assume the risks aforesaid, and gave the 
 buyer, in instances, the opportunity to penalize the former by 
 Teason of accidental causes ; one of two results would follow — either 
 the seller would not contract at all, or else he would demand that 
 "the buyer pay him a prendium for the unequal risk which the 
 former assumed; and in either case the volume of future trading 
 would be diminished to such an extent, and the price of the con- 
 iract would be so affected by artificial considerations, that its 
 utility as a hedge for non-speculative producers and merchants 
 -would be destroyed. 
 
 RELATIVE VALUE OP CONTRACTS AND SPOTS. 
 
 In this connection, it would be well to say a word about the 
 relative value of future contracts and spot cotton. It is a funda- 
 mental prerequisite of a good contract that it should in all respects 
 be representative of the commodity for which it stands, and that 
 its value should be on a substantial parity with the value of cotton 
 in the spot market. But it is a niistake to compare, as many do, 
 -the present value of cotton with the price of a future contract 
 maturing in another or a, distant month. It is error, therefore, 
 ;to say that a future contract is bad and unresponsive because, for 
 instance, spot cotton presently sold in July is materially higher 
 •i;han the quotations for the October contract: just as it would be 
 
74 
 
 a mistalie to condemn a contract because the price of spots in 
 October, say, was lower than the future contract quotations for the 
 following month of July. The comparison must be made between 
 the value of spot cotton and the value of the future contract matur- 
 ing in the current month. The quotations for the future months 
 do not represent the value of cotton at the present time, but they 
 record the consensus of opinion as to what spot cotton will be worth 
 at said future time. But it is essential that the value of the con- 
 tract maturing in the current month shall be substantially the same 
 as the value of spot cotton. If the quotations for the contract 
 should be materially or consistently lower or higher than the value- 
 of spot cotton, then it is proof that the contract has some defect 
 which artificially advances its value above, or artificially depresses 
 its value below its true, bona fide value as a cotton contract. Thus- 
 it becomes clear, as heretofore stated,, that any terms or conditions 
 in a contract which give it either a fictitious premium, or which 
 impose upon it an artificial discount, will always impair, and, if 
 of sufficient moment, will inevitably destroy the usefulness of the- 
 contract as a trade utility or a hedge. 
 
 It, therefore, follows that a contract is not necessarily unfair 
 because it gives the seller some latitude in the option of the time- 
 during the month at which delivery shall be made; nor, as shall 
 be shown in more detail hereafter, because it gives him an election 
 as to the grades of cotton he will deliver, provided, always, that 
 the time option shall be reasonable, and that the grade option shall 
 be limited to cotton that is neither too low, nor too high, and to such 
 grades as are, in normal times, salable and the actual subject of 
 current market transactions. On the contrary, this latitude given 
 the seller is necessary for that free and unrestricted issue and 
 transfer of contracts which makes the future market, and supplies- 
 the spot trader with the protection which can be afforded only by 
 the existence of such market. The "seller's option," as prescribed 
 in the future contract, is not per se unfair, but is correct and! 
 
75 
 
 necessar}'. The valid objection is not that the option given is ia- 
 equitable or wrong, but that under certain rules of certain Ex- 
 changes, the seller is permitted to abuse this privilege and to 
 impose such collateral burdens upon the buyer as will discourage 
 the latter from receiving the cotton on contract, and, in con- 
 sequence, depreciate the price of such contract below the value of 
 the cotton it represents. 
 
 In the succeeding article we will endeavor to show the neces- 
 sity of a basis contract, or a contract in which the seller is perr 
 mitted to deliver all merchantable grades within certain limits and 
 restrictions. Having demonstrated the necessity of these several 
 privileges, we will then proceed to show how they may be abused, 
 and how they are abused ; and how a contract altogether fair in its 
 terms may be, and is, made the instrument of injurious and corrupt; 
 practices. , 
 
76 
 
 CHAPTER XII. 
 
 Further Discussion of the Rules Under Which Future 
 Contract Trading Is Conducted. 
 
 In the preceding article we undertook to lay down certain 
 fundamental rules which should be observed in the formulation of 
 all contracts for future delivery. We announced that the contract, 
 in its terms, must be fair alike to both buyer and seller, and must 
 not hold any lurking dangers or pitfalls into which the uninitiated 
 or Unwary trader may fall. We undertook to show that the 
 "sellers' oftion" as to the date (during the month) on which de- 
 livery shbuld be made, and as to the grades (within certain limits) 
 that should be delivered, was not only a fair provision — provided it 
 was f a;irly employed — ^but a necessary provision,_ if the contract was 
 to realize the requirement that it hold no lurking peril or pitfall, 
 ^he seller, undertaking as he does the more onerous and dangerous 
 obligation, must be given a reasonable latitude as to the time of 
 delivery, and a reasonable election as to the grades he will deliver; 
 otherwise he may be made the victim of an accident or a "squeeze." 
 In this event, the selling of a future contract would be attended 
 \vith such uncertainties and dangers that few would be found 
 Willing to undertake the obligation at all, or unless they were paid 
 a considerable premium for so doing. In either case the hedging 
 value of the future contract would be destroyed, its most im- 
 portant function would be impaired, and the very object of its 
 existence defeated. 
 
 THE BASIS' CONTEACT. 
 
 Some superficial critics of the form of future contracts presently 
 employed in the several exchanges, have found fault with the fact 
 that they are all "basis" contracts, and not contracts for a specific 
 grade or grades. A little reflection will show that the basis con- 
 
77 
 
 tract — provided that the range of deliverable grades is not too 
 wide, and provided always that the terms of the contract are justly 
 and without partiality enforced under the rules and by the practice 
 of the exchange — is not only fair to both parties and dangerous to 
 neither, but is in fact the only kind of contract under which any 
 comprehensive system of hedging is feasible or even possible. 
 
 The basis contract is a contract wherein the seller agrees to 
 deliver, and the buyer to receive, a certain amount of cotton to be 
 paid for at a certain price for a basis or standard grade, with 
 additions to such price or deductions therefrom for such cotton 
 as may be delivered of a higher or lower grade than the basis or 
 standard. In cotton future contracts the basis is the Middling 
 grade. The contracts in use in the several exchanges provide that 
 any grade from Good Ordinary to Fair, inclusive, is deliverable. 
 If it should so happen that only Middling cotton was delivered 
 on the contract, then the buyer would pay therefor the price named 
 in the contract; but if other grades than Middling were delivered, 
 the payment for such grades would be made on the basis of so 
 much above or so much below the contract price — the, amount of 
 the premium or discount being determined by the relative differ- 
 ence in value between the grades delivered and Middling, or the 
 basis grade. To illustrate: 
 
 Suppose A bought and B sold 100 bales of cotton for October 
 delivery at the price of 12c per pound. When October came, if 
 only Middling- cotton was tendered, then A would pay B for the 
 total number of pounds delivered at the rate of 13c per pound. 
 It makes no difference what cotton might be worth when October 
 came, the settlement of the transaction would be on the price 
 named in the contract. But suppose, instead of delivering all 
 Middling, B should deliver say 50 bales of Middling, 35 bales 
 of Low Middling and 35' bales of Good Middling. For all the 
 Middling A would pay 13c, but for the Low Middling he would 
 pay as much less than 13c as Low Middling was worth less than 
 
78 
 
 Middling ; and for the Good Middling he would pay as much more 
 than 12c as Good Middling was worth more than Middling. It 
 trould make no diflference what the current price of cotton might 
 Be at the time of delivery — Middling might be 15c or it might be 
 lOc, and the other grades correspondingly high or low^the parties 
 to the contract in the illustration would settle on the basis of 13c 
 for Middling, with additions to or deductions from said price for 
 the other grades delivered, as stated. 
 
 S'OUND m THEORY. 
 
 The theory of the Middling basis contract is unassailable, and 
 it is entirely possible to give it a practical efEect which iS fair, just 
 and satisfactory to all iorm fide traders therein. If the receiver 
 is required to take only merchantable or saleable grades, and if for 
 the grades other than Middling he is required to pay on the basis 
 of the actual difference in value between such grades and Middling 
 that exists in the spot market at the time of delivery, he can suffer 
 io hardship because of the delivery of such grades or because of 
 the basis contract. But it is also possible to make the basis con- 
 tract an instrument of oppression and injury. This result may 
 fee accomplished by the operation of rules and practices of the 
 exchange permitting the seller to deliver, and compelling the buyer 
 to receive, cotton for which there is no market and which the 
 tuyer cannot dispose of except at a loss; and by giving the mer- 
 chantable grades other than the basis grade a fictitious and incor- 
 rect valuation, thus requiring the receiver in the contract to pay 
 for such grades more than their actual relative value. These de- 
 liveries of unmerchantable cotton and this improper valuation of 
 the grades other than the basis grade are prolific sources of manipu- 
 lation of the contract price, and have done more than any other 
 causes to bring reproach upon- the system of future contract 
 trading. A little later we will show specifically how these objec- 
 tionable practices work, how the improper valuation is fixed, how 
 
79 
 
 manipulation results, and how the market is afEected by such 
 manipulation. Our present purpose is to show that the basis con- 
 tract correctly administered, is not only the proper medium for 
 future trading, but is the only form of contract upon which an 
 adequate and efficient systein of future trading can be predicated. 
 
 BASIS CONTRACT NECESSAEY. 
 
 This series of articles has been written in vain if it has not 
 been made clear that the primary and essential value of the system 
 of future trading lies in the protection and facility it affords to 
 those dealers in cotton who cannot afford to speculate or who do 
 not want to speculate. The major function of the system is to 
 provide the means whereby the owner or holder of cotton, or the 
 prospective owner or holder thereof, may hedge his holdings or 
 commitments. The important office of the future contract is not 
 so much to provide the spinner with the specific grades which he 
 spins into cloth, as it is to give him an insurance that when he 
 needs the actual specific grades, the net cost thereof will not be 
 more than a certain stated price. The value of the future contract 
 to the producer lies not so much in the fact that through actual 
 delivery thereon he will find a market for his crop, as in the fact 
 that by using the contract he can insure to himself a stated net 
 return for his crop and not take the chance of a decline before he 
 can get it ready for market. The great use of the future contract 
 to the buyer and exporter is not so much that it is a source of 
 supply of actual cotton or specific grades, nor the medium of dis- 
 tribution of the same, as it is that it gives him an insurance which 
 will enable. him to buy the farmer's cotton without having pre- 
 viously placed the same, and to contract with the spinner for the 
 specific grades the latter will need, even though he, the buyer or 
 exporter, has not the cotton in hand. The fundamental advantage 
 of future contract trading is, therefore, the insurance or hedge 
 protection, Just as the value of an insurance policy is the protec- 
 
80 
 
 Hon it affords the insured. The enforceable specific performance 
 of the terms of the future contract is the guaranty of this protec- 
 tion, just as the enforceable performance of the contract of insur- 
 ance is the guaranty of the protection which the insured has 
 bought. To compel a man to take or make actual delivery on a 
 future contract regardless of any and all circumstances or else 
 go to jail, as is proposed by certain legislative acts now pending, 
 would be the same in principle as to compel a man to burn his-- 
 house and thus enforce specific performance of his insurance con- 
 tract, or else make affidavit that he intended to burn it, before he 
 could validate his policy and purge himself of the presumptive 
 charge that his transaction was gambling. 
 
 VOLUME OF CONTKACTS MUST BE SUPPLIED. 
 
 In order that there may be a supply of such contracts from 
 which producers, buyers, exporters and spinners may purchase the 
 required protection, it is necessary that there shall be parties who 
 are willing to offer to sell or buy, or in other words, to issue these 
 contracts. As heretofore shown, the supply of contracts comes 
 primarily from the speculative class. This division of trade is 
 composed of individuals who on the one side believe that prices 
 will be lower in the future, and on the other that they will be 
 higher. The first mentioned parties offer to sell, and the second 
 offer to buy. The producer, spinner, and spot dealer who desire 
 to protect their holdings or commitments, as heretofore showny 
 procure their supply of contracts from the trading center estab- 
 lished for this purpose in the exchanges, and" in turn become parties 
 to such contracts, and obligate themselves to perform the terms 
 thereof so long as they remain parties thereto. This speculative 
 nucleus, reinforced and augmented by the hedge trading men- 
 tioned, constitutes the future contract market. 
 
 Now in order that there may be contracts available for those 
 who want to buy, it is an obvious prerequisite that there must be 
 
81 
 
 parties who are willing to sell. A man of ordinary judgment will 
 not contract an obligation unless lie has reasonable assurance that 
 he can fulfill it, and he would not contract to deliver cotton at 
 some future time if, by the terms of the contract he was, upon 
 pains and penalties, compelled to supply the grade of the buyer's 
 selection or any grade which he might have difficulty in procuring,, 
 or not be able to procure at all. 
 
 There has been a good deal of discussion in this connection 
 as to the advisability of narrowing the range of grades deliverable 
 on the contract, or of making the contract call for specific grades, 
 or for no grade below Middling. Such stipulations in the contract 
 would not only fail to advance the price of actual cotton, but 
 would make the contract highly speculat.ve^ restrict its use to 
 speculators only and would most probably destroy the future 
 market and deprive all traders of the hedging facility. It is. 
 entirely possible to formulate a contract that would be most attrac- 
 tive to the buyer, hut such contract would do the buyer no good 
 unless he could find some one willing to assume the selling side 
 of the obligation. Just as a person desiring insurance can con- 
 coct a policy which would be very much to h's liking, but he could 
 realize no benefit therefrom unless he could find some one wh& 
 would underwrite the risk on the terms proposed. It would do no- 
 good to sanction such policy by statutory enactment. Neither 
 Legislature nor Congress can compel a man to engage in a business 
 or assume a risk which is objectionable to his business Judgment.. 
 He would simply let it alone. 
 
 SELLEE MUST FOT BE TEAPPED. 
 
 Let us see why the basis Middling contract is essential, and 
 why a specific grade contract, or a contract on which only high 
 grades could be delivered, would deter sellers to the extent of so 
 narrowing the market and reducing the supply of contracts that 
 the hedging protection, so necessary to the cotton trade, would be 
 abrogated. 
 
82 
 
 For illustration let us take in the first instance the producer 
 who is the primary seller of cotton. The farmer does not make a 
 crop all of one grade, neither is his crop always of a high grade. 
 The protection desired by him is for his crop and not for one 
 particular grade in that crop, nor for certain high grades of which 
 he may have little or none. Suppose the producer was satisfied 
 with the future price of cotton as shown by contract quotations, 
 and desired to insure himself that he would realize that price and 
 avoid the chance of a decline pending the time his crop was ready 
 for market. He would in such case sell a contract to deliver so 
 much cotton as he expected to make or desired to hedge. Under 
 the currently used basis contract he could deliver all the cotton 
 he made, except such as was very low and of an unmerchantable 
 character. But suppose the contract he sold provided that he could 
 deliver only one grade, or certain specified high grades. When 
 the time came for him to make delivery, he might find that he 
 could deliver only a small proportion of his crop, and possibly 
 none at all. In such case such contract would not be an asset but a 
 liability; and not only would the seller fail to secure the protection 
 for which he had bargained, but would be penalized and "squeezed" 
 or mulcted by the buyer in addition. One or two such experiences 
 would effectually eliminate the producer or primary seller from the 
 market, and would in all probability bring swift legislative action 
 against any such contract. 
 
 But it may be contended that the producer does not use the 
 contract market for hedging purposes to any great extent, and that 
 the elimination of him therefrom would have no appreciable effect 
 upon the volume of trading. Opposed to this contention it can 
 be stated that a considerable number of planters do use the future 
 market directly for this purpose; but even if they did not so use 
 it at all, the effect would be the same. If the farmers do not use 
 the future contract direOtly, still it is used by the merchant and buyer 
 who purcliase from the farmer, and thus the latter realizes the 
 
83 
 
 benefit resulting from the future contract hedge, e^'en though he 
 does not personally handle the contract. 
 
 The foregoing illustration is typical. The same experience 
 falling to the lot of the merchant or cotton buyer who sold a con- 
 tract would deter them from repeating the transaction, as effectu- 
 ally as in the case of the producer who sold directly and suffered 
 the consequences noted. The same conclusion is true in the case 
 ■of the speculative element. The speculator is not looking for the 
 worst of it in any particular, and, no matter how strong his con- 
 viction might be that prices would decline, he would not enter into 
 an obligation which would require him to do something which he 
 might not be able to do, and thus not only suffer a penalty for such 
 default, but place it within the power of the speculative buyer on 
 the other side of the contract to "squeeze" and mulct him. 
 
 BUYEE MUST BE PEOTECTED. 
 
 It, therefore, seems to be a reasonably correct conclusion that 
 in order that the future market shall be broad enough to supply 
 the required protection, and safe enough to warrant the use of the 
 same, the contract prescribed should give the seller a reasonable 
 option both as to the time of delivery and the grades that he will 
 deliver. But on the other hand, the buyer must be protected from 
 any misuse or abuse of this option in either respect, and from any 
 hardships or burdens which would cause him to be mulcted and 
 deter him from buying the contract, or having bought it, would 
 make him unduly eager to sell it out before maturity in order that 
 he might escape taking delivery of the' cotton and avoid losses that 
 would be entailed thereby. 
 
 The. present contracts in force in the Xew Orleans Cotton 
 Exchange and the New York Cotton Exchange are in form as 
 nearly correct as reason and experience can instruct. Both are 
 Middling basis contracts, both stipulate that the deliverable grades 
 shall be from Good Ordinary to Fair inclusive, and both give the 
 seller a reasonable option as to the time he will tender and the 
 
84 
 
 grades he will deliver. Xo evil lies in the form of the contract. 
 Both of the aforementioned options, however, may be abused 
 by the seller, and, unfortunately, are so abused when per- 
 mitted by the rules of an exchange and abetted by the adminis- 
 tration and officials thereof. It is this practice by one of the 
 exchanges in this country that constitutes the most serious count 
 in the indictment of future trading, and it is the arrogant refusal 
 of such exchange to adapt its rules to the principles of equity 
 that is responsible for the animus of the contemporary attacks, 
 upon a beneficial economic system which such exchange misuses. 
 In the succeeding articles we shall endeavor to show just how an 
 exchange may and how the exchange in question does prostitute' 
 ■^ts function and its power by converting a contract ostensibly fair 
 in terms and conditions into an uneconomic and predatory agency. 
 
85 
 
 CHAPTER XIII. 
 Abuse of the Basis Middling Contract in Future Trading. 
 
 Although the basis Sliddling contract giving the seller the 
 •option as to the grades he will deliver and the time he vs^ill make 
 •delivery — as limited and explained in the preceding papers — is the 
 only form of contract that will supply the protection required by 
 the cotton trade; yet the very provisions mentioned render the 
 future contract peculiarly susceptible to misuse and abuse, and if 
 these provisions are not fairly interpreted and enforced, may to a 
 ■great extent nullify the usetulness of the contract and vitiate the 
 ■entire system of trading therein. It is, therefore, of the utmost 
 importance that the exchanges in which such contract is the subject 
 ■of trade, should safeguard the same, and by precept and practice 
 protect the traders and the trade from an unfair and dishonest 
 use of these necessary provisions and options. 
 
 The particulars in which this form of contract may be abused 
 are obvious. In the first place, the grade standards adopted by 
 "the exchange, upon which standard contracts are settled, may not 
 be true standards but misrepresentations; not bona fide standards 
 but specially prepared paraphernalia; not clean cards but a marked 
 deck : in which case the entire foundation of the contract is wrong ; 
 the trader therein is misled and mulcted and the future contract 
 based thereon vitiated and degraded. Secondly, where several 
 grades, may be delivered on a contract, and the grades other than 
 the basis grade must be settled for at the relative difEerence in the 
 value of said grades above or below the basis, these grade differ- 
 ences may be, by the rules of an exchange, incorrectly or improperly 
 fixed: in which case one of the parties to the contract liquidated 
 by delivery must suffer a loss similar in principle to having his 
 pocket picked; and furthermore, the contract based upon such 
 
86 
 
 incorrect or improper grade differences loses its relation to the 
 commodity it is supposed to represent, and becomes the instrument 
 of manipulation, if not actual fraud. Thirdly, an exchange may, 
 by it? rules, permit the seller to abuse his option as tD deliveries, 
 and, by such abuse, to harass and put onerous, unjust and unequal 
 burdens and charges upon the other party to the contract; in which 
 case, not only is the party receiving cotton under the contract the 
 victim of wrong, but he is deterred from using the contract as the 
 medium of actual transfer and the latter becomes thereby depre- 
 ciated and debased. Each and all of these abuses may be prevented 
 by requiring the future contract exchange, both in rules and prac- 
 tice, to observe the principles of good faith in the establishment 
 of its grade standards; of accuracy in the adjustment of grade 
 differences; and of impartiality in the treatment accorded both 
 parties to the contract. 
 
 V\'e will discuss these abuses seriatim, going into some detail 
 as to the nature and effect thereof, and finally suggesting the 
 remedies therefor. 
 
 I. GBADE STAXDAEDS. 
 
 The grade standards upon, wJiich contract settlements are. 
 based should he established and employed in good faith. By this 
 we mean that the standards adopted by an exchange should be 
 fairly responsive to the ideas of the trade, and should moreover 
 be known, or easily susceptible of being known, to all men who 
 trade in the contract based thereon. 
 
 The range of grades deliverable on the contracts of the two 
 future contract exchanges of this country is from Good Ordinary 
 .on the low end of the classification scale to Fair on the high. We 
 have heretofore made the statement that no fault is to be found 
 with this range of contract grades. This statement is true, pro- 
 vided that we know what the exchange means by its classifications, 
 and provided further that these classifications agree with a 
 
87 
 
 uniform standard representing the consensus of opinion among- 
 traders in actual cotton as to proper grade types. For instance, 
 we might say that Good Ordinary is an entirely merchantable and 
 spinnable grade, having in mind a sample of cotton containing a 
 certain amount of leaf or extraneous matter. But we would retract 
 our assertion if we found that the Good Ordinary standard of a 
 particular exchange consisted of a type much lower than the one 
 we had in contemplation. In order, therefore, that the trader may 
 know that he will not be required to take delivery of unsalable and 
 depreciated stuff, he must know that the lowest tenderable grade 
 is no lower than a certain uniform standard with which he is 
 familiar. Again: When the term Middling is used, the average 
 trader sees in his mind's eye a certain grade, containing a certain- 
 amount of leaf or extraneous matter; and so on with all the other 
 grades. When such trader buys or sells a contract he thinks he 
 knows what kind of cotton he will have to receive or deliver for 
 Middling, Low Middling" and so on, and bases his calculations 
 upon such assumption. If, however, when delivery is made, he 
 finds that the grade standards of the exchange in which his con- 
 tract is settled, is different from his idea of grades, his calculations- 
 are upset and thrown awry. He may, perhaps, find that such 
 standards are lower than he expected, and, consequently, if he was- 
 the buyer he would have to pay the contract deliverer more than 
 he had anticipated. Suppose he bought a Middling basis con- 
 tract for lOe per pound: he would be willing to pay lOe for what 
 he thought was Middling, and would be willing to pay the proper 
 premium or discount for such other grades above or below Middling 
 as might be delivered. But if when the cotton was tendered he 
 found that he would have to pay 10c per pound for cotton which 
 the exchange on its standard called Middling, but which in his 
 own estimation and in the general estimation of the trade was- 
 lower than Middling, he would be called upon to stand a loss on 
 the contract delivery which was unexpected and unwarranted. 
 
88 
 
 Afsuming, for the sake of argument, that the grade standards 
 of a future contract exchange were afflicted with the vices men- 
 tioned, what would be the result upon the trader and the trade? 
 A man who had been required to take on a contract, a grade which 
 the exchange called Good Ordinary, for instance, but which he 
 found he could not dispose of as Good Ordinary in the actual spot 
 markets, and probably could not dispose of at all except at a 
 ruinous discount; or a man who had been required to take up and 
 pay for as Middling, Low Middling, etc., grades lower than the 
 standards prevailing in actual spot markets, would do one of two 
 things: either he would not buy the contract at all again, or, if 
 the exigencies of his business required him to do so, he would bid 
 enough less for the contract to offset the loss he knew he would 
 make if he took delivery, and, moreover, he would be so anxious to 
 avoid taking delivery and making the loss that he would sell out 
 the contract at a sacrifice rather than liquidate it by taking the 
 cotton. The inevitable effect of such defective standardization of 
 grades would be to depreciate the contract of the exchange employ- 
 ing the same, below the -^'alue of actual cotton ; and the consequence 
 of such depreciation would be not only to rob such contract of its 
 legitimate trade utility, but to constitute it in the hands of inter- 
 ested and powerful operators the effective means of preying upon 
 the unwary. 
 
 I.MPOETAXC'E OF UNIFOEM STANDARDS. 
 
 It now becomes apparent why fair grade standards, and 
 standards well known to contract traders, are necessary to the 
 integrity of the future contract. There should be no hesitation or 
 equivocation in this regard. ■ The exchange that proposes to do a 
 legitimate future business cannot do otherwise than adopt bona 
 fide grade standards upon which its contracts are liquidated. It 
 is not fair, neither is it honest to set a trap for the uninitiated 
 and unsuspecting trader in contracts. The exchange pretending' 
 
89 
 
 to conduct a legitimate business in contracts cannot consistently 
 evade the demand that its. grade standards be fairly representative 
 of the consensus of trade opinion. The first thing an exchange, 
 intending to deal honestly, vrould do, would be to adopt fair stand- 
 ards, and then promulgate the same in order that all traders in 
 its contracts should be fully apprised of what they might be per- 
 mitted to deliver and what they would be required to receive. Any 
 exchange which uses low and misleading grade standards and 
 furthermore keeps the same under cover or makes it difficult for 
 the trade to know what said standards are ; and any exchange which 
 refuses to adopt a uniform, widely-known and generally-approved 
 ■standard of grade, but persists in using its own private standards 
 for the liquidation of contracts entered into by the general trade, 
 cannot defend its attitude upon any other, ground except that its 
 primary object is to enable its members to make money, and that 
 by pursuing such course it places an advantage in- the hands of 
 the initiated by means of which they may prey upon the outsider. 
 
 G.OVERNMEFT STAISTDAEDS. 
 
 The United States Department of Agriculture, pursuant to 
 instructions from Congress, has taken cognizance of this important 
 issue and has prepared, adopted and promulgated a set of grade 
 standards from Good Ordinary to Middling Fair. These types 
 were selected by the Department with the advice and assistance of 
 cotton-grading experts drawn from all branches of the spot cotton 
 trade. These standards not only represent the best opinion of the 
 "trade as to what the several grades should be, but they are widely 
 known and any man or institution desiring to do so rtiay at a small 
 cost purchase a set of the same. The man who sells or buys a 
 ■contract in an exchange which has adopted these standards, knows 
 exactly what he may deliver and what he will receive for Middling 
 ■and all the other grades when delivery on the contract is made. 
 'Consequently, a contract based upon these standards is representa- 
 
90 
 
 tive of actual cotton and not a flim-flam device employed for 
 mulcting the unwary. 
 
 THE EEMEDY FOE FALSE STANDARDS. 
 
 The remedy f^r this injurious phase of future contract trading 
 is olivious and simple. In the interest of honesty and fair dealing, 
 as well as for the purpose of preserving and perfecting a proper 
 and heneficial system of future trading, the Government should by 
 law compel the future contract exchanges to adopt the grade stand- 
 ards promulgated by the Department of Agriculture, or else suffer 
 the penalty of having the future contracts entered into under the 
 administration of such non-conforming exchange prohibited and 
 outlawed. 
 
91 
 
 CHAPTER XIV. 
 
 Abuse of Basis Middling Contract in Future Trading:. 
 
 (Continued.) 
 Continuing the discussion begun in the last article, con-- 
 cerning the misuses and abuses to which the basis future con- 
 tract is subject, we will in this, devote some attention to tlje- 
 second general particular in which these untoward incidents 
 are manifest — namely, the incorrect and improper adjustment' 
 of the difference in value between the basis grade and the^ 
 several other grades deliverable on contracts. 
 
 II. GRADE DIFFERENCES. 
 
 "We come now to one of the most important, and at the 
 same time, one of the most complex phases of the future con- 
 tract. The complexity is, however, more seeming than real.. 
 There is a perfectly natural, just and correct method of estab- 
 lishing the grade differences in contract settlements, and: 
 there is another method which is faulty, inequitable and arti- 
 ficial. Where the one method is used, both the receiver and" 
 the deliverer in a contract secures a fair deal, and the con- 
 tract maintains its proper relation to spot cotton, and is a- 
 fair representative thereof; where the other method is em- 
 ployed one of the parties to the contract secures an, unfair - 
 advantage over the other, and the contract loses its represent- 
 ative character and becomes, not the medium for the trans- 
 fer of actual cotton, but an agency for speculative manipula-- 
 tion. 
 
 It is well within the limits of accurate statement to say 
 that the strongest and best supported ground of the com- 
 plaint against future trading, and of the antagonism thereto,. 
 
93 
 
 :is founded upon this particular abuse of a fundamentally le- 
 sgitimate and beneficial system. Men have observed the er- 
 jratic and unrelated fluctuations in the value of contracts 
 "which are liquidated under the unfair and uneconomic method 
 .;"mentioned; have become incensed by reason of the losses in- 
 "flicted thereby; and have deplored the efEect iipon the value of 
 'the commodity supposed to be represented by such contracts, 
 ^Droduc'ed by the manipulation thereof; and have rushed to 
 tte unwarranted conclusion that all future trading vs^as bad. 
 Many men who have interested themselves in the question 
 Ihave failed to perceive that the results of which they com- 
 plain are not the natural consequences of future trading, but 
 the products of a subversion of the system, accomplished 
 through an artificial and incorrect method of establishing the 
 grade differences upon which the contract is settled. They 
 have failed to appreciate that the fault does not lie in the 
 St/stem of future trading per se, but in tlie rules and regulations 
 i)f the Exchange which permits and enforces uneconomic and un- 
 fair methods of settlement. And finally, they make the mis- 
 take of demanding the prohibition of all future contract trad- 
 ring, when the appropriate and efficient remedy lies in com- 
 spelling the Exchanges to rectify the bad rule and to employ 
 'the proper method. If we understand clearly the proper and 
 the improper methods of establishing these grade differences. 
 "we will perceive plainly where the evil lies and be able confidently 
 "to apply the specific remedy. 
 
 SYSTEMS OF ESTABLISHING GKADB DIFFERENCES. 
 
 The basis contract, as heretofore explained, is a contract 
 Tipop which any of several grades, within certain prescribed 
 limits, may be delivered; and settlement for the grades other 
 than the basis grade is predicated upon the difference in 
 <TaIue between the grade or grades delivered, and the basis 
 
93 
 
 grade. Suppose a man buys 100 bales of cotton for future de- 
 livery on a basis contract, and pays therefore 10 cents per 
 pound. When the delivery month arrives, suppose the seller- 
 tenders a lot of 100 bales containing several different grades.. 
 The receiver will pay for all the Middling, or basis grade^ 
 the stipulated price of 10 cents per pound, and will pay as- 
 much more or less than 10 cents per pound, for the other 
 grades delivered as such grades are worth more or less than 
 Middling. This is the theory of the basis Middling 'contract, 
 and it is equitable and sound. The essential point, however, 
 is that the receiver shall pay the relative worth of the grades 
 delivered, or in other words, that the grade differences upon 
 which settlement is made shall be actual and correct differ- 
 ences. For instance, if one of the grades delivered should 
 be low Middling, and if low Middling should be actually- 
 worth on the market one cent per pound less than Middling,, 
 then the receiver should pay for the low Middling one cent' 
 per pound less than the contract price, or in the instant case' 
 9 cents per pound, and so on with the other grades, either 
 above or below Middling, delivered. If, however, in such- 
 case, the receiver is required by an arbitrary rule of the Ex- 
 change to pay for the low Middling delivered only one-half 
 cent per pound less than the contract price, or 9 1-2 cents in. 
 the illustrative case, when as a matter of fact low Middling, 
 in the actual market at the time, was worth one cent- per 
 pound less than Middling, or 9 cents, then the injustice of 
 such a rule is obvious, and it is easily understandable why 
 the purchaser in such contract should be anxious to avoid 
 taking actual delivery thereon and be willing to sell out his 
 contract at a discount, in order that he might escape such 
 delivery with its inevitable loss. 
 
 The foregoing explanation and illustration leads us log- 
 ically to the consideration of the two prevailing methods of 
 
94 
 
 ei^tablisliing the basis of settlements for grades other than 
 Middling,, when the same are delivered on the basis Middling 
 contract. The method first indicated, or that method under 
 vwhich the receiver pays for the grades other than the basis, 
 "the actual premium or discount for such grades in the cur- 
 "rent market, is called the "Commercial Difference" System; and 
 the other method, or that method under which the receiver 
 Tnay be called upon to pay incorrect and artificial differences 
 ■for such -grades delivered, is called the "Fiiced Difference" Sys- 
 ^em. There has been a good deal of controversy waged over 
 "the merits and demerits of these respective systems, although, 
 'in truth, there is small ground for debate. The first men- 
 tioned is the natural, economic and just method of adjust- 
 anent of grade differences; while the latter is an artificial, 
 tarbitrary and inequitable device for separating people from 
 their money. That these characterizations are true, we shall 
 demonstrate before we have concluded this discussion; but 
 if any of our readers should still be unconvinced and should 
 require the testimony of some higher authority than the Union 
 Guide, we refer such readers to the Report of Hon. Herbert 
 .IKnox Smith, Comissioner of Corporations, United States De- 
 ipartment of Commerce and Labor, to which report we have 
 Iherctofore called attention. 
 
 "COMMERCIAL" DIFFERENCES. 
 
 The "commercial" difference system, which is employed 
 in the New Orleans Cotton Exchange, makes contract deliv- 
 eries fair to both receiver and deliverer. Under this system 
 and the rules effectuating the same, when a future contract 
 is liquidated by delivery, a board of disinterested expert 
 classers inspects and grades the cotton tendered. All bales 
 outside of the limits of tenderable grades are rejected. The 
 •«lassers furnish a certificate showing the grade (based on 
 
95 
 
 the United States Government Standards) of each and 
 every bale delivered, according to the marks of said bales. 
 Reference is then had to the spot quotation board of the 
 Exchange, which board shows daily the value of each and 
 every, grade as established by actual sales in the spot market. 
 The difference between the value of the several grades, so 
 found to exist, is applied to the several grades delivered on 
 the contract. Thus if it should be found that Low Middling 
 was actually worth in the market Ic per pound less than 
 Middling, then the receiver would pay the deliverer for all 
 Low Middling delivered just Ic per pound less than the con- 
 tract price, and so on with all the other grades. The state of 
 the actual current market establishes the grade differences 
 in all instances and in every respect. • The certificate of grade 
 issued by the New Orleans Cotton Exchange shows the grade 
 of each particular bale and identifies each bale by a specific 
 mark or number. The correctness of such classification is 
 guaranteed by ample financial responsibility. If the cotton 
 covered by said certificate is redelivered on contract, it is not 
 reclassed, but the grade or grades thereof stand as certified. 
 The relative difference in the value of said grades, however, 
 do not remain inflexible, but is established, as in the first 
 instance, by reference to the spot market quotations existing 
 at the time of such second, or any subsequent delivery. 
 
 The fairness of a contract settled upon the foregoing 
 terms is obvious, and the desirability thereof as a medium 
 for the transfer of actual cotton commends it to all informed 
 traders. The deliverer need have no fear that he will be paid 
 a greater discount or a less premium for the grades he de- 
 livers below or above Middling, than the same are worth, 
 because he knows that settlement will be made upon the same 
 differences that would obtain if he sold and delivered his 
 cotton in the spot market. The receiver will have no fear of 
 
96 
 
 a transaction under such contract and settlement, because he 
 knows that he will pay the same premiums and discounts for 
 the higher and lower grades delivered that he would pay iC 
 he bought the same in the spot market at hand. The assur- 
 ance of safety in such deliveries is still further apparent in 
 this : that although the receiver may be a merchant or a 
 spinner requiring certain grades, and although it is true 
 that on a contract delivery he may receive some other grades 
 than those for which he has use, still he can receive such 
 grades without fear because he knows that he will pay there- 
 for the premiums and discounts that actually exist at the 
 time, and, consequently, can dispose of such grades in the 
 spot market at the same relative differences that he paid. 
 
 This fair and logical method of settlement of the basis 
 contract not only gives it value as a medium for the transfer 
 of cotton from seller to buyer, but invests the contract with 
 a character for stability, safety and responsiveness which 
 makes it what it is intended to be — the respresentative of 
 spot cotton and the bona fide agency for the great volume 
 of important and necessary hedge transactions.'' Furthermore, 
 and coincident with the character just named, it will be 
 observed that contracts based upon the "Commercial" differ 
 ence method will normally maintain an approximate parity 
 with the value of spot cotton and will not show those ruin- 
 ous discounts under the value of spots which is occasionally 
 exhibited in the case of contracts settled upon the basis of 
 the other; or "Fixed" difference system. 
 
 "FIXED" DIFFERENCES. 
 
 The "fixed" dift'erenee system of establishing the rela- 
 tive value of grades, other than the basis grade, delivered on the 
 basis contract, employed by the Few York Cotton Exchange, is not 
 fair either to the buyer or seller, or to the commodity which is the 
 
97 
 
 subject of the contract. In theory the system is nnfair to both 
 parties and to the thing, but as the system is at times operated by 
 said Exchange, the burden invariably falls upon one party 
 to the contract — namely, the buyer or receiver, and upon the 
 commodity which is the alleged subject of the transaction. 
 
 Under this system, the several grades other than the 
 basis grade, delivered on contract, are not settled for upon 
 the actual difference in value that may obtain at the time, 
 but upon certain arbitrarily assumed differences in value 
 fixed by a committee of the Exchange prior, and possibly long 
 prior, to the time of the delivery. On the second Monday in 
 September a committee of the New York Exchange -meets and 
 decides that each of the grades below Middling are worth 
 respectively so many points less than Middling, and each of 
 the grades above Middling are worth respectively so many 
 points more than Middling. These differences, so fixed, re- 
 main unchanged and unchangeable until the third Monday in 
 November, when the committee meets again and either re- 
 affirms the differeaces already fixed, or establishes a new scale. 
 The differences established at the November meeting of the 
 committee remain unchanged, and, regardless of variations in 
 the actual market differences, unchangeable until the follow- 
 ing September meeting. 
 
 Under this system the differences may not be correctly 
 fixed at either the September or November meeting of the 
 committee, and it is, therefore, entirely possible that a ficti- 
 tious valuation may be given certain low and undesirable 
 grades, which valuation will maintain throughout the entire 
 year and constantly depreciate the contract and exert an 
 injurious influence upon the price of cotton itself. But even 
 if these differences were correctly fixed in the original in- 
 stances, there is no assurance that they will not be out of 
 line almost immediately, or at any time thereafter. The 
 
98 
 
 Telative value of the several grades of cotton does not always 
 remain the same; on the contrary, this value may and does 
 fluctuate with the relative supply of, and demand for the several 
 grades. In a year when the weather conditions during the 
 gathering season are good, the proportion of higher grades 
 will be larger, ahd of lower grades less; hence, the lower 
 grades will be worth relatively more and the higher grades 
 relatively less, or in other words, the difference between the 
 lower grades and Middling, and the difference between the 
 higher grades and Middling will be narrowed. Or, if the 
 contrary conditions should prevail, and the open crop be ex- 
 posed to rains and storms and other damaging factors, the 
 proportion of the lower grades would be greater, and of the 
 higher grades less; hence the grades below the basis would 
 sell at a greater discount and the higher grades at a greater 
 premium than in the other case. 
 
 The "fixed" difference system takes no account of the 
 natural and inevitable variations in grade premiums and 
 •discounts. It assumes, for instance, that if low Middling is 
 in November worth fifty points less than Middling, it will 
 ■continue to be worth exactly fifty points less than Middling, 
 until the following September. This assumption is absurdly 
 false in theory, and in actual experience is flatly contradicted. 
 Indeed, in recent years we have seen a disparity of a full cent 
 per pound between the actual selling price of certain low 
 grades in the markets of, the South and the relative value 
 of such grades fixed by the New York Cotton Exchange. In 
 which case the buyer or receiver on a contract of said 
 Exchange would, by the rules thereof and the fixed differ- 
 ences adopted thereby, be required to pay for such grades on 
 ihe basis of one cent per pound higher than he could sell them 
 for in any market in the world. 
 
 The effects of such incorrect differences or fictitious val- 
 
99 
 
 nation are obvious. If the low and undesirable grades are 
 thus favored, such grades will inevitably be attracted for 
 •delivery on the contract liquidated on such differences. If 
 the buyer of such a contract is not previously advised of 
 this differential against him, he is, when he takes delivery, 
 plainly buncoed. If he is advised that in the event he takes 
 delivery he will be required to pay such fictitious valuation 
 on such grades, he will also be certain that the deliverer will 
 tender such artificially valued cotton. He would, therefore, 
 figure how much he would lose if he took delivery and paid 
 the fictitious fixed difference, and would bid the resultant price 
 for the contract. Depreciation of the value of the contract 
 is the inevitable result of such conditions, and the extent of 
 the depreciation would be measured by the amount of the 
 loss which the receiver would sustain by reason of such 
 injurious method of settling differences. 
 
 The practical results of "fixed" differences and of the 
 •disparity between the value of the contracts liquidated 
 thereon and the value of spot cotton, caused by the employ- 
 ment of this obnoxious system, is to discourage bona fide 
 •deliveries in the course of trade, by making the buyer o L' 
 such contract shun actual delivery as he would the attentions 
 of a highwayman. Having lost its character as the repre- 
 :sentative of cotton in the market, and having been robbed of 
 its utility as a trade agency for the bona fide transfer of 
 ■stock, such contract, so administered, becomes the haven for 
 the flotsam and jetsam of the cotton crop, and, in the hands 
 •of so-called "specialists," the means whereby the owner of 
 ■cotton is wronged and the bona fide hedge trader despoiled. 
 
 It may be, and is, claimed that the "fixed" differences 
 are not always incorrect, but, on the contrary are in the 
 majority of season;s in substantial correspondence with actual 
 differences. It is unnecessary to even deny this claim. 
 
100 
 
 Admitting this contention merely for the sake of argument, 
 the system of "fixed" differences remains indefensible. The 
 fact that such differences may be incorrectly fixed, and may 
 be thrown out. of line at any time during any season, afflicts 
 the whole system with unsoundness, just as one rotten link 
 will destroy the integrity of the whole chain. 
 
 THE REMEDY. 
 
 The "fixed" difference system is indefensible except upon 
 the theory that the function of the Exchange employing the 
 same is to make money for the members thereof, or a certain 
 dominant division of such membership, at the expense of the 
 outsider, of the commodity and of the general trade. ' ' Fixed ' ' 
 differences are likely to be incorrect, and incorrect differences 
 that cannot be corrected, constitute an economic crime. The 
 system should be summarily abated. 
 
 It ' should be borne in mind that this injurious incident 
 of future contract trading does not inhere in libe system 
 itself, but is a defect of administration. A legitimate, meri- 
 torious and indispensable business principle may be, by 
 inequitable practices, prpstituted to unworthy purposes. The 
 remedy in such case is not to prohibit the utilization of the 
 principle, but to outlaw the prostitution thereof. The 
 "fixed" difference method of settling contract deliveries' is 
 not only unsound in theory, but harmful in practice; and 
 the prohibition thereof should be demanded both as a matter 
 of abstract right, and as the means whereby the integrity of 
 a legitimate system of future trading may be preserved. 
 
 The remedy is simple and effective. It is disclosed in the 
 scriptural admonition "if thy right eye offend thee, pluck 
 it out and cast it from thee." Congress may effect the re- 
 quired prohibition by a law denying the instrumentalities of 
 interstate commerce to parties who trade in contracts based 
 
101 
 
 upon this condemned system, and may protect and perfect 
 a proper system of future trading by an enactment that all 
 future contracts not based upon the equitable and approved 
 system of operation in this particular, should be included 
 within the said prohibition. 
 
103 
 
 CHAPTER XV. 
 
 Abuses of Basis Middling Contract in Future Trading. 
 
 (Concluded) 
 Having pointed out how the basis contract may be mis- 
 used and abused in the particular of depreciated and mis- 
 leading private grade standards, and in the particular of 
 artificial, arbitrary and incorrect fixed grade differences, we 
 will now discuss the third general item of injurious usage to 
 which such contract is subject — ^namely, the imposition, bjr 
 the rules of an Exchange, of unfair and onerous charges and 
 burdens upon the buyer who takes delivery of cotton. 
 
 III. EULBS IMPOSING UNJUST BURDENS UPON THE 
 
 RECEIVER. 
 
 It is inadvisable, within the limits of this discussion, to- 
 undertake recommendations as to all the rules which an. 
 deliveries. Our conclusions must, therefore, be in the nature 
 of general principles, with an illustration of a flagrant viola- 
 tion of the rule of fairness for which we are contending. We 
 shall furthermore show the effect of the improper usage com- 
 plained of on the contract contaminated thereby, ajtd shall 
 finally make some suggestions as to remedy. 
 
 It has been heretofore shown that in order that the future 
 contract may be a medium for the actual transfer of cotton 
 and not a highly speculative device; and in order that such 
 contract may be broad and elastic enough to warrant the 
 seller in incurring the obligation without fear of an ambus 
 cade . or " squeeze ' ' ; and in order, finally, as a corollary to 
 the two foregoing propositions, that the volume of contracts 
 available be sufficiently large and the contract market 
 sufficiently comprehensive to supply the non-speculative 
 
103 
 
 trader with quick and adequate hedge protection; it is neces- 
 sary that the contract should cover all the merchantable and 
 spinnable grades grown by the producer, (within a certain 
 reasonable range) and should give the seller or deliverer an 
 option as to which of said grades he would deliver. 
 
 But if the exercise of this option by the seller is to be 
 attended by no injurious consequences, it is imperative that 
 the rules of the Exchange regulating the same, should be 
 scrupulously fair both in the letter of the law and in the 
 spirit of its enforcement. The harmful effects of the adoption 
 by an Exchange of depreciated and misleading secret grade 
 standards; and the injurious results of a system of contract 
 settlement based upon artificial, arbitrary and incorrect fixed 
 grade differences, fall logically within the purview of the 
 pronouncements in this text against unfairness in the rules 
 and regulations of an Exchange. But in addition to these 
 fundamental considerations, there are certain inequities of 
 detail applying in one of the Exchanges of this country, 
 which impose such burdens upon the receiver in the contract, 
 that he will, in order to avoid delivery, sell out his contract 
 even at a considerable discount under the value of cotton in 
 spot markets. We will cite one glaring instance of this dis- 
 crimination against the buyer or receiver in the future 
 contract. 
 
 IMPROPER CERTIFICATION. 
 
 The rules of the New York Cotton Exchange require that 
 before cotton is tendered on a contract, it must have been 
 examined by its classification department and a certificate 
 issued showing the several grades in the lot. Delivery of the 
 cotton is made by the passing of this certificate, together 
 with the warehouse receipt covering the lot, from the deliverer 
 to the receiver. This process is entirely correct, as far as it 
 goes, but under the said rules, it does not go far enough. 
 
104 
 
 The certificate of grade does not give sufficient information. 
 It is true that the certificate shows that a certain number of 
 hales grade Middling, and a certain number Good Middling, 
 Low Middling and so on, as the case may be, but it does not 
 apprise the receiver by any means of identification, which 
 particular bales' are Middling, Low Middling, Good Middling, 
 etc. If the receiver upon inspection of his grade certificate 
 finds that there are in the lot a certain number of bales of the. 
 particular grades he can use — if he is a spinner — or which he 
 can place, — if he is a spot merchant — and he further finds that 
 there are other bales of grades which he cannot use or pres- 
 ently dispose of and which he desires to re-tender upon 
 contract, he is unable to ascertain from the face of the cer- 
 tificate which are the particular bales he wishes to segregate, 
 but is put to the necessity of having the whole lot turned out 
 and sampled; amd furthermore his certificate is by this pro- 
 ceeding cancelled, and if he desires to re-tender any of the 
 cotton on contract, he is required to submit the same to the 
 Exchange for re-inspection, reclassification and re-certifica- 
 tion — all of which entails an added trouble and an extra 
 expense, not called for by any requirement of trade but 
 altogether gratuitous and wanton. 
 
 By way of illustration suppose the receiver is a spinner 
 who requires for his mill cotton grading Strict Middling to 
 Good Middling. Suppose his cert-ificate calls for 500 bales 
 and he finds noted that there are 200 bales than he can use 
 for his particular wants. Naturally, he would desire to with- 
 draw these 200 bales from warehouse and ship the same to 
 his mill, and the remaining 300 bales he would want to re- 
 tender on a contract. Under the said New York Gotten 
 Exchange rule he would, in ®rder to accomplish this result, 
 be obliged to go to the trouble and expense of having the 
 entire lot of 500 bales turned out and re-sampled. He womld 
 
105 
 
 select the said two hundred bales therefrom, and in order 
 that he might re-tender the 300 bales remaining, he would 
 be compelled to re-submit the same to the classification com- 
 mittee of the Exchange, to be by it re-inspected, re-sampled 
 and re-certificated. 
 
 There is no good reason why the certificate in question 
 should not supply the recefver with the information which 
 would enable him to take cotton on contract and dispose of 
 it to advantage. On the contrary, there is every reason why 
 these details should be supplied, if the framers of the con- 
 tract and rules governing the same, intend in good faith that 
 the contract shall be a trade utility and not a cover for some 
 ulterior purpose. If after having made a contract of gale, 
 the seller in any contract, attempts to block delivery by 
 throwing obstacles in the way of the buyer, the presumption 
 is well nigh conclusive that the seller is not anxious to con- 
 ■summate the transaction according to the terms of the con- 
 tsact, but rather the buyer shall compromise, or settle in some 
 other way more advantageous to' the seller. "When an Ex- 
 change regulates the performance of its authorized contracts 
 by rules and regulations whigh give the seller the advantage 
 noted and which gratuitously impose said burdens upon the 
 buyer, the presumption is conclusive that the framers of such 
 contract and such rules dfesire and intend that the contract 
 be not litjuidated by actual delivery, but that the buyer 
 should be frightened off and induced to get rid of his con- 
 tract upon the best terms he can secure from the seller. 
 Indeed it would seem that the Exchange employing siJch 
 method*, instead of desiring to facilitate bona fide deliveries 
 on contract, was determined to prevent such deliveries; and 
 as a motive for such attitude it may with a considerable 
 degree of justice be surmised that said Exchange was afraid 
 that unhampered delivery on contract might be made the 
 
106 
 
 means of depriving a so-called market of its artificially 
 accumulated stock of cotton; and in order to prevent this 
 catastrophe devised the rule in question as vsrell as the others 
 noted, to discourage buyers from demanding cotton, which 
 under the terms of the contract they had every legal and 
 moral right to do. 
 
 PROPER CERTIFICATION. 
 
 ' In order to emphasize the injustice of the certification 
 rule just criticised and the ulterior significance thereof, let 
 us examine the proposition from the other side and consider 
 the fairness and the beneficial results of a proper system of 
 certification. 
 
 The New Orleans Cotton Exchange, as has been hereto- 
 fore stated, furnishes the receiver of cotton on contract, with 
 a certificate showing the grades of cotton contained in the 
 lot delivered. So far the rules of the two Exchanges coincide, 
 but there is a material and significant difference between the 
 two certificates. The New York certificate gives the number 
 of bales of each grade, but does not identify the bales with 
 their respective grades. The New Orleans certificate, on the 
 contrary, shows on its face every bale in the lot, identified 
 by marks or numbers, and opposite said marks or numbers 
 the grade of each bale is specified. Thus the receiver, upon 
 the mere inspection of his certificate, knows the character of 
 his entire purchase and is able to segregate the same accord- 
 ing to the dictates of his interest or engagements. Further- 
 more, after he has withdrawn from the certificate such cotton 
 as he desires to use or ship, the Exchange will, without cost 
 to the holder and without any more formalities than a request, 
 issue a new certificate for the residue. 
 
 An exporter or spot merchant who supplies the mills, 
 may, for example, take actual delivery on a future contract 
 
107 
 
 when it matures. Under a proper system of certification, 
 when he inspects his certificate he will find that there are a 
 certain number of bales of a given grade which he can sell 
 to a given trade or to a particular mill. With his certificate 
 before him he will order out of warehouse these particular 
 bales by marks or numbers and ship them to his customer. 
 He will find certain other grades he can sell to certain other 
 mills or trade, and these he will order out in the same manner. 
 He may thus dispose of the entire lot received without leav- 
 ing his desk and with no more labor and expense than is 
 involved in writing out the necessary orders on the ware- 
 house. Or, if there is any residue that he cannot place, all 
 he has to do is to make the request, and the Exehang^ will 
 give him a new certificate for such residue, with each bale 
 classed and its grade accurately identified therewith, as in 
 the first instance, without any cost whatsoever. 
 
 This rule of certification is in its terms and in its object 
 fair and logical, and not only .encourages producers, mer- 
 chants and spinners to use the contract as a medium of trans- 
 fer, distribution and supply, but by its honest and equitable 
 treatment of both buyer and seller, tends to make the contract 
 a representative of the commodity, and not the subservient 
 agent of a clique of individuals who make their money by 
 divorcing the contract from the alleged subject matter thereof 
 and subjecting it to the vagaries of manipulation. 
 
 The impairment of the hedge value of the future con- 
 tract — which is, as heretofore stated, its most vital and com- 
 prehensive function — effected through the abuse herein speci- 
 fied, together with the abuses heretofore set out, is now 
 obvious. If the future contract is to be a hedge, it must stand 
 in the place of the cotton covered thereby, or in other words, 
 be its representative, and not an independent agent subject 
 to influences and variations to which the commodity itself is 
 
108 
 
 not subject. The party requiring a hedge may not take or 
 make delivery of the cotton covered by the future contract, 
 but if he is t© have an adequate and bona, fde hedge, he must 
 lie assured of protection and fair treatment in the event that 
 he does take or make delivery. It makes no difference how 
 many different parties may have and use a contract during 
 its currency, some parties will have to liquidate it at maturity. 
 The rules governing deliveries and settlements, therefore, give 
 the character to a contract throughout its entire life. A. 
 future contract which is by the rules of delivery and settle- 
 ment deprived of its representative and responsive character, 
 does not, and cannot supply a legitimate hedge. It, there- 
 fore, follows that such a rule as the one compl-ained of herein, is 
 not only unfair to individuals, but is subversive of the funda- 
 mental mer.its and legitimate functions of future contract 
 trading. 
 
 THE REMEDY. 
 
 The remedy for this particular abuse of the basis future 
 contract and of the seller's option thereunder, does not appear 
 to be so direct and specifie as the remedies in the two afore- 
 mentioned cases. If a cotton exchange, either because qf the 
 exigencies of its location or necessities, or from a wilful dis- 
 regard of its semi-public character and its obligations to all 
 branches of the trade it is supposed to serve, sees fit by its 
 rules and regulations to utilize its machinery for partisan 
 and private ends, it is not a simple matter to directly circum- 
 vent such design. All the details of administratitfin cannot be 
 specifically regulated, because it would be impracticable for 
 the law-making power to frame ar set of rules for the govern- 
 ment of all the business details of an Exchange. But the case 
 is by no means hopeless. Theje are certain definite and essen- 
 tial principles which may be enforced, and made operative for 
 the proper working of the system. In the first place, the 
 
109 
 
 compulsory adoption ty the Future Contract Exchanges of 
 the National Grade Standards and of the "Commercial Diflfer- 
 ence" system of establishing the relative value of the several 
 grades in deliveries, would place the future trading system 
 upon sound fundamentals; and regulation in these vital re- 
 spects would not only prevent the abuses complained of, but 
 would by logical compulsion bring about the adoption of 
 detail rules consistent with such fundamentals. In the second 
 place, an act of Congress commanding the observance by the 
 Exchanges of certain cardinal principles of regulation and 
 management, would consistently carry a provision charging 
 some department of the government with supervision with 
 respect to the proper observance of the said mandatory pro- 
 nouncements. An act framed for intelligent application to 
 the obvious abuses practiced under the name of future con- 
 tract trading, with the supplemental safeguard of supervision 
 by a department of the Federal government, would without 
 doubt minimize, if it did not entirely eradicate the injurious 
 incidents of future trading, add to the usefulness of the 
 Exchange, and preserve to the cotton trade that indispensable 
 protection which can be afforded by future contract trading, 
 and by that agency only. 
 
 RE-STATEMENT OF ABUSES. 
 
 Having in the last three papers directed attention to the 
 fundamental abuses to which an adequate and workable 
 future contract is subject — ^which abuses constitute, in fact, 
 the basis of the complaints that are recklessly made against 
 the whole system., of future trading — we will, in order that 
 attention may be concentrated upon the salient points of the argu- 
 ment herein made, bring this part of the discussion to a con- 
 clusion with a concise re-statement of the evils that militate 
 against the system which we are endeavoring to explain and 
 
110 
 
 which, when properly administered, we are determined tu 
 defend. 
 
 Grade standards upon which contract settlements are 
 made, if too low, or if not in accord with the views of the 
 trade; and if in addition, such standards are held for the 
 information of the favqred few and not accessible to the 
 trading public, open the door for fraud: and even if there- 
 should be no fraudulent intent or action, the use of such 
 standards renders the specific performance of the terms of 
 the contract by acceptance of delivery thereon, a hazardous 
 and injurious undertaking, and thus undermines the bona fides 
 of the future contract and perverts its character as an agency of 
 trade. 
 
 "Fixed" grade differences, in the first place give those 
 who "fix "them, the power to invest certain grades compris- 
 ing a minute proportion of the crop, with a fictitious value 
 when tendered on contract, thereby crucifying the buyer or 
 receiver; and by the same act divorcing the contract from its 
 proper relation to spot cotton, and making it the subject of 
 unrelated manipulative fluctuations : and in the second place, 
 even though the differences are not deliberately fixed for the 
 purposes mentioned, still if such differences are fixed and 
 inflxible, the natural variations in the relations of supply 
 and demand, may at any time bring about the harmful con 
 ditions stated. 
 
 Insufficient and incomplete grade certificates, and other 
 phases of discrimination against the buyer or receiver on 
 contract, cannot be designed for any other purpose than to 
 discourage such buyer or receiver from demanding or taking 
 the cotton on his contract, and to induce him to get rid of 
 his obligation at a discount to the end that interested sellers 
 might buy in their shorts at a profit. Such practices are not 
 only not indefensible in principle, but in practical effect they 
 mulct the bona fide user of the contract, and assist in depre- 
 
Ill 
 
 dating the value of both the contract and the commodity, 
 and in defeating the legitimate ultimate purpose of the 
 former — namely, the transfer of actual cotton by the final 
 holders thereof. 
 
 NOT PARTISAN OR SECTIONAL. 
 
 It is no part of our purpose to make war upon any insti- 
 tution per se. We have deduced certain principles which 
 apply to all cotton exchanges wherever domiciled and under 
 whatever name they may be called. If it so happens that the 
 rules, regulations or practices of a particular Exchange are 
 in conflict with these generalizations, then we think that such 
 Exchange, by name, is the legitimate subject of criticism. 
 Our object is to promote a better understanding of the issue 
 of future trading, to the end that the admitted evils may be 
 eradicated without the necessity of destroying or impairing 
 the good. The importance of the issue in both of its branches, 
 justifies us in speaking plainly of the offenders as well as oT 
 the offence. 
 
 The New York Cotton Exchange offends flagrantly, in- 
 sistently and arrogantly in the three particulars stated. This 
 institution maintains these cardinal irregularities in contemp- 
 tuous disregard of the demands of both the producing and 
 manufacturing divisions of the cotton trade for a fair and 
 responsive contract, and in open defiance of the strictures of 
 Commissioner Herbert Enox Smith of the Bureau of Cor- 
 porations. 
 
 These conditions should and must be changed. Not by 
 any vindictive legislation aimed at the New York Exchange, 
 nor by any wholesale prohibition of future contract trading. 
 The direct and effective method is to establish certain stand- 
 ards of trading to which the future contract exchanges must 
 conform. If they do not or can not conform, it is their 
 
112 
 
 fault or misfortune. By analyzing the system and its abuses 
 we have endeavored to lead up to the point of outlining a 
 concrete plan for improvement. Legislation is needed, but 
 vpe must be very sure that our efforts in this regard shall be 
 intelligent, discriminating and constructive; not haphazard, 
 vindictive or destructive. We will devote a next succeeding article 
 to a discussion of the latter, or hurtful, modes of reformation, and 
 in the article following thereafter, we will bring the series to a close 
 with certain suggestions for legislation along what we believe to 
 be sane and constructive lines. 
 
113 
 
 CHAPTER XVI. 
 
 Future Contract Trading : . Summary of Uses, Abuses, 
 
 Remedies. 
 
 The series of articles on Future Contract Trading, which 
 has been running in the Union Guide, will, as stated in our last 
 issue, be brought to a conclusion with a discussion of the 
 pending and proposed legislation relating to the subject. If 
 we have properly diagnosed the trouble; the next important 
 step is to find the appropriate remedy. A physician may be 
 accurate in his conclusions as to the nature of his patient's 
 malady, and yet through a want of care and thorough atten- 
 tion, may administer the wrong remedy and till the patient. 
 In an effort to avoid this fell conclusion, we will re-state the 
 case in as concise a form as possible, to the end that our 
 minds may firmly grasp the essentials of the subject before 
 we undertake the important .and dangerous task of formu- 
 lating .the efficient remedy. 
 
 LEGISLATION ENACTED AND PENDING. 
 
 In recent years a great hue and cry has been raised 
 against trading in contracts for the future delivery of cotton. 
 All of the Southern States, with the exception of two, have 
 enacted laws, more or less drastic, directed against such trad- 
 ing. Organized future trading is carried on in the New Or- 
 leans Cotton Exchange and the New York Cotton Exchange. 
 Neither the State of Louisiana nor the State of New York 
 has adopted a;nti-future trading laws, hence it is still possible 
 to buy and sell future contracts in said Exchanges. The said 
 state anti-future laws have not in fact prevented the citizens 
 of said states, who are engaged in the cotton business and for 
 
114 
 
 whose business future trading is a necessity, from buying 
 and selling for future delivery, but these laws do to a great 
 extent actually prevent such trading by parties who have no 
 use for the future contract other than as a medium for specu- 
 lation. But the anti-future advocates are not satisfied with 
 what has been accomplished, and have been and are now at- 
 tempting, through Federal legislation, to prohibit all future 
 trading, whether necessary or unnecessary, whether legiti- 
 mate or otherwise, by closing up the future trading depart- 
 ments of the American Exchanges, and thus depriving Amer 
 ican citizens and producers of both the right and the oppor- 
 tunity to trade in said contracts, and turning over to the 
 European markets and manufacturers the uncontested priv- 
 ilege of shaping future prices for their own selfish interest 
 and ends. 
 
 In this crisis it is imperative that the people of the South 
 who are interested in the price that cotton brings and in the 
 welfare of the cotton trade — and all the people of the South 
 are either directly or indirectly interested in these is.sues — 
 shoud proceed with caution and judgment, lest by a reckless 
 interference with economic laws, the whole complex machin- 
 ery of the cotton trade shall be thrown out of gear and the 
 fabric of modern business issuing therefrom, come forth rent 
 and wrecked. 
 
 FUTURE CONTRACT TRADING. 
 
 Future Contract Trading is not understood by the great 
 majority of people, and is woefully misunderstood by the 
 great majority of its opponents. It is an economic issue which 
 calls for scientific and discriminating attention. It has been 
 made a political issue and utilized as the basis of demagogic 
 appeals to prejudice. Without any intention of defending 
 
115 
 
 the abuses that have been practiced in the name of future 
 contract trading, but with every desire, and a fixed deter- 
 mination, to exert our every effort to wards the eradication 
 of such abuses, we are constrained to issue a solemn warning 
 to the farmers of the South, that they pay greater heed to 
 the admonitions of sane counsel than to the fustian of stump 
 speaking. 
 
 Future Contract Trading per se is not iadj but is on the 
 contrary entirely legitimate, and in the evolution of the trade 
 has become absolutely necessary to the advantageous move- 
 ment of the immense volume of the present day cotton crop. 
 In order that the future contract should perform its full and 
 proper function, the trading therein must be concentrated at 
 certain given centers and systematized by certain appropriate 
 rules and regulations. These necessary centers of operation 
 where trading is reduced to rule and order and where buyers 
 and sellers in person or through representatives, are brought 
 together, thus constituting the future markets, are called 
 future trading Exchanges. The system of trading as devel- 
 oped, has been, and is, productive of great fundamental ben- 
 efit to all divisions oi the cotton trade from the producer to 
 the spinner and from the spinner to the ultimate consumer. 
 But it is not to be denied, but rather charged, that in this 
 development abuses have been engendered and injurious re- 
 sults entailed. Analysis will demonstrate that these abuses 
 and results arfe not the logical consecjuences of future trad- 
 ing, but the fruits of inequitable rules and regulations and 
 injurious practices in force, particularly, in one of the Amer- 
 ican Exchanges. To differentiate these incidental evils from 
 the fundamental good and to destroy the one without harm 
 to the other, is one of the most important, if not the para- 
 mount, economic issue before the people of the South to-day. 
 
116 
 
 THE CONTRACT. 
 
 The future contract is a legal and binding obligation. 
 Two parties, through their agents, enter into an engagement, 
 the one to deliver and the other to receive a certain number 
 of pounds of cotton at a stated price and at a specified time 
 in the future. This contract, when it matures, must be liquid- 
 ated either by specific performance of the terms thereof, 
 ■or settled by the agreement of both the final parties thereto. 
 The original principals to the contract, however, need not 
 necessarily be the final holders. The obligations of the con- 
 tract may be in the meantime transferred to any number of 
 parties. This facility of transfer makes available a large vol- 
 ume of trading, and out of this supply, the non-speculativo 
 producer, merchant, buyer and manufacturer is able to secure 
 his hedge, or that protection against fluctuations in price, 
 which is as essential to any of the parties mentioned, as a 
 policy of insurance is to the owner of any property. 
 
 PRACTICAL USES AND BENEFITS. 
 
 If the spinner can go into the future market and by buy- 
 ing contracts insure himself that he can obtain a requisite 
 amount of cotton at a stated price when he needs it, he is in 
 a position to contract ahead for sale of the output of his mill, 
 -and thus enlarge his business for his own profit, and increase 
 the consumption of cotton for the benefit of the producer. 
 The more business the spinner does, the greater amount of 
 cotton he consumes, and the more stable his business and 
 the fewer risks he takes, the cheaper will he be able to sell 
 his manufactured output. He can secure this protection in 
 only one way, and that is through the future market. If this 
 market were destroyed and the spinner deprived of his hedge, 
 the following results are demonstrable : Because of decreased 
 •consumption the farmer would receive less for his product. 
 
117 
 
 and because of the increased risk and cost of manufacture, 
 he and all wearers and users of cotton goods would pay a 
 higher price for their supply. 
 
 If the spot cotton buyer in the interior markets of the 
 belt can go into the future market and by selling contract,? 
 insure himself that he -will obtain a stated jtnee for any spot 
 cotton that he might buy, he is in position to make an offer 
 on all cotton that comes to market, even though he has at 
 the time no order from the spinners for such cotton as he 
 might purchase. Thus an outlet is created for cotton that 
 must be marketed, even when there is no demand from the 
 actual users thereof or the manufacturers; and the farmer is to 
 an extent relieved from the burden of carrying the cotton 
 until such time as the spinner had need for it, or else of auc- 
 tioning it off to bargain hunters. The buyer can secure this 
 necessary protection or hedge, in only one way, and that is 
 through the future market. If the facility in question were 
 destroyed, this source of demand would be curtailed, and if 
 the farmer was dependent upon the spinners alone to buy his. 
 cotton, he would frequently find times at which it was impos- 
 sible to sell, and in any and all events he would have to carry 
 his cotton until it suited the spinners to buy it, or else sell it 
 at the price dictated by his adversary. The demonstrable 
 results in such case would be the elimination of the small 
 buyer, the concentration of the buying power into a few 
 strong hands in combination against the farmer, the estab- 
 lishment of a limited number of large markets and the de- 
 struction of the multitude of smaller buying centers, the anni- 
 hilation of buying competition, and in consequence of all 
 these, an inevitable decrease in the amount the producer 
 would receive for his crop. 
 
118 
 
 PRESENT SITUATION. 
 
 In this connection attention may be profitably called to 
 the present situation in cotton. By some unthinking or un- 
 informed persons, the great decline during the months of 
 September and October is charged to speculation. To the 
 attentive observer such statement is perceived to be far from 
 the truth. The pressure on the market causing the decline 
 in prices has come primarily and consistently from the owner 
 of actual cotton. It is not our purpose to criticise the farmer 
 for his precipitation in rushing his cotton on an over-supplied 
 and unwilling market. The excuse of necessity in some cases 
 and of fear in others, may be urged in extenuation. But the 
 fact remains that the farmers themselves did smother the 
 market with offerings. Speculation was influenced by the 
 course of current spot prices and did not lead the decline. 
 Spot offerings broke the market and future contracts fol- 
 lowed. That this statement is true can be proved by refer- 
 ence to the future contract quotations of the New Orleans 
 Cotton Exchange and the comparative spot prices, especially 
 in the markets of the eastern part of the belt. 
 
 But it will be asked, if our contention be true that the 
 future market affords an outlet for cotton that is weighing 
 upon the market, why has not the future market absorbed the 
 recent and current surplus of offerings and maintained prices? 
 Our answer is that to an extent this is exactly what the fu- 
 ture market did do. There was no human agency that could 
 have withstood the effects of the stupendous rush of supplies 
 to market, but if it had not been for the future market, in 
 which buyers could hedge their purchases, these effects would 
 have been disastrous instead of distressing. Suppose there 
 had been no future market, and suppose, because of inability 
 to hedge purchases for which there was no present demand, 
 
119 
 
 the great multitude of buyers had been driven from the mar- 
 ket and the producer left dependent upon the current needs 
 and demands of the spinner, and upon these demands alone? In 
 such case the pressure would have been infinitely grater than it 
 was, and we would have had, not a serious decline in tho 
 price of cotton, but a panic in the cotton trade. Let those 
 who are clamoring for the prohibition of future trading and 
 the destruction of the future markets, ponder well this pro 
 tective phase of the future contract, and what it means not 
 only as an agent for stimulating an advancing market, but 
 as a buffer to a market temporarily over-supplied and smothered by 
 actual cotton. 
 
 Briefly, the hedge supplied by the future contract, and by 
 that agency alone, constitutes an insurance against the risks 
 of handling cotton, which insurance enables a multitude of 
 buyers to compete with each other and with spinners in the 
 purchase of the farmer's crop, and enables the spinner to 
 conduct his business at the minimum of cost and risk to him- 
 self, and to enlarge his consumptive capacity to the great 
 benefit of the producers of cotton. If this protective facility 
 should be destroyed the efEect upon the value of the com- 
 modity and upon the machinery of the cotton trade, would 
 be similar to the demoralization of general business and the 
 shrinkage in the value of all property, that would follow the 
 prohibition of all underwi'iting by insurance companies. 
 
 But in magnifying the importance and necessity of future 
 contract trading we must not lose sight of the evils that have 
 grown out of the sytem under which such trading has been 
 in instances operated. If we are under obligation to preserve 
 and utilize the beneficial functions, we are no less constrained 
 to prohibit and destroy the injurious features thereof. 
 
120 
 
 EVILS OF FUTURE TRADING. 
 
 The obvious evils which future contract trading has de- 
 veloped, may be designated under two general heads, viz. : 
 Excessive Speculation, and Manipulation of Prices ly Means of 
 Unfair Bules and Practices in the Exchange. Blame for the first 
 mentioned injurious development falls primarily upon the in- 
 dividuals who misuse and abuse the contract facility; repre- 
 hension for the second named, must be directed toward the 
 Exchange which formulates the rules and permits the prac- 
 tices complained of. 
 
 EXCESSIVE SPECULATION. 
 
 The great wave of speculation which swept the country a 
 few years ago and which was to a great extent responsible 
 for the crusade against future trading, had one important 
 phase of manifestation which has been erroneously charged 
 against contract trading and cotton exchanges. This phase 
 was what is called "Bucket-Shopping." A large proportion 
 of the said results of the speculative mania is properly attrib- 
 utable to the indefensible practice named. Bucket Shops are 
 not Cotton Exchanges, nor is "bucket-shopping" trading in fu- 
 ture contracts. The bucket shop is a gambling institution 
 pure and simple, and its proprietors bet with their customers 
 upon the fluctuations that occur in the value of actual eon- 
 tracts, as registered by actual trades made in legitimate 
 cotton exchanges. There is as much sense in attempting to 
 destroy bucket-shopping by prohibiting future contract trad- 
 ing, as there would be in an effort to stop betting on horse 
 races by killing all the horses. Inasmuch, therefore, as 
 bucket-shopping and future contract trading are two separate 
 and entirely distinct propositions, and in further considera- 
 tion of the fact that bucket-shopping has been practically de- 
 stroyed by legislation in the several Southern States, and can 
 
131 ■ 
 
 be rooted up and east out forever by other legislative acts 
 specially directed thereat, this practice can not logically Hbe 
 considered as an evil for which future contract trading is 
 responsible. 
 
 Speculation is neither wrong nor wicked, per se; but on the 
 contrary gives life to all trade and vitality to all enterprise. 
 But speculation may be abused, and vsrhen this is the case re- 
 strictive measures should be employed. Speculation by the 
 general public, and excessive speculation, even by those who 
 are financially able, and equipped in other respects to assume 
 the risk entailed, constitutes an injury to the individual 
 trader and an unhealthy and hectic element in the body eco- 
 nomic. But as has been stated, this is the fault of the individ- 
 uals who abuse the principle of speculation. The speculative 
 principle is not only a beneficial and vital influence in trade 
 and being such, should not be eradicated, but it is an instinct 
 inherent in human nature, and being such, can not be erad- 
 icated. The remedy lies in regulation. To undertake to pre- 
 vent the individual from abusing the principle of speculation, 
 by attempting to destroy all opportunity to speculate, would 
 be no less illogical than to essay the suppression of profanity 
 in individuals, by tjie command that all men should remain 
 speechless and dumb. But this evil of excessive and indis- 
 criminate speculation, as it relates to the effect on the indi- 
 vidual speculator, has been to a great extent taken care of. by 
 the State laws heretofore mentioned. The larger economic 
 phase, or the eifeet of excessive speculation upon the com- 
 modity, and the trade therein, which is the subject of such 
 transactions, is easily traceable to a particular future trading 
 institution, organized for the purpose of promoting specula- 
 tion, and operated under a system of rules and regulations 
 which puts a premium upon speculative manipulation. Thus 
 we arrive at the crux of the complaint against future contraeit 
 
123 
 
 trading — the specific source of the contamination which has 
 brought the whole system into reproach, namely. 
 
 MANIPULATION BY MEANS OP UNFAIR RULES AND 
 PRACTICES IN A COTTON EXCHANGE. 
 
 A future contract Cotton Exchange, if it is to realize its 
 proper and beneficial function, and if it is to escape condem- 
 nation as a menace and an injurious influence in the trade 
 it purports to serve, must recognize as the fundamental basis 
 ■•of all its operations, its obligations to the public, or to the 
 entire division of the public interested in the commodity 
 which is affected by its transactions, and must not direct its 
 activities upon the assumption that it is a private club, or- 
 ganized in the interest of its members, or a certain favored 
 ■clique of its membership, to enable these to profit at the ex- 
 pense of the outsider, and of the commodity which is the os- 
 tensible subject of trade. If the Exchange is organized upon 
 the first mentioned theory, the rules and regulations under 
 which it operates will of logical necessity be open, fair and 
 •equitable to all concerned; if organized upon the other theory 
 it will, in its laws and practices, make manifest its partial, 
 unfair and inequitable purposes. 
 
 There are three fundamental particulars in which a fu- 
 ,ture contract exchange may offend against the plain prin- 
 'ciple of right, mulct the uninitiated individual trader, depre- 
 ciate the value of the future contract and of the commodity 
 ior which it is supposed to stand, convert a logical trade 
 utility into a highly speculative medium, and finally, by such 
 means, encourage speculation not of the legitimate, stimulating, 
 beneficial type, but of the injixrious, "sure thing," manipulative 
 (variety. 
 
133 
 
 The first of these particulars of offense is the use by an 
 Exchange of grade standards, as the basis of settlements on con- 
 tract deliveries, which are depreciated, misleading and not 
 known or accessible to the parties to the contract, unless they 
 happen to be members of that Exchange. 
 
 The second particular mentioned, is the adoption by an 
 Exchange of the uneconomic, inequitable and condemned sys- 
 tem of "fixed" grade differences which govern in contract de- 
 liveries, and w^hich, as has been demonstrated by disinterested 
 testimony, not only establishes artificial values, to the detri- 
 ment of the individual trader, the trade and the commodity 
 traded in, but opens the door to actual fraud. 
 
 The third particular is exemplified in rules imposing un- 
 equal burdens upon the huyer or receiver on a contract, thereby 
 penalizing the latter for demanding and taking delivery of 
 cotton thereon, discouraging him from so doing, depreciat- 
 ing the value of both the contract and the commodity, and 
 encouraging speculation on one side of the market — namely 
 the short side. The most conspicuous example of such rules 
 is the imperfect system of grade certification heretofore ex- 
 plained. 
 
 THE CUKE. 
 
 This is the case against future contract trading. It will 
 be readily perceived that the untoward developments in the 
 system are not inherent in the system but are the results of 
 specific acts of misuse and abuse. The basis of the trouble 
 can be reached without difficulty through the enactment by 
 Congress of certain fundamental provisions to which all fu- 
 ture contract Exchanges must conform. To be more specific : 
 An act of Congress 
 
134 
 
 (a) making compulsory the adoption by such Ex- 
 changes of the grade standards approved and promul- 
 gated by the United States Department of Agriculture ; 
 
 (b) outlawing the obnoxious "fixed" difference 
 system; and 
 
 (c) authorizing a department of government to 
 supervise the operations of such Exchanges and report 
 violations to the proper officers, 
 
 should effectually eradicate the evils growing out of the 
 wrong use of the system of future trading without the neces- 
 sity of destroying the system itself, and thereby bringing de- 
 moralization upon the cotton trade, and loss upon the pro- 
 ducer of the great world-desired asset of the South. 
 
125 
 
 CHAPTER XVII. 
 Anti-Future Legislation Pending and Proposed. 
 
 Having set forth the economic necessity for a properly- 
 regulated system of future contract trading; having laid 
 down certain fundamental principles that should govern 
 those Exchanges in which future trading is conducted; hav- 
 ing pointed out certain injurious developments in the future* 
 •contract system as it is operated under certain unfair rules 
 and regulations specified; and finally, having reached the con- 
 clusion that the beneficial function of the system can be pre- 
 served and perfected and the evil developments eliminated 
 only through regulative legislation and supervision by the 
 Federal government, it is now in order to examine certain 
 pending legislative efforts and to offer some concrete sug- 
 gestions as to the kiud and form of legislation that will pro- 
 duce the desired results. 
 
 I 
 DESTRUCTIVE LEGISLATION. 
 
 The first and most important consideration is that legis- 
 lation on this subject should be regulative or remedial and 
 not destructive. Those drastic anti-future measures which 
 propose to eradicate the incidental evils by prohibiting all 
 future contract trading ■ would, if enacted into laws, smite 
 the cotton trade hip and thigh, demoralize the demand for 
 cotton and the markets therefor, and would saddle the 
 greater share of the resultant loss upon the man who ulti- 
 mately pays the penalty for wildcat economic legislation — 
 namely, the producer. No less disastrous would be the effects 
 of legislation, although in terms not absolutely prohibitive 
 
126 
 
 and although according to the professions of proponents, 
 merely regulative, which being based upon an imperfect 
 knowledge of the subject or a crude conception thereof, pro- 
 poses a use of the future contract altogether impossible to 
 honest men, and hence in logical result, prohibitive. 
 
 The acts now pending before Congress are all of the 
 aforementioned destructive character. Typical of this sort of 
 legislation is the Scott Bill which was introduced in the 61st 
 Congress, amended in House Committee on Agriculture, 
 passed by the House, amended in Senate Committee, and 
 finally dying on the calendar upon the adjournment of Con- 
 gress, ilarch 4th last. This bill has been re-introduced by 
 Hon. A. S. Burleson of Texas, and is now pending. As it is 
 probable that this measure will receive consideration at the- 
 forthcoming session, it is of vast importance that its signif- 
 icance be fully understood. Before undertaking an analysis 
 of the technical provisions of this bill a little introductory 
 matter may be with profit presented, for the' purpose of show- 
 ing that the measure is not a great moral agent, as its pro- 
 ponents claim, but merely a clumsy attempt to interfere with 
 economic customs and laws. 
 
 ALLEGED ANTI-GA:\IBLING MEASURES. 
 
 When the Scott bill was originally introduced back in 
 1909, its prohibition covered future contracts relating to- 
 grain, cotton and all other farm products. It was proclaimed 
 by its proponents as a great moral measure which would anni- 
 hilate the pernicious practice of "gambling" in farm products. 
 As the bill fared on its way, however, the "moral" phase- 
 met with a mishap. We find that the bill, when it had finally 
 been reduced to the form in which it passed the House, no- 
 
127 
 
 longer applied to grain and the other farm products, but its- 
 proliibition related to cotton contracts only. It appears that tho- 
 grain farmers of the West, fully satisfied with the effective- 
 "anti-bucket-shopping" laws which their several States had' 
 enacted, and realizing the great advantage accruing to them 
 from legitimate future contract trading, objected to the in- 
 clusion of their commodity within the prohibition of Mr., 
 Scott's bill. It may be remarked in passing, that Congress- 
 man Scott represented a Kansas district, that — as we are- 
 informed — in the last election he made his campaign largely 
 upon his activity in connection with his anti-future bill, and 
 that his prosperous constituency promptly retired him and 
 elected another Congressional representative in his stead. 
 
 But, passing these collateral considerations and return- 
 ing to the main issue, the fact remains that the Scott bill in 
 its ultimate form, and its successor, the Burleson bill in its- 
 present form, did not and does not prohibit future contracts 
 relating to grain and the other farm products, but such con- 
 tracts only as relate to cotton alone. If it is morally wrong 
 to trade in cotton future contracts, it is morally wrong to 
 trade in such contracts when they relate to grain or any other 
 commodity. A man can not claim to be a good prohibitionist 
 if while he fulminates against corn whiskey, he winks at the 
 drinking of rye. By eliminating grain and other farm pro- 
 ducts from the prohibition of the proposed statute, its pro- 
 ponents have definitely abandoned the moral issue. They 
 must quit prating about the sin of gambling and give us some 
 economic basis for their measure and advance some argument 
 to show why trading in cotton futures is bad for the cotton 
 trade, while trading in grain futures is good for the grain 
 trade. Probably they will tell us that the system of trading 
 
138 
 
 in grain contracts is regulated to better advantage than is 
 the case "with the system of trading in cotton contracts. This 
 brings the issue squarely in line with our contention that fu- 
 ture contract trading per se is beneficial, but that certain inci- 
 dental developments therein are injurious; and is an unequiv- 
 ocal admission that the remedy lies in the regulation of the 
 system under which such trading is conducted and not in the 
 annihilation of the future contract itself. The test by which 
 any proposed legislation should be tried is, therefore, clearly 
 perceivable. If a proposed law Avill regulate future contract 
 trading and preserve the benefits of the same, it is good and 
 should be enacted; if it materially impairs or destroys the fa- 
 cility, it is bad, and should not be passed. Does the Scott 
 bill, and its successor the Burleson bill, fall Avithin the one 
 characterization or the other? We claim that this proposed 
 legislation is destructive and not regulative ; and further- 
 more, we insist that it would not only destroy the hedging 
 facility and prohibit the legitimate use of the contract by 
 self-respecting and non-speculative traders, but would actually 
 encourage the illegitimate use of the future contract by irre- 
 sponsible and unprincipled gamesters. In other words, such 
 a laAv would prove to be not only futile, but pernicious. 
 
 SCOTT OR BURLESON BILL ANALYZED. 
 
 The Scott, or Burleson bill, as it is now called, is typical 
 of the anti-future measures pending in Congress. The dis- 
 cussion of the provisions of this bill will, therefore, be appli- 
 cable to all the others pending. 
 
 This bill in its first essential provision declares that it 
 shall be unlawful for any person to transmit by telegraph, 
 telephone, wireless telegraph, cable, or other means of com- 
 
129 
 
 munication interstate or international, any message offering 
 to make or enter into a contract for the purchase and salo 
 of cotton for future delivery, without intending that such 
 cotton shall be actually delivered or received. 
 
 Thus the lawfulness of a future contract is made to de- 
 pend upon the intention of the parties thereto at the time of 
 the making of the contract; and furthermore, it is not suf- 
 ficient that the parties shall intend to receive and deliver 
 actual cotton, but they must intend to receive or deliver the 
 cotton embraced in the contract into which the parties have 
 entered. In other words, under this provision, no contract 
 for the future delivery of cotton shall be lawful unless the 
 parties thereto shall intend under any and all circumstances 
 that they themselves shall specifically perform the engage- 
 ments of the contract. The penalty for the violation of this 
 provision is a fine, or imprisonment, or both. 
 
 But realizing that the intention of a man, or that dis- ' 
 position which he holds in hfe secret mind^ is an illusive and 
 unprovable fact, the proponents of the bill attempt to rescue 
 it from utter futility by making it incumbent upon the par- 
 ties to a future contract to commit themselves in the matter 
 of intention by a direct statement under oath; and in order 
 to secure a conviction of unlawful intention upon these un- 
 happy parties, proponents attempt to arbitrarily import a 
 sinister significance into otherwise lawful actions. 
 
 Therefore, the second essential provision of said bill re- 
 quires all parties sending a message relating to a contract 
 for the future delivery of cotton to make an affidavit cover- 
 ing certain specified particulars of fact, which in effect con- 
 stitutes a sworn statement that the intention of the sender 
 of such message is to receive or deliver the cotton covered 
 
130 
 
 hy such contract; and it is provided, furthermore, that proof 
 of failure to make said affidavit, or proof that the parties 
 did not actually make or take delivery of the cotton called 
 for in such contract, shall constitute prima facie evidence that 
 there was no intention to take or make delivery of such cot- 
 ton when the contract was made, and consequently that the 
 same was unlawful. Violation of this provision is likewisp 
 punishable by fine or imprisonment, or both. 
 
 In short, under said bill, every contract for the future 
 delivery of q.otton shall be unlawful unless every successive 
 party thereto shall intend to deliver or receive actual cotton on 
 said contract, and unless such parties shall make affidavit 
 covering such intention, and finally, unless each and every 
 party thereto shall actually, and in fact, specifically perform 
 the terms of said contract by receiving and delivering the 
 cotton called for thereby. 
 
 WOULD DESTROY HEDGING. 
 
 The proponents of this bill claim that they do not pro- 
 pose to demoralize legitimate cotton business; they spe- 
 cially disclaim any intention of destroying the hedging func- 
 tion of the future contract; and they make the wholly inac- 
 curate and illogical statement that their bill will not produce 
 the aforementioned results, but will eliminate gambling 
 transactions only. This claim and statement is based upon 
 
 the flagrant mistake of assuming that every contract not 
 i 
 
 liquidated by each successive holder thereof by actual receipt 
 or delivery of cotton thei^on is necessarily a speculative con- 
 tract, when as a matter of truth and fact few of the non- 
 speculative hedging contracts are ever by the parties thereto 
 liquidated by such receipt or delivery. Therefore, by forcing 
 
131 
 
 ■each and every party to a future contract to make or takt! 
 .actual delivery thereon, and by thus denying to any parties 
 to such contract the right of selling out or transferring the 
 same to other parties, the said bill strikes at the very vitals 
 •of the principle of hedging, and would, if it should become a 
 law, absolutely prohibit the use of this necessary facility. 
 
 The importance of the hedging function of the future 
 ■contract has been heretofore emphasized, and the manner in 
 which this protection may be secured has been fully ex- 
 plained. The spinner broadens his business, enlarges his re- 
 -quirements and increases the consumptive demand for cotton 
 by contracting to deliver his output during long future pe- 
 riods; and he could not make these forward commitments 
 unless he could protect the same by buying a hedge in the 
 future contract market. The buyers of cotton at the thou- 
 sands of points throughout the belt, supply markets for cot- 
 ton even when there is no present demand from spinners 
 therefor. But these buyers could not make and carry such 
 purchases unless they could protect themselves against a 
 •decline in the market pending the time when they could dis- 
 pose of such holdings, by selling a hedge in the future eon- 
 tract market. 
 
 HOW SPINNERS' AND BUYERS' HEDGES WOULD BE 
 
 DESTROYED. 
 
 Under the present system of hedging, the spinner, when 
 lie enters into commitments to supply manufactured goods, 
 -to the cloth merchant, protects himself by buying contracts 
 for the raw cotton. The buyer, when he purchases cotton for 
 •which he has no order, or which he is unable at present to 
 sell to the spinner, protects his purchases by selling contracts 
 for future delivery. There are two future contract markets 
 
132 
 
 in this country — one at New York and one at New Orleans' — 
 and one principal market abroad, at Liverpool, where hedges' 
 may be bought and sold. The contracts bought and sold under 
 the auspices of the cotton exchanges in said markets, specif- 
 ically require that the cotton covered by the contract shall" 
 be delivered and received in the respective markets and atr 
 no place else. The parties desiring the hedges are located at' 
 different points throughout the entire country. Such parties,, 
 therefore, wire or telephone their orders to brokers in one or 
 the other of the exchanges mentioned, who execute the con- 
 tract for and in behalf of their principals. 
 
 If the party in such case is a spinner, he may not, and' 
 in the great majority of cases does not, intend to take deliv- 
 ery in New Orleans, New York or Liverpool, but expects and! 
 intends to select such grades as he requires at the nearest 
 market ■when available, or out of the most desirable stock or offers- 
 which come to hand. He desires the hedge as a matter of 
 protection until he has bought the spot cotton, probably from 
 some merchant in his own town, and when he has so bought; 
 he no longer needs the contract and, therefore, sells it out to 
 some other party. If he was compelled to take delivery on' 
 the contract, he would in the first place be by no means sure- 
 that he would receive the specific grades he needed; and in 
 the second place, he would have to pay the freight, moving' 
 and carrying charges on the cotton from its point of origin,, 
 (which might possibly be in the same county or town in' 
 which his mill was located) to New York, New Orleans or 
 Liverpool, as the case might be, and thence back to his mill.- 
 This would be an economic absurdity. 
 
 The spot buyer in the multitude of Southern markets,, 
 under the present system of hedging, sells his contract for 
 
133 
 
 rfuture delivery either in New York, New Orleans or by a 
 bare possibility, in Liverpool. He expects and intends to de- 
 liver actual cotton, but not in either of said markets. He expects 
 and intends to deliver his holdings to some spinner customer, 
 -possibly near at hand, when the latter needs supplies. He wants 
 ihe future contract merely as a hedge until such time as he can 
 ^lace his stock. When he has placed the same, he no longer needs 
 'the hedge contract and, therefore, closes it out to some other party. 
 If he was compelled to make delivery on every such future con- 
 tract into which he entered, he could not sell to the nearby spin- 
 ner, but would be obliged to ship his holdings to JSfew Orleans, 
 ^sTew York or Liverpool, as the ease might be. This, also, would 
 be economically absurd. 
 
 But the bill in question says unequivocally that all contracts 
 for future delivery of cotton shall be unlawful unless the parties 
 -thereto intend to make and take delivery of the actual cotton under 
 -the terms thereof and shall make affidavit of such intention, and 
 shall in fact so deliver and receive. The spinner in Augusta, 
 ■Georgia, for instance, if he bought a hedge contract in the New 
 York Exchange would under the provisions of said bill be 
 compelled to take delivery in New York or else he would be 
 fined or sent to jail; and the spot merchant in Augusta, if he 
 ;sold a hedge contract in New Orleans, would, likewisi;, 
 under the provisions of said bill, be compelled to 
 deliver in New Orleans or else pay a fine or be thrown 
 into jail. Thus the spinner and merchant even in the same town, 
 if they undertook to hedge their commitments, would, instead of 
 • dealing directly with each other, erect a Chinese wall between them- 
 selves. "Hedging" under the Scott or Burleson bill would not be 
 .-a protection, but a calamity. Let no one be misled in this regard. 
 J.i the Scott bill, or any act constructed upon similar lines, should 
 
134 
 
 become a law, and if its provisions should be enforced, the Ameri- 
 can manufacturer and the American spot merchant would be 
 summarily denied the vital and indispensable protection of the 
 hedge contract. Are proponents willing to assume responsi- 
 bility for such a wreckage of the machinery of modern trade ? 
 
 WOULD PfiOHIBIT THE GOOD AND BNCOUEAGE THE 
 
 BAD. 
 
 But we have made the statement that not only would the bill 
 in question destroy the beneficial and legitimate use of, the future 
 contract as a protective, or hedging agency, but it would actually 
 encourage the pernicious gambling phase, which its proponents- 
 claim it is designed to destroy. We have shown how the said bill 
 would destroy the one, let us now consider how it would encourage- 
 the other. 
 
 It has been shown that the provisions of the bill' deprive- 
 American manufacturers and American spot merchants of the use 
 of the future contract as a hedge ; but how about, the speculators ? 
 It is true that the responsible and self-respecting members of the 
 speculative division of trade would, along with the spot merchants- 
 and spinners, refrain from laying themselves liable to a prosecution 
 for perjury or a term 'in jail for failure to receive or deliver cotton- 
 called for in the contract; but how about those irresponsible and 
 unprincipled speculators who would be more than willing to ply 
 their trade provided they could do so without fear of being caught?' 
 Would this bill interfere with these ? On the contrary, it not only 
 would not prevent these injurious practices, but by- an express 
 provision protects those who operate therein. 
 
 The bill in question provides that a separate affidavit of inten- 
 tion need not be made to cover each particular transaction, but 
 that the party can give all his transactions prima fade legality by 
 swearing that he will not send any messages relating to the pro- 
 
135 
 
 hibited contract within the period of six months next succeeding the 
 date of the atEdayit. If the speculator of the undesirable class men- 
 tioned undertook to execute his contract in New Orleans or New 
 York, the federal authorities could trace these contracts and if it 
 should be found that no cotton was delivered or received thereon,, 
 the party could be convicted under the act. But suppose the party 
 should make the required omnibus six months affidavit of intention,, 
 and then open an office for the purpose of executing contracts on 
 the Liverpool (jotton Exchange. Prima fade all the messages 
 relating to these contracts would be lawful because of the affidavit. 
 But suppose the contracts concerning which the messages were sent, 
 were not lawful, but gambling ventures pure and simple. What 
 danger would attend the sending of such messages and the opera- 
 tions in such contracts ? True the act provides that proof of failure 
 to receive or deliver the actual cotton would be prima facie evi- 
 dence of the imlawfulness of the contracts. But how could this 
 proof be obtained in the cases mentioned? The contracts were 
 supposed to have been executed in Liverpool, and the "United States 
 authorities would be wholly without authority to compel the 
 English broker to disclose whether or not there had been actual 
 delivery on the contracts. Ordinarily, this difficulty might be 
 obviated by haling the American contract trader into court, and 
 by his books proving that there had been no actual delivery; but 
 the act itself by specific provision makes such a proceeding futile 
 and nugatory and confers absolute immunity upon the suspect by 
 the following proviso : "but no person shall be prosecuted or sub- 
 "jected to any penalty or punishment whatever for or on account 
 "of any transaction, matter or thing concerning which he may 
 "testify or produce evidence of any character whatever." 
 
 Thus in logical and inevitable effect, the act would not only 
 destroy the good that is in future contract trading, but wouldl 
 encourage and protect the bad. 
 
136 
 
 BASED UPOX WROXG PEINCIPLE. 
 
 Our limited space will not permit us to go into a discussion 
 of the specific injurious effects that would follow the enactment 
 of the measures criticized. Enough has been said to show that 
 the principle of the proposed legislation is wrong. It is based 
 upon an imperfect knowledge of the subject matter of the proposed 
 prohibition, and upon a reckless disregard of consequences, which 
 makes it necessarily mischievous and destructive. The contrary 
 principle should prevail. The end to be obtained should be clearly 
 ascertained and then the appropriate and effective means to such 
 end should be carefully selected and judiciously employed. This is 
 a vital economic issue involving the material welfare of millions of 
 people and the prosperity of one of the great industries of the 
 world. Congress has no more right to single out the cotton trade 
 to experiment thereon by the application of nostrums, or the enact- 
 ment of rough-house legislation designed to satisfy the prejudice 
 or to advance the prestige of certain of its members, than has a 
 cotton exchange, for example, the right to enact laws and rules 
 which will enable some of its members to prey upon the great 
 industry and to mulct the multitude of people concerned therewith. 
 
 In the next succeeding article we will bring this series to a 
 close with certain recommendations for legislation based upon the 
 analysis of the subject attempted in these columns, and animated 
 by what we apprehend to be a proper consideration for all the 
 great interests involved. 
 
137 
 
 CHAPTER XVIII. 
 
 Remedial and Regulative Legislation. 
 
 Assuming that future contract trading per se is not only 
 beneficial to the cotton trade but necessary thereto ; and 
 admitting that the system under which future contract trad- 
 ing is presently operated is faulty in some respects and has 
 in some instances developed drawbacks which not only mili- 
 tate against the efficiency of the contract as a trade agency, 
 but which injuriously affect the market for the commodity 
 vsrhich is the subject of the transaction, it then follows that 
 the task before us is to devise some legislative measure whicli 
 Tvill, in the first place, establish a proper and equitable system 
 of future contract trading; and which will, in the second 
 place, eradicate the known evils that exist and prevent a 
 xecurrence of the same. 
 
 SUMMARY OP THE GOOD TO BE MAINTAINED AND 
 THE EVILS TO BE ABATED. 
 
 Our investigations have disclosed that a Middling basis 
 ■contract, permitting the delivery of spinnable and merchant- 
 able grades only, based upon the grade standards promul- 
 gated by the United States Government, and settled on the 
 lelative actual or commercial difference in value between tho: 
 basis grade and the other grades delivered, existing in the 
 market where the contract is made and at the time the same 
 is liquidated, is the typically fair contract and the only con- 
 tract that would or can be traded in to an ex^put sufficient 
 to make it serve its economic purpose. 
 
 "We have also found that the evils which have attached 
 themselves to the system of future contract trading proceed 
 
138 
 
 from two general causes : first, excessive speculation in the 
 contract ; and second, unfair and partial rules and regulations 
 of an exchange which give certain individuals an advantage, 
 impair the trade utility of the contract and adversely affect 
 the value thereof. Under the head of speculation, we have 
 endeavored to show that the harm proceeded, not from specu- 
 lation per se, but from encouragement to speculate offered to 
 those who were not qualified to participate therein, and from 
 gambling wages effected in certain evil institutions known 
 as "Bucket Shops." Under the head of unfair and partial 
 rules and regulations of exchanges, we have found that the 
 fundamental evil lies in the claim to irresponsibility which 
 a certain exchange endeavors to maintain; and we have found 
 that the particular and specific causes of harm lie in tlu> 
 refusal of such exchange to adopt fair and authoritative 
 standards of classification, in the rule compelling settlement 
 of contract deliveries to be made on the basis of fixed arbi- 
 trary and incorrect grade differences; and finally, in the 
 imposition of burdens and hardships upon the receiver of 
 cotton in the contract for future delivery. 
 
 Addressing ourselves to these merits and demerits, wc- 
 would recommend the passage of a Federal Statute which 
 would fix the status of a legitimate contract as pointed out, 
 and correct and prohibit the obvious abuses thereof. Thr- 
 difficulty lies in differentiating the permissible and beneficial 
 class of future contracts from the class which is bad and 
 should be prohibited. A wholesale prohibition would result 
 in much more harm than good, and an unintelligent tinkering 
 with the question would prove mischievous if not destructive. 
 The object of the exposition and analysis attempted in this- 
 series of editorials is to aid in reaching a just conclusion irt 
 this regard. 
 
139 
 
 It is submitted that a bill drafted on the following lines 
 would cover the several particulars pointed out and answer 
 the several requirements specified. 
 
 THE PROPER BILL. 
 
 A BILL 
 
 to prohibit the use of the instrumentalities of interstate and 
 foreign commerce, such as railroads, ships and vessels, 
 mail, telegraph, telephone and express companies, from 
 being used to conduct or to aid or assist in conducting 
 interstate and foreign transactions, or interstate or 
 foreign coijtracts for the purchase or sale of gambling 
 contracts for the future delivery of cotton, and to prO' 
 hibit such contracts. 
 
 SECTION 1. BE IT ENACTED BY THE SENATE AND 
 HOUSE OP REPRESENTATIVES OP THE UNITED 
 
 STATES IN CONGRESS ASSEMBLED: 
 
 That every contract, order, direction or request trans- 
 mitted directly or indirectly by mail, by telegraph or by 
 telephone, or by ship, vessel or railroad or by express or by 
 any other means of communication from a pois(in, flrm, cor- 
 
 poration or association m one state, ,or territory, or m the 
 
 r C ■ ' ' ,- t 
 
 District of Columbia, or in any foreigi?,, cojmtry, to another 
 
 person, firm, ■ corporation, or association m , /another' state 'or' 
 
 territory, or from any foreign counlrjT to -another 6t^te'or 
 
 territory, or to the District of Columbia, for the purchaise or 
 
 sale of cotton for future delivery in oiij (^a^the door of or 
 
 under the rules of any cotton exchange or I a^ociation whose 
 
 members, or allowed habitues, or authorized visitors, deal in 
 
110 
 
 such contracts, either as brokers or as principals, or else- 
 where, is hereby declared to be a transaction of interstate 
 commerce or of commerce with foreign countries. 
 
 Sec. 2. That all such contracts, orders, directions or 
 i-equests for the purchase and sale of cotton for future de- 
 livery where the intention of the parties is not to make or 
 receive an honest and bona fide delivery of cotton, are hereby 
 declared to be gambling transactions. 
 
 Sec. 3. That all transactions for the purchase and sale 
 of cotton comprehended in Section 1 hereof, except as here- 
 inafter declared and specified; and all the transactions com- 
 prehended in Section 2 hereof, are hereby prohibited and 
 hiade unlawful, illegal, null and void, and the person, firm 
 or corporation that pays any money, or gives anything of 
 Value in settlement or in payment of such prohibited contract 
 shall have the right to recover the same in any court of the 
 United States having jurisdiction of the receiver. This right 
 shall be barred by the limitation of one year from the date 
 of the payment or delivery of anything of value. 
 
 Sec. 4. Be it further enacted, etc., That it shall be un- 
 lawful for any person, firm, corporation or association to 
 send or cause to be sent from one state or territory of the 
 United States- or the District of Columbia to any other state 
 pr territory of the United States, or the District of Columbia, 
 or to, a,Ayi fbijejgn e&ani-rj, by mail or by telegraph, telephone, ship, 
 v;essel, railr9g.d br depress company, or knowingly to receive or 
 kaO'vV'i'nglv to causer to be received in any state or territory 
 of the United States, or the District of Columbia, by mail, 
 or by . telegraph, . telephone, ship, vessel, railroad or express 
 cbmpany, ,a-ny letter, telegram or message, or written or 
 printed order relating to a contract for the future delivery 
 tof cotton such as is prohibited in this act. 
 
141 
 
 Sec. 5. Be it further enacted, etc., That it shall be un- 
 lawful for any person, firm, corporation or association own- 
 ing or operating any interstate or foreign telegraph, or tele- 
 phone, or ship, or vessel, or railroad, or express company, or 
 any person acting as officer, agent or employe of such owner, 
 knowingly to use, or knowingly to allow the use of such 
 property for the transmission from any foreign country, or 
 from one state or territory of the United States, or from 
 the District of Columbia, to any state or territory of the 
 United States or the District of Columbia, or knowingly to 
 receive, or knowingly to cause to be received in any state or 
 territory of the United States or the District of Columbia 
 from any other state or territory of the United States or 
 the District of Columbia, or from any foreign country, any 
 letter, telegram, message, or written or printed order relating 
 to a contract for the future delivery of cotton such as is 
 prohibited in this act. 
 
 Sec. 6. Be it further enacted, etc., That the provision.s 
 of this act shall apply to all interstate and foreign contracts 
 for the future delivery of cotton which fall within the pro- 
 visions of Section 2 of this act, no matter where or by whom 
 executed, and shall apply to all interstate and foreign con- 
 tracts for the future delivery of Cotton, executed in or on or 
 by the members of, or brokers of, or allowed habitues, or 
 permitted visitors of all so called cotton exchanges or asso- 
 ciations of persons, which do not expressly and clearly pro- 
 vide by their rules or by their by-laws as follows, and do not 
 Avith proper diligence enforce such rules : 
 
 1st — That every contract to buy or sell cotton for future 
 delivery made on its floor, or under its rules, or between its 
 members, or between its members and third persons is an 
 
142 
 
 enforceable obligation to deliver and to receive actual cotton 
 as specified in the contract, and that any stipulation or under- 
 standing to the contrary between the parties is prohibited. 
 
 2d. — That the standards of grades adopted and established 
 by the United States Department of Agriculture shall be the 
 standards upon which Spot Quotations are based and future 
 contracts settled in all exchanges situated in the United 
 States. 
 
 3rd. — That all contracts for the sale of cotton for future 
 delivery executed in any exchange in the United States shall 
 be on the basis of the Middling grade of the Standards of 
 the said Department of Agriculture, unless particular grades 
 are by special agreement specified; and no grade below Good 
 Ordinary and no grade above Middling Fair on the said 
 Standards, and no unmerchantable cotton of any grade what- 
 ever shall be deliverable on said contracts. 
 
 4th. — Where cotton other than the basis grade is deliv- 
 ered on a future contract, the difference above or below the 
 contract price which the receiver shall pay for such grades, 
 shall be determined by the actual difference in value between 
 such grades and the basis grade found to exist in the market 
 for spot cotton where the exchange is located and at the time 
 when the cotton is delivered and received; and no arbitrary 
 difference in value between the several grades shall be fixed 
 .or established by or under any rule or by-law of the exchange. 
 5th. — "Where in contract deliveries a certificate of grade 
 is issued by the exchange, then such certificate must show 
 upon its face the grade of each bale certificated, identifying 
 the same by mark or number with its grade. 
 
 6th. — ^The reporting of false or fictitious sales, and all 
 fraudulent conduct by a member with another member or 
 
143 
 
 with a non-member shall be punished by expulsion from the 
 exchange. 
 
 Sec. 7. — Be it further enacted, etc., That the: United 
 States Bureau of Corporations is hereby specially charged 
 with the duty of examining from time to time, the rules, 
 regulations and by laws of all Cotton Exchanges and asso- 
 ciations, for the purpose of discovering whether they comply 
 with the provisions of this Act, and it shall report the result 
 of such examinations to the District Attorneys of the respec- 
 tive districts in which such exchanges or associations may be 
 located. 
 
 Sec. 8. — ^Be it further enacted, etc.. That any person who 
 shall violate any of the provisions of this act shall, upon con- 
 viction thereof, be punished for each offense by a fine of hot 
 more than one thousand dollars nor less than two hundred and 
 fifty dollars, or shall be imprisoned for not more than six 
 months nor less than one month, or both. 
 
 See. 9. Be it further enacted, etc.. That this act shall go 
 into effect within ninety days from the date of its approval 
 by the President, and that all laws and parts of laws contrary 
 to or in conflict with the provisions of this act be and the 
 same are hereby repealed. 
 
 SUMMARY. 
 
 This bill would make cotton future contracts executed 
 on the floor and under the rules of the exchanges, transac- 
 tions of interstate commerce and, therefore, subject to the 
 regulative power of Congress: it would declare that all con- 
 tracts for the future delivery of cotton where the parties 
 intended not to make delivery were gambling contracts; and 
 it wo'uld prohibit and nullify such contracts and would deny 
 
144 
 
 the use of the mails and the instrumentalities of interstate 
 commerce to these gambling transactions. Thus Bucket 
 Shopping and kindred practices would be annihilated. 
 
 But the bill goes further: It would regulate the ex- 
 changes in which future contract business is transacted, by 
 denying the use of the mails and instrumentalities of inter- 
 state commerce to all such transactions unless the rules of 
 the exchange in which they were consummated provided for 
 certain specified standards of settlement and enforced cer- 
 tain principles of correct method and fair dealing. 
 
 And finally, the regulative function of the proposed law 
 is made effective by lodging in one of the departments of 
 the Federal Government the authority to see that the man- 
 dates of the statute are observed. 
 
 If our understanding of the nature, functions and neces- 
 sity of future contract trading is correct, and if our diag- 
 nosis of the faults and evils of the system, as it has been in 
 instances operated, is true, then the proposed bill will strike 
 at the evils only, while permitting and encouraging the ben- 
 eficial and protective functions of forward trading.