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Author: 
 
 U.S. Congress. House. 
 
 Title: 
 
 Regulation of commodity 
 exchanges 
 
 Place: 
 
 Washington, D.C. 
 
 Date: 
 
 1935 
 
COLUMBIA UNIVERSITY LIBRARIES 
 PRESERVATION DIVISION 
 
 BIBLIOGRAPHIC MICROFORM TARGET 
 
 MASTER NEGATIVE # 
 
 ORIGINAL MATERIAL AS FILMED - EXISTING BIBLIOGRAPHIC RECORD 
 
 255.1 
 
 Un35 
 
 U.S. Congress. House. Committee on agriculture, i 
 Regulation of commodity exclianges. Hearing before 
 the Committee on agriculture. House of representa- 
 tives. Seventy-fourth Congress, first session on 
 H.R. 3009 (Commodity exchange act). February- 5,7, 
 8, 1935. Serial B. Washington, Govt, print, off., 
 1935. 
 
 iii, 130 p. 23cm. 
 
 / 
 
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3)255.1 
 
 Un35 
 
 
 LIBRARY 
 
 School of Business 
 
 
 \ 
 
lu 
 
 S^S-if-g 
 
 ^"^ school of Business l^hrwx yj V 
 Coluinllia Uni\^r8ity 
 
 Regulation of Commodity Exchanges 
 
 HEARING 
 
 BETFOBB 
 
 THE COMMITTEE ON AGRICULTURE 
 HOUSE OF REPRESENTATIVES 
 
 SEVENTY-FOURTH CONGRESS 
 
 FIRST SESSION 
 ON 
 
 H. R. 3009 
 
 (Commodity Exchange Act) 
 
 FEBRUARY 6» 7/ 8/ ) 936 
 
 » - • 
 
 Serial B 
 
 
 114803 
 
 UNITED STATES 
 
 GOVERNMENT PRINTING OFFICE 
 
 WASHINGTON : 1936 
 
W^^r^n^lJ'''^^'^^^ «°"^^ Carolina 
 WALL DOXEY, Mississippi 
 
 J. R. MITCHELL, Tennessee 
 
 ^^L?- C^^«I^EN. Kentucky 
 
 Ha1rv'^p''^^''''^^^N' •^»' Virginia 
 HABRY P. BEAM, Illinois 
 
 JAMES G. POLK, Ohio 
 
 RICHARD M. KLEUERG, Texas 
 
 FRBD CUMMINGS. Colorado 
 
 WALTER M. PIERCE, Oregon 
 
 FRED BIERMANN, Iowa 
 
 E. M. OWEN. Georgia 
 
 WILLIAM^?- v'l^.''^'' ^^«^*^ ^"^"n'^ 
 ^J^xT.^^ ^- NELSON. Missouri 
 FRANK E. HOOK, Michigan 
 HARRY B. COFFEE, Nebraska 
 
 icJttooA oi Business Library 
 Coliiiiibla IT* ■ ^ -^■^•-'-' * V- 
 
 COMMITTEE ON AGRICULTURE 
 MARVIN JONES, Texas. Chairman 
 
 CLIFFORD R. HOPE. Kansas 
 
 ioSS^'^^ KINZER, Pennsylvania 
 FRED C. GILCHRIST, Io^^a 
 CHARLES W. TOBEY. New Hampshire 
 L. T. MARSHALL, Ohio 
 
 ^rJ^^Lt «0<^^^ IN. New York 
 AI GUST H. ANDRBSEN, Minnesota 
 
 GERALD J. BOILEATJ, Wisconsin 
 
 ANTHONY. J. DIMOND. Alaska 
 SAMUEL W. KINK, Hawaii 
 SANTIAGO IGLESIAS, Puerto Rico 
 
 Katherink Whekleb^ Clerk 
 
 CONTENTS 
 
 Statement of — p^ 
 
 ' ^®^^®» Pbelan, general counsel, New York Cotton Exchange, New 
 
 ^ —"■ — — — — — — — — — — — — — — — — _>_._ AC 
 
 Boylan, Robert P., president ChiVa«"o" Board" of TrVdV,~CW^^^ 9 87 
 
 Caldwell, Louis G., member law firm of Kirkland, Fleming, Green & ' 
 
 Martm, Washington, D. C. (attorney for Chicago Board of Trade) 11 
 
 Christian, Paul J., representative New Orleans Cotton Exchange' 
 
 Washington * ' g^ 
 
 Coughlin, James J., president Brokers' Association Chicag'o' Board' of 
 
 Irade, Chicago oj gg 
 
 Davis, George H., Terminal Elevator Grai'n"Me'rch'an'ts'A"ssn'"and ' 
 chairman Gram Exchange Code Authority, Kansas City, Mo 37 80 
 
 Duvel, Dr. J. W. T., chief Grain Futures Administration, Washing- ' 
 ton, D. C trt fso 
 
 ?#"v'i Edwin, Jr., floor broker, Chicago' Board" of 'fr"a"d"e", "Chicago '22 
 
 Mehl, J. M^ Grain Futures Administration, Washington, D C_ '*"" 66 
 Thatcher, M. B., representative Farmers National Grain Corporativ'es 
 
 and National Agricultural Conference, Chevy Chase, Md 84 
 Wickham, Thomas Y., chairman Grain Committee on "Nati"o"n"a"l 
 
 Aflfairs, Chicago 3 44 
 
 
EEGULATION OF COMMODITY EXCHANGES 
 
 TUESDAY, FEBBUABY 5, 1935 
 
 House of Representatives, 
 Committee on Agriculture, 
 
 Washington^ D, C, 
 
 The committee met at 10 : 30 a. m., Hon. Marvin Jones (chairman) 
 presiding. 
 
 The Chairman. The committee will come to order, please. 
 
 (The committee had under consideration H. R. 3009, to amend the 
 Grain Futures Act, which is printed in the record, as follows:) 
 
 [H. R. 3009, 74th Cong., Ist sees.] 
 
 A BILL To amend the Grain Futures Act to prevent and remove obstructions and 
 hurdens upon interstate commerce in grains and other commodities by regulating trans- 
 actions therein on commodity futures exchanges, by providing means tor limiting 
 short selling and speculation in such commodities on such exchanges by licensing 
 comorission merchants dealing In such commodities for future delivery on such 
 exchanges, and for other purposes. 
 
 Be it enacted hy the Senate and House of Representatives of the United States 
 of America in Conffress assetnhled, That section 1 of the Grain Futures Act 
 (U. S. C, title 7, sec. 1) is amended to read as foUows: "This act shall be 
 known by the short title of * Commodity Exchange Act.' " 
 
 SBa 2. The Grain Futures Act (U. S. C, title 7, sees. 1 to 17, inclusive) is 
 amended by striking out the word " grain " wherever it appears in such act 
 and inserting in lieu thereof " commodity ", " ai^ycommjyyjUty ", or " com- 
 modities ", a6 the case may require!^ "^ 
 
 Sec. 3. Section 2 of the Grain Futures Act (U. S. C, title 7, sec. 2) is 
 amended by — 
 
 (a) striking out the third sentence of paragraph (a) and inserting in lieu 
 thereof the following : " The word ' commodity ' shall mean wheat, cotton, rice, 
 com, oats, barley, rye, flaxseed, grain sorghums, and mill feeds." ; and 
 
 (b) adding at the end of paragraph (a) the following sentences: " The words 
 'cooperative association of producers' shall mean any bona fide cooperative 
 association, corporate or otherwise, owned or controlled by producers of agri- 
 cultural products, whether or not qualified under the act of Congress of Feb- 
 ruary 18, 1922 (U. S. C, title 7, sees. 291 and 292), or any organization acting 
 for a group of such associations and owned or controlled by such associations. 
 The words * member of a contract market ' shall mean and include individuals, 
 associations, partnerships, corporations, and trusts owning or holding member- 
 ship in, or admitted to membership representation on, a contract market or 
 given members' trading privileges thereon. The words 'futures commission 
 merchant ' shall mean and include individuals, associations, partnerships, corpo- 
 rations, and trusts engaged in soliciting or in accepting orders for the purchase 
 or sale of any commodity for future delivery on or subject to the rules of any 
 contract market and that, in or in connection with such solicitation or accept- 
 ance of orders, accepts any money, securities, or property (or extends credit in 
 lieu thereof) to margin, guarantee, or secure any trades or contracts that result 
 or may result therefrom. The words 'floor broker' shall mean any person 
 who, in or surrounding any * pit ', • ring ', * post ', or other place provide<l for 
 the meeting of persons similarly engaged, shall engage in executing for others 
 any order for the purchase or sale of any commodity for future delivery on or 
 subject to the rules of any contract market, and who for such services receives 
 
 I 
 
 
 / 
 
iT 
 
 I REGULATION OF COMMODITY EXCHANGES 
 
 slrilHfJnrf niJ'lT'?'''" ^i ^.^^^.'* <^<>^Pe«sation. The words ' the commission' 
 AUorilerOe^^^^^^^^^ ^^ Agricuture. the Secretary of Commerce, and the 
 
 anfemied b!--'''''^ ^^ '^'^ ^^^''' ^"^"'^ ^"^ ^^' ^' ^- "^^^ ^^ «^<^- »> ^^ 
 
 (a) striking out tiie word "except" at the end of the first paragraph- 
 
 (b) striliing out all of paragrai>h (a) ; and paragrapu, 
 
 (c) striking out the parentheses and letter •* b " and tlie word ♦'Where" at 
 
 n .nf i;}-''^"^ f paragraph (b) and inserting in lieu thereof the words "elcept. 
 in an.v ot the toregoing cases, wliere." ^^yx^\^ 
 
 WnTi \J:^c^ ?h!'? n"^"'^' ^'*^ ^^ amended by adding after section 4 (U. S. C, 
 title <, sec. G) the following new sections: 
 
 ume^TonablP^J'm.^f«Hf '^ speculation in any comm<»dity. causing sudden or 
 1 md^Vf- n^^ t.uctuations or unwarranted changes in the price of such coin- 
 nmn,*'iu ''V'^r '"^^ ""necessary burdcu on interstate commerce in such 
 CMUi uodity. For the pui-pose of diminishing, eliminating, or pwentii L such 
 biirden the commission shall, by order, fix such lin.it o^l^^ Ln Ihe amoSnt 
 t S^r^^^eS^f-l,f^L?!j-^^---^^^ future. deil";^r 
 
 innri-^t« «nH ^'^^ ^-A.^ ^-^4 '-"-•* '^^ "^*^^' ^" aiiicrent amounts for dilTerent 
 bf fiiefl to nnniv f '^n'^"^?"^" ^^ ^^''^'^^'^ months, or a trading limit may 
 Me fixed to apply to all markets and all futures of any commoditv Such 
 
 A?'and m\ hfl/r df^^'-'^t for the different purposes of rbnuagrapte 
 tionv; nml in^ho^ n ^""^ vS^ ^^ ^"^^^ "' ^^^^"^^ amounts for buying opera- 
 m?ssion shall ^n It^h ^^^l^*^^^«"t amounts Uv selling operations. Ae coin- 
 mission shall, m such order, fix a reasonable time (not to exceed ten davs) 
 after the order's promulgation ; after which, and unti such order is si snend^ 
 modified, or revoked, it shall be unlawful for any person- bu^pended, 
 
 (A) directly or indirectly to buy or sell, or agree to buv or sell under 
 contracts of sale of such commodity for futire delivery on or subject to tlie 
 rules of any contract market, any amount of such commodity during any onl 
 
 ^Ztl\^2. i" ^^""^V^ '^^ trading limit or limits fixed by the cSimiLs^Sa 
 m such order lor or with respect to such commodity ; or 
 
 .nnf. \'^'T^'*T «^ i'ldijectly to buy or sell, or agree to buy or sell, under 
 rn ii^nf'nn^ sale of such commodity for future delivery on or subject to tli 
 fn !?.? o. ^ contract market any amount of such commodity that shall result 
 
 IvHth .?i.T^ ^'■^'''' ^v."^^ ^^*"- ""^ "^t ^ho^ i»««^tion at any one time in or 
 with respect to any such commodity ih excess of the trading limit or limits 
 
 "?o^V»?^ f''"i•"'^^^'?''.!'' ^"'^J' '\''^^'' f^i-^r with respect to such commodity. 
 .,^. ^ r . trading limits authorized in paragraph (1) of this section shall 
 not apply to transactions which are shown to be bona fide hedging transactions 
 Transactions known as » spreads' or 'straddles' may be exempted in such 
 order of the commission, or the commission in such order may fix different 
 tratlmir linntJi applyinjr to 5=iK-h sproid or straddle transaction^ 
 
 "(3) For the puriK)se of paragraph (2) of this section, hedging transactions 
 shall mean sales of any commodity for future delivery on or subject to tho 
 rules of any board of trade, to the extent that such sales are offset in quantitv 
 by tlie ownership or purchase of cash commodities or, conversely, purchases 
 for luture delivery to the extent that such purchases are offset by sales of 
 cash commodities. There shall be included in the amount of any commodit' 
 which may be hedged by any person— 
 
 "(A) the amount of such commodity such person is raising, or in good faith 
 Intends or exi^ects to raise, within the next twelve months, on land (in the 
 United States or its Territories) which such person owns or leases; 
 
 "(B) and amount of such commodity the sale of which for future delivery 
 would be a reasonable hedge agjiinst the products or byproducts of such com- 
 modity owned or purchased by such person, or the purchase of which for future 
 delivery would be a reasonable hedge against the sale of any product or 
 byproduct of such commodity by such person. 
 
 "(4) This section shall apply to a person that is licensed as a futures 
 commission merchant or as floor broker under authority of this act only to the 
 extent that transactions made by such persons are made on behalf of or for 
 the account or benefit of such person. This section shall not apply to trans- 
 actions made by, or on behalf of, or at the direction of, the United States or 
 a duly authorized agency thereof. ' 
 
 REGULATION OF COMMODITY EXCHANGES 6 
 
 ** Sec. 4b. It shall be unlawful for any member of a contract market, or for 
 any correspondent, agent, or employee of any member, in or in connection with 
 any order to make, or the making of, any contract of sale of any commodity 
 ininterstate- xcwminerce, or for future delivery, made, or to be made, on or 
 subject~to the rules of any contract market for or on behalf of any person if 
 such contract for future delivery is or may be used for (1) hedging any trans- 
 action in interstate commerce in such commodity or the products or byproducts 
 thereof, or (2) determining the price basis of any such transaction in interstate 
 commerce in such commodity, or (3) delivering any such commodity sold, 
 shipi)ed, or received in interstate commerce for the fulfillment thereof — 
 ^'**(A) to cheat or defraud or attempt to cheat or defraud such person; 
 
 *'(B) willfully to make or cause to be made to such person any false report 
 €ft statement thereof, or willfully to enter or cause to be entered for such person 
 any false record thereof; 
 
 "(C) willfully to deceive or attempt to deceive such person by(^anj, means 
 whatsoever in regard to any such order or contract or the disposition or execu- 
 tion of any such order or contract, or in regard to any act of agency performed 
 with respect to such order or contract for such person ; or 
 
 "(D) to bucket such order, or to fill such order by offset against the order 
 or orders of any other person, or willfully and knowingly and without the 
 prior consent of such person to become the buyer in respect to any selling 
 order of such person, or become the seller in respect to any buying order of 
 such person. 
 
 " Sec. 4c. It shall be unlawful for any person to offer to enter into, enter into, 
 or confirm the execution of, any transaction involving any commodity, which 
 is or may be used for (1) hedging any transaction in interstate commerce in 
 such commodity or the products or byproducts thereof, or (2) determining 
 the price basis of any such transaction in interstate commerce in such com- 
 modity, or (3) delivering any commodity sold, shipped, or received in interstate 
 commerce for the fulfillment thereof — 
 
 (A) if such transaction is, or is of the character, commonly known to the 
 trade as a ' wash sale ', * cross trade ', or ' accommodation trade ', or is a fic- 
 titious sale; 
 
 "(B) if such transaction is, or is of the character, commonly known to the 
 trade as a ' privilege ', ' indemnity ', ' bid ', ' offer ', ' put ', ' call ', ' advance guar- 
 anty ', or • decline guaranty ', or 
 
 "(C) if such transaction is used to cause any price to be reported, registered, 
 or recorded which is not a true and bona fide price. 
 
 " Nothing contained in this act shall be construed to prevent the exchange of 
 futures in connection with cash commodity transactions or of futures for cash 
 commodities, or of ' transfer trades ' or '-office trades ' if made in accordance 
 with board of trade rules applying to such transactions and such rules shall not 
 have been disapproved by the Secretary of Agriculture. 
 
 " Sec. 4d. It shall be unlawful for any person to engage as futures commis- 
 sion merchant in soliciting orders or accepting orders for the purchase or sale 
 of any commodity foi future delivery, or involving any contracts of sale or con- 
 tracts to sell any commodity for future delivery, on or subject to the rules of 
 any contract market unless — 
 
 "(1) such person shall have been licensed by the Secretary of Agriculture as 
 such futures commission merchant and such license shall not have expired nor 
 been suspended nor revoked ; and 
 
 "(2) such person shall, whether a member or nonmember of a contract 
 markei. treat and deal with all money, securities, and property received by such 
 person to margin, guarantee, or secure the trades or contracts of any customer 
 of such person or accruing to such customer as the result of such trades or con- 
 tracts as belonging to such customer. Such money, securities, and property 
 shall not be used to margin or guarantee the trades or contracts, or to secure 
 or extend the credit, of any customer or person other than the one for whom 
 the same are held ; Provided, however. That such money, securities, and prop- 
 erty may be deposited or pledged separately and apart or commingled with the 
 deposits and pledges of such person with any bank or trust company and that 
 such share thereof as shall be necessary to margin, guarantee, or secure the 
 contracts or trades of such customer carried with the clearing house organiza- 
 tion of such contract market or with a member of such contract market, may 
 be deposited or pledged with such clearing house organization or with such 
 member. 
 
 t^ 
 
 
 i\ 
 
 I i 
 
4 REGULATION OF COMMODITY EXCHANGES 
 
 execu^n/^anl^^^w^ unla^yful for any person to act as floor broker In 
 dellverv ^nr ?nv.i^^^ ^"""^ ^^^ purchase or sale of any commoclity for future 
 for Sr^ doiK^l^"^ ^"^ contracts of sale or contracts to sell any comm^Uv 
 such perso^^^^^^ h" '"?^""* !S ?^ ^"^^« «^ «"'^ contract markeT unless 
 
 floor broke? fn^^nlZuJ^'' ^'Tff^ ^^^ ^^^ Secretary of Agriculture as such 
 revoked '*''^® ^^^" ''^^ ^^^'^ ^^P*^^^ "^^ been suspended nor 
 
 When Ileen.ed hlreunlT Xl"?iUewL'Sn fe loTe'^Jf ^nd fu^'i^h^oTh'i; 
 
 December of the year for which issued ^^ "^^ ^^ 
 
 rules or regulations of the SecfetarrofTgrSu,^'here«mtV"or"sLn'fMt 
 or refuse to make any report required by the Secretary of Agd culture regir.lini 
 
 S;c=dtre? J^r-f^^uJITelK^ry^Vr^^^^^^^ 
 
 nf^'^J^ Agriculture or the United States Department of Justice the ^ic^nse 
 of such person may be suspended or revoked after notice and hp^r in? f« 
 accordance with the procedure described in para^'Iph/b^ TsecUonl S 
 
 "Sec. 4h. It shall be unlawful for any person— 
 o^ i^i^ conduct any ^fticeN or place of business anywhere in tha TTr,u^^ 
 States for Hie-purpose of -ffoliciting or accepting anv-»rrW^?nif hi ^k*^^ 
 or sale of any commodity for future delivery orLr^^inrit^^^ 
 
 d^^errorToT^^^d^^ctU^^^^^ 
 
 rcrieif«-ny^-!fch"'.^ZX sX^»" ofrilS TZT^ 
 commerce for the fulfillment thereof. If such ordm ^ntr^rts^r 1 ^'^'* 
 
 "^t'-'^tk^tror""""^'' •'"'"•"•'^^ ""■" ^y^^'roZiT^eZ^r'^f^i 
 
 "(2) falsely to represent such person to be a mpmhpr ,^f o /.«««-« u , ^ 
 
 or the representative or agent of such member, or to tea licenseS*"^rS com' 
 mission merchant, or the agent of such licens^ futures comiXsionmB^^ho^" 
 in soliciting or handling any order or contract fm- fh« ™,w^„ merchant^ 
 
 commodity In Interstate commerce or fo^future deliverv'^r^T .''^^'''* "' ""^ 
 in connection with the handling o7any sucnrdero7CtSif l^h 'fTf'"'^*''' 
 
 Sal? SiU^e^ """ "^'^'^ '°' "^ '^ o' th'i^liYh^Lrt^Xf "orXTn! 
 
 REGULATION OF COMMODITY EXCHANGES O 
 
 ** Sbc. 4i. It shall be unlawful for any person to make any contract for the 
 purchase or sale of any commodity for future delivery on or subject to the 
 rules of any contract market unless such person shall report or cause to be 
 reported to the properly designatetl officer in accordance with the rules and 
 regulations of the Secretary of Agriculture (1) whenever such person shall 
 directly or Indirectly make such contracts with respect to any commodity, or 
 any future of such commodity, during any one day in an amount equal to or 
 in excess of such amount as shall be fixed from time to time by the Secretary 
 of Agriculture; and (2) whenever such person shall directly or indirectly 
 have or obtain a long or short position in any commodity or in any future 
 of such commodity, equal to or in excess of such amount as shall be fixed 
 from time to time by the Secretary of Agriculture. Such person shall also 
 keep books and records of transactions coming within the provisions of (1) 
 and (2) hereof, which books and records shall show complete details concern- 
 ing all of such transactions, including the names and addresses of all persons 
 having any interest therein, and shall be open at all times to inspection by any 
 representative of the United States Department of Agriculture or the United 
 States Department of Justice. 
 
 " Sec. 4j. It shall be unlawful for any person to make or enter into, or be 
 a party to as principal or agent, any contract of sale of any commodity for 
 future delivery on or subject to the rules of any contract market, unless — 
 
 "(1) such contract shall be made prior to a date to be fixed by rule or regu- 
 lation of the Secretary of Agriculture, which shall not be earlier than the fif- 
 teenth day of the delivery month to which such contract relates: Provided, 
 That the Secretary of Agriculture may fix different dates for difiEerent com- 
 modities, and if as to any commodity no date is fixed, then as to such com- 
 modity the provisions of this paragraph shall not apply ; and 
 
 "(2) such contract shall require, in accordance with the rules or regulations 
 of the Secretary of Agriculture, that the party making delivery thereon of any 
 commodity shall furnish to the party receiving the same, written notice of 
 the date of delivery, which notice shall be given at least three business days 
 prior to the date of delivery : Provided, That the Secretary of Agriculture, by 
 rule or regulation, may require longer notice of delivery as to any commodity 
 or commodities, not exceeding ten business days; and 
 
 "(3) such contract provides for the delivery thereon of a commodity of a 
 grade or grades conforming to United States standards, if such standards shall 
 have been officially promulgated." 
 
 Sec. 6. Section 5 of the Grain Futures Act (U. S. C, title 7, sec. 7) is amended 
 by— 
 
 (a) striking out the word "is" after the word "board" in paragraph (a) 
 and inserting in lieu thereof the word " are " ; 
 
 (b) striking out the word "purpose." at the end of paragraph (a) and in- 
 serting in lieu thereof the following: "purpose: Provided, That any board of 
 trade not so located shall be designated as a * contract market ' if such board 
 of trade provides for the delivery of commodities on such contracts at a deliv- 
 ery point or points and upon terms and conditions approved by the Secretary 
 of Agriculture."; and 
 
 (c) striking out the word "or" after the word "prices" In paragraph (d) 
 and inserting in lieu thereof the word " and ". 
 
 Sec. 7. The Grain Futures Act is amended by adding after section 5 (U. S. C, 
 title 7, sec. 7) the following new sections: 
 
 " Sec. 5a. Each board of trade which shall have been designated as a * con- 
 tract market ' under authority of this act shall — 
 
 "(1) promptly furnish the Secretary of Agriculture copies of all bylaws, 
 rules, regulations, and resolutions made or issued by it or by the governing 
 board thereof or any committee, and of all changes and proposed changes 
 therein, 
 
 "(2) allow inspection at all times by any authorized representative of the 
 United States Department of Agriculture or United States Department of Jus- 
 tice of the books, records, and all minutes and journals of proceedings of such 
 board of trade, its governing board and all committees, and of all subsidiaries 
 and affiliates of such board of trade, which books, records, minutes, and jour- 
 nals of proceedings shall be kept for a period of three years from the date 
 thereof, or for a longer period if the Secretary of Agriculture shall so direct, and 
 
 "(3) when so directed by the Secretary of Agriculture, require the operators 
 of warehouses in which or out of which any commodity is delivered on any 
 •contract for future delivery on such board of trade, to make such reports, keep 
 
 i 
 
6 
 
 BEGULATION OF COMMODITY EXCHANGES 
 
 cuUm™'i,,^crr'"'l,T^ warehouse visitation as the Secretary of Agrl- 
 a n^ri^f «? P5fs"l'>e- Snoh boolis and records sliall be required to be kent for 
 
 T.Ln:^Tot iSls aT"""'*' "'"" "'* """^'"^« "'^^""^ <n parl^aph T^ 
 and'?i)Va"mended by-' *'™'" "^'"^ ^" <"• '• ^- "«« ^- «-«• «^ »• W- 
 
 th^Uf^'tt' following:'" «'',hrsr/v'ST?.'':;,t''' s"*' '^''^'^-^ '° »-» 
 
 that any „ers«n has^io "cj^anv o7 ike plv1f 'o™ oTnd"" ?"""" "^ '^J'T 
 
 ?he.!^f7r^^rfn°^such nerso^ t^olh »"' '*^ '^r "'^'* ""^^ "n^-" the ^ni^ 
 dirming Tat "ll coLact m'rkefs'T„,t'!w„"M ' "" "J"" ^''""''' '"« "e made 
 Agriculture refuse a rtradln^orMleirS i 1; t'' ""*"''' "£ /""" Secretary of 
 why tlie IKense of such Sn if H^^^JS T i ^''■*""'^' '»"<'^'"' *" »''"" <-a»se 
 a. floor broker here„Jder!iruVL''^rsr?en5rorrerkS '■•"" °"""'^'" " 
 
 tary of Agricultur™^ Paiagraph (b) and Inserting in lieu thereof '■ Secre- 
 
 an^^^'rllijf ta"'lU''LTrf :.';i':i';; 'rU'rle-"""" ^^"'^"^'^ "' P"''^^''^'' <") 
 
 s Jol/d 's^ei^^rnfe^of pa^ajraph ;;Ta'fterThr±j''^?'''i™™"''-'-" '» the 
 culture"; loragrapn (D) after the words "to the Secretary of Agrl- 
 
 (e) striking out the words and numerals "of section ^^>" .«»- .i, 
 penaltles."ln the thini sentence of parasrTph O. ) " ""^"^ ^^^ "'"'^ 
 
 thereof the following: " Cpon eviden^l rJ.»tv^^^^ o * "^'^ n'sorting in lieu 
 
 may require all contract m^arkft\tnT»fyr<f*1; "■* Secretary of Agriculture 
 thereon for such Sd a"may be sr^S T^hf "^h" ''" ^""^^"^ Privileges 
 has been licensed as tutnZ^u^n!^Zrc^ntVls''«LV'u;I "r" ""f " 
 may suspend, for a period not to PT<iL =il „ \S °'*"'^ broker hereunder, 
 such person."; *° '''**^ *"= months, or revoke, the license of 
 
 Jinth'anreigStV^sLrenci^Trraltanh 7hrT." "PP"" •" ">« ^'^l^ 
 the words " Secretarv of A^ricultS?™^^ ^^ ""^ inserting In lieu thereof 
 
 thi^iord'-'^'to^-rth'Tsrefth^llften^^^^ any member thereof" after 
 
 thereof the word "him "^ and ^*°*^°*^^ "' paragraph (b) and Inserting In Ueu 
 
 the^'f^o'^^n^gT .'^"cL^'e* ±i:;^^t :>''•'-"<' "'l^^S^aph O) and Inserting 
 
 mark^^^h"irexSfrLTemb:"h?pira^"a,f"'r,?*"' "« « '""-'"^ 
 tivelaws o?any State. or'.'ST^'^ntZ^'^f^Xt^^'^^,^^ 
 
 I 
 
 REGULATION OF COMMODITY EXCHANGES 7 
 
 of producers by the United States Government or by any agency thereof, if such 
 association or corporation complies and agrees to comply with such terms and 
 conditions as are or may be imposed lawfully upon other members of such 
 board, and as are or may be imposed lawfully upon a cooperative association 
 of producers engaged in cash commodity business, unless such board of trade 
 Is authorized by the commission to exclude such association or corporation 
 from membership and privileges after hearing held upon at least three days' 
 notice subsequent to the filing of complaint by the board of trade. Such com- 
 mission may prescribe that such association or corporation shall have and 
 retain membership and privileges, with or without imposing conditions, or it 
 may permit such board of trade immediately to bar such association or cor- 
 poration from membership and privileges. Any order of said commission en- 
 tered hereunder shall be reviewable by the circuit court of appeals for the 
 circuit in which such association or corporation, or such board of trade, has 
 Its principal place of business, on written petition either of such association 
 or corporation, or of such board of trade, under the procedure provided in 
 paragraph (a) of section 6 of this act, but such order shall not be stayed by 
 the court pending review. 
 
 ** Sec. 6b. If any board of trade, or any director, ofiicor, agent, or eiriployee 
 of any board of trade sliall violate any of the provisions of this net or any of 
 the rules or regulations of the Secretary of Agriculture thereunder, or any 
 order issued by the commission pursuant to any provision of this act, the com- 
 mission, in lieu of revoking the designation of sudi board of trade as a ' con- 
 tract market ' may, upon notice and hearing and subject to appeal as in other 
 cases provided for in paragraph (a) of section 6 of this act, make and enter an 
 order directing that such board of trade, director, officer, agent, or employee 
 Fhall cease and desist from continuing such violation or violations, and if such 
 board of trade, director, officer, agent, or employee, thereafter and after the 
 lapse of the period allowed for appeal of such order, shall fail or refuse to obey 
 or comply with such order, such board of trade, director, officer, agent, or 
 employee shall be guilty of a misdemeanor and, upon conviction thereof, shall be 
 fined not less than $500 nor more than $10,000 or imprisoned for not loss than 
 six months nor more than one year, or both. Each day during which such 
 failure or refusal to obey such order continues shall be deemed a separate 
 offense." 
 
 Sec. 10. The Grain Futures Act Is amended by adding after section 8 
 (U. S. C, title 7, sec. 12) the following new section: 
 
 " Sec. 8a. The Secretary of Agriculture is authorized — 
 
 "(1) to issue to futures commission merchants and floor brokers upon appli- 
 cation in accordance with rules and regulations and in form and manner to be 
 prescribed by the Secretary of Agriculture ; and 
 
 "(2) to refuse to issue a license to any person if such person has violated any 
 of the provisions of this act or any of the rules or regulations promulgated by 
 the Secretary of Agriculture hereunder for which the license of such person 
 has been revoked : and 
 
 "(3) to suspend or revoke the license of any futures commission merchant 
 who shall accept any order for the purchase or sale of any commodity for 
 future delivery on or subject to the rules of any contract market from any 
 person if such person has been denied trading privileges on any contract mar- 
 ket by order of the Secretary of Agriculture under the provisions of paragraph 
 (b) of section 6 of this act and the period of denial specified in such order 
 shall not have expired ; and 
 
 "(4) to fix and establish from time to time fees and charges for the issu- 
 ance of licenses and renewals thereof and for copies, not to exceed $10 for each 
 such license, renewal, or copy ; and 
 
 "(5) to make and promulgate such rules and regulations as, in the judgment 
 of the Secretary of Agriculture, are reasonably necessary to effectuate any of 
 the provisions or to accomplish any of the puriwses of this act ; and 
 
 "(6) to communicate to the proper committee or officer of any contract 
 market and to publish, notwithstanding the provisions of section 8 of this act, 
 the full facts concerning any transaction or market operation, including the 
 names of parties thereto, which in the judgment of the Secretary of Agricul- 
 ture disrupts or tends to disrupt any market or is otherwise harmful or against 
 the best interests of producers and consumers." 
 
 Sec. 11. Section 9 of the Grain Futures Act (U. S. C, title 7, sec. 13) is 
 amended by : 
 
 s?" 
 
 i 
 
8 
 
 EEGULATION OF COMMODITY EXCHANGES 
 
 (a) striking out the word "section" and the numeral "4" and inserting in 
 lieu thereof the f«mowing: "section 4, section 4a, section 4b. section 4c, section 
 4d, section 4e, section 4h, section 4i, or section 4j " ; 
 
 (b) inserting after the comma following the word "act" the following: "or 
 Who shall manipulate or attempt to manipulate the price ol any commodity in 
 interstate commerce, or for future delivery on or subject to the rules of any 
 board of trade, or who shall comer or attempt to comer any such commodity," : 
 
 (c) striking out the words " said section " after the words " mentioned in " 
 and inserting in lieu thereof the words " section 4 of this act " ; and 
 
 (d) inserting after the word " deliver " the words " or cause to be deliv- 
 creel . 
 
 Sec 12. If any provision of any section of the Grain Futures Act shall be held 
 invalid by reason of any amendment thereof by this act, then and in that event 
 such section, in its original form without amendment, shall continue in force 
 and effect No proceeding shall be abated by reason of any such amendment, 
 but shall be disposed of pursuant thereto. 
 
 Sec. 13. This act shall take effect ninety days after the date of its enactment. 
 
 The Chairman. I will state for the benefit of those who may be 
 interested that in past years we have had rather full hearings on the 
 various propositions involved in this bill. We had a rather full 
 hearing again la^t spring on most of the features in the bill, and the 
 committee feels that those hearings, which are available in printed 
 form, cover substantially all of the proposed features in the bill be- 
 fore us except the one feature which has not been covered, that of 
 control or licensing of floor brokers, and we have had no specific 
 hearinjzs for floor brokers who would be directly affected. That was 
 commented on from time to time, and we decided to devote one morn- 
 ing s session to that particular subject. 
 
 A number of witne;sses have requested permission to be heard. I 
 made the request the other day that they choose two or three, or aoree 
 on those wiio would rejpresent them in a full discussion, which would 
 permit more time. >< evertheless, we have several here, and if we 
 are to hear the entire group it will be necessary to limit them to 
 about 10 minutes each. 
 
 We will hear Mr. Wickham, chairman of the grain committee on 
 national affairs. 
 
 STATEMENT OF THOMAS Y. WICKHAM, CHAIRMAN OF THE 
 GBAIN COMMITTEE OF THE NATIONAL ASSOCIATION, CHI- 
 CAGO, ILL. 
 
 Mr. Wickham. Mr. Chairman, so far as we are concerned we will 
 stay within the time allotted. 
 
 The Chairman. Very well. 
 
 Mr. Wickham. Mr. Cha rman and members of the committee my 
 name is Thomas Y. Wickham. I am appearing as chairman of the 
 grain committee on national affairs. That is the National Asso- 
 ciation of Grain Exchanges, connected with the Grain Association 
 of ban i^rancisco and the National Grain and Feed Dealers' Asso- 
 ^fiV^^: ^,^^ letter, as the name implies, is a national association 
 of the local gram and feed dealers of the Nation. 
 
 As I understand it, the hearing this morning is to be confined 
 to the question of licensing floor brokers. The time allotted us will 
 be directed entirely to that point. However, if the committee is 
 willing, I should like to reserve just a moment at the end of the 
 hearing to urge upon you the necessity of a full hearing, covering 
 every phase of a matter as important as this. 
 
 REGULATION OF COMMODITY EXCHANGES ll 
 
 The first witness we have to offer is Mr. Kobert P. Boylan, presi- 
 dent of the Chicago Board of Trade. 
 The Chabrman. Mr. Boylan. 
 
 STATEMENT OF ROBERT P. BOYLAN, PRESIDENT OF THE CHI- 
 CAGO BOARD OF TRADE, CHICAGO, ILL. 
 
 Mr. Boylan. Mr. Chairman and members of the committee, for 
 the purpose of the record my name is Robert P. Boylan. I am presi- 
 dent of the Chicago Board of Trade. 
 
 I am going to be very brief in what I have to say and will finish 
 in a few minutes, unless there are some questions. But I do desire, 
 if it is acceptable to the committee, to give as much of my time as 
 1 can to Mr. Caldwell, who will follow me. 
 
 Mr. Chairman and members of the committee, in making my 
 appearance before you and presenting to you our objections to the 
 provision of House bill 3009 requiring the licensing of floor brokers, 
 I would be remiss in my obligations as a citizen if I did not also 
 remind you that there are other provisions of that bill which should 
 be discussed here. I know that hearings were held last year. I 
 was here before you then. But there are six new members of the 
 present committee who were not here and who have had no oppor- 
 tunity to hear both sides on the bill. 
 
 Time has elapsed— and a year changes many things— often men's 
 ideas and judgments. 
 
 No matter what the philosophy behind the bill, if the bill pre- 
 scribes unworkable and impracticable mechanical difficulties, the 
 onus will rest upon this committee. A bureau following an Act of 
 Congress is not to be censured in enforcing a bill which will cer- 
 tainly appear ill-advised in its ordinary mechanical provisions. 
 That responsibility will be upon Congress, and especially upon 
 this committee unless full consideration is given before the bill comes 
 out on the floor. 
 
 IParticularly is this true in that laws are difficult to amend and 
 mistakes in laws are not easily corrected. Acts of Congress are rigid 
 and do not conform of themselves to the quick changes required of 
 all of us to adapt ourselves to the rapid changes and improvements 
 in economic affairs sougjht and accomplished by the New Deal. 
 
 We request opportunity, therefore, to discuss these matters, per- 
 haps with a small subcommittee of this committee, if you please, 
 before you are committed to what I can assure you are its unwork- 
 able provisions. 
 
 Mr. Chairman, it is fair to assume that this committee and the 
 Congress desire a bill that will work, and I just want to go on record 
 as stating that the present bill, in its present form, will not work. 
 That is why we desire, Mr. Chairman, to have a fuller hearing. 
 
 Mr. BoiLEAu. May I ask a question? 
 
 The Chairman. Mr. Boileau. 
 
 Mr. Boileau. If the committee should decide further hearings, 
 do I understand that you would feel obligated to try to help perfect 
 the bill or that you would like to oppose the entire bill ? 
 
 Mr. Boylan. It would be our desire to point out to the committee 
 wherein the biU does not work. We believe the obligation is upon 
 
 1 1 
 
 / 
 
10 
 
 EEGUIATION OF COMMODITY EXCHANGES 
 
 US to show to the members of the committee wherein this particular 
 bill, in its present form, will not work. 
 
 Mr. Andresen. Would it be possible for you, Mr. Boylan, in the 
 brief time allotted to you to point out wherein the provisions of the 
 bill will be detrimental to the producers and the trade of the country 1 
 
 Mr. BoYLAN. That is my desire if the hearing is broadened, but 
 • jn ^^^^ time we have we can only cover the specific point mentioned 
 by the chairman; but if this hearing is broadened we will bring 
 before you witnesses, men who are familiar with all phases of this 
 particularly contemplated legislation, and will try to discuss all 
 those points. If it is the desire to give me more time, to broaden 
 the hearing, I shall be glad to do so now. 
 
 Mr. Andresen. Can you state that briefly? 
 
 Mr. BoYLAN. I cannot state it briefly, because the bill covers many 
 thmgs; It limits lines; there is the licensing feature; the question 
 of changes in delivery dates ; changes of delivery to the 15th of the 
 month ; there are many provisions in the bill, Mr. Chairman, that 
 should be given consideration, and many things have happened dur- 
 ing the last year which we could bring up that we did not know a 
 year ago. 
 
 Mr. Andresen. As I understand it, K. R. 3009, this form of the 
 Dill, IS a copy of a similar bill of last year. 
 
 Mr. BoixAN. In all respects, as I understand, except that the 
 licensing of floor brokers is provided in this bill. 
 
 Mr. Andresen. Would the testimony that would be given bv wit- 
 nesses who are interested on your side be the same as the testimonv 
 ^ven before the committee at the last hearings ? 
 
 Mr. Boylan. I think not. We have had time to study this bill, 
 and 1 think that there is a great deal we could show to the committee 
 m the testimony of witnesses who could be brought here which, in 
 "^y oP"iion, would be enlightening to the committee. 
 
 Mr. Andresen. Do you feel that some of the evils contemplated 
 Cod^ Authorit ? ^^^"^ remedied by the operation of the 
 
 Mr. Boylan. Yes. When we were here a year ago the code was 
 not in operation, since that time the code has been put in operation. 
 
 Mr. Andresen. With the exception of the margin requirement, 
 what has the code accomplished ? => ^ , 
 
 Mr. Boylan. I should like you to ask that question, Mr. Andresen, 
 of the chairman of the Code Authority who is here and will testifv 
 
 Mr. Andresen. Very well. •^* 
 
 Mr. Beam. Mr. Chairman ■ 
 
 • The Chairman. Mr. Beam. 
 
 Mr. Beam. Could you suggest to the committee, give us a tenta- 
 tive outline of the testimony that would be presented ? 
 
 Mr. Boylan. If the hearing is broadened and you allow us a few 
 days time we will bring to the committee witnesses who will testifv 
 on those matters, which we are on record as stating to the com- 
 mittee, that show the bill will not work in its present form 
 
 Mr. Beam. You feel you could do that in more detail than vou 
 can in the time allotted to you? ^ 
 
 Mr. Boylan. Yes. We have had a vear to study this bill, Mr. 
 Chairman, and I think the testimony, while it is true, a good deal of 
 
 REGULATION OF COMMODITY EXCHANGES 
 
 11 
 
 it will be along the same line as that given a year ago, there will be 
 some new things brought out, a great many things brought out that 
 have developed during the year's time that we have had time to study 
 this bill, will change the minds of you men. 
 
 Mr. Andresen. One more question. 
 
 The Chairman. Mr. Andresen. 
 
 Mr. Boylan. Yes, sir, Mr. Andresen. 
 
 Mr. Andresen. What is your idea about this bill, if it becomes a 
 law and is put into operation, as to the effect, ultimate eltect it wiU 
 have upon the price paid for the commodity, gram, corn, and so 
 
 forth ? 
 
 Mr Boylan. I do not like to look into the crystal ball for you. 
 But mv opinion is that the bill in its present form, in the normal 
 crop year, and we are going to have normal crojp years again some- 
 time, will cause the speculator that carries the fanners gram from 
 the time it matures until it goes into consumption to disapp.-ar from 
 the market, thereby leaving a price structure that, m my opinion, 
 
 will be very low. . 
 
 Mr. Hope. May I ask you a question IT 
 
 Mr. Boylan. Yes, Mr. Hope. j. j.. . 
 
 Mr. Hope. Is it not a fact that the same argument that you are 
 making now was made at the time the Capper-Tincher bill was 
 passed by Congress in 1922? , .„ t i ^ +i>^ 
 
 Mr. BoYLAi^ No. The Capper-Tinclier bill did not carry the 
 
 limits this bill does. j. xi. i. j.-^^ 
 
 Mr Hope. But were not the same arguments made at that time, 
 thkt it would not work and that it would destroy the market for 
 ffrain ? You will find that argument was made, as a matter ot tact, 
 because I have checked it up ; exactly the same argument were made 
 when that bill was being considered that are being made now as to 
 the effect of this bill. Yet, is it not also true that there has been 
 more speculative activity in the gram market since that time than 
 at any time in the history of boards of trade inthis country? 
 
 Mr Boylan. With a few exceptions, yes. We had speculation m 
 1933, and again in 1925 that resulted from European crop failures 
 and crop failures in this country, and general trade inflation, that 
 brought about speculation ; but normally, no. 
 
 The Chairman. We desire to thank you, Mr. Boylan. 
 
 Mr. Boylan. Thank you, Mr. Chairman. . 
 
 Mr WicKHAM. Mr. Chairman, the next witness is Mr Louis Or. 
 Caldwell, of the law firm of Kirkland, Fleming, Green & Martm, of 
 
 ^ ThTcHAiRMAN. We will be glad to hear you, Mr. Caldwell. 
 
 STATEMENT OF LOUIS G. CALDWELL, LAWYER, CHICAGO, ILL. 
 
 Mr Caldwell. Mr. Chairman and gentlemen «/ ^^^ <^«™^^^^^^^i 
 mvname is Louis G. Caldwell. I am a member of the law firm of 
 Sfrkland FleZg, Green & Martin, of Chicago, attorneys for the 
 n^ira^rBoard of Trade, and am resident partner in charge of the 
 SfwasSon office. ' My partner, Mr. Ellis, who has previously 
 anneared S?e you, was unable to be present and consequently 1 
 Kavfug to^^^^^^^^^^ to you the matters which he had intended to 
 cover. 
 
 'I 
 
 > 
 
12 
 
 REGULATION OF COMMODITY EXCHANGES 
 
 This statement will be confined to the provisions of H. K. 3009 
 having to do with the licensing of futures commission merchants and 
 of floor brokers. It is not directed at the fundamental licensing fea- 
 ture of the bill, namely, the designation of exchanges as " contract 
 markets by the Secretary of Agriculture. In this respect, the bill 
 takes oyer the machinery already established by and under the 
 Cjram Futures Act of 1922, and supplements it with various addi- 
 tional restrictions and forms of regulation which I shall not discuss, 
 except where they are relevant to my subject. The licensing of 
 futures commission merchants and floor brokers is, however, a new 
 feature not contained in the present law. 
 
 I find it necessary to preface our objections to this feature by a 
 brief summary of the pertinent provisions of the bill. 
 
 The bill makes it unlawful for any person to engage as futures 
 commission merchants or to act as floor brokers unless licensed by the 
 becretary of Agriculture (sec. 4 (d) and (f)). 
 
 It authorizes the Secretary of Agriculture to issue licenses upon 
 application m accordance with rules and regulations and in form 
 and manner to be prescribed by the Secretary (sec. 8 (a) (1)). To 
 obtain a license an applicant must give such information and facts 
 as the becretary may deem necessary concerning his business. When 
 licensed the licensee must continue to report and furnish to the 
 Secretary such information pertaining to his business as the Secre- 
 tary may require (sec. 4 (e) (1)J. The Secretary is authorized to 
 fix fees, not to exceed $10, for the issuance and renewal of licenses 
 (sec. 8 (a) (4)). 
 
 The Secretary is authorized to refuse a license if the applicant has 
 violated any of the provisions of the act or any of the rules and 
 regulations promulgated by the Secretary under the act for which 
 the license of such applicant has been revoked (sec. 8 (a) (2)). 
 Incidentally the meaning of this section is far from clear with re- 
 spect to a person who applies for a license the first time and who, it 
 may be claimed, has previously violated some provision of the act 
 or some regulation. 
 
 In one part of the act (sec. 4 (g)) it is provided that a license 
 may be suspended or revoked for anv of the following grounds : 
 
 1. Violation of any provision of the act. 
 
 2. Violation of any rule or regulation of the Secretary under the 
 acb. 
 
 3. Failure or refusal to make any report required by the Secretary. 
 
 4. Failure or refusal to keep books and records in the form and 
 manner prescribed by the Secretary. 
 
 5. Failure or refusal to keep such books and records open to in- 
 spection by any representative of the Department of Agriculture or 
 the Department of Justice. 
 
 6. In another portion of the bill (sec. 8 (a) (3)), an additional 
 ground is specified, namely, the accepting of an order from any per- 
 son who has been denied trading privileges on any contract market 
 by order of the Secretary. 
 
 The procedure for suspension or revocation of license is substan- 
 tially the same as that provided in section 6 (b) of the grain futures 
 act, having to do with orders directing that all contract markets 
 refuse all trading privileges to a person who has violated any provi- 
 sion of the act, and so forth. The principal difference which, how- 
 
 REGULATION OF COMMODITY EXCHANGES 
 
 13 
 
 ever, is very important, as I shall point out later on, is that under 
 the Grain Futures Act the prosecution was by the Secretary of Agri- 
 culture before a commission of judges consisting of the Secretary of 
 Agriculture, the Secretary of Commerce, and the Attorney General, 
 while in this bill the Secretary of Agriculture institutes the proceed- 
 ing as prosecutor before himself as judge for violations, it may be, 
 of regulations which he himself has made as legislator. The pro- 
 cedure may be briefly summarized as follows : 
 
 If the Secretary has reason to believe that any person has com- 
 mitted a violation, he serves upon that person a complaint stating 
 his charge, accompanied by a notice of hearing specifying " a date 
 and place not less than 3 days after the service " and requiring such 
 person to show cause why his license should not be suspended or 
 revoked. The section then goes on to provide that upon evidence 
 received the Secretary may suspend the license for a period not to 
 exceed 6 months or revoke it. ^ n^' 
 
 Provision is made for a review of the Secretary's order by filing 
 a petition in the United States Circuit Court of Appeals of the circuit 
 in which the petitioner is doing business. Thereupon the Secretary 
 files in the court a transcript of the record including the evidence 
 received and the court is given jurisdiction to affirm, set aside, or 
 modify the order of the Secretary. The findings of the Secretary as 
 to the facts, however, if supported by the weight of the evidence, are 
 made conclusive. There is also provision for further review by the 
 Supreme Court upon certiorari. 
 
 Since a license may be suspended or revoked for violation of any 
 rule or regulation promulgated by the Secretary, it is important to 
 note what regulation-making powers are conferred on the Secretary. 
 For present purposes it is not necessary to do this in detail since, in 
 addition to the far-reaching powers conferred on him by specific 
 provisions in the act, he is given blanket authority in section 8 (a) 
 (5), "to make and promulgate such rules and regulations as, in the 
 judgment of the Secretary of Agriculture, are reasonably necessary 
 to effectuate any of the provisions or to accomplish any of the pur- 
 poses of this act." 
 
 Let me say in passing that I am not at all certain that what I have 
 just quoted is valid in view of the recent decision of the Supreme 
 Court in the oil cases. The language is exceedingly broad and in- 
 definite and seems to lack any standard limiting or defining the Sec- 
 retary's authority. I did not come here, horaver, te talk on the 
 constitutionality of any provision of the bill. ^What I want to em- 
 phasize here is the almost unlimited power you contemplate lodging 
 in the Secretary to put a man out of business for violation of a 
 regulation promulgated under this broad language, coupled with the 
 fact that the bill makes no requirement that the Secretary give 
 advance notice of his intention to make a regiilation effective at some 
 future date, or to hold a hearing of any kind at which interested 
 parties may point out to him that it is unworkable or unjust) 
 
 These rules and regulations are to have all the force and effect of 
 statutes enacted by Congress and, as you can readily see, violation of 
 them is attended not only by miscellaneous criminal penalties but 
 also by what amounts to destruction of a man's business. When Con- 
 gress enacts an important statute it affords hearings before its com- 
 
 114603— 35— SBB B 2 
 
 i 
 
 i 
 
14 
 
 REGULATION OP COMMODITY EXCHANGES 
 
 REGULATION OF COMMODITY EXCHANGES 
 
 15 
 
 mittees to interested parties, such as the hearing we are having 
 today, and nearly always enough time elapses between the introduc- 
 tion and fanal passage of a bill to give the persons affected an oppor- 
 tunity to adjust themselves to meet the new requirements. I believe 
 that this bill should make provision for the lapse of a certain period 
 of time before any regulation can become effective, together with a 
 prior opportunity for hearing of objections to the proposed regula- 
 tions. It may be that on one or two particular subjects in this bill 
 Its proponents w;ill feel that there should be power to change the 
 law overnight. While I would not agree with such a view, I would 
 say that if there are such cases they should be specificallv made ex- 
 ceptions to requirements such as I have outlined. In other words 
 It IS not fair that a man's right to continue in business should be 
 subject to the hazard that what he was legitimately doing today 
 may, without his knowledge, become illegal tomorrow. 
 
 Needless to say, in anything I have said or shall say, I am not 
 referring to either the present Secretary of Agriculture or to the 
 Chief or any of the personnel of the Grain Futures Administration. 
 1 do not believe that any of them would be guilty of such arbitrary 
 conduct. I am simply talking about the power you are conferring, 
 and from this point of view I think we must keep in mind that the 
 present encumbents may be succeeded by others in whom we would 
 not have confidence. 
 
 With respect to the licensing provisions themselves, I have two sets 
 of objections to bring to your attention. The first are general and 
 are cited to show the undesirability of including any such provisions 
 m the bill The second are directed at what are believed to be 
 detects m the provisions as now drawn. 
 
 Before taking up the general objections, let me tell you the num- 
 ber of persons involved in the license requirements. The figures I 
 shall give you have^ reference to the Chicago Board of Trade onlyi 
 we do not have the figures for the other grain exchanges. 
 
 There are approximately 351 individuals, member firms, and cor- 
 porations who would have to be licensed as futures commission mer- 
 chants. They maintain main offices, branch offices, and wire connec- 
 tions with correspondents' offices to a total of approximately 2,200 
 While no exact figures are available, the best data available indicate 
 that between 40 000 and 50,000 ^.ersons are employed in thesroS 
 ^ In ^addition, there are 325 floor brokers on the ChicagrBoard of 
 
 (These figures will in themselves, offer you some idea of the sub- 
 stantial increase m Government machinery and personnel that will 
 be necessary to handle merely the routine of issuing and renewing 
 nwT f^^ of recording tabulating, and otherwise make use o7 the 
 information which is to be required along with the applications for 
 licenses and from time to time thereafter! pii^uiions lor 
 
 The principal point I want to make, however, is that if you impose 
 the hcense system upon the commission merchants and fl^r C5^s 
 you will undermine the discipline now effectively exerS bTthe 
 gram exchanges through their business-conduct rules, and yoif will 
 not provide a satisfactory substitute. You will remember that inThe 
 first project for stock-exchange regulation it was pro^^^d that Ld^^^ 
 
 xi^'f fi'^'if' ^ ^r^'??- J^' Securities Exchange Commiss^n 
 Act as finally passed omitted any such requirement, with thrrSult 
 
 that stockbrokers are not now subject to licenses, and, so far as I 
 know, there has been no claim that they should be. In other words, 
 the regulation of stock exchanges so far seems to have proceeded 
 satisfactorily without the use of licenses. The reason for not includ- 
 ing a license requirement in the act were clearly set forth in the report 
 of the committee on stock-exchange regulation to the Secretary ot 
 Commerce made in January 1934. I quote from a portion of the 
 report : 
 
 Your committee does not consider it desirable to require the licensing of 
 individual brokers. There is a distinct danger that such a system would 
 break down the controls already exercised by the stock exchanges through 
 their business-conduct rules, which operate or can be made to oPerate with 
 summary speed and efifectiveness. If brokers were licensed, it would inevitably 
 come to' be thought that the proper method of disciplining a broker would be 
 the revocation of his license by the governmental authority. An exchange mignt 
 well hesitate to deny its privileges to a broker whose license was still m tull 
 force and effect. Inevitably, however, the process of revoking a license would 
 te much less summary than the action of a business-conduct committee ot tne 
 exchange. The proceeding would take place at Washington and not locally. 
 To some extent it would have to follow more or less protracted forms of 
 judicial procedure and would have to be subject to review in the courts. AU 
 these factors, while cutting the ground from under the effectiveness of the 
 exchange's own disciplinary procedure, would substitute a procedure slower 
 and les9 certain of accomplishing results. It seems distinctly better, m the 
 opinion of your committee, to stimulate the exchange to further disciplinary 
 activity by 'holding it to a high degree of accountabUity for the conduct of 
 members. 
 
 Other witnesses who will follow me will develop this feature in 
 more detail. Let me point out, however, that proceedings within the 
 exchanges have the following advantages among others : 
 
 First, they are more rapid, since the hearing in practically all 
 cases is at the place where the alleged violator and all the witnesses 
 
 do business. 
 
 Second, they are free of the requirement that a formal record of 
 evidence be built up that will stand review by the courts. 
 
 Third, they are before experts who are familiar with both the 
 transactions and the practices and reputations of the persons in- 
 volved and who do not need to have technical terms explained by 
 elaborate testimony. 
 
 Fourth, the complaint is usualljr kept anonymous so that the com- 
 plainant is not held back by considerations which would deter him 
 if his complaint went before a formal governmental body. 
 
 The bill, together with the Grain Futures Act, provides ample 
 means for compelling exchanges to maintain adequate discipline. In 
 the first place, the exchanges themselves are, as I have already pointed 
 out, under a license system, and their designation as contract markets 
 can be suspended or revoked for failure to fulfill their obligation. 
 This, of course, is too severe a penalty and would inflict injury on 
 too many innocent persons in the ordinary case. Presumably to 
 cover this defect in the present act, the bill provides in section 6-B 
 on page 22, that in lieu of revoking a designation as a contract mar- 
 ket, the Secretary of Agriculture may enter an order directing that 
 the exchange, or any director, officer, agent, or employee thereof, 
 shall cease and desist from continuing an alleged violation, and 
 failure or refusal to obey such order constitutes a misdemeanor sub- 
 ject to a fine of from |500 to $10,000 and imprisonment of from 
 
 '»\ 
 
16 
 
 KEGULATION OF COMMODITY EXCHANGES 
 
 6 months to 1 year. Each day during which the failure or rpf„«,l 
 to apply continues is made a separate offense ""^""'^ 
 
 • '"'tnermore, commission merchants and brokers are alrt^acU cnV. 
 ject to the penalty of denial of trading pSe-i on contract 
 markets, a severe penalty in itself. They ire or caS be made Hahle 
 to criminal penalties directly for violation of an? proviSon of the 
 act or of any rule or regulation made thereunder/ P'^"'""'"'' °* ^^^ 
 
 tht m„^f 4? '^ "u*° ^y '^** **»« ""^ense provisions in this bill are 
 the most far-reachmg that have ever been imposed bv the FeHpr«t 
 Government on any business or calling. I migKve to adrnft th^t 
 there are apparent exceptions to this broad statemen??n the Ikensin * 
 provisions m the Agriculture Adjustment Act and the alreadv ex 
 pired similar provisions in the N. I. R. A. But in neither case^wa^ 
 l^f h T-T*"™ '?*'*^ compulsory, and they are bo?h hedged about 
 with restrictions that are not presented in this bill In all cas^s 
 
 Da^ UrCr^fr, ""^'n^ ^^^ ^^'"""^ ^y'*^"" ^''^ been imposed in the 
 past by the Federal Government, there has been some verv imncn.i 
 
 reason, ordinarily of a technical character, suchT in 7e caseol 
 radio stations where the license system seems neces^rv to flvo?H 
 
 obHgiS' TtV"/tS '""'^ T"*'-y t- fulfiSTts" inCatiS 
 
 language of the statute, the net effect is uJually tha?X licensee must 
 
 LTn^t JSL^oT"'™'^^ apncy every so often, not ti prole him- 
 seir not guilty of a particular charge of which there is Pvir1pnn« 
 against him but rather to prove himself innocent of any char? It 
 
 SeSs hfm' of *aZo^*"r ^ ^"T" '"^•'^ his Gov Jrn'Sand 
 ha^ty action safeguards against arbitrary or over- 
 
 It puts the licensee in a position where he cannot safely Question 
 any regulation or order of the licensing authority, no matter how 
 arbitrary or illegal without running th'e hazard of firs^beS- ml 
 
 to tat the^lz^rl ^r* t««>P°^«ril3^. A man is frequently wfllFn" 
 to take the hazard of a fine or imprisonment to contest an invflViS 
 
 neS" tTpV^"* ^ °°* T'^"? ,^'"'"g t« hazard the lols of hsbS 
 ne^ There is no way that I know of that he can be given adeauTt« 
 protection in the courts against an arbitrary or politlaUy mSt 
 licensing authority when the latter has this weapon to useA^r 
 stated, f am not referring to any individual noT°n authority 
 in H R ^Sr''"*\P'?'^'™'"o" objections to the licensfng pr&ns 
 J?„ J .^,*^/*'^.''"*^y- Some of them have alreadi Seen men 
 Fi4 Thf f '"y .''"PWrtio?;. They are as folloVsH ™^"' 
 
 censLf is i?ilfv°nf ? -^ l-"^"'^ ""^"^^^^ »'• "»t John Doe, a li- 
 wfl' • ^j^.^t * violation of a regulation and should lose his 
 i^l^„' .' ^J"'''"«l function. It should not be exercised by the Ln^ 
 
 These trials should be by an independent tribunal of some sort 
 
 caspf oi^.r*";* "'■ '''t " '*>?"«*« ^7 that does nothing but K 
 cases of this type. I cannot claim that I think that tfe form of 
 commission now set up under the Grain Futures Ac\ is idejfor 
 
 REGULATION OF COMMODITY EXCHANGES 
 
 17 
 
 this purpose. It consists of three Cabinet officers who cannot pos- 
 sibly give their time and attention in an adequate manner and who 
 cannot possibly become familiar enough with the field to be called 
 experts, and one of whom is the prosecutor. This judicial function 
 really belongs to the courts. 
 
 If there are good reasons why it should not be placed there, it 
 should be confided to a specialized court — call it a commission if you 
 will — say, of three persons who do nothing but hear and decide cases. 
 
 Second. The licenses should not be for a limited period of time, 
 but should be for indefinite periods, namely, until suspended or re- 
 voked. This bill plainly intends that disciplinary measures shall 
 be taken by suspension or revocation and not by refusal to renew 
 a license. Yet, you will find that wherever provision is made for a 
 license that has to be renewed every so often, the tendency is for the 
 licensing authority to use the ap])li('ation for renewal as the method 
 of discipline rather than suspension or revocation proceedings. This 
 has been done regularly by the Federal Radio Commission and the 
 Federal Communications Commission seems to be following in the 
 same path with regard to radio licenses. By this method the licens- 
 ing authority is usually able to throw the burden of proof upon the 
 applicant to prove himself innocent and to save itself the burden 
 of alleging and proving specific charges. If the matter of annual 
 license fees is important, it can be taken care of by a provision 
 that failure to pay is likewise a ground for revocation or suspension. 
 
 Third. There is no provision for automatic or other type of stay- 
 order pending an appeal to the courts so as to protect the licensee 
 in the right to do business in the interim. An interruption of his 
 business for any period of time will usually mean the ddstruction 
 
 of it. . 
 
 Fourth. The power given to the Secretary to require any and all 
 information from applicant and licensees is' too broad and is subject 
 to no legislative standard or limitation. 
 
 Fifth. The causes for suspension and revocation are too broad. 
 A license should not be revoked for isolated violations of trivial 
 regulations. There should, I submit, be a requirement of a showing 
 that the violations are substantial and persistent. Trivial violations 
 should be punished by fine only. 
 
 Sixth. The practical effect of the language in the bill is to limit 
 judicial review to questions of law and to make the Secretary's 
 decision on issues of fact final and binding on the courts. I suggest 
 that there should be a review on both the law and the facts. This 
 can be done if provision to this effect is made for an appeal to the 
 United States Court of Appeals of the District of Columbia. It is 
 my impression, after some experience in attempts to get review of 
 the decisions of administrative officials, that a review on questions of 
 law only is worth next to nothing in 99 out of 100 cases and will not 
 reach arbitrary decisions which are premised on erroneous findings 
 
 of fact. 
 
 Seventh. The bill should, I submit, require that so far as possible 
 the hearings take place in the district where the alleged offender, and 
 probably all of the witnesses, reside. Under this bill it is possible 
 to require that every hearing be held in Washington. 
 
 Mr. Chairman, I have not attempted to cover various defects in 
 phraseology and of a comparatively less important character. The 
 
 J\ 
 
18 
 
 BEGULATION OP COMMODITY EXCHANGES 
 
 the^mittef *^ ^^^ *""*"^ '"® ""'" '^"^^ ^'*'^ *^^ practical aspects of 
 
 The Chairman. Mr. Caldwell, the floor broker is simply the acent 
 as a rule, for the commission man, is he not ? ^ ' 
 
 Mr. Caldwell. I would say so; yes, sir. 
 knowledge^'*"''"" ^'^ '^ technical work. He has to have technical 
 
 Mr. C.4LDWELL. Mr. Chairman, on the technical questions, the two 
 witnesses who wall follow me are floor brokers, and I would rXr 
 not attempt to answer that type of question. 
 
 The Chairman. Well, let me aproach it this way : 
 
 as ^tTniSomSrs' Sde^"'^" °' '^"^'''^ *°' '^'^'' ^ -» 
 Mr. Caldweu.. I understand so. 
 
 the^o£st'''''^''' ^^'"^ '^^^ '''' ^^^ ^^' ^^ *^" exchange and execute 
 
 ^. w'; ?^^^'^^- ^^r. Chairman, I must again warn you that I am 
 only a lawyer, in Washmgton. j ^i^ x am 
 
 k^ot^^^jT^^'i ^ ""'^I'H^ ^^^ l^*^* *^^y ^^ *^^*^ i^ you do not 
 
 ^now It. I have learned it from others. 
 
 Now, being on the floor, executing customers' orders, they may 
 engage m the scalping of orders, in executing their own orders in 
 connection with that customer's interest. Now, you do Tot tS tC 
 ought to be permitted ; you do not think the maA ought to be aL age^^^^^ 
 or a trustee or a representative of one man, and then engage in a 
 business that conflicts with his interests? ^^ 
 
 Mr. Caldwell. Well, Mr. Chairman 
 
 is ^' as'^a'r^^^^^^^ proposition, you would say that that 
 
 T .w ^ffu'^fi' P^^ "^ ^f^^^ ^^^^ ^^at should not happen. Well 
 I contend that that cannot be reached by license; it should be reached 
 first by the exchange through their disciplinary methods aXtK 
 
 The Chairman. As you agree, you recognize the fact that a man 
 should not represent conflictfng interests? 
 Mr. Caldwell. That certainly is true. 
 
 The Chairman. That is a general proposition of law that is sound 
 N ow you are a licensed lawyer, are you not ? 
 Mr. Caldwell. I am. 
 
 The Chairman. And we license all lawyers and doctors? 
 
 Mr. C.ALDAVELL Uh, yes; you license members of several of thft 
 professions, usually under certain regulations. 
 
 Ihe Chairman. Now, do you not feel, as a lawyer while von «th. 
 representing a client, if you undertook to reSnt a co^^^^^ 
 "nf iTljS ^^^'^'^^ you/ license should be taK^^f rom^^^^^^^ 
 
 Mr. Caldwell. Well, that, of course, is true under certain limit« 
 tions, under the canons of ethics, but there is thfs vLrgrer^ 
 ence. A lawyer is more than a man engaged in a profitable buS 
 He IS an officer of the court. He is a quastpublic official, f y^ wTu 
 
 llie Chairman. It is a trust relationship. ' ^ 
 
 Mr. Caldwell. That is true. 
 
 kegulation of commodity exchanges 
 
 19 
 
 The Chairman. That is true of any fiscal agency or any agency 
 where a man has the authority to protect or promote his chent& 
 
 financial rights, is it not? . ^i ^ xi. 
 
 Mr. Caldwell. Yes; but you will find, Mr. Chairman, that the 
 discipline of the lawyer is hedged about by safeguards far greater 
 than you will find in this bill. 
 
 The Chairman. This requires that he may be suspended, or his 
 license revoked after notice and hearing in accordance with the pro- 
 cedure prescribed in paragraph (d) of section 6 of the original Gram 
 Futures Act which has been in effect many years, and that provides 
 that after the commission has decided to suspend a license — and the 
 license feature is written all over the bill of ten years ago— after the 
 license is suspended, then the one affected may appeal to the circuit 
 court of appeals of the district in which he is doing business and have 
 it reviewed by that court and then by the supreme court in the regular 
 
 way. . 
 
 Mr. Caldwell. That appeal, as I stated, Mr. Chairman, is worth 
 next to nothing in ninety-nine out of a hundred cases, because of the 
 construction given by the courts to tliis language. Questions of re- 
 view are restricted to questions of law. Their action is usually based 
 upon a finding of fact; of course the courts could find that they were 
 not supported by the evidence. 
 
 The Chairman. That is what all procedure is in appeal. 
 
 Mr. Caldwell. I beg your pardon. 
 
 The Chairman. If the facts are not sufficient to sustain the judg- 
 ment, then, of course, the courts may reverse the judgment. That is 
 true in any court or anything that goes to the circuit court of appeals. 
 
 Mr. Caldwell. There is a far greater difference between review of 
 administrative acts and review of the lower court's action by an 
 appellate court. The appellate court has very broad jurisdiction in 
 upsetting the decisions of the lower courts on questions of fact. 
 
 The Chairman. Not only on questions of fact but of law, and if 
 there is not sufficient evidence .to sustain the judgment of the lower 
 court, it may be set aside. 
 
 Mr. Caldwell. That is an entirely different rule. In this type of 
 rule, where there is one scintilla of evidence, that is usually found 
 to be sufficient to support a finding. 
 
 The Chairman. Now, there has to be evidence which is sufficient to 
 justify a decision of the court in each case. 
 
 Mr. Caldwell. Not in the review of these administrative tribunals. 
 The court will usually sustain the finding if there is a scintilla of 
 evidence. 
 
 The Chairman. This is not exactly an administrative matter. 
 They are given sort of a judicial function to this commission of three 
 people. 
 
 Mr. Caldwell. Yes, sir. 
 
 The Chairman. And that was done, as I remember, and I was here 
 when the original act was passed, because you people did not want 
 one man to have this power, so in response to that suggestion of yours, 
 or the suggestion of those who appeared at that time representing 
 these institutions, they made a sort of court of three Cabinet officers to 
 hear the appeal before these licenses could finally be taken away, and 
 they exercise judicial functions almost like a trial court. You 
 
 i 
 
20 
 
 REGULATION OP COMMODITY EXCHANGES 
 
 could not run to and bother the courts every time a thing first came 
 up, but It was safeguarded in every way by giving the right of appeal, 
 as you would be from any judicial tribunal? *== ^ ^1 """^^ 
 
 Mr. Caldwell Now, the theory of that is good, but in practice it 
 lias not worked, because the three men whom you did set up as such 
 a board have not either the time nor 
 
 The Chahiman (interposing). They have not abused it; they 
 have not put you fellows out of business as you all thought, or al- 
 leged they would. ^ ' 
 
 Mr. Caldwell. Of course, my statement was in connection with 
 takmg that away and puttmg it all back into the hands of the Sec- 
 retary of Agriculture. 
 
 Let me finish what I was saying about the lawyers. When a 
 lawyer is up against losing his license, does he go before his prose- 
 cutor, or before the man making the rules by which he will lose 
 his license ? Not at a 1. He goes before a court, not his prosecutor, 
 not the man who n^ade the rules and has a fair trial. He gets all 
 of the necessary safeguards. 
 
 The Chairman^ He goes before a court that is established by the 
 Congress or the State governing authority, just like this board was 
 established by the National Government authority, 
 fiat ^^^^ ^^stance, the institution was established by a legislative 
 
 Mr. Caldwell. The difference here is this, you are putting the 
 commission men and the brokers before a judge who is also the 
 prosecutor and the man who made the rules. 
 
 The Chairman No; the Secretary of Agriculture is not prose- 
 cuting anybody. He is an administrative officer. ^ 
 
 Mr. Caldwell. I am using that in a technical sense. 
 
 +i.;t o^.^^^^^i^'^^* . i'^^. ^ "^r^I" ^^^^^ department who administers 
 l^Lf- f ^""^^ T^^^ '^o The Secretary is one who is sunposed 
 to be fair to everybody. Surely you would not say that a dabinet 
 officer IS going around prosecuting folks. v^aoinei; 
 
 hn^\^''f'^]^'J ^I^^""^ referring to the present Secretary. I 
 have heard of Cabinet officers who do that. ^ 
 
 The Chairman. I think that he acts simply in a representative 
 manner, as a representative or an agent. He o^t to ex^ercTse go^^^^ 
 faith. If you put him out of business, if he violates the law and 
 goes and two-times somebody, the commission people ought to be 
 glad to have him exposed. & v vk, u^ 
 
 Mr. Caldwell. Here is the situation, Mr. Chairman : This man is 
 alleged to have done something wrong. Somebody is sent out to 
 make an investigation who is probably convinced that he has He 
 comes back and this same man is the prosecutor. He comes before 
 these same subordinate officials of the department andTeyhay^ 
 already made up their minds, that he is probably guilty tha^^^^ 
 not what constitutes a fair trial. What similar p^ar^aRf that do 
 lrJ^\'^ connection with the revocation of the licenses of lawyers 
 orany other proceeding of that character? ^ 
 
 calTit t?;rii«eS."' "^^'^ ^^^^ ^'^^ ''' ^^y- ^ --*-l ^ 
 ^^Mr. Andresen. Are you familiar with the packer and stockyards 
 
 Mr. Caldwell. Superficially, only. 
 
 regulation op commodity exchanges 
 
 21 
 
 Mr. Andresen. They have a provision in the act relating to the 
 licensing of commission men operating in terminal yards. 
 
 Mr. Caldwell. I believe that is true. 
 
 Mr. Andresen. And I have known of cases out in Minnesota and 
 also in Illinois where the commission men have been suspended for 
 violating some of the regulations of the Department of Agriculture; 
 one that is very similar to what is proposed in this legislation. 
 
 Mr. Caldwell. I think that is a fairly similar set-up, except that 
 the statute, as I remember, does not go nearly as far as this in mak- 
 ing regulations. In other words, in changing the law overnight by 
 which those fellows operate. I might be wrong on that. 
 
 Mr. Andresen. I know of a case where 14 were suspended at one 
 time and many of them were not permitted to go back into business 
 again. 
 
 Mr. Caldwell. I am not familiar with that. 
 
 Mr. Andresen. That is all. 
 
 The Chairman. Thank you, Mr. Caldwell. 
 
 Mr. Caldwell. Thank you. 
 
 Additionax. Memorandum Submitted on Behalf of thb Chicago Boabd of 
 
 Tbadb 
 
 [By Louis G. Caldwell, attorney for Chicago Board of Trade] 
 
 The committee has already been supplied with a list of members of the 
 Chicago Board of Trade suspended or expelled for reasons other than insol- 
 vency during the period January 1, 1928 to February 1, 1935. This list showa 
 a total of 51 suspensions and expulsions. 
 
 During that period there have been seven cases in which both the Grain 
 Futures Administration and the Chicago Board of Trade have pnrticii)ated. 
 Two of these clearly originated with the Grain Futures Administration; two 
 are difficult to classify, and the others originated with the Chicago Board of 
 Trade. In only one of these cases did the Board fail to take disciplinary 
 
 action.* 
 
 The two cases which were uncontrovertibly brought to the attention of the 
 Board by the Grain Futures Administration involved five persons and grew 
 out of the same general state of facts. They are Frank H. Day and his son^ 
 Frank M. Day, who were respectively expelled and suspended for two months 
 on May 19, 1931 ; and G. W. Beaven, A. K. Ruxton, and Mose Singer who were 
 respectively suspended for G months, 60 days, and 30 days on May 5, 1931. 
 
 The two matters which are difficult to classify grew out of the M^issey case, 
 already discussed in the testimony heard by the committee. They really 
 originated with a complaint to the Chicago Board of Trade from an employee 
 of the Department of Agriculture (not an employee of the Grain Futures 
 Administration) in the southwest, who alleged misconduct in Massey's hand- 
 ling of a certain job-lots transaction for him. This is the case in which at 
 first a 5-day suspension was imposed and then, on further investigation and 
 rehearing in which it appeared that Massey had been guilty of similar mis- 
 conduct in other instances, a suspension of 2 years was imposed on Novem- 
 ber 26, 1929. The other case was, in a sense, collateral to this, the Ready 
 case. This was the one case in which the board of directors refused to take 
 disciplinary action. Its reason was that the investigation that had previously 
 taken place had, in its opinion, failed to disclose any basis for action. The 
 Ready brothers were two of the three defendants against whom the Grain 
 Futures Administration proceeded in the Massey case. We understand that 
 before the ultimate disposition of the Massey case, on motion of counsel the 
 
 1 The meetings of the business conduct committee are confidential and no minutes are 
 kept of Its proceedlnjis. It is Impossible, tlierefore, to produce documentary evidence to 
 the effect that there were no other cases brought to the attention of the business conduct 
 committee by the Grain Futures Administration In which no disciplinary action was 
 taken We have, however, made a sufficient check with members and employees familiar 
 with the affairs of the business conduct committee to feel justified in saying that the above 
 statement is accurate, and, in any event, substantially correct. 
 
 
 
22 
 
 REGULATION OF COMMODITY EXCHANGES 
 
 REGULATION OF COMMODITY EXCHANGES 
 
 23 
 
 ^ 
 
 I 
 
 I 
 
 rin'^/fh* ..""'*"■ '?"'^,«ase3 the Grain Futures A.lnilnl.stration had nothlne to 
 «L i>^ uneoveriDR the miseontluit or initiating the <liscipllnarv nrc^Mne, 
 
 ZJ^if"^r ^Tl '5™'^*" '" ""y "^"y 'n them until'^Xr thTcS c ,S 
 Board of Trade had done so. One of these involved FrederlV a ¥ili'.fn 
 who was expelled by the board on July 24 1934 A second w««T v J^fl^' 
 "'ho was expelled by the board on Janury S, IMS ' '^^ ^''^"'^• 
 
 er^ hi t^hJU'?^ ''"'Il^*'' * ^'■"'«' <=»«'•• I" this oase the facts were uncov- 
 
 by the commission barring the firm from trading piivlS for 6 nt^ifbf 
 Promptly on being notified of this decision the board Sdecors 'on Number 
 
 "itPaIr J Sr?S.f^rtrt ti'^'Sl^^^J^rSlZ^^ 
 
 Trtd^rK-TlSfnary-ictr*''" "'''^^ ""^ '«"• '^« ChrrB^d^ff 
 
 0fT2%"n^.i;'::^rit;''SLl^t.'';i,^.^"'"'^« Administration maintain, a staff 
 
 STATEMENT OF EDWIN KUH, JE., EEPRESENTING THE BOAED 
 OF TEADE OF CHICAGO, CHICAGO, III. 
 
 ih^^h ^A^'i .^^j °''?\^' ?<*^'" K"h' J"". I am a floor broker on 
 the board of trade of the city of Chicago. 
 
 Rn^r^'ifT^ ^' Coughlin who is also a floor broker on the Chicago . 
 Board of Trade and myself appear before you today to present tSe 
 ■objections of the floor brokers of that exchange to the licensW pre! 
 visions contained in H. R. 3009. I order to save time and livoTd 
 repetition we have divided the testimony which we desire to pre^nt 
 In the brief time at my disposal I wish to point out to you theTea- 
 sons why there are floor brokers, what functions they perform, and 
 the dangers involved in any attempt to straight-jacket them under 
 a licensing system. Mr. Coughlin will point oft to you he utter "ack 
 of necessity for imposing the license provisions in this bill and the 
 exJhan» ^ maintaining the present disciplinary macliinery of the 
 
 What is a floor broker and what service does he perform « In 
 brief, a floor broker is that person who executes the orders of 'com- 
 mission houses m the "pit." He must be a member of the exchange 
 Z^T^'";]' '' does business. To obtain such membership he must 
 cLl SLjonsiS^^^^^ " ''^'^'^^' "' '" ^'' character ^nd finan- 
 
 As to the orders which are executed by the floor brokers, tht^v are of 
 Tarious types known as " limited ", " market ", " stop loss » "scale " 
 and " spread " orders The meanjng of these' terms'^ is self .e^kna! 
 tor y. Insofar as the " spread " orders are concerned, they are usually 
 
 tZ,}^ ^'v.'''"''* ^^- ^^i^^^-^V^- ^-i "fillers, warehouse interests, ex- 
 porteis, who comprise the cash grain group. To give you an example 
 of the work of a floor broker, let me refer to this latter group. It is 
 essential for these interests, from time to time, to change their 
 hedges from one delivery to another. This is done through the 
 floor broker, who buys one future and sells another, usually at a stated 
 pnce differential This purchase or sale is made in the pit either 
 by voice, the nod of the head, or signal by hand. This technique 
 has been developed over a period of some 50 years and has resulted 
 m a mechanism that is remarkable for its speed and efficiency. That 
 
 it is the only practicable method will be readily appreciated ^ben 
 one realizes that upward of 50,000,000 bushels of wheat are oiten 
 bought and sold on the Chicago Board of Trade m a single day. 
 The point I wish to make, however, is this. The system is based 
 entirely on the honesty and integrity of the floor broker. All trans- 
 actions are thus completed on faith. And as Mr. Coughlin will point 
 out to you, it is policed by the brokers themselves, because everytime 
 a violation of the rules occurs it results to the financial loss of some 
 
 other broker. . 
 
 Inasmuch as very large sums of money are usually involved, 
 there must be among floor brokers a high standard of honor and 
 business ethics. Otherwise, the mechanism of trading would destroy 
 itself. Cases of breach of faith among brokers in trading are almost 
 unknown. And for this reason we are at a total loss to understand 
 wliy it is now sought to impose a license system upon us. 
 
 Under the present bill, not only is the Secretary of Agriculture 
 given almost unlimited authority to make rules and regulations but 
 no provision is made regarding the effective date of such regula- 
 tions. Things which are legal and proper one day may be barred 
 the next. We feel that if the power to legislate is to be given to 
 the Secretary of Agriculture that we should at least have an oppor- 
 tunity to appear and be heard before measures of far-reaching 
 consequence, which have the force and effect of a criminal law, are 
 put into effect, and, further, that such measures should not become 
 effective until the trade has had some opportunity to adapt itself 
 
 to them. ,0, ^ ii A • n 
 
 Suppose this bill is enacted into law and a Secretary of Agri- A 
 .Ui^,.A ^n fKo -fnfnvo iccnpe n rpomlation nrohibitinff a floor broker / 
 
 culture in the future issues a regulation prohibiting a floor broker 
 to trade for his own account. 
 
 That is the point you brought up, Mr. Chairman. 
 
 Such a regulation would instantly make it virtually impossible 
 for brokers to act. Being human, they are bound to make errors 
 in the execution of orders, especially in a big, active, excited rnarket. 
 They may overbuy, oversell, get caught on the wrong end of a 
 spread order, overlook an order, and so forth. The instant a broker 
 makes such an error he is in the market for his own account as 
 he can hardly expect his client to assume his market position. Who 
 would care to take out a broker's license if he knew that at the time 
 of his first error in filling an order his license could be revoked 
 and that he might subsequently be subject to fine and imprisonment? 
 
 Even though a highly intelligent Secretary of Agriculture, such as 
 we have now, would be most unlikely to issue a regulation forbidding 
 brokers to trade for their own account, his successor might be a 
 different type. We brokers protest strenuously against having our 
 business and hence that of the entire marketing machinery put 
 into the hands of one official through his power to issue rules and 
 
 licenses. 
 
 Not only is the floor broker a necessary part in the present system 
 of marketing commodities, but he performs a service of singular 
 
 benefit to that system. i . -, /. xt, • 
 
 The fact that about 99 percent of floor brokers do trade for their 
 own account is a tremendous factor in contributing to the liquidity 
 of the market. Remove this trading element and you will find 
 
 / 
 
 I 
 
 I 
 
 t 
 
24 
 
 REGULATION OP COMMODITY EXCHANGES 
 
 instantly that when a buyer of grain in the country wishes to hedge 
 It by a sale of futures, in the absence of a liquid market f urnishfd 
 by floor traders, he will receive a lower price than under the 
 present system On the other hand, the miller who when he sells 
 flour buys m futures would have to bid up more before he found 
 sellers. Hence, the producer would receive less, and the consumer 
 pay more. This is the inevitable result of the reduction of liquiditv 
 m a market. ^ ^ 
 
 I am sure it is not the intention of this bill to destroy the existing 
 machinery for the marketing of grain and other commodities, but 
 such a result is more than possible if the clause for licensing brokers 
 is retained m this bill. I thank you, Mr. Chairman. 
 
 do ou? '^^^^^^' ■^^' ■^"^' ^^^ ^^ ^^^ ^^^^ ^'^^^ *'^® P^^^^^ ^^ ^^> 
 Mr. KuH. No, sir. 
 
 The Chairman. You simply execute the orders for the commis- 
 sion men? 
 
 Mr. KuH. That is right. That is, execute customers' orders ; yes, 
 sir. 
 
 The Chairman. Now, you sometimes have buying and selling 
 orders at the same time? ^ 
 
 Mr. KuH. Yes, sir. 
 
 The Chairman. That is, open orders, buy at the market and sell 
 at the market? 
 
 Mr. KuH. Yes, sir. 
 
 The Chairman. If you have an unusually large order — I will not 
 say you— if a broker has an unusually large order, it furnishes an 
 opportunity at least for him to consider getting into the market on 
 his own account. 
 
 Mr. Kuh. That is true; but you will find dishonesty in anv line 
 of human activity, sir. J ^ 
 
 The Chadiman. Do you not think, in protection to the public, that 
 the man who is executing the orders on the floor you say the public 
 IS interested in, ought to be governed, or that there ought to be 
 some method of dealing with the man who does not deal fairlv and 
 squarely? ^ 
 
 Mr. Kuh. There. is, Mr. Chairman. 
 
 The Chairman. And who rides a horse going in the other direc 
 tion, does not in good faith, execute his orders « 
 
 Mr. Kuh. There is such a method, Mr. Chairman. 
 
 Ihe Chairman. You recognize that the highest of good faith i& 
 required of the floor broker? ^ 
 
 Mr. Kuh. Yes, sir. 
 
 The Chairman. It is a peculiar trust, a relationship that requires 
 as high a degree of integrity as that required of the attorney or the 
 doctor or anyone else ? ^ 
 
 Mr. Kuh. That is right. He is policed, too. 
 
 Mr. Kuh. Well, I would not say that. One of the best policeman 
 is his competitor. If a competitor of mine, who wants to get an 
 account away from me thought I was dishoneLt, he could very^easilr 
 get me suspended or expelled, if I were dishonest. ^ ^ 
 
 regulation of commodity exchanges 
 
 25 
 
 The Chahiman. Well, there is competition, of course, m all lines 
 of business, good and bad. Just simply because there is competition 
 does not necessarily mean everybody should be turned scottree. 
 There is competition in the practice of law, but we find it necessary 
 to license lawyers, because, for the principal reason, it is a highly 
 technical business and a business that requires the highest of good 
 faith. 
 
 Mr. Kuh. That is true. 
 
 The Chairman. Therefore, it is found necessary to license lawyers 
 in order to see that the quack and the one who is dishonest, is not 
 turned loose on an unsuspecting public. . ,i: 
 
 Now. in the long run, it is to the interest of the profession itself 
 to have that done. The same is true of doctors. They are m a 
 position where they can abuse the public. 
 
 Mr. Kuh. May I say, Mr. Chairman, may I say one thing? 
 The Chairman. Yes. 
 
 Mr. Kuh. It is possible for a broker to be dishonest and cases have 
 arisen where brokers were dishonest. They are caught very quickly. 
 No commission house in its right mind would give an order to a 
 broker whom they even suspected of dishonesty and dishonesty can- 
 not long be covered on an exchange where hundreds of men are min- 
 gling together and whose work is being scrutinized all of the time. 
 It is'difficult to be dishonest. If we were a bunch of crooks, it would 
 not be awfully hard for us to be found out. 
 
 The Chairman. I am not maintaining that, but I am talking about 
 the ones who happen to be dishonest. 
 Mr. Kuh. They are quickly caught, sir. 
 
 The Chairman. And, the exchanges, as well as the public, need 
 protection. 
 
 It is interesting to note that the same line of arguments was 
 made here against the licensing of the contract places, the licensing 
 of the exchange, when the measure was up some 10 or 12 years ago. 
 This is the same line of argument that was made agamst those 
 thijigs. 
 
 XSince the broker, as you said awhile ago, is trading for his own 
 account, and at the same time executing orders for others, does he 
 not very frequently have interests in the market directly adverse to 
 the interests of the commission houses, or the orders that they are 
 
 executing ? -^^ 
 
 ^^JMv. Kuh. That happens not infrequently, and the rules of oOr 
 exchange are extremely stringent against a broker favoring himself 
 against an order. For instance, supposing that I should get an order 
 to buy a million bushels of wheat at the market, and I should, by 
 being a piker, buy 10,000 bushels of wheat on my own account before 
 I filled the order for the million? I could do that and I might get 
 away with it I might profit from that sort of thing, but probably 
 the second time I would be caught and disciplined. 
 
 The Chairman. Do you claim that those instances are very rare? 
 Mr. Kuh. Yes, sir ; 1 think it is extremely rare that a broker does 
 that. A broker knows that he is in a position of trust and that his 
 function is to do the best he can for the customer. 
 
 The Chairman. Well, now, that is just the point I was leading 
 up to: Suppose you get an order to buy a million bushels. You 
 are in the market for yourself anyway. 
 
 / 
 
26 
 
 REGULATION OF COMMODITY EXCHANGES 
 
 Mr. KuH. I may be; I may be. 
 
 The Chairman. You are permitted to be without limit, to be in 
 the market and buymg and selling for yourself. 
 
 Now, what is to keep you from going and buying 10,000 bushels- 
 of wheat since you have that order for a million bushels, and know 
 that that will put the price up a little or that that is the tendency « 
 You go m and buy 10,000 bushels. You are in the market without 
 
 Tii 1?^* ^^^ *^*^^ ®^ y^"^ ^^^ account. 
 
 Mr. KiJH. It is against the rules. It is doing what is called run- 
 ning ahead of the order, which is the case we are discussing. There 
 are two things that would keep me from doing that. One might 
 not. If I were dishonest I might try to do it. In the first place, 
 ordinary honesty would keep me from doing it, and, in the second 
 place, fear of getting caught, if I were dishonest, would keep me 
 from doing it, because it is a violation of the rule of the exchannre 
 and I can be suspended from the exchange for doing it. '^ 
 
 The Chairman. Now, if you had an order to buy a million bushels 
 of wheat, and you had an order to sell a million bushels, you could 
 buy 10,000 bushels. When I say " you ", I am just using " you » as an 
 illustration. I am not speaking personally. 
 Mr. KuH. I understand. 
 J\/r ^^^^ Chairman. You could buy the 10,000 bushels and then put 
 m m your million-bushel order and then sell 20,000. Sell that 10,000 
 \ and another m executing your order for a million bushels, run the 
 Vnarket down and get an advantage in both cases. I mean, if you 
 were disposed to take advantage of it. 
 
 Mr. KuH. If I am disposed to be a crook, I probably would try 
 to make money dishonestly, and I do not think I would last very 
 long on the board of trade. Crooks are very soon found out. 
 
 The Chairman. I think that is very true about you, but the very 
 discussion of this shows that it is one of the most highly technical 
 of occupations, does it not? 
 
 Mr. KuH. Yes, sir ; and our honor happens to be very high. We 
 are fortunate in that. I mean this. This is not propaganda. 
 
 The Chairman. There is no profession you could conceive of which 
 requires a higher order of good faith. 
 Mr. KuH. Well, it requires an extreme order of good faith. 
 The Chairman. Just as high as there is, just the highest. 
 Mr. KuH. Yes, sir. 
 
 The Chairman. That being true, does it not look logical that if 
 there is any profession that ought to be licensed, this is the one? 
 
 Mr. KuH. That might be true if the license does not put us in 
 the position where our business could be ruined overnight, and if 
 we had no other means of being kept in order and kept true to our 
 position of trust. 
 
 We maintain that we have very ample machinery for making us, 
 in case we are not disposed to, live up to our trust. The gentleman 
 who will speak next, I believe, is going to take that up more 
 specifically. 
 
 The Chairman. You people trade on a commission basis, or are 
 you paid salaries? 
 Mr. KuH. We are all on a commission basis. 
 
 REGULATION OF COMMODITY EXCHANGES 
 
 27 
 
 The Chairman. Has there ever been a suggestion that you be 
 paid on the basis of a salary and not permitted to trade at all for 
 yourselves ? 
 
 Mr. Kuh. Yes. We were, I believe, until 1919, on salaries, with 
 very, very few exceptions. It was a privilege for a man to be able 
 to accept orders for a fee. Now, there is a rule against salaries. 
 But in 1919 it became the rule of the exchange that all brokers must 
 be paid a fee instead of a salary. 
 
 The Chairman. You are required to have someone on the ex- 
 change floor, or do you represent a commission house ? 
 
 Mr. Kuh. I must have a seat on the exchange. 
 
 The Chairman. Then, you may represent a commission house 
 that does not have a seat on the excnange, may you not ? 
 
 Mr. Kuh. Well, now, I would have to give up the name of a 
 clearing member, a member of a clearing house on the exchange, 
 when I make a trade. If I make a trade with you, Mr. Jones, as 
 another broker in the pit, I might say put the trade down in the 
 name of Lampson Brothers, or any firm that I might get the order 
 from. I would have to give the name of a clearing member there. 
 I would have to represent a member of the exchange. 
 
 The Chairman. And that is the only capacity you are permitted—: 
 in which you are permitted to act? 
 
 Mr. Kuh. Yes, sir. 
 
 The Chairman. You are not permitted to act for someone who 
 is not a member, take orders, for instance, from someone in Kansas 
 City, to execute for some individual ? 
 
 Mr. KuH. I may take an order from Kansas City, or any indi- 
 vidual in this room, but he must tell me to clear that trade tnrough 
 a member, a clearing member of the board of trade in Chicago. 
 
 The Chairman. In other words, you do not hold that type of 
 membership ? 
 
 Mr. Kuh. There is only one type of membership and that entitles 
 the members, all members, to the privileges of the exchange. 
 
 The Chairman. You are not a member? 
 
 Mr. Kuh. I am a member. I am not a member of the clearing 
 house. 
 
 The Chairman. And that is the way the orders must come, 
 through the clearing house ? 
 
 Mr. Kuh. No ; they do not come through the clearing house, but 
 the transaction is cleared through the clearing house. 
 
 Mr. ToBEY. You have to give the name of the clearing house 
 in connection with the sale ; that is right ? 
 
 Mr. Kuh. Exactly. 
 
 The Chairman, i ou are required to clear the order through the 
 clearing house in each instance where an order is executed ? 
 
 Mr. Kuh. Yes, sir. 
 
 Mr. ToBEY. There is one question that I wish to ask, but first I 
 want to concur in what you have said, insofar as your faith in the 
 integrity of the majority of members is concerned, and I share it, 
 too. The fact is that a great majority of men in the financial busi- 
 ness of the country are honest, possessing as high a degree of hon- 
 esty as is shown in any profession in the world; but I also realize 
 that just the reverse is true also among a minority element in every 
 
 
 
 
28 
 
 BEGULATION OF COMMODITY EXCHANGES 
 
 business in the world, every profession. This is preliminary to 
 what I wanted to ask you. 
 
 Suppose, you Mr. Kuh, as a floor broker, received an order to sell 
 500,000 bushels of wheat at the market. You could then, under your 
 practice and in accordance with your rules, take it up yourself? 
 
 Mr. Kuh. I could do what ? 
 
 Mr. ToBEY. Take it yourself. 
 
 Mr. Kuh. For my own account? 
 
 Mr. ToBEY. Yes. 
 
 Mr. Kuh. No, sir; that is a strict violation. That is bucket shop- 
 ping. That is the worst sin in our field. 
 
 Mr. ToBEY. But you could do this. You could go into the market 
 yourself. Suppose that you had an order from Tom Jones on the 
 other side of the river to buy 500,000 bushels and at the same time 
 received an order to sell an equal amount, you could do that by 
 washing sales ? 
 
 Mr. Kuh. That is a violation of the regulations. 
 
 Mr. ToBEY. Crossing sales? 
 
 Mr. Kuh. Yes, sir. 
 
 Mr. ToBEY. All orders must be filled in the open market? 
 
 Mr. Kuh. Yes. 
 
 Mr. ToBEY. They must be announced, given publicity, so that any 
 other broker may bid on them or bid for them ? 
 
 Mr. Kuh. Yes. All trades must be made in the open market. 
 
 Mr. ToBEY. If you had an order to buy and to sell, you could not 
 cross them off of your books at the last market price ? 
 
 Mr. Kuh. No, sir; that is a violation of the rules. I have that 
 rule here and can read it to you if you would like me to. 
 
 Mr. ToBEY. If you will. 
 
 Mr. Kuh. Rule 202-A. " Orders must be executed in the public 
 market " is the name of the rule. [Reading :] 
 
 AU orders received by any member of this association, firm, or corxwration, 
 doinp business on " charge, to buy or sell for future delivery any of the com- 
 moilities dealt in upon the floor of the exchange (except when in exchange for 
 cash property " must be executed In the open market in the exchange hall dur- 
 ing the hours of regular trading and under no circumstances shall any member, 
 firm, or corporation assume to have executed any of such orders or any por- 
 tion thereof by acting as agent for both buyer and seller either directly or in- 
 directly, in their own name or that of an employee, broker, or other member 
 of the association: Provided, That on transactions where brokers as agents 
 for other members meet in the execution of orders in the open market and with- 
 out prearrangement unintentionally consummate a contract for the one and 
 same clearing member principal, such transactions shaU not be considered in 
 violation of this rule. 
 
 The meaning of the last part of that rule is that if a big commis- 
 sion house needs more than one broker in each pit, and supposing that 
 I am one of five brokers, and I should get an order to sell 10,000 
 bushels of wheat at the market, and the market we will say is 95 
 bid, and I offer 10,000 bushels, and another broker says that he will 
 take it — one who has an order — ^there is nothing to prevent me from 
 selling that wheat, if he is the first one to take the offer, according 
 to our customs. We have to sell it to the first person who accepts 
 our offer, no matter whether he happens to be a broker for the same 
 house or not. 
 
 EEGULATION OP COMMODITY BXOHAKGBS 
 
 29 
 
 Mr. ToBEY. That being so, why should you object at all to this pro- 
 vision of the bill. It only strengthens that provision in your rules 
 and regulations. 
 
 Mr. Kuh. Well, I object to it as a license. 
 
 Mr. ToBEY. The next feature. Have you any recollection what- 
 ever of the exchange having disciplined or expelled members for run- 
 ning ahead, say, Siking a 10,000 bushel order, buying it for them- 
 selves and then executing another order for the customer after that? 
 Have there been instances where the exchanges have expelled mem- 
 bers for that ? 
 
 Mr. Kuh. Well, I am sure that members have been disciplined for 
 
 that. 
 
 Mr. ToBEY. Do you know of any! 
 
 Mr. Kuh. I do not. 
 
 Mr. ToBEY. And yet your predecessor testified that it had been 
 done. 
 
 Mr. Kuh. I cannot testify to that, with any assurance, because I 
 do not know. Members are suspended on rare occasions and are ex- 
 pelled for violations of the rules, and I do not doubt that they have 
 been for this, but I do not remember for what offenses. Members 
 have been disciplined on rare occasions when they have violated the 
 rules. We have little trouble on the exchange with dishonesty. I 
 want to impress that upon vou gentlemen. 
 
 That is all. 
 
 Mr. CooLEY. May I ask a question, Mr. Chairman ? 
 
 The Chairman. Mr. Cooley. 
 
 Mr. C001.EY. What procedure do you follow in expelling a man 
 from the exchange for violation of the rules of the exchange? 
 
 Mr. Kuh. A committee is appointed. Well, in the first place, the 
 charges are usually brought by some member to the business conduct 
 committee. The business conduct committee looks into the charges, 
 and if they think there is any basis for them whatever they appoint 
 a committee to investigate these charges and then this committee ap- 
 points a prosecutor to prosecute the accused and he is tried before 
 the board of directors. He is defended by another member of the 
 board of trade and he is prosecuted by another member of the board 
 of trade. 
 
 Mr. CooLEY. Does he have any appeal from their decision? 
 
 Mr. Kuh. No, sir. 
 
 Mr. Cooley. Now, one other thing: You made the statement that 
 you did not want to be expelled from the exchange for or on account 
 of the commission of an error. 
 
 Does not this bill contain the word " willful " and does that not 
 give some protection against any error that might be committed ? 
 
 Mr. Kuh. Well, I thought about that, and what I think is this, 
 that, unfortunately, this bill would, under a condition of that nature, 
 and if a regulation were passed prohibiting brokers from trading for 
 their own account, put a premium on dishonesty and it would create 
 it, because if it were to my interest to do so and I was dishonest I 
 could say that I was not trading for my own account, that that was 
 an error. 
 
 114603 — 35— SBB B 3 
 
 I 
 
 i 
 
30 
 
 
 REGULATION OF COMMODITY EXCHANGES 
 
 Mr. CooLEY I know ; your reputation would be brought into plav 
 
 T^I'''' ""TJ"^ ''^^ 'T"" ^^'^^ ^ ^i^t y^"' "«^er those circum: 
 stances, would you not? 
 
 of^'^^SeS'll^^^^' '^ ""'^^'^ ^ '" * personal case, but I was thinking 
 I hate to see an inducement to dishonesty brought into plav 
 
 ,,r: w ^^"^^ ^V^' ''''^ ^^""^ *^^ ^^^^ ''^^^ wl^en you are brought 
 up before the exchange commission that hears any accusations, and 
 are you not given the same ri-ht to explain that the violation of the 
 rules was an error and it was honestly committed ? 
 
 Mr. KuH No; there is a prohibition of the exchange upon a mem- 
 ber trading for his own account. I might be dishonest and be tried 
 and defend myself by lying and saying I had not done it, that is 
 true, but I would not get very far because they would not trv me 
 unless they have pretty good evidence. There is a vast majority of 
 convictions m thefew cases which are brought up for violations^ 
 
 Mr. CooLEY. TVTiat I am trying to get at is this, does not this act 
 gne you the same safeguards and even better safeguards than vou 
 have under those exchange regulations? ^ 
 
 Mr. KuH. No, sir; we are not tried by experts and the rules are 
 not made by experts, or people who undei stand the technical ma- 
 chmery of the exchange. 
 
 Mr. Marshall. Mr. Chairman 
 
 The Chairman. Mr. Marshall. 
 
 Mr. Marshall. The question I had in mind is in connection with 
 wiiat has already been asked you, if the broker did make a sale 
 nllnu u ?" ^^i^"* ^^ received, received an order to buy or sell 100,- 
 000 bushels and went ahead and transacted a 10,000-bushel order for 
 your own account. Now, he is protected. In other words, at the 
 end or the close of the day all sales are cleared, as I understand vou 
 ^"iV ^^P^^^^^"^^^ 10,000-bushel transaction would be cleared 
 
 Mr. KuH. That would be very easily detected. Maybe not the 
 first time, or possibly not the second time. I would say it would not 
 take very many actions of that kind on the part of the broker, but 
 that somebody would say to the commission house whose broker I 
 was when I did that: You know, your broker in the pit there is 
 making himself some change by buying a little wheat ahead of all 
 of his big buying orders. Tf my client did not fire me it would 
 probably get to the business conduct committee. 
 
 Mr. Marshall. In other words, when transactions are cleared thev 
 are cleared under your own name, showing that you did it ? 
 Mr. Kuii. It would be on my trading card ; yes. 
 Mr. Marshall. And that is*^ easily distinguished ? 
 Mr. KuH. It would not be cleared in my name, unless— that is 
 technical, and I am not trying to dodge your question. They would 
 T?j^ ^iv ^^^"^^ ^^ would be on my trading card ; yes, sir. 
 Mr Marshall. I was just wondering how easily it would be de- 
 tected if anyone cared to observe it. 
 
 Mr. KuH You have no idea how quickly it gets around, if any- 
 body IS shady in his activities. ^ 
 
 The Chakman^ Are there any further questions which anyone 
 desires to ask ? Thank you, Mr. Kuh. 
 Mr. KuH. Thank you, Mr. Chairman. 
 
 i; 
 
 regulation of commodity exchanges 
 
 31 
 
 The Chairman. Mr. Boylan, Mr. Boileaii would like to ask you 
 ji question. 
 
 Mr. ToBEY. This committee is forming its judgment on all of the 
 evidence. Would you be willing, as representing the Chicago Board 
 of Trade, to file with this committee a list of the charges and con- 
 victions made by the board against all of the members and what 
 the offenses were during the last 5 years, including 1929? 
 
 Mr. Boylan. Yes, sir. 
 
 The Chairman. You will give us that? 
 
 Mr. Boylan. Yes, sir. 
 
 STATEMENT OF JAMES J. COUGHLIN, PRESIDENT OF THE 
 BROEEBS' ASSOCIATION, CHIGAGO BOABD OF TBADE 
 
 Mr. CouGHLiN. My name is James J. Coughlin. I live in Chicago. 
 I am a floor broker on the Chicago Board of Trade and for the past 
 '^% years I have been the president of the Brokers' Association. 
 They are a group of some 500 floor brokers trading in all lines on 
 the Chicago Board of Trade, and in their behalf, as well as my own, 
 I presume in behalf of anyone else that might be affected, I am 
 appearing here with these other gentlemen protesting against the 
 inclusion of the license provision in House bill 3009. 
 
 I am assuming that that provision was inserted in the bill in order 
 to make effective and enforceable the restrictions and the proposi- 
 tions that are in the bill concerning the conduct of floor brokers. 
 
 I assume generally you gentlemen are familiar with them and I 
 want to say at the outset that you are not half so interested in main- 
 c {lining a very high standard of fair dealing and honesty and honor 
 among the floor brokers as are the brokers themselves, because they 
 have an immediate financial interest, as well as the general good 
 of the association, involved. 
 
 Let me say this, that there is not a single thing that I know of 
 that a broker could do, by way of an unfair act, a dishonorable or a 
 fraudulent act, that is not already prohibited by specific rules of the 
 exchange ; and if somebody comes along ultimately, some diabolical 
 genius, and thinks of something that has not already been specifically 
 prohibited b}^ the rule, the general rule, what I call the disorderly 
 conduct provision or provisions of the rules are ample to cover. 
 They cover generally anything that is in any way inequitable, un- 
 fair dealing, and detrimental to the welfare of the exchange, and so 
 on, and so far as safeguards and guaranties of brokers' conduct is 
 concerned, there are already ample and sufficient specific rules 
 covering them. 
 
 So that these restrictions that are contained in your bill are simply 
 a duplication of what are already existing rules. 
 
 Now, that being so, it seems to me that the next question is to 
 what extent and how effective are these rules of the exchange 
 enforced. 
 
 Well, first of all, let me say this, that I think it would be a prac- 
 tical impossibility for a broker to do an unfair, dishonest, or fraudu- 
 lent thing in the handling of an order without being immediately 
 detected. I do not know what he could do that somebody would 
 not see him do. As you all know, we all stand shoulder to shoulder 
 
 
32 
 
 REGULATION OF COMMODITY EXCHANGES 
 
 m the different pits. If a broker gets an order, a half a dozen see 
 mm get it. They see what he does with it; see what notes are made, 
 wnat notation he makes on his trading card. 
 
 Now, those men are all experienced traders. They are keen ob- 
 servers. They have to be or they would not remain in the pits very 
 
 So that no man, it seems to me, however much he might desire to 
 do a dishonest thing, is always forestalled by possible immediate 
 detection, and when I say " immediate " I mean exactly that. 
 
 That being the case, we have had this situation on the board: I 
 think probably in my time, which covers approximately 10 years, 
 we have averaged disciplinary cases before the board of directors at 
 the rate of about one a year, and in that time, just taking that aver- 
 age over the period of 10 years, I know of one instance where a man 
 was acquitted. In the other nine instances there was a finding of 
 guilty and inevitably infliction of penalties that I always thought 
 were far more severe than I would have inflicted if I had been sitting 
 in judgment. ^ 
 
 Now, these trials are conducted in this kind of mann«r : If a man 
 is detected m doing an improper thing, the customary method is that 
 he IS reported to a member of the business conduct committee by 
 whoever sees him doing it, and, incidentally, let me teD you that it 
 has never been considered and is not now 'considered sn nnsports- 
 manhke thing for one member to report another, because everv time 
 a broker does an unfair thing, such as bucketing an order, he is just 
 depriving the market, which means everybody in it, of his right to a 
 chance to that trade, and consequently there is never any hesitancy 
 about reporting any broker on anything of that sort that might 
 go on. 
 
 When the report is made to the member of the business conduct 
 committee, or to a director, an investigating committee is appointed 
 immediately. They send for all of the cards of the transaction, the 
 orders of the broker, his cards, and trading cards, if he has any, and 
 everything that might be at all pertinent. They are gone over care- 
 fully. If they indicate violations, charges are preferred again before 
 the board of directors, and he is haled in on reasonably short notice 
 and he has no right to retain professional counsel. He can only be 
 represented by another member of the board. There is no long 
 record made up, necessarily. He is tried before a jury of experts 
 who not only know all about the business generally but they know 
 all about the facts and circumstances that surround the market at 
 the particular time the offense is alleged to have been committed, and 
 they know the man who is accused. 
 
 There is never any dilatory procedure such as you might have in 
 proceedings under this bill; no question of validity or constitution- 
 ality of the regulation or statute ; no motion to quash a pleading or 
 anything else. They simply take the evidence and put it under the 
 man's nose and make him explain it. 
 
 Now, I know something about those trials, and I do not think I 
 have seen one where a member was up for discipline that was not 
 disposed of in the same afternoon that the hearing began, at no 
 expense to anybody. 
 
 Now that is the machinery as it exists at the present time. Of 
 course, you know what the procedure before a commission would be. 
 
 REGULATION OF COMMODITY EXCHANGES 
 
 33 
 
 Necessarily, the man would be required to retain professional coun- 
 sel, probably have to spend a great deal more money than he had. I 
 do not think it is unfair to the brokers at this time to say that if any 
 such proceeding was brought against our members nowadays, he 
 would probablv have to let it go by default, or we would probably 
 have to pass the hat to collect a defense fund for him. 
 
 Now you know in a general way what these proceedings are. It 
 \vill be necessary to have a lot of explaining, presentation of evidence, 
 in order to make a record clear to those who are going to consider it. 
 There are briefs to be written and printed, subsequent arguments in 
 Washington before the Commission, and then the possibility of an 
 appeal. 
 
 Now that is a thing that the bill seeks to substitute for this present 
 effective machinery that we have. 
 
 Now your bill here, it seems to me, substitutes realljr a terrible 
 threat against the brokers. First of all, I assume that it displaces 
 the disciplinary provisions and powers of the board of trade we 
 maintain ; secondly, the license section feature is here, and the possi- 
 bility of its revocation; and, thirdly, of course, you have got the 
 criminal provisions of the bill. 
 
 Now I am frank to say this, that I know some brokers I do not 
 like, but I do not know any broker that I think sufficiently vicious 
 that the public needs to be protected against him to the extent to 
 which this bill goes, and in that connection I just want to say that 
 I think I am going to differ with the chairman a little bit with 
 respect to the comparison of attorneys and doctors and brokers. 
 Possibly I know something about that. In an unguarded moment 20 
 years ago the Supreme Court of Illinois issued a license to me to 
 practice law. Nobody has ever offered a satisfactory explanation for 
 that, but it is a fact none the less. 
 
 Now, attorneys and physicians are not grouped in an organization 
 that is operating under a corporate charter under a Federal license 
 and that makes rules and can enforce the rules, for the proper behav- 
 ior and proper conduct of those persons. Every attorney and 
 every physician is simply out on his own, and the only law that he 
 is bound in any way to respect is, of course, the statute or the law, 
 whatever it may be, that is applicable to everybody. He is not a 
 member of an organization or organized exchange that makes rules 
 of conduct for him and that can enforce those rules. 
 
 We have that situation on the board, and for that reason I think 
 the feature as to licensing is decidedly unnecessary in order to pro- 
 tect the public because the man is in effect under a license already. 
 He is operating under the rules of the exchange, and the minute 
 he violates them there is an enforcement and a disciplinary power 
 that can immediately revoke his right to operate. 
 
 Now, as I say, I do not know of any conditions that exist that 
 make the delegation of this licensing power through the Secretary 
 a necessity. I think, as a matter of fact, that if this bill were 
 passed with that provision in there the only purpose you would 
 serve would be to defeat the purposes of the bill. 11 told you a 
 moment ago it is impossible for a broker to do anything without 
 being detected, and whenever he does it is not considered unsports- 
 manlike to turn him up, if we catch him doing it; but I question 
 very much whether any other broker would care to turn another 
 
 > 
 
34 
 
 BEGULATION OF COMMODITY EXCHANGES 
 
 up to the Government, were he subject to the possibility of revo- 
 cation of his license and a l<mg, expensive trial before a commission 
 and possibly a jail sentence} I think possibly any friendship that 
 ceases in the present existing conditions might conceivably be re- 
 vived and, rather than turning up, the disposition might be to cover 
 him up; and for that reason I think that your bill would tend to 
 defeat its own purpose if you pass it in its present form. 
 
 We now have detection and disclosure under our present system, 
 and under your system I think we would have detection and inclo- 
 sure wherever it were possible. That is my own theory. I know, 
 as much as I detest and deplore to see any improper thing on the 
 part of a broker, I would certainly hesitate very much to turn him 
 up to a governmental body where he can become involved so com- 
 pletely and so expensively as he could under the provisions of this 
 act. 
 
 Are there any questions, Mr. Chairman ? 
 
 The Chairman. If there are no questions, the hour of adjourn- 
 ment has arrived. 
 
 Mr. Hook. I would like to ask a question, Mr. Chairman. These 
 regulations of your exchange are a matter of a code ethics? 
 
 Mr. CouGHMN. It is not. They are rules; definite rules. They 
 are not a code of ethics. They say, "It shall be unlawful." It 
 is strictly " thou shalt " and " thou shalt not ", all the way through. 
 
 Mr. Hook. Does it not compare with the code of ethics in the 
 legal profession? 
 
 Mr. CouGHLiN. No. A code of ethics in the legal profession, as 
 I understand, is merely a recommendation of the profession gen- 
 erally as to how they ought to behave themselves; but ours are 
 rules, and specific directions as to how they shall behave themselves, 
 or else. In other words, they are enforced. Your legal ethics are 
 not. 
 
 Mr. Hook. Certain bar associations do enforce the rules of ethics 
 in the same way that you enforce the laws of your exchange. 
 
 Mr. CouGHLiN. I assume so, and possibly by a revocation of 
 license. 
 
 Mr. Hook. In addition to that, the profession is guarded by a 
 license. 
 
 Mr. CouGHLiN. Well, I can still see a very substantial difference 
 between an attorney, a physician, and the broker. After all, brokers 
 are dealing in dollars and cents and while unquestionably his work 
 is of great importance, necessarily it seems to me that there is a 
 great deal of difference between the damage that a broker can do 
 and an attorney or a physician can do. 
 
 Mr. BoiLEAU. As I gather from your testimony, you are of the 
 opinion that every broker is interested in seeing that every other 
 b/oker is honest. 
 
 Mr. CouGHLiN. Decidedly so. 
 
 Mr. BoiLEAu. Do you know of any broker who is dissatisfied with 
 the present metliod of disciplining the brokers ; feels that it is not 
 strong enough? 
 
 Mr. CouGHLiN. Hardly. I should not say so. I think it is de- 
 cidely effective and decidedly severe. I have seen them suspended 
 for 2 years when I thought that 30 days' suspension would have 
 been sufficient. 
 
 y 
 
 REGULATION OF COMMODITY EXCHANGES 
 
 35 
 
 Mr. BoiLEAu. I gather also that the members of the exchange 
 would be quite interested in knowing that the brokers are all 
 honest men. 
 
 Mr. CouGHLiN. They are very emphatically so. 
 
 Mr. BoiLEAu. And is there any demand on behalf of the ex- 
 changes other than the brokers, for any additional disciplinary 
 regulations ? 
 
 ]Mr. CouGHLiN. No ; because as I have said, I think the rules right 
 now cover everything the broker possibly could do that might be 
 construed as fraudulent or unethical and the exchange itself has 
 machinery for enforcing and does enforce it; enforces it very ef- 
 fectively, and very speedily, and very expeditiously. 
 
 The Chairman. It will be necessary for us to suspend. 
 
 Mr. Andresen. Would it be possible for the committee to have 
 a copy of the regulations of the exchange ? 
 
 Mr. CouGHLiN. Yes. I will give you one right now. 
 
 I would just like to say, or make this further observation for the 
 benefit of the chairman, who seems to be convinced that something 
 ought to be done about the idea of the brokers trading for them- 
 selves. I most certainly would tread very lightly before I made 
 such a regulation, because I cannot think of anything that you 
 could do that would be any more harmful. 
 
 The Chairman. I am asking that, because I know nothing of 
 those regulations. 
 
 I would like to have you though, if you have a completed card 
 on which orders have been executed, I would like to have a copy 
 of such card left with the committee. 
 
 You spoke of the cards upon which the notations were made of 
 orders. 
 
 Mr. CouGHLiN. Trading cards. I think that I have one here. 
 
 The Chairman. With all of the endorsements on it? 
 
 Mr. CouGHLiN. Well, I can show you a card here. 
 
 The Chairman. That is a blank card. 
 
 Mr. CouGHLiN. We will put in a sample. 
 
 The Chairman. You can use the name John Doe, but I would 
 like to have the complete notations you use. I would like to have 
 a completed card as if a transaction had gone through the clearing 
 house and had been finally disposed of so that we may see what 
 information is placed on each of those cards and see how much 
 information the clearing house has when it gets the card finally 
 as to what the transaction has been and how much opportunity 
 is thus given for a check. 
 
 Mr. CouGHLiN. We will complete the card and file it with you. 
 
 The Chairman. Now, gentlemen, this morning was set apart for 
 hearing of witnesses on this bill. 
 
 Mr. Beale. Mr. Chairman, I would like to be heard. 
 
 The Chairman. We have had rather full hearings on this bill or 
 similar bills during the last 3 or 4 years. 
 
 (After informal discussion as to further hearings, the following 
 proceedings were had :) 
 
 The Chairman. If it is satisfactory to the members of the com- 
 mittee we will meet Thursday morning and endeavor to complete 
 the hearings on this bill. 
 
 (Thereupon, at 12.10 p. m., the committee adjourned.) 
 
 k\ 
 
 I'. 
 
BEGULATION OF COMMODITY EXCHANGES 
 
 . :t 
 
 THURSDAY, FEBBUABY 7, 1935 
 
 House of Representatives, 
 Committee on Agrioui.tdke, 
 
 Washington^ D, G. 
 
 The committee met at 10:30 a. m., pursuant to adjourmnent, 
 Hon. Marvin Jones (chairman) presiding. 
 
 The Chairman. The committee will come to order, please. We 
 will hear Mr. Davis first, this morning. 
 
 STATEMENT OF GEOEGE H. DAVIS, VICE PEESIDENT OF THE 
 TERMINAL ELEVATOE GEAIN MEECHANTS' ASSOCIATION, AND 
 CHAIEMAN OF THE CODE AUTHOEITY OF THE GEAIN EX- 
 CHANGES, OF KANSAS CITY, MO. 
 
 Mr. Davis. My name is George H. Davis, of Kansas City, Mo. I 
 am vice president of the Terminal Elevator Grain Merchants' Asso- 
 ciation, and chairman of the Code Authority of the Gram Ex- 
 changes. 
 
 Our terminal elevator association controls about 300,000,000 of 
 the 425,000,000 storage there is in the country. The balance of the 
 storage is at seaports and private mill storage. 
 
 This bill is a bill to control or curb speculation. It seems to me 
 that it has been pretty well covered by the gentlemen who have 
 preceded me. 
 
 I want to approach it from a cash-grain standpomt. 
 
 Mr. Hope. You are engaged in the cash-grain business yourself, 
 are you not, Mr. Davis? 
 
 Mr. Davis. Yes. We run a lOi^ million bushel grain elevator at 
 
 Kansas City, Mo. 
 
 Now, this bill, aside from its curbing speculation, as I say, has 
 been pretty well covered by the gentlemen who preceded me. That 
 is not our point of view at all. Our point of view is that a futures 
 markets is for the purpose of economically handling the farmers' 
 grain crops. 
 
 We are the men who bring the grain in and hedge it and so long 
 as we have hedging facilities we are not especially interested in the 
 speculative market. 
 
 Now, there are several features in this bill tliat will affect the 
 €ash-grain handling and also, in my judgment, affect the farmers 
 materially. There is one provision in the bill that allows the Secre- 
 tary to require up to 10 days' notice on a delivery. If we have to 
 carry grain for 10 days before we can deliver it, that will result in 
 
 37 
 
 I 
 
38 
 
 REGULATION OF COMMODITY EXCHANGES 
 
 nf o J * \'^'?T°*J?'""''^'® *'■«'» three-eidiths t<i three-quarters 
 of a cent a bushel We cannot pay that. %e handle grain now 
 
 ^Jjf} *• '^?*,* K^^^^' *"¥ '* t*''-o«?h th« elevator, elevate it, 
 
 ^ New York tr?^ \V"*' *"^ r Wy ^Chicago or Minneapolis 
 or «ew rork, for a half a cent a bushel or $7.50 a car, average. 
 
 bo you can readily see we cannot absorb that three-eights to three- 
 quarters of a cent a bushel.. So it is going to come out oTthe f aV^r. 
 
 There is another provision in this biff that allows the SecretarV 
 
 dSiv^r^ WT,'" Kansas City and Chicago markets, for December 
 elpte'„T!t T^\^'Sher than Ma.y delivery. If the Secretary 
 elected to take advantage of that provision for the purpose of sup- 
 ^IwL^f ATT ^^P^"^ any manipulation, we wo\ild be com- 
 r"nl "bushel ^^ """" ^"^ ''''"*^' "'"■ ^'^^ ^"'' ''"'^'^ ''°™ 
 
 ^°l! yo" gentlemen have had some farm experience. Do any of 
 you think that a farmer would submit to having us drop our prices 
 L nnilin^f '^°^*™l^*'*.' ««'nP«'*d to the futures? fheJi woufd 
 
 sSculatiig ''^*''' '^ """"'^ P"* "' '" **»« P^^it'"'' of 
 
 * ^° »l ^!;*i®™®"' t**"^® *^o items might cost the farmer anvwher« 
 from $5,000,000 to $25,000,000. The same thing wouldTppCKly 
 
 htf Vf "?*!' ^^l i^*^ u^'^y «f t'^^ month\e woulFbuy wheal 
 grto' r^lSl; ba^ir ^•^^ ^«*^ «^ *^« -"*»^ - -om\..e to 
 ^K.i'*''®u^1^P**'"^*'" ^'^^^t 10 cents a bushel less than July, 
 1^ Mr H„lW7*f ^"'i?'" l?r*^'"?• ^« >"" think the farmers' 
 HnoHh^?/ t' ^*{:''i*', *"■ y*"- ?''^" « <^'«trict, would submit to get- 
 nf «.! 4! *^** '"J^S.y*^ ?«>• their wheat because of some regulation 
 of the Secretary? They simply would not stand for it. 
 th.f7^J^ T ^y.' " *"*•";«« "'"'•ket to us means a cash market for 
 the farmers' grain every day m the year. He may not like the price 
 
 CeleS!" ' ""^ * "y' ^* "'^^ *"•■ Ws grain on any^da^ 
 
 Now, that is our interest in the futures market. 
 
 Here we are faced with a proposition of being licensed because 
 even, elevator concern more or less handles a few futures In ou^ 
 ne's^ hu^t ;!n! T"^* to possibly more than 5 percent of our busi- 
 ness, but If one of our mill customers m Ohio tells us to buy 60,000 
 
 Se f^tur Air^ss'"^^ '*• ^""^ ''^■•^''**^'- - -"-* "-W being 
 Now, when you say that you are going to license us, why we 
 would be hamstrung 5n our business arrangements. We woul5' sTv 
 we could not take that business. We could not buy the 50^ bushdJ 
 TVe, of course, would not take a chance on having to go to jafl for 
 onTr!"^ or a year for the privilege of making a h!lf a cent a' bushel 
 on 50,000 bushels of wheat. In our case it would probably throw 30 
 or 40 men out of work, but that would not have very much affect 
 I^suppose, on the number of unemployed ; but it woul/just add that 
 
 Now, you may think it is strange that I am here speaking for the 
 farmer. I think myself that the organized farm intereste such al 
 
 REGULATION OF COMMODITY EXCHANGES 
 
 39 
 
 my friends of the American Farm Bureau Federation or the Farm- 
 ers' National should be here showing that that is what this would cost 
 the farmer, but the fact that this bill exempts them from certain coop- 
 erative restrictions probably is enough to keep them from doing it. I 
 do not believe they have given this bill the study that they should 
 have. I think that they should be defending the farmers losing from 
 $5,000,000 to $25,000,000. The only possible argument on the other 
 side *s the Secretary would not do it. Well, you might just as well 
 hnn*^' a man as to keep him in suspense for 30 days believing that he is 
 going to be hung. It would have the same effect on business, because 
 what kills people is not actually things that happen to them ; it is the 
 worries over what is going to happen to them. And that is the case 
 with the law, if a law of this kind is passed. 
 
 Now, you say, well, it has been told us that we elevator people would 
 not be affected by this bill. The definition of a commission merchant 
 is "' soliciting or accepting futures on orders." Futures orders on 
 
 margin. 
 
 Now, you would not solicit the business ; but when, as I have shown 
 you, on selling cash wheat we would be bound to take some orders from 
 millers. Now, on the buying side it is customary out our way to buy 
 grain for 30 days' shipment. The farmer in June knows it is just a 
 question of quality on his wheat crop. He knows he has it. The mar- 
 ket is up on some of these factors that you gentlemen are trying to 
 control — rightly or otherwise — and he wants to hedge his crop. So he 
 goes to the country elevator and he sells him 4,000 bushels of wheat 
 And he brings it in as soon as the combine gets around to him. The 
 country dealer in turn wires us, "Accept your bid for so much bid for 
 30-day shipment." We hedge it in the pit. 
 
 Now, the Kansas courts have ruled that that is a futures transaction. 
 They did not rule on it regarding futures trading. They ruled on it 
 regarding the warehouse act. They said that that was not a ware- 
 house deposit, that it was a futures contract, and the A. A. A. have 
 accepted that ruling. 
 
 So you see there does not seem to be any possible way for our 
 elevator friends to get away from this. 
 
 Now, getting back to the question of control and considering the 
 matter for a moment, I want to speak now, Mr. Chairman, as Chair- 
 man of the Code Authority of the grain exchanges. 
 
 The Chairman. May I ask you a question or two before you go 
 to that ? 
 
 Mr. Davis. Would you let me make my statement and then ask me ? 
 
 The Chairman. Yes. 
 
 Mr. Davis. Unfortunately, I have been struck with a little larynx 
 trouble, and if I can get rid of that, I will be glad to stay as long 
 as you want me to answer questions. 
 
 This question of controlling futures trading is not new. I have 
 been coming down to Washington for 25 years on this subject, and 
 coming as a cash grain dealer, not as a dealer in futures. 
 
 We recognized that the Government wanted some control of futures 
 trading, so Mr. Pe^ and Mr. Chester Davis suggested that we have 
 a code covering these grain exchanges. We spent about 8 months on 
 that code talking to the Government and talking to our people. 
 Everybody had a different idea. But after 8 months' time we have 
 a code with the idea that there was plenty of law, plenty of rules 
 
40 
 
 REGULATION OP COMMODITY EXCHANGES 
 
 on the exchanges and what we needed was enforcement, and we drew 
 up this code with the idea of having an overtopping, if I may say 
 organization backed up by law and by the Secretary, that would 
 fjitce the exchanges to obey their own rules and law. 
 ^ After that, as I say, we spent about 8 months perfecting that code 
 It was finally approved by the Secretary of Agriculture. It was 
 approved by the A. A. A. and it was signed by the President. 
 
 Well, nobody likes to be a policeman. It is not a very popular 
 ]ob, and the exchanges looked around for the seven members of the 
 code authority. Well, finally there were two members from the 
 speculative element that would take the job and five members of the 
 cash grain industry agreed to be policemen, because we felt that we 
 looked on it from a disinterested point of view, as we simply used 
 the futures market as a method of economical handling of the 
 farmer's grain. We got that far along and then we icHJked for a 
 goat to be chairman, who would stand all of the abuses and who 
 would have to get U]) and defend the code. Well, after considering 
 the matter and thinking that it was a chance to show the (loverinnent 
 that the cash grain interests were just as much interested in main- 
 taining a high standard of futures trading as the Government was, 
 
 1 accepted that job, and I have been de\oting about a third of my 
 time for the last 6 months trying to make it effective. 
 
 There is not anything 100 JDeix-ent that I have ever heard of, but we 
 have had no complaints. The people who fought the code most vio- 
 lently were the futures trading element themselves, and the thing 
 they fought most was the 10-percent margin. They said they could 
 not get any business. But even some of those elements, the majority 
 of them in fact, have found that they lose le.-^s business in dollars 
 and cents than they lost on accounts before, so even that opposition 
 is dying down. 
 
 Now, I feel, and I speak for the Code Authority, that we are en- 
 titled after this 8 or 10 months' work, to a fair trial for this code. 
 WTien a law is passed it is inflexible. It cannot be repealed under 
 
 2 or 3 years, at the least, and we feel that the code is entitled to a 
 fair trail before this is reduced to law. 
 
 There is not any question in my mind and I think you gentlemen 
 agree with me, that these codes are going to be extended for 2 years. 
 If, after another year of this Code Authority, it does not answer 
 all of these questions, you gentlemen have had at this hearing, then 
 go ahead and pass your law in the light of that sentiment. Now, 
 you say maybe this code does not cover it now. Well, if it does not 
 we can amend that code. We have talked this matter over with the 
 Grain Futures Administration. There are several points they bring 
 up; I think are right. We have told them that we would be willing 
 to amend this code to cover, for instance, the points of limitation of 
 lines. Jiist at present, what we need more than anything else is in- 
 creased lines, a billion bushels of speculation to hold wheat prices 
 up in face of a crop of 500,000,000 winter and 150,000,000 or 200,- 
 000,000 spring, we need all of the possible speculation we can get 
 to carry this wheat crop over the period of July and August, be- 
 cause the farmer insists on marketing about 60 percent of his wheat 
 from the combine and there is not anybody but the speculators to 
 carry it^ 
 
 REGULATION OF COMMODITY EXCHANGES 
 
 41 
 
 We will buy the wheat if we can hedge it and we need the specu- 
 lator to hold the market up until the demand catches up with the 
 supply. ^ 
 
 If this code were given a fair chance, if it is found best to limit 
 lines or any of the things that a majority interested want in that bill 
 we can amend the code and if it is found after a year or more that 
 this code does not cover it, I certainly will have nothing to do with 
 It and we can kill it and then go on with your legislation. 
 
 Now, my point, Mr. Chairman, in taking up your time is to earn- 
 estly request that you do not handle this bill hurriedly; that you 
 appoint a subcommittee to go into these matters more in* detail— our 
 people will give you all of the information— have hearings and hear 
 both sides of this question. There are so many people that are in- 
 terested m just one phase of this question, but appoint a subcom- 
 mittee that can take the time to go into the details on each side 
 and If we cannot convince them that the farmer is going to get the 
 worst of It on this, that you will throw a lot of people out of work: 
 that you will tear down an industry, where we have nothing to substi- 
 tute, then go ahead and pass your law; but first give us the benefit 
 of appearing before a subcommittee that has lots of time and to 
 mto every phase of this thing. We will furnish all of the informa- 
 tion you want; we will open up the avenues for investigation and 
 It certainly is of great interest not to virtually hamstring a market 
 detaik ^ ^^ ^ ^^^^^ building up, without going into the 
 
 Now if your committee decides that after that that it is the proper 
 thing top ahead and pass this bill, after you find out what you are 
 doing, why, we will have to abide by the consequences. 
 
 I will be glad to answer any questions, Mr. Chairman 
 ^ .K ^J^'?^«^,AN- .Just one or two questions, Mr. Davis. You spoke 
 
 <^^ i? ' notice. How much notice is given now « 
 
 Mr. Davis. None. It is usually known if a man is going to deliver 
 gram. 
 
 ,vi7\^ ^IV*';^ u- ^^•^ 'T?? *•>"* ^ "*" t«" a man that I have this 
 wheat right oi^ here for delivery and he has to take it now ? 
 
 Mr. Uavis. Yes Deliveries are made by warehouse receipts to the 
 clearing house and we have to take wheat or corn or oats and put it 
 m the elevator, weight it up, have it inspected, have the receipts regis- 
 tered, and then make delivery through the clearing house with the 
 warehouse receipt Well, that takes a^minimum of f or 3 days prob! 
 
 immedktlT'''' "' ^^"^ '^' ^'™ '" '^' '^''''''^'' ^« canSer 
 
 )o'^'fv^"i"'*'*''-.7fi^ Secretary may fix the time at not to exceed 
 10 days He would fix a reasonable time, would he not? He would 
 n\jnv time that the dealers found practicable 
 
 Mr. Davis. Y^; but he fi.xes the time not on the basis of what 
 the farmer gets for the grain. He fixes 
 
 The Chaibman Ought not there to be a certain time? You do 
 not have any maximum limit at ail now. Is that the way it is" ''** 
 
 Mr. Davis. No; there is no t me limit, Mr. Chairman. ^ 
 
 Ihe Chairman. No time limit in any way 
 
 
42 
 
 REGULATION OF COMMODITY EXCHANGES 
 
 Now, nine-tenths of the trade go out before the 1st day of the 
 month, because nine-tenths of the trade is speculative and they do 
 not want delivery. They are engaged in trying to guess the future 
 course of the grain market. It is the 10 percent that stay in such 
 as mills, people of that sort, that want delivery, and they are always 
 prepared to take it. They make their arrangements before the 1st 
 of the month. Most of them have their offices there. For instance, 
 Washburn-Crosby, Pillsbury, Larabee, all have offices there. 
 
 The Chairman. So it can range clear across from the time the 
 order is taken to the end of the month the way it is now, and there is 
 no definite, specified time ? 
 
 Mr. Davis. No; none at all. 
 
 The Chairman. Would it not be better for both sides to have a 
 time limit on those things so you would know that there would not 
 be any danger of misunderstanding or any undue advantage taken? 
 
 Mr. Davis. Why should a man who says he wants December wheat 
 to grind into flour against a sale he has made, why should he have 
 any time ? He does not care when he gets it. He hopes he does not 
 get it until the last day of the month. 
 
 The Chairman. But the other fellow may take some time. 
 
 Mr. Davis. Selling? 
 
 The Chairman. Yes. 
 
 Mr. Davis. He has to go out and get the grain, Mr. Chairman, 
 and the man who buys December expects delivery. 
 
 The Chairman. It there were a definite specifaed time, both sides 
 could be ready for it. 
 
 Mr. Davis. Well, as it is the man who buys knows. Those things 
 have been developed over a period of years. 
 
 Now, as I said 10 days would just cost the farmer from three- 
 eighths to three-quarters to carry tnat grain. 
 
 The Chairman. Your board could make a recommendation cov- 
 ering that. The code could have a regulation covering it. 
 
 Mr. Davis. Oh, yes, we could. 
 
 The Chairman. Have you ever done it? 
 
 Mr. Davis. If it were found desirable, we could. 
 
 The Chairman. Has it been done? 
 
 Mr. Davis. No; it has not been advisable. 
 
 The Chairman. Has it been tried on delivery? 
 
 Mr. Davis. No ; Tjecause of the added cost of doing business. Our 
 idea is cost — ^you have no idea how close the grain is handled; cash 
 
 grain. 
 
 The Chairman. With regard to this 15-day provision that the time 
 shall be fixed not earlier than the 15th day of the delivery month to 
 which the contract applies : Suppose a fellow comes right in at the 
 last day of the month. He would not have time to enter into a con- 
 tract, if actual delivery was to take place during that month. It 
 seems to me this is just giving the department a chance to make 
 this definite so that there will be no misunderstandings. 
 
 Mr. Da\^s. Well, suppose it rains, Mr. Chairman, in Julv, and 
 the farmer out there cannot get his wheat in. Now, these mills may 
 have bought wheat against flour sales. Do you think it is right to 
 shut them out of the last 15 daj^s of July? *We would be shut out. 
 We would be glad to buy their wheat when it comes in on the 
 market, and in 2 days we can deliver it for the farmer. 
 
 ' I 
 
 EBGUIiATION OP COMMODITY EXOHANQBS 
 
 43 
 
 The Chairman. This does not say it shall be the last 15 days. 
 It shall not be longer than that It might be made a maximum of 3 
 days, or 6 days, after consultation and the Secretary sees which 
 would be the best. 
 
 Mr. Davis. Who is he going to consult; who is going to tell the 
 Secretary what the conditions are in Kansas City, Minneapolis, 
 Toledo, or any other place? 
 
 The Chairman. You have a rather practical man at the head of 
 the Grain Futures Administration, have you not? 
 
 Mr. Davis. Mr. Duval is very familiar with futures trading, but 
 I do not think that the doctor would claim to be an expert on cash 
 grain. If he is, he ought to be in the cash-grain business, because we 
 have got a big field there and need more men who are competent in 
 the cash-grain field. 
 
 The Chairman. Of course, you understand this bill does not affect 
 hedging in any sense at all. 
 
 Mr. Davis. But, Mr. Chairman, that is what I want to get across 
 to you. You say it does not affect hedging. 
 
 The Chairman. You say, of course, that you have to have the 
 market in order to hedge. 
 
 Mr. Davis. That is it. 
 
 The Chairman. In your argument you are clear over with the other 
 fellow because of the necessities of the market. 
 
 Mr. DA\^s. Yes. We must have a market. We cannot hedge unless 
 we have a buyer. We do not care what the buyer does with it. You 
 see, it goes through the clearing house. We do not even know who 
 the buyer is. We deliver the warehouse receipt. The price is what 
 we are interested in. 
 
 The Chairman. We are getting into a field that has been covered 
 so thoroughly on that that I will not ask any further questions. 
 
 Are there any other questions by any of the members of the com- 
 mittee ? 
 
 Mr. Gilchrist. Mr. Chairman, I would like to ask something. 
 
 The Chairman. Mr. Gilchrist. 
 
 Mr. Gilchrist. TJhis bill has been before Congress for the past year 
 or two and even before that, has it not? 
 
 Mr. Davis. In various forms ; yes, sir. 
 
 Mr. Gilchrist. Well, is it not true that this specific bill has been 
 before Congress and that the only difference here is the transposition 
 of some of the paragraphs in this bill as compared to former bills? 
 
 Mr. Davis. Substantially so. 
 
 Mr. Gilchrist. Yes. 
 
 Mr. Davis. But we had no code then, Mr. Gilchrist. 
 
 Mr. Gilchrist. I know. 
 
 Mr. Davis. We developed that in the light of this bill to cover the 
 points that we thought you wanted covered. 
 
 Mr. Gilchrist. You believe in a code system, do you, for all of the 
 industries, eight or ten hundred of them ? 
 
 Mr. Davis. Well, that is a rather large order to ask whether I be- 
 lieve in the code for all of the 800 industries. I believe that a code 
 endeavoring to cover any abuses in the future market is much more 
 flexible than any law you could pass, because if you found, for in- 
 stance, on the limitation of lines, if you found that it did not work 
 
44 
 
 REGTJIiATION OF COMMODITY EXCHANGES 
 
 REGULATION OF COMMODITY EXCHANGES 
 
 45 
 
 and that it was putting the farmers' grain down 10 to 25 cents a bushel, 
 you could in 30 days' notice, with the Secretary's permission, amend 
 the code and take it out. 
 
 Mr. Gilchrist. How is it amended when it is amended? 
 
 Mr. Davis. The Secretary and the President 
 
 Mr. Gilchrist. By the trade itself? 
 
 Mr. Davis. Their recommendations. 
 
 Mr. Gilchrist. The trade itself is instrumental in making the 
 amendment ? 
 
 Mr. Davis. The trade holds a hearing. 
 
 Mr. Gilchrist. Yes. 
 
 Mr. Davis. And everybody is heard. 
 
 Mr. Gilchrist. They then make a recommendation. 
 
 Mr. Davis. Then we recommend it to the Secretary. If the Secre- 
 tary approves, he passes on it and the President approves the amend- 
 ment, and then it becomes law. 
 
 Mr. Gilchrist. Then it is up to the Secretary finally to amend the 
 code if he wants to ? 
 
 Mr. Davis. After hearings. 
 
 Mr. Gilchrist. After hearings? 
 
 Mr. DAv^s. Yes, sir. And the agreement of the trade. Of course, 
 he can force amendments against the advice of the trade. He has 
 that authority under the code. 
 
 Mr. Gilchrist. Well, that is all. 
 
 The Chairman. Any further questions ? If not, we desire to thank 
 you, Mr. Davis. 
 
 Mr. Davis. Thank you, Mr. Chairman. 
 
 STATEMENT OF THOMAS Y. WICKHAM, CHAIEMAN OF THE 
 GRAIN COMMITTEE ON NATIONAL AFFAIRS 
 
 Mr. WicKHAM. Mr. Chairman, I should like to add my voice to 
 the suggestion of a subcommittee, and I wish also to extend to that 
 subcommittee a very cordial invitation to visit the Chicago Board of 
 Trade and study these processes. 
 
 Now, that institution was not built from a blueprint. It is merely 
 the experience of merchants, crystalized in the white heat of indi- 
 vidual competition. Every rule there has a purpose. Every rule 
 there is tested by the experience of merchants. It is hard to explain 
 it all, but I do feel that if a subcommittee would come there, let us 
 show them the reasons for these various rules, let us show them proc- 
 esses, they would have information that they will never get through 
 orations delivered here. 
 
 We need study of this question, real study of it. 
 
 Dr. Duval is head of a bureau, and has naturally a desire to 
 increase the power of that bureau, just as I, as a grain merchant, 
 desire to promote my business. Our viewpointe are colored. 
 They must be, by our personal desire and ambition; but here is a 
 great trade institution that you propose to regulate. But if you are 
 going to do so, study the question ; study the trade. 
 
 One point, in particular, that has not been brought out at all in 
 all of these discussions, and, in my judgment, it is the most important 
 of all, and that is the uniformity of law. We have always been told 
 that a law should be something that anyone who runs may read» 
 
 They say that the grain trade has always opposed legislation. Well, 
 why shouldn't we? Leg:islati<)n has become a matter of confusion. 
 We are under the Agricultural Department. Other codes run to 
 the N. R. A. Ours runs to the N. R. A. and the A. A. A. That is 
 two more departments. We are under the Grain Futures Admin- 
 istration. There is a fourth department. And then we have 48 
 States passing laws regarding our contracts. Conflict after conflict. 
 The United States Government says we can do something. The 
 State of Illinois says we cannot. The code says you must do some- 
 thing. The State of North Dakota says you cannot. 
 
 Now, if you are going to pass a law, and I feel that the trade is 
 more eager than anything else that it should be clarified and there 
 should be some authority that we can go to and find out what we can 
 do; but I submit that in all justice, if you are going to draft a law, 
 if the Federal Government will say, as it has said, that these future 
 contracts are in the stream of interstate commerce and subject to 
 Federal regulation and Federal control, and that is sustained by the 
 Supreme Court, then you must take away the control of these 48 
 States. Only in fairness, make this legitimate. Quit constant leg- 
 islating. I think you will all agree that legislation has become 
 largely a matter of ballyhoo. 
 
 Now, study this question. I am speaking for the farmer. Every 
 dime I ever had is invested in agi'iculture. I want the farmer pro- 
 tected and I want his market protected. 
 
 Here is a machine that, in my judgment, is the most efficient in- 
 strument of distribution commerce has yet devised. It is not perfect. 
 Nothing human is. It has only been running for 80 years. It is 
 not as good as it will be 100 years from now, but it is better- than 
 anything else. It is able to take 12,000,000 bushels of wheat every 
 day and turn it into bread. There is not a station on a railroad in 
 the wheat country where you cannot go any day and sell wheat for 
 cash and there is not a grocery store anywhere in the civilized world 
 where you cannot buy flour, and yet the crop will vary as inuch as 
 2 or 3 or 400 million bushels in a year. That is good distribution. 
 That is the best distribution I know of. And I think that you gen- 
 tlemen, charged with all of the responsibility that rests now upon 
 you, because of the state of agriculture, certainly owe it to the farm- 
 ers of this country to take a few days over with a subcommittee 
 and study this question. We will give you everything we have. 
 
 Mr. Boylan joins me in a very cordial invitation to come to Chi- 
 cago. 
 
 STATEMENT OF PHELAN BEALE, GENERAL COUNSEL FOR THE 
 NEW COTTON EXCHANGE, NEW YORK, N. Y. 
 
 Mr. Beale. Mr. Chairman and gentlemen: My name is Phelan 
 Beale. My address is 165 Broadway, New York City. I am counsel 
 for the New York Cotton Exchange. 
 
 I have a very brief statement to make. 
 
 At the hearing before this committee on last Thursday, a com- 
 mittee composed of four members of the New York Cotton Exchange 
 attended for the purpose of being heard. As the entire session was 
 consumed by representatives of the Chicago Board of Trade who 
 
 114603—35 — SBR B 4 
 
 I.: 
 
 
 « 
 
46 
 
 BBGUIATION OF COMMODITY EXCHANGES 
 
 REGULATION OF COMMODITY EXCHANGES 
 
 47 
 
 ^oke on the question of licensing floor brokers, the committee of the 
 JVew York Cotton Exchange ftlt that anything they might say 
 would be more or less in the nature of repetition, and in considera- 
 tion of not consuming the time of this committee, they have re- 
 quested me to ask the indulgence of the committee to the extent that 
 1 be allowed 10 mmutes, as counsel for the New York Cotton Ex- 
 change and Its membei-s, to present two brief arguments on the merits 
 ot the bill 1 his request, I realize, may not be agreeable to the 
 chairman, but I respeitfully point out that the hearings by this com- 
 mittee on the proposed bill at the last session of Congress were 
 closed and thereafter the bill was amended so as to include cotton, 
 consequently the cotton-futures trade has never been heard on the 
 merits of the bill. May I further respectfully say that the cotton- 
 futures trade may have appeared a few years back in respect of a 
 similar bill affecting cotton futures, but at such time there were not 
 present at least six members of the present committee. 
 
 J^if/^Jl^^^c«"^ent of the chairman I will, therefore, proceed to 
 submit briefly two arguments. 
 
 The fli-st of these arguments is that the cotton trade is so separate 
 and. apart from the grain trade it would be a grievous error to in- 
 clude cotton in a bill that primarily was drawn to apply to grain. 
 J or instance, tlie planting of grain, the bringing of same to mirket, 
 and placing the commodity into the hands of the ultimate consumer 
 
 ^?u?u . ^i®^ persons and affect but few industries in comparison 
 with that of cotton. ^ 
 
 It may be surprising to know that, according to economists and 
 authorities on the subject, from 10 million to 12 million persons in 
 the United States depend for their living on the growing, distribu- 
 tion, and manufacture of cotton or upon industries or trades which 
 are otherwise vitally related to cotton. That the States in which 
 these persons reside are 10 in number, containing nearly one-half of 
 t le population of the Union, and this population is dependent either 
 directly or indirectly on cotton. Moreover, out of 6,300,000 farms 
 recorded m the United States census about 2,000,000 grow cotton 
 and of these 1,600,000 are devoted chiefly to cotton.' Cotfon has been 
 the chief export ot this country for over a century, and now is, and 
 IS the most valuable crop raised in the United States. It is respect- 
 fully submitted to this committee that any bill that has reference to 
 the control of contract markets of cotton and that may affect the 
 price ot cotton or its marketing should be a bill that relates solely 
 to cotton, and no eltort should be made to add cotton to a bill that 
 was ch;awn pnnianly to apply to grain exchanges, wherefore the 
 i>ew lork Cotton Exchange and its members ask that if this com- 
 mittee insists ui>()ii legislation affecting cotton-futures exchanges, 
 then let such icgn^iar.on be m a separate law, to the end that delifer- 
 ation may be luul thereon and a bill prepared that through no in- 
 advertence nor siiH ot omission or commission may the greatest 
 
 T^Tl^iVV'.'^^' ^'"i^^^f States and the greatest VportTf the 
 Lnited htates be impaired. 
 
 Tlie second of these arguments is that your committee, as well as 
 
 every other patriotic citizen of the United States, are prompted only 
 
 o demand legislation governing private businesses as and when such 
 
 legislation is necessary to prevent abuses of the public welfare and 
 
 to protect a trade that belongs to no individual nor a group of indi- 
 viduals but, indeed, is the property of our people as is the public 
 domain of our country. I deny that there is any such demand in 
 respect of the cotton-futures contract markets. In support of this 
 denial may I submit that over a period of months many conferences 
 were held by representatives of the three cotton- futures exchanges 
 with representatives of the A. A. A. Division of the Department of 
 Agi-iculture to ascertain whether or not a code of fair competition 
 was necessary to govern cotton-futures exchanges and its members 
 to prevent abuses against the public or the cotton trade or the mem- 
 bers of such exchanges. In these conferences representatives of the 
 N. R. A. participated. The proposed code contained substantially 
 the provisions of the bill H. K. 3009, now under consideration, ex- 
 cept in respect of licensing floor brokers; and in fact the proposed 
 code was, perhaps, more drastic in that the power was concentrated 
 in the Secretary of Agriculture or the Administrator for Industrial 
 Recovery. 
 
 The result of these conferences was that the A. A. A, Division 
 requested that the members of the cotton-futures exchanges submit 
 memoranda showing why a code should or should not be imposed, 
 and the reasons therefor. Memoranda were accordingly submitted, 
 one of which was on behalf of the members of the New York Cotton 
 Exchange. This memorandum is short, and every argument ad- 
 vanced therein is a meritorious argument against including cotton in 
 the so-called " Jones bill ", wherefore I will end this paper by read- 
 ing such memorandum. 
 
 After conferences and the memoranda, the A. A. A. Division were 
 sat i tied that no code was necessary. Such portions of such memo- 
 randum that are applicable here are as follows : 
 
 On August 22, 1934, a conference was held in Washington by 
 officials or the A. A. A. Division of the Department of Agriculture, 
 and of the N. R. A. There were also present those members of 
 the New York, New Orleans, and Chicago cotton-futures exchanges, 
 who had been invited to attend. The purpose of the meeting was to 
 afford a free and full discussion of the need, if any, of a code for 
 the cotton- futures trade — whether the same would be helpful and, if 
 so, what provisions should the code contain. 
 
 Views were exchanged and a lengthy discussion ensued wherein 
 every one who so desired voiced his opinion. 
 
 The suggestion was iiiially adopted that the proposed code pre- 
 pared and presented at the conference by the A. A. A. Division be 
 sent by each exchange to its members for examination, and after a 
 reasonable period each exchange request its members to hold a gen- 
 eral meeting at which to express their views on the advantages or 
 disadvantages of a proposed code; and to elect a committee to pre- 
 pare a memorandum to submit to the Department of Agriculture — 
 to reflect the prevailing opinion as registered by the members, 
 accompanied by reasons to support such opinion. 
 
 A meeting of members was lield at 3 : 15 p. m., on September 5, 
 1934. The view was unanimously to the effect that a code was neither 
 necessary nor helpful. 
 
 Messrs. Geer, McEnany, and Wachsman were chosen as a com- 
 mittee and requested to prepare a memorandum, apprising the De- 
 
 
48 
 
 REGULATION OF COMMODITY EXCHANGES 
 
 REGULATION OF COMMODITY EXCHANGES 
 
 49 
 
 partment of Agriculture to the foregoing effect and submitting the 
 reasons that prompted the negative vote. 
 
 The committee invited members to give to the committee the rea- 
 sons on which they based their conclusion that a code would rather 
 hinder than help. From the material so supplied, the committee 
 exercised a selection which it submits to the following effect : 
 
 The members of the cotton-futures trade in New York City occupy 
 a position entirely different from members of what might be called 
 the basic trades or industries of the United States—perhaps a unique 
 position— in that, by virtue of being controlled by a central authority, 
 namely, the New York Cotton Exchange, which they established 
 and under which they have voluntarily operated for 65 years, they 
 have subjected themselves to a code of fair-trade practices to elimi- 
 nate cutthroat competition and destructive evils to the public, which 
 the committee understands is one of the chief purposes that the 
 N. R. A. codes were designed to achieve. 
 
 The members of the cotton futures trade in New York City occupy 
 a second different and unique position in that the central authority 
 that they established, namely, the New York Cotton Exchange, and 
 under the bylaws of which they have operated for 65 years, was 
 created by a special law of the State of New York which permitted 
 the members of such exchange to function through a body corporate 
 for limited purposes, the chief of which were to maintain suitable 
 quarters m which to trade, to adjust controversies between them- 
 selves, to establish just and equitable principles in trade, and to dis- 
 cipline by suspension or r xpulsion aiiy member guiltv of violating 
 this code. Should the members not conform to the foregoing, the 
 State of New York may bring an action to dissolve the exchange, 
 wherefore the members of the cotton futures trade in New York City 
 are subject to this control by the State of New York. 
 
 The members of the cotton futures trade in New York City occupy 
 a third different and unique position in that, under the United States 
 Cotton Futures Act of August 11, 1916, with amendments, more 
 commonly known as the " Smith-Lever Act ", such members must, 
 through a tax provision, conduct their business in the manner and 
 time and under the terms and conditions as in said act prescribed, as 
 supplemented by the regulations of the Department of Agriculture, 
 wherefore it may be conservatively said that for 18 years all members 
 of the cotton futures trade have lieen subject to supervision and con- 
 trol by the Federal authorities— and are now so controlled. 
 
 The members of the cotton futures trade in New York City occupy 
 a fourth different and unique position from members of what might 
 be called the basic trades and industries of the United States in that 
 they do not buy or sell anything whatsoever either between them- 
 selves or with the public. They offer to the public that for a stated 
 broker s commission they will, on certain terms and conditions, pur- 
 suant to the rules and regulations of the New York Cotton Exchange, 
 enter into contracts with each other for the purchase and sale of a 
 single commodity— cotton— to be delivered in the future. These 
 contracts must be of a kind described in the Smith-Lever Act; and 
 the cotton to be delivered on such contracts must be of a kind speci- 
 fied m the same law and certificated by the Department of Agricul- 
 ture. The stated commission as aforesaid is a fixed sum, wherefore 
 
 competition between members is limited solely to persuading the pub- 
 lic to employ one member rather than another. Abuse along this 
 line is prevented by the bylaws of the exchange, which are made a 
 part of this memorandum by reference thereto. The public cannot 
 be injured by unstable commission charges or by the delivery of an 
 inferior product. 
 
 The public can be injured only in two ways, through the bank- 
 ruptcy of a member which is guarded against by the limited credit 
 rule established by the exchange, the close scrutiny exercised by the 
 exchange over the financial aflfairs of its members and the exchange 
 clearing house in requiring original margins on all contracts, and 
 through a manipulation of the market to the prejudice of the cotton 
 trade. Such manipulation, if possible, may only be by members 
 either on their own behnlf or for customers in acquiring long or 
 short contracts to a v^olume that permit the owners thereof, in 
 liquidating these contracts, to put the market prices up or down ab- 
 normally, or otherwise, creating a condition wherein the futures 
 market may be made to respond to artificial causes rather than to 
 the law of supply and demand. 
 
 To prevent even an attempt at manipulation, section 114 of the 
 bylaws of the New York Cotton Exchange was adopted, providing 
 that the interest in futures contracts for delivery in any one month 
 of any individual, firm, or corporation and his or its affiliations 
 shall not exceed the limit prescribed by the board of managers of 
 the exchange (except as to hedges in any one month wholly against 
 spot or cash cotton), and even in respect to these hedging trans- 
 actions, if the board of managers determines that the same unduly 
 affect or endanger the normal parities between months or markets or 
 for any other valid reasons, the board may ])rescribe a limit in 
 respect of the interest in futures contracts which shall include such 
 hedging transactions: and the member or members who have ex- 
 ceeded the limit either in futures or hedging transactions shall be 
 required to reduce such interest to bring it within the permitted 
 total, and may be disciplined by suspension or expulsion. The maxi- 
 mum interest in futures ccmtracts that may be held in any one month 
 by any individual, firm, or corporation and his or its affiliations is 
 prescribed by the board of managers. And section 115 establishes a 
 control committee with wide powers of investigation to insure that 
 section 114 is not violated. 
 
 The committee points with pride to the fact that there have been 
 no scandals of any kind in the operations of the members of the 
 cotton futures trade in New York City for years — and certainly no 
 suspicion of manipulation since the adoption of bvlaws. sections 
 114-115. 
 
 The members of the cotton futures trade in New York City submit 
 that there has not been a single demand from its members for a code 
 because of evil trade practices, unfair competition, or otherwise ; nor 
 has there been such a demand on the part of a single person engaged 
 in the cotton trade whether a producer, consumer, factor, or mer- 
 chant; nor has there been such a demand on the part of a single 
 person either in the United States, Canada, abroad, or elsewhere, 
 who has had occasion to use the market of the New York Cotton 
 Exchange; nor has there been such a demand on the part of any 
 
 1 » 
 
1 \ 
 
 50 
 
 REGULATION OF COMMODITY EXCHANGES 
 
 REGULATION OF COMMODITY EXCHANGES 
 
 51 
 
 financial institution or other interest in the many affiliated lines 
 associated with cotton from its planting to the delivery of the 
 finished product into the hands of the ultimate user. 
 
 It is respectfully submitted that the opposition to a proposed code 
 for the members of the members of tlie cotton futures trade in New 
 York City, is not prompted by arbitrary unwillingness to accede to 
 the suggestion that a code be adopted. On the contrary — and this 
 statement is made in earnest sincerity — if the meiiib^rs bolieved that 
 a code would be helpful to them or to the trade, or contribute to an 
 improvement of present financial conditions, they would unhesitat- 
 ingly solicit a code. However, the fact is that the cotton futures 
 market is a delicate mechanism easily thrown out of adjustment. 
 The market established and maintained by the members of the cot- 
 ton futures trade on the New York Cotton Exchange is a national 
 institution; indeed, a world-wide institution, because it is used by 
 citizens of many countries. It may be safely said, without fear of 
 contradiction, that this market is an indispensable necessity for the 
 marketing of the greatest export commodity of the United States, 
 and that any interference therewith, even though well-intentioned, 
 may invite evils that cannot now be foreseen. Among these evils 
 is the possible diversion to the two foreign futures exchanges whose 
 markets reflect buyers' interest rather than sellers', of hedging 
 transactions ordinarily handled in the New York market. This 
 
 eesult would necessarily lower the prices to the American farmer, 
 t may not be unfitting to assert that the present members of the 
 cotton futures trade in New York City, and their forebears, having 
 been engaged in the cotton futures trade for three generations, are 
 better qualified to judge whether or not a code will be helpful or 
 harmful ; and by the same token, if they were of the opinion that it 
 would be belpful, they would be the first to step forward with this 
 declaration]) 
 
 And, finally, may it be said, that it is their firm conviction that a 
 code would not contribute toward reestablishing prices of cotton to 
 farmers thereof, at a level that will give this commodity a purchas- 
 ing power equivalent to its purchasing power in the base period, 
 which is the declared policy of the Agricultural Adjustment Act. 
 On the contrary, it is believed that a code may have the reverse 
 effect, in that its operation may reduce or limit competitive buying 
 in the futures market to price prejudice which, in turn, would react 
 on the crop. 
 
 I most earnestly beg the members of this committee not to take 
 lightly the appeal that I am making to omit cotton from the bill. 
 There is no reason for haste — there has been no abuse nor scandal 
 in the cotton futures markets since the enactment of the Smith- 
 Lever law, 19 years back. Reiteration is not argument, so forgive 
 mc whon T reiterate that if you insist upon the cotton futures ex- 
 changes that are indispensable to the marketing and exporting of 
 the greatest crop that the United States produces, be governed by 
 legislation that must necessarily affect the cotton trade, which in 
 turn will directly affect 10,000,000 people and indirectly affect half 
 of the population of the IJnited States, then pray, I beg of yon, 
 put this legislation in a separate law after fiie most meticulous 
 consideration. 
 
 I J^^^ank you, gentlemen of the committee, for your indulgence. 
 
 The Chairman. Mr. Beale, about 2 years ago on practically this 
 same bill, we had 2 weeks' hearings, most of which, or the major 
 portion of which, was devoted to cotton. There appeared at those 
 hearings Mr. William S. Dowdell, Mr. F. F. Bush, Mr. H. H. Greene, 
 Mr. Robert Harriss, Mr. Gardiner H. Miller, and two or three others. 
 The hearings were delayed for a few days and then there appeared 
 Mr. Charles W. Wells, Mr. Herbert L. Bodman, and then later we 
 again heard William S. Dowdell, who is vice president of the New 
 York Cotton Exchange, and Russel Clarke, who was president of the 
 New Orleans Cotton Exchange. All phases of the bill were gone 
 into very thoroughly. 
 
 kNow, the only substantial change of any consequence, aside from 
 niy changes, was the enlarging and clarifying of provisions which 
 would forbid the exclusion of cooperative organizations from the 
 exchanges, and all of the exchanges that have appeared here before 
 have said they would have no objection to cooperatives having a 
 seat on the exchange. I assume you do not have.]) 
 
 Mr. Beale. I do not wish to beg the question, Mr. Jones, but I 
 do not know. I do not know what is the attitude of the New York 
 Cotton Exchange in that respect; but I should imagine 
 
 The Chairman (interposing). Well, just as a matter of general 
 justice, if a marketing organization is maintained which vou assert 
 is in the interest of the farmers themselves, there certainly could not 
 be any objection to any cooperative organization having the priv- 
 ilege of the exchange. 
 
 Mr. Beale. I would assume that that is true. 
 
 The Chairman. I understand that it has been the position of the 
 exchange all along that they do not have any objection. The main 
 change that has been put into the bill is a provision which makes it 
 certain that they cannot be prohibited. Otherwise, the bill is largely 
 as it was. 
 
 Now, of course, on somewhat similar bills that have been pending 
 for years, we have had other cotton men appear. Undoubtedly when 
 this goes to the Senate you will desire further hearings. 
 
 If we are ever going to have legislation, we must have it in the 
 bill. Having gone into this question so thoroughly at these previous 
 hearings, we did not feel that it was necessary at this time to have 
 further hearings, especially in view of the fact that the Senate com- 
 mittee will no doubt want to go into that question, if the bill should 
 get that far. 
 
 Mr. Beale. Well, you recognize, of course, Mr. Chairman, that the 
 New York Cotton Exchange does not wish it to appear that by not 
 being present here and opposing this measure it might be interpreted 
 as a tacit acquiescence to this bill. 
 
 The Chairman. We are very glad to have you make your position 
 clear on that, Mr. Beale. 
 
 Mr. Beale. Thank you, Mr. Chairman, very much. 
 
 The Chairman. Are there any further questions by members of 
 the committee ? If not, we wish to thank you, Mr. Beale. 
 
 Mr. Beale. Thank you. 
 
 The Chairman. Now, I believe, the committee would like to have 
 a statement from Dr. Duvel, if he cares to say anything in answer 
 to anything that has been said. 
 
 P'! 
 
 
52 
 
 KEGULA.TION OP COMMODITY EXCHANGES 
 
 STATEMENT OF DE. J. W. T. DITVEL, CHIEF, GRAIN FUTUEES 
 ADMINISTRATION, DEPARTMENT OF AGRICTJITTJRE. WASH- 
 INGTON, D. C. 
 
 The Chairman. Dr. Duvel, we will be glad to hear you at this 
 time. 
 
 Mr. Hope. Mr. Chairman, before Dr. Duvel begins I would like 
 to ask whether he is going into all phases of the bill or is he going 
 to limit his discussion to matters developed by the witnesses? 
 
 Mr. Duvel. I might say at the outset, Mr. Chairman, that there is 
 really not anything that I need to say. I think the Department's 
 position is very clear on this legislation and the need for it. This 
 is substantially the bill which was approved by the last Congress, Iby 
 the Department, and which was submitted to the last Congress by 
 the President. Unless there are some questions which members of 
 the committee desire to ask me, I think I have no particular 
 statement. 
 
 The Chairman. Just one or two questions. I would like to ask 
 you about this 10-day provision. What is the reason for, or the de- 
 sirability of having a provision of not exceeding 10 business days' 
 requirement of notice of delivery? 
 
 Mr. Duvel. The situation at the present time in the grain trade is 
 that the buyer must stand ready to take delivery on any day that 
 the seller tenders it; the seller may deliver it on the 1st day of the 
 month or he may defer delivery until the last day of the month, but 
 the buyer must stand ready to take delivery and to pay for it. I 
 believe he is allowed an hour in which to make payment; anyhow, 
 it is a very short time, practically immediate payment. 
 
 Now, this bill requires at least 3 days' notice to the buyer. We 
 have a great many people who advocate the idea that the buyer 
 should be granted a longer time when he demands it. This only re- 
 quires that the buyer be entitled to 3 days' notice. The Secretary 
 mav give as much as 10 days. 
 
 And, from the standpoint of the grain trade, I do not believe 
 there would be any need for or that they would want more than 3 
 days. The cotton trade, I think, is given 5 days. And the sugar 
 trade 7 business days ; however, sugar is not in this bill. The require- 
 ment in this bill is not to exceed 10 days' notice; 3 days, not exceed- 
 ing 10. Of course, if the exchanges want 10 days, we will be glad 
 to give it to them. 
 
 The Chairman. What is the reason for the provision that such 
 contracts shall be made prior to a date to be fixed by rule or regula- 
 tion of the Secretary of Agriculture, which shall not be earlier than 
 the 15th day of the delivery month to which such contract relates? 
 
 Mr. Duvel. That is in order to stop aggressive trades of those 
 engaged in heavy trading, but to give an opportunity to the man 
 who has sold a future to secure the actual grain and make delivery 
 whereby the benefits will be reflected to the producers in the country. 
 For example, take corn, the price may advance sharply on the last 
 day of the month. I have in mind a case where the price advanced 
 during the last few days of the expiring future, and on the last day 
 of the delivery month was 14 cents above the price of cash corn 
 the following day. If the seller had had 15 days to complete deliv- 
 
 kegulation of commodity exchanges 
 
 53 
 
 ery, the producers would have received some benefit in that they 
 would have had 15 days to get their corn to market. 
 
 This bill does not stop trading the 15th of the month but merely 
 makes it possible to do so. If there is any serious belief that to 
 stop trading the 15th will work to the detriment of the producers, 
 then may I suggest that the period be extended into the following 
 month — that is, January. If speculative activity should force prices 
 above proper levels at the very end of a delivery month, why 
 shouldirt the farmers have an opportunity to share in these profits ? 
 To do so they require sufficient time to get their grain to market. 
 
 Mr. Kleberg. Mr. Chairman, I would like to ask Dr. Duvel a 
 question. 
 
 The Chairman. Mr. Kleberg. 
 
 Mr. Kleberg. Does not the code in operation at the present time 
 control that situation? 
 
 Mr. Duvel. No. The code, as far as delivery is concerned, the code 
 has nothing to do with it ; does not touch it at all. It covers margin 
 requirements. It requires a minimum margin of 10 percent on 
 speculative transactions up to 2,000,000 bushels and 25 percent 
 thereafter. 
 
 It eliminates trades in privileges. The code also limits the daily 
 price fluctuations, which was also in operation before the code became 
 effective. 
 
 I think there are one or two other points which I do not recall 
 at the moment. 
 
 Mr. Kleberg. Has the code generally failed to remedy the com- 
 plaints that come to you ? 
 
 Mr. Duvel. Generally speaking, yes. In the matter of excessive 
 lines the code operates only indirectly; it does not go into many 
 things that are touched here. The bill goes into many matters which 
 are not covered by the code. 
 
 Now, there is not a single thing in the code — and I do not wish 
 to be understood as criticizing it — ^but there is not a single thing 
 in the code that could not be continued by the exchanges. 
 
 Mr. Kleberg. As a matter of fact, do you have reason to believe 
 that through a redrafting of the code to meet some of those inequities 
 and complaints you speak of the same thing could not be reached ? 
 
 Mr. Duvel. The only difficulty about redrafting the code is that 
 we do not know how long the code is going to last; whether it will 
 last longer than June or whether it will be extended for another 2 
 years. 
 
 Mr. Kleberg. Is there now not an indication that the code, in all 
 probability, will be continued for at least 2 years? I am asking 
 just as a matter of information? 
 
 Mr. Duvel. I believe so ; yes. 
 
 Mr. Kleberg. Yes. 
 
 Mr. Duvel. I might say, however, that our views with reference 
 to this legislation are based on intensive study that has been made 
 of the marketing of grain, and our approval of it does not depend 
 upon whether or not a code continues. I would like to see the provi- 
 sions of the code extended, of course. But I think this law should 
 be enacted whether the codes are extended or not. 
 
 Now, there is just one other thing I want to say in reference to 
 floor brokers, which has been discussed. 
 
54 
 
 BEGUIATION OF COMMODITY EXCHANGES 
 
 We have m Chicago on an average of about 11 billion bushels of 
 wheat traded m each year. That is about 14 times the average pro- 
 duction of the United States and more than 3 times the world crop. 
 About one-half of the trading is by floor brokers; they do about 60 
 percent of the business. Every order must go through a floor broker, 
 must be executed on the floor, presumably executed on the floor, so 
 that the floor brokers are indirectly connected with the orders that 
 go through. In fact, there is no part of the exchange operations for 
 customers which is not directly connected with the flcKn- brokers. 
 If the floor broker is not fair, or if he is dishonest then it affects all 
 of the orders of the commission house for whicli he executes cus- 
 tomers orders. But if he is honest the order is handled for the bene- 
 fit of the customer. In that event, of course, he is rendering a proper 
 service to the customer. But we have found cases where the floor 
 *^rokers were taking orders into their own account. 
 
 Mr. ToBEY. How many cases do you know of? 
 
 Mr. DuvEL. How many cases? 
 
 Mi. Tobey. How many cases in the last 5 years? 
 
 Mr. Dttvel. We have not undertaken to go into that matter in 
 the last 3 years very seriously. 
 
 Mr. ToBEY. Why not? 
 
 Mr. DuvEL. In one case that was taken up with the Commission; 
 the Commission ruled that the irregularity complained of was not 
 a violation of the Grain Futures Act, and there was nothing else 
 we could do about it. 
 
 ^^^' ^i^u^^* ^^^^^ »s I understand you, you do not have a single 
 case, and have not had a single case in which a complaint has been 
 sustained^ Nor do you have any evidence that would justify you 
 m saying how many times the condition you complain of has hap- 
 pened? ' * 
 
 Mr DuvEL. At the time we went into this matter, as I recall, 
 roughly, there were 14 instances. 
 
 Mr. Tobey. How long ago was that? 
 
 Mr. Duvel. That was about 4 years ago. 
 
 Mr. ToBEY. Have you done anything since then? 
 
 Mr. Dttvel. We have not undertaken anything. 
 
 Mr. ToBEY. Have you found out about it? 
 
 Mr. Duvel. We have not undertaken to check such cases because 
 the Commission has ruled that we had no authority to prevent such 
 irregularities. 
 
 1 T^^J?^: ^^^^' ^^ *^^ ^^ actual cases that vou refer to, what did 
 you do ? Bring it to the attention of the exchange ? 
 
 Mr. Duvel. Not at that time. We brought that one case before 
 the exchange when that matter was up. 
 
 Mr. ToBEY. What did you do about the 14 cases 
 
 Mr. Duvel. The other cases? 
 
 Mr. Tobey. Yes. 
 
 Mr. Duvel. I do not think that anything was done. 
 
 Mr Tobey. Why did you not take it up with the exchanfres and 
 see whether or not they were acting in good faith, if you thought 
 they were not ? ^ j & *> 
 
 Mr. Duvel. They have seemed to cooperate. 
 
 regulation of commodity exchanges 
 
 55 
 
 Mr. Tobey. Why did you not take these specific cases up with 
 the exchanges and give them a chance to either affirm or deny the 
 <jharges beiore the exchanges? 
 
 Mr. Duval. As I have said, in that one case, much time had 
 elapsed, 2 or 3 years, and there was nothing that we could do under 
 the Commission's ruling. Therefore, the other instances were 
 allowed to rest. 
 
 Mr. Tobey. So, if I understand you. Dr. Duvel, you had specific 
 cases where a man's honestly was challenged, or where he was charged 
 with a law violation, but that nothing was done by your department 
 to brin^ that matter to the attention of the exchanges and that no 
 demand was made upon the exchanges to take action in those cases? 
 Is it your judgment that law violations are going on continuously- — — 
 
 Mr. Duvel. That is not mv ludiiiiient. In some instances — it is 
 just a question of human conduct, and you cannot get away from 
 the fact that there will be some variations, some chiseling. We are 
 intere.>ted in it because there may be only an occasional instance, but 
 the ])ractice of the exchange itself, in doing business is 
 
 Mr. Tobey (interposing). The question that I want to bring out 
 is this : That you had these complaints, but as I understand, you say 
 they were not taken to the exchange, nor was the evidence. 
 
 Mr. Dl^vel. 'When we tried to deal with these cases we were told 
 by the Commission that we did not have any authority. There was 
 nothing we could do about it until some legislation of this kind was 
 enacted. 
 
 Mr. Marshall. Mr. Chairman, I have a question. 
 
 The Chairman. Mr. Marshall. 
 
 Mr. Marshaix. Dr. Duvel, my question relates to the fact that the 
 •chairman just asked you about, and that is giving the Secretary 
 authoi'ity to fix a delivery date not earlier than the 15th of the 
 month. Now you were here and heard the statement a little bit ago 
 by the gentleman from Kansas City, and I understood his statement 
 to be almost opposite to that of yours. I understood that you do 
 not give much credit to the opposition in stating that harm would 
 come as the result of the Secretary having this authority. 
 
 I understood him to say that it would result in harm. I am very 
 anxious to know what these facts are. I would like to know which is 
 right, for my own information. 
 
 Mr. Duvel. We have this situation: Let us assume trading in 
 December wheat; that is one of the leading futures. 
 
 Mr. Marshall. Yes? 
 
 Mr. Duvel. Carrying it through December. 
 
 Mr. Marshall. Yes? 
 
 Mr. Du\^L. It merely fixes a cut-off for new trades. The basis for 
 trading could be just as well in November wheat, and eliminating 
 December entirely. It is the basis of the contract, where the cut-off 
 is. So long as everybody knows, it would not do any harm, whether 
 the 15th or the end of the month. 
 
 Mr. Marshall. Then the whole proposition which is asked for 
 in the bill is what? Just what is the real purpose of that section? 
 
 Mr. Duvel. So as to give some opportunity to close out contracts 
 and prevent the cornering of the market contracts could be liqui- 
 dated in a normal manner. At the present time tiie limit on cotton. 
 
 
 M 
 
56 
 
 REGULATION OF COMMODITY EXCHANGES 
 
 «»,^'";w T''^- Th*5!?"^"^n ^li" i"st testified from Kansas City 
 
 Mr. DuvEL. I do not agree with him on that; no. 
 Ihe Chairman. Mr. Beam. 
 
 i, olV^^f'*^- ^'■- P^^'^l' J"?* ^^** '^"^fi* «J» yo" think the producer 
 T^^^^^ derive from having the Government licensing the broker? 
 Ihe exchanges themselves are interested in the operations of these 
 floor brokers, as the gentleman testified here last Monday or TuesdiSl 
 m their supervision of them they are much more anxious to have 
 
 vou^conl^m.r' *^'"' *"y^?* ^l'^ '=°"J*^ '^' »nd •« it not Possible if 
 fwT ^i f T P.'e^'jsion for submitting the evidence to them 
 
 Mn 1^^ could deal with it more effectively than the Department? 
 
 Mr. Vv\EL. If we could secure the facts— the exchanges have been 
 very successful m dealing with cases of that kind, that^come within 
 their rules and regulations. 
 
 Mr. Beam. And do you not think that they are in much better 
 position, can deal more directly and in a much n,ore"xMido«s 
 way than if you have the Government license floor brokers as is 
 contemplated by the proposed legislation? 
 
 Mr. DuvEL. No ; I do not think so. 
 
 Mr. Beam. Why not? 
 
 Mr. DuvEL. Well, let us take the floor broker who holds a cii<5 
 omers' order, if he fills that order by taking it into his own account, 
 
 Mr B?* ""^ ''"V'"' ^^^ ej^ange to know anything about it. ' 
 vnm. oiSf.'*'' ¥"l.**>«'"« ^^'er been any case of that kind called to 
 ff. fl K T ' Have you had any complaints along that line that 
 the floor broken do what you have just described here? 
 Commi *^' ^ mentioned the case that we had before the 
 
 Mr. Beam. Just the one case. Is that all ? 
 Mr. DuvEU No; there were others. 
 
 th^r ^^'''^' ^*"' ^""^ """"^ ■ ^ *"" *"*'0"« to find out some of 
 Mr. DuvEL. There are a number of other cases. We have had no 
 authority to go into that It requires considerable work to find out 
 whether that has been done, and we have not had anv means of 
 doing It up to the present time. " 
 
 (The chairman withdrew and Mr. Doxey assumed the chair.) 
 
 Mr! S^ Sta'fSJ:''^ '"'•■" *" ''^'^ y^" °"* "^ '^'^ 1"-*-- 
 
 Mr. Kleberg. If that is all right with you, Mr. Beam? 
 Mr. Beam. Yes. 
 
 Mr &^ERG The idea in Mr. Beam's question, as I understand 
 It, IS to hnd out the criticism of the present manner or method the 
 trade itself has set up for control over these various unethical prac- 
 tices. Now, how would the Department arrive at a method of 
 obtaining evidence, if you please, on the violations of ethical prac- 
 tices carried on by the trad!e itself? ^ 
 
 Mr. DuvEL. From the records. 
 
 REGULATION OP COMMODITY EXCHANGES 
 
 57 
 
 Mr. Kleberg. How is that? 
 
 Mr. DuvEL. From the records. 
 
 Mr. Kl e b erg. But vou do not have a record of those transactions, 
 of the amount of trad.es, do you ? 
 
 Mr. DuvEL. They are available; the records of such transactions 
 are available at the present time. 
 
 Mr. Kleberg. Is there no way now, under the present set-up, 
 whereby the Department could not function efficiently merely by 
 calling attention to the board itself, the exchange, by consulting 
 the records and determining the facts and pointing out the evidence 
 to them? 
 
 What I am trying to get at is this : That instead of having this 
 additional legislation, could not the Department, if it would merely 
 call these discrepancies in these trades to the attention of the board, 
 and these unethical practices— that the board could correct them? 
 
 Mr. DuvEL. There is not any way of getting at it, as I said, unless 
 they were required to furnish 
 
 Mr. Kleberg (interposing). I think perhaps you do not under- 
 stand my question. My question is this : Would not merely the fact 
 that your office calls these matters to the attention of the board, prac- 
 tices that appear in the record, and bring the facts to the exchange 
 as the basis for your statement, enable the exchange to correct it 
 itself? 
 
 Mr. DuvEL. We do that right along, wherever we find these cases ; 
 we work with the exchange, the business-conducts committee in these 
 cases. 
 
 Mr. Kleberg. Do you get response from them in cases where you 
 have called it to their attention? 
 
 Mr. DuvEL. Yes, where there has been a strict violation of the 
 rules ; yes. We work with the business-conducts committee and it has 
 been very effective in those cases. 
 
 Mr. Kleberg. Do you not think their regular set-up is sufficient to 
 cover any real dishonesty or unethical transactions? 
 
 Mr. DuvEL. The difficulty is in getting the necessary machinery 
 to find out the facts concerning the unethical practices. 
 
 Mr. Kleberg. That goes back to the first question. Then if they 
 do not have the machinery to find out the unethical practices, or 
 who would be dishonest, and if you do not have that machinery, how 
 are you going to discover these discrepancies? 
 
 Mr. DuvEL. We know a little more about the transactions of the 
 brokers; we know something about the transaction: what is done, 
 from the records. ' 
 
 Mr. Kleberg. How are you to find that out? 
 
 Mr. Beam. How can you know that? 
 
 Mr. Kleberg. How would ;^ou ascertain those facts? In other 
 words, what means, under this bill, is made available to you to 
 ascertain the information and make it available to the Department 
 with reference to these discrepancies ? 
 
 Mr. DuvEL. We would be able to ascertain from the broker what 
 his transactions were ; that is what I am getting at. 
 
 Mr. Kleberg. And you cannot do that now ? 
 
 !t' 
 
58 
 
 REGULATION OF COMMODITY EXCHANGES 
 
 Mr. DuvEL. We do not have any authority to make that check at 
 the present time. 
 
 _ Mr. Beam. You have authority now to refer violations back to 
 the exchange, have you not? 
 
 Mr. DuvEL. The grain exchange? 
 
 Mr. Beam. Yes. What Mr. Kleberg and I are trying to find out 
 now IS how would it work out so that you would be able to find out 
 and determine the evidence in thousands and thousands of dealings 
 that go through every day on the exchange, every day in the year 
 the exchange is open, how would you find out, as a practical matter? 
 Is that feasible ? That is what I want to know. 
 
 Mr. DuvEL. We would probably, in the case of the broker, require 
 from him a report, or require him to keep some kind of a record. 
 
 Mr. Beam. You are not requiring that at this time? 
 
 Mr. DuvEL. No. 
 
 ^u^^xV^^^* ^f^*' ^^^ ®^^ exchange has a record of every sale 
 that the man makes, has it not? 
 
 Mr. DuvEL. Perhaps so. 
 
 Mr. Beam. And you have access to the records of the stock ex- 
 change now ? w CA 
 
 Mr. DuvEL. The stock exchange? 
 
 Mr. Beam. Yes. 
 
 Mr. DuvEL. The board of trade. 
 
 Mr. Beam. You have the board of trade ? 
 
 Mr. Duvel. Yes. 
 
 Mr. DoxET. Gentlemen, it is now 12 o'clock, and the first thine 
 
 «e^* ?nri"n ^^-t ^°'' ^'' ™^™'"g i« the conf;rence report on twf 
 seed-loan bill. I know we are all interested in this discussion «nd 
 I hate not to prolong it. but I am afraid we will have to adfourn T 
 hoi^^those wlTo have questions will make them shors^^thlne can 
 
 Mr. Goodwin. Mr Chairman, I would like to ask a question 
 Mr. Andkesen I have one or two questions too, MrThaiman 
 ti,^ w"^^- ^l <=«"'^'. ^e could prolong this ' hearing f™ some 
 
 ^rivil''""' rir''"'' r "PPortunitrto testify hat been Sven th^ 
 privilege of filing whatever statement they wanted to make Ih f 
 
 cTalr^Z^ '" '''^""" ^'^•^ '=""•'»'"«« suiject"S,%ircS'of1he 
 
 Mr' fc'VelTT win'^.'.V* ^"* * i'*"** """^^ information myself, 
 .et Vo^^; Jl'"' LT" *^" /*'" ^hat we will d<^if you want to 
 
 meet tomorrow morning on this matter 
 
 REGULATION OF COMMODITY EXCHANGES 
 
 59 
 
 , , . - — fo -^^ WHO iiiattei 
 
 co« r'^SuX (•"^^^P"^'"^)- I --W like to make a unanimous- 
 
 Mr. DoxEY. You have that privilege, of course. 
 
 Mr. Andresen. That is, that Dr. Duvel submit to us tomorrow 
 complaints that he has received regarding operations that are illegal, 
 and some of the practices indulged in — specific instances — and also 
 the procedure that has been adopted in taking this matter up with 
 the board of trade and the business conducts committee ; and let this 
 committee know what cooperation he has had with that committee in 
 dealing with these complaints. Also, that he furnish specific com- 
 plaints that he has referred to here or the other day of irregular 
 practices, and of the case where the man wrote to the department 
 stating, as you may recall, that he had lost several thousand dollars 
 in trading. 
 
 Mr. DuvEL. Yes. 
 
 Mr. Andresen. And giving us more information on it. 
 
 Mr. DuvEL. I do not know that I can give you that tomorrow. 
 As I stated the other day in executive se&sion we only had the one 
 side, and I do not know the other. 
 
 Mr. Andresen. Well, that matter was referred to in executive ses- 
 sion, and I believe the committee is entitled to have that made a 
 matter of record, the cases that have been cited to the department, 
 and set forth in the hearings. And I would ask unanimous consent 
 that Dr. Duvel appear here tomorrow morning and furnish a com- 
 plete statement and full information. 
 
 Mr. DoxEY. Without objection, the unanimous-consent request of 
 Mr. Andresen, that we meet in executive session tomorrow at 10 : 30 
 and have Dr. Duvel appear before us with the information along 
 the line suggested — without objection, that will be done. 
 
 Mr. Goodwin. I have one or two questions, Mr. Chairman. 
 
 Mr. DoxEY. Yes. 
 
 Mr. Goodwin. I wanted to ask them at this time. 
 
 Mr. DoxEY. Yes, Mr. Goodwin ; you may proceed. 
 
 Mr. Goodwin. While we are in this discussion of section 4 (j), 
 page 15, which reads: 
 
 Such contracts shall be made prior to a date to be fixed by rule or regulation 
 of the Secretary of Agriculture, which shall not be earlier than the 15th day 
 of the delivery month to which such contract relates. 
 
 The gentleman from Kansas City made the statement, as I under- 
 stood it, that there would be a loss to the farmer under that section. 
 I ask this question : Dr. Duvel said a moment ago that it would not, 
 in his opinion, result in such loss. 
 
 Now, may I ask the privilege of having the gentleman from Kan- 
 sas City give us the reasons for his statement that there would be 
 such a loss? 
 
 Mr. DoxEY. Yes ; Mr. Davis. 
 
 Mr. Davis. I think you can see, from the illustration which I will 
 give you, that it would result in such loss. Let us assume, for in- 
 stance, they advise the Secretary they should stop trades on the 15th 
 day of the month. I am operating an elevator, and I buy grain, have 
 been buying grain in that trade area, and there is plenty of it. Now, 
 someone is long 5,000,000 bushels of December wheat. Now, under 
 this law no new; trade can be made after the 15th of the month. 
 
60 
 
 REGULATION OF COMMODITY EXCHANGES 
 
 EEGULATION OF COMMODITY EXCHANGES 
 
 61 
 
 Therefore, I could not go out and trade with the farmer who had 
 wheat and go back into the pit and sell on December wheat, because 
 he would! not allow any new trades. Now, it might mean that in 
 that trade there would be a better price, but the farmer could not 
 get the benefit of the price. 
 
 Suppose, for instance, that the price of wheat is 95 cents, and I 
 could go out and would be glad to pay 95 cents for that wheat, and I 
 send men around to buy^ wheat, and I would be glad to pay the 
 farmer the 95 cents. Under the present operation I could take that 
 wheat, and the farmer would get 95 cents for the wheat. But if this 
 provision becomes a law, and if that May wheat is selling at 92 cents, 
 I would have to pay the 92 cents, because I could not handle any new 
 wheat, could not make any new trade, after the 15th day of the 
 month. Of course, I might go out and buy a few cars of wheat at 95. 
 But the man who demands delivery of that wheat will not hold that 
 price up for a long period. But I could go out and pay 95 cents, 
 and I could come in and make that sale today, but I cannot under 
 this regulation, which means that the farmer will have to lose on that 
 transaction 3 cents a bushel. 
 
 Now, I will state that I have been in this business for 35 years, 
 and I am willing to bet a thousand dollars to a penny that 1 can 
 prove my statement. 
 
 Now, in regard to the question asked about the code, I would just 
 like to read this one paragraph from the code, in respect to its 
 amendment. The code states : 
 
 This code in all Its provisions is expressly made subject to the right of 
 the President of the United States, i!i accordance with the provisions of sub- 
 section (b) of section 10 of tlie act, from time to time, to cancel or modify any 
 order of approved lines under the rules and regulations of said act. 
 
 That is what the code provides regarding amendments. 
 
 Mr. Beam. I would like to amend Mr. Andresen's unanimous-con- 
 sent request, that we have an open hearing. I think that the wit- 
 ness' statement should be on the record. 
 
 Mr. DoxET. We could determine that in executive session tomor- 
 row, and I think we can save the time of the witnesses, and perhaps 
 get further. It is my understanding that we would not have any 
 further session, but if the committee wants it, of course, that is what 
 we will have to do. 
 
 Mr. Andresen. My unanimous-consent request was not for an 
 executive session. I wanted the statements to be made by Dr. Duvel 
 to go into the record. 
 
 Mr. ToBEY. I think we should have some further hearing. 
 
 Mr. Beam. If necessary, I make that motion. 
 
 Mr. DoxEY. If that is the wish of the committee, I am going to 
 adjourn this hearing until tomorrow morning at 10:30. 
 
 (Thereupon, at 12:05 p. m., the committee adjourned until 10:30 
 a. m. tomorrow, Friday, Feb. 8, 1935.) 
 
 STATEMENT OF PAUL J. CHKISTIAN 
 
 Mr. Christian. Mr. Chairman, my name is Paul J. Christian 
 The Chairman. I have your telegram and I was going to read it 
 
 before we concluded the hearings. Is that what you have in mind? 
 
 Mr. Christian. Yes, sir. 
 
 The Chairman. Here is a telegram from the president of the New 
 Orleans Cotton Exchange, which reads: 
 
 [Radiogram-— Mackay radio] 
 
 19a \iTra in« vtt i /ka i i:,^ ,> ^. Februabt 6, 1985, 10: 11 P. M. 
 
 128 MKH 108 NL 1/50 1 Extra. B New Orleans, La., Feb. a 
 
 Hon. Mabvin Jones: 
 
 Chairman House Committee on AffHoulture, 
 
 Washington, D. C. 
 In view of conversation had with two of our representaUves in Washington 
 }SSL ^ i/?^ ^°"/ assurance that hearings before your committee on H R. 
 3009 would be confined to consideration of floor brokerage. Our exchange was 
 not represented at meeting of your committee on Tuesday of this week. We 
 have since been Informed that the hearings are to be broadened at the meeting 
 ^no^rnV^"" ^^^J'' Thursday, February 7, and if this is to be the case we 
 request an opportunity to be heard before hearings are closed inasmuch as 
 time allowed to reach Washington by Thursday would be too short. 
 
 C. P. Emjs, Jr., 
 President New Orleans Cotton Exchange. 
 
 That is a matter for the committee to determine. 
 
 :l« 
 
 114608 — 86 — SBB B- 
 
KEGULATION OF COMMODITY EXCHANGES 
 
 FBIDAY, FEBBXTABT 8, 1935 
 
 House of Representatives, 
 . Committee on Agriculture, 
 
 Washington^ D. C, 
 
 The committee met at 10:30 a. m., pursuant to adjourimient, Hon. 
 Marvin Jones (chairman) presiding. 
 
 The Chairman. The committee will please come to order. 
 
 The chairman was not here yesterday during the last few minutes 
 before adjournment. It was necessary for me to go to the House 
 on a matter that was coming up there immediately after the session 
 opened. I understand that some of the members of the committee 
 wanted to ask some further questions this morning. 
 
 Mr. Andresen. Mr. Chairman, I made a unanimous-consent re- 
 quest that Dr. Duvel furnish the committee with a list of the com- 
 plaints that had been made to him, and as to his actions in 
 connection with those complaints as to whether or not he had 
 received cooperation from the business conduct committee, in order 
 that the committee might have some definite information as to the 
 nature of the complaints which he had received. He said he would 
 furnish that. 
 
 The Chairman. I do not know about that. Some of those mat- 
 ters they are not permitted to give out. We will hear Dr. Duvel. 
 
 I have in my hands a copy of the hearings that were held last 
 April. 
 
 Hearings were held on this identical measure, on April 3, 4, 5, 9, 
 11, 12, 13, 16, and 17, last year, and it was gone into rather thor- 
 oughly. That is one reason why we are trying to avoid duplica- 
 tion as much as possible. 
 
 Dr. Duvel, we will be glad to hear further from you. I think 
 some questions were asked of you yesterday before we closed. 
 
 STATEMENT OF J. W. T. DTTVEI, CHIEF, GRAIN FUTURES ADMIN- 
 ISTRATION, DEPARTMENT OF AGRICULTURE, WASHINGTON 
 D. C— Resumed ' 
 
 Mr. Duvel. I want to say part of the information requested 
 yesterday will be furnished by Mr. Mehl, who was going to produce 
 It this morning, but he has been detained and has not been able 
 to get here yet. I really wanted him to go on first. However, 
 there is something that I will take care of and get out of the way 
 
 On yesterdav there was brought up one of the questions, if I 
 recollect, which was with reference to the stopping of trading on 
 the 15th day of the month — authorizing that power. 
 
 6S 
 
 H 
 
64 
 
 REGULATION OF COMMODITY EXCHANGES 
 
 Now, Mr. Davis in testifying before the committee stated that a 
 law or regulation prohibiting new sales of wheat futures during the 
 last 15 days of the delivery month, for example, new sales oi the 
 Kansas City December future during the last 15 days of December, 
 would prevent terminal elevator operators buying cash wheat for the 
 purpose of putting it in store, selling the December future against 
 it and delivering the wheat upon the futures so sold. 
 
 If I understood Mr. Davis correctly he stated further that such a 
 prohibition would necessarily and of itself lower the bids of terminal 
 elevator operators for cash wheat for prompt delivery during the 
 last 15 days of the delivery month whenever the following future 
 was selling below the expiring future. For example, if new sales 
 of the December future were prohibited during the last 15 days of 
 December and the May future was lower than the December future, 
 terminal elevators would base their bids for cash wheat during the 
 last half of December upon the May, rather than the December, 
 future. 
 
 If this assumption of Mr. Davis is entirely correct cash wheat of 
 contract grade during the last 15 days of December 1934, should 
 have sold in Kansas City at prices at which it could have been bought 
 and delivered at a profit on the Kansas City December future. 
 
 It is a fact, however, that during the last half of December 1934, 
 there was no day on which the lowest price paid for no. 2 hard 
 wheat, the contract grade, in the Kansas City Board 'of Trade was 
 not above the highest quotation for the Kansas City December during 
 the same day. 
 
 The daily weighted average prices of No. Hard cash wheat and 
 the high, low and average price of the December future on the 
 Kansas City Board of Trade as reported by the Kansas City Grain 
 Market Review from December 15 to 31, 1934. was as follows : I will 
 leave with the reporter a table. I do not tnink it is necessary to 
 read it, but will talk about the average figures. 
 
 (The table above referred to is printed in the record as follows:) 
 
 Date 
 
 Dec. 15-. 
 Dec. 17. 
 Deo. 18. 
 Dec. 19- 
 Dec.20- 
 Dec. 21- 
 Dec. 22. 
 Dec. 24- 
 Dec. 26- 
 Dec.27- 
 Dec.28. 
 Dec. 29. 
 Dec. 31- 
 
 Average 
 price 
 no. 2 
 hard 
 
 Simple average- 
 
 105% 
 104« 
 
 102ji 
 
 vm 
 
 103^ 
 
 104H 
 
 103H 
 
 None 
 
 105 
 
 10^ 
 
 103^i 
 
 December future 
 
 High 
 
 1025^ 
 101 
 
 mi 
 mi 
 mi 
 
 98% 
 
 ml 
 mi 
 
 100% 
 
 IOOVr 
 
 100% 
 
 101 
 
 100% 
 
 100% 
 
 Low 
 
 101% 
 99% 
 99 
 
 98% 
 95% 
 
 ^ 
 
 96% 
 
 V071 
 
 96% 
 96 
 90% 
 96% 
 
 97% 
 
 Average 
 high 
 and 
 low 
 
 102 
 
 99^ 
 90% 
 
 96% 
 97% 
 98M 
 98»^ 
 96K 
 
 98 
 
 mi 
 
 During the last half of December 1934, the average price of all 
 sales of 1^0. 2 Hard, the contract grade, was $1.03%, while for the 
 same period the average of the daily high quotations for the Decem- 
 ber future was $1,001/4 and the average of the daily average December 
 future price only 98%- In other words, this contract grade wheat was 
 
 BEGULATION OF COMMODITY EXCHANGES 
 
 66 
 
 bought at an average price 3% cents per bushel above the highest 
 December future that could conceivably be sold against it and at a 
 price 5 cents per bushel above the average price of the December 
 future. Therefore, it is perfectly clear that this cash wheat was not 
 purchased for delivery upon the December future. Whatever the 
 reasons for the relatively high price of this cash wheat may have been, 
 it is certain that its delivery upon the December future through sales 
 of the future at the time it was bought was not one. An elevator 
 operator does not buy wheat at 103% with the intention of delivering 
 it within 15 days upon futures sold at 98% or 1.0014. 
 
 Likewise, in the Kansas City Grain Market Review of December 
 10, 1934, in the review of the cash market of December 10, 1934, the 
 Kansas City Grain Market Review said : " It is expected that only a 
 few more days will elapse until all dealings will be on the basis of 
 May." 
 
 In the report of the market of December 11, this journal stated 
 that cash " Trading was based on 991/2 to 993^ cents for May." 
 
 In other words, on the 11th of the month, switch in trading was 
 expected, from December futures on to May futures. 
 
 This chart [exhibiting chart to the committee] shows here during 
 the month of December this [indicating] is the cash wheat prices; 
 this lag in the cash wheat prices, and this [indicating] is the futures 
 prices ; this being [indicating] December here, and then it was based 
 on the 11th, based on the May. 
 
 The Chairman. Is that the customary practice in the latter part of 
 the month, to buy cash wheat on that basis ? 
 
 Mr. DuvEL. Yes, sir; it is quite frequently done on the Chicago 
 market earlier. That is based upon December, and that [indicating] 
 futures. 
 
 The Chairman. Dr. Duvel, Mr. Mehl is here, if you want him to 
 go on. 
 
 Mr. Duvel. I will just finish this part. 
 
 The Chairman. Very well. 
 
 Mr. Duvel. Now, this chart shows Kansas City through the 3 
 months, September, October, November, and December. 
 
 Up to this point here [indicating on chart] . These were all based 
 upon the December futures, with a cash price ranging about the same 
 distance above, and when we get here [indicating on chart] then it 
 is based on May futures, with the cash running about the same dis- 
 tance above the May. 
 
 That [indicating] is what they actually paid. 
 
 Now, there is a difference in opinion. There are times, of course, 
 that that happens. That is the distance [indicating on chart] the 
 futures is at a discount. There are other times when it works the 
 other way. 
 
 Mr. Andresen. Mr. Chairman, may I ask a question right here 
 on this? 
 
 The Chadiman. Mr. Andresen. 
 
 Mr. Andresen. Last year, Dr. Duvel, and the present season, is 
 abnormal so far as wheat is concerned; is that not correct? 
 
 Mr. Duvel. Yes, sir. I think that is correct. 
 
 Mr. Andresen. A short crop, and a premium is paid on all cash 
 grain over the futures options. So, if you are basing your statement 
 
66 
 
 REGULATION OF COMMODITT EXCHAKOES 
 
 BEGTTLATIOIT OP COMMODITT EXCHANGES 
 
 67 
 
 ■f 
 
 (ii 
 
 on last December, what can vou tell us about a normal season such 
 as we expect to have in the future ? 
 
 Mr. DuvEL. I thought I had those figures here. I had the figures 
 yesterday and I thought that I had them right here this morning. 
 As I remember, it is about 3 years out of 8. Normally, the differ- 
 ence between December and May wheat, or cash wheat and the dis- 
 tant future is the carrying charge of the wheat. In other words, 
 December wheat is lower than May, and September is lower than De- 
 cember, so that you have, during the month of delivery, cash wheat 
 at a price which is a normal carrying charge below the distant future. 
 1 hat has not been true recently. Has not been for the past year 
 ^^il^ A^ wheat and corn, the cash grain has been above the futures. 
 
 Mr. Andresen. How much lower is July and September futures 
 now than the May futures? 
 
 Mr. DuvEL. I cannot give you those figures, off-hand. Maybe 
 somebody present can. 
 Mr. George H. Davis. About 7 cents. 
 
 Mr. CouGHMN. Between 6 and 7 yesterday ; it is down to about 4 
 at this time. 
 
 Mr. CoF^. Mr. Chairman, I would like to ask what effect this 
 bill would have if it were m operation as to changing those prices, 
 or changing conditions, I mean. 
 
 Mr. DuvEL. I do not think that it would have any. 
 
 Mr. CoiTEE. It would not have any effect; there would not be any 
 
 Mr. DuvTEL. I do not think that it would have any. That is my 
 opinion That provision of the bill is in line with some of the pro- 
 visions that we have now on some of the commodity exchanges 
 where they stop trading before the end of the month. That is fre- 
 quently done, so to take care of other commodities, this bill provides 
 for a limit, but the Secretary cannot go beyond 15 days. It is not 
 material from our standpoint whether it is 15 days or*^10 days: but 
 
 w''i/^.w*^^*,i*^^r,^^'''"^^ be provision for some limitation! 
 Well, that IS all of that point. If Mr. Mehl is here now, I think 
 that 1 will let him take it up. 
 
 The Chairman. We will hear Mr. Mehl. 
 
 STATEMENT OF J. M. MEHL, ASSISTANT CHIEF OF THE GEAIN 
 
 FTTTURES ADMINISTRATION, DEPARTMENT OF AGRICULTURE 
 WASHINGTON, D. C. /vixxwii.ui.iuiti;., 
 
 Mr. Mehl. My name is J. M. Mehl, Assistant Chief of the Grain 
 Futures Administration. 
 
 Mr. Andersen. How long have you been with the Administration? 
 
 Mr. Mehl. Since 1924. I am also the representative of the Sec- 
 retary of Agriculture on the Grain Exchange Code Authority of 
 which Mr. George H. Davis is the esteemed chairman. 
 
 I was happy to learn from the testimony of Mr. Davis yesterday 
 that he thinks so much of this bill and of the code that he is willint^ 
 to have them joined in a sort of a trial marriage, and I just want the 
 committee to know that we have already been "engaged", so to 
 speak, for about a year. I sit on the Grain Exchange Code Author- 
 ity and our several Grain Exchange supervisors sit in the meetings 
 of the business conduct committees of the exchanges. 
 
 At yesterday's session, Dr. Duvel was requested to bring with him 
 today a list of all the cases and instances, with names, which had 
 come to our attention in the past, involving irregularities on the 
 part of floor brokers and commission firms in connection with cus- 
 tomers' orders. 
 
 Now, we have a list, a memoranda list, of cases from 1929 to 1931, 
 that were npted for lurther investigation and possible handling in 
 the event that the case which was started at that time, known as 
 the " Massey and Reedy case ", was successfully terminated and it 
 was found we had authority to deal with this Jrind of cases under 
 the present act. The working papers of the accountants in refer- 
 ence to those cases are still in Chicago and we have here just the 
 roughest kind of a memorandum. 
 
 I would like to present at this point, a memorandum which Dr. 
 Duvel submitted to the Solicitor for the Department last evening 
 in reference to the right of the Grain Futures Administration to 
 disclose the names and the individual business transactions of per- 
 sons who are under investigation but who have not actually been 
 found guilty of violating our act. 
 
 The Chairman. What was the conclusion? I do not think the 
 committee would care particularly about having the opinion read. 
 Does he think they should be or should not be? Unless some one 
 wants to hear the opinion read, I do not think it is necessary. 
 
 Mr. Mehl. His conclusion was that the Grain Futures Administra- 
 tion was not justified, in view of the specific prohibition in the present 
 grain futures, in disclosing the names of individuals and names of 
 customers. 
 
 The Chahiman. Well, is there any reason that you should not give 
 an estimate as to the number? 
 
 Mr. Mehl. No. I will be glad to do that. 
 
 The Chairman. I do not think the particular name of anyone would 
 be necessary. I do not think the committee would want to do any of 
 them any injustice. I do not care to have their names. 
 
 Mr. Andresen. You might put that opinion in the record. 
 
 The Chairman. We will be glad to have the opinion printed in the 
 
 record. 
 
 Mr. Mehl. I will offer, then, Mr. Duvel's letter to the Solicitor of 
 February 7 and the Solicitor's reply. 
 
 (The documents referred to are as follows :) 
 
 Uniteid States Department op Ageiculture, 
 
 Grain Futubes Administration, 
 Washington, D. C, February 7, 1935. 
 
 MEMORANDUM FOR ME. GSTTH THOMAS, SOLICITOB 
 
 Dear Mr. Thomas : At a public hearing on H. R. 3009 before the House Com- 
 mittee on Agriculture this morning I was requested by certain members of the 
 committee to have prepared and present at the session tomorrow a list of cases 
 and instances, with names, which have come to our attention involving irregu- 
 larities on the part of floor brokers in executing orders and involving such prac- 
 tices as cross-trading, bucketing of customers' orders, etc., aimed to be prevented 
 by the provisions of H. B. 3009. 
 
 You wUl recall that a test case was instituted by the Secretary of Agriculture 
 on March 12, 1930, against three members of the Chicago Board of Trade. This 
 was what is known as the *' Massey-Reddy case ", dockets 2 and 3, and was in- 
 tended to determine whether the practices complained of could be dealt with 
 
68 
 
 ./■ 
 
 REGULATION OF COMMODITY EXCHANGES 
 
 Smmis^fonTu^^^ ^Mt'wSlTe t?'ac?fc/ fr, ^^ ^^^^/ -"iPulation. The 
 evidence might be detrimental to c^?nmp^ 1'^!?^''?^^?''^ *^ indicated by the 
 they (xjuld nit be consider^ as ^nStTnTmantoSa^H^^^^^^ J^ ^"^'"^ 
 
 and'c^^mziSo^^firms'who "^f S^e'lksrofn^.?^'^ " "«^ ^' ^^^^ ^0 brokers 
 
 ori^i?u1^nre\Vo^^r^r T'^^r:tL''^^Tl^tX^^^''''^ ^~^^ 
 face of the prohibitions contai^d iZ^nSn r nf thl n ^t^'l? J'' ""^^ ^"^ ^^^ 
 may be permitted to subidt tbL list ^^ ^'"^ ^"*"^^« ^^ ^^ 
 
 Very truly yours, 
 
 ^_____^ J. W. T. DuvEL, Chief, 
 
 United States Depabtment of Agbicultubi; 
 
 Office of the Solicitob, 
 wasninoton, D. C, February 8, 19S5. 
 
 memorandum fob DB. J. W. T. DUVEL, CHIEF, GBAIN FUTUBES ADMINI8TBATION 
 
 «o^^o i "®® Committee on Agriculture that you submit a li^f nf fhi 
 
 names of persons who seemed to have violated the firflin FnfnL? l^} ^f 
 ^^n «? ^iL^'rr^y, investigations made und^r'^y our dir^^^^^ 
 ago^at^about the time of the proceedings in the Mass^Sy cll^'^dc^keU 
 
 the^t\'S%u\lreTASl42""^^^^^^ ?,' 1^^^""">!;T ^ >?-^^- « -' 
 
 your investigation * 7 U. S. C. 1) to publish the results of 
 
 kJ •* * X* except data and information which would senaratpiv i«sr»ina« fh^ 
 
 as to any actual transaction." *^ ^ mciude the facts 
 
 ^J^. V®^, ^^J^^ decision of the Grain Futures Commission that the transac 
 ^.^''•''''^''^ ^° 9^ Massey-Reddy case were not in violation of the act no 
 fh^T^'"^^^ 7^11 instituted against the other persons above referred to so 
 ^t obviously they have not been found guiltFof having viSfatS the act 
 ^erefore in view of the above^uoted provision of the act it s m v oninlon 
 that you do not have authority to disclose the namesVthe indivSials^^^^ 
 cerned. There could, however, be no objection to your ^ving the Comm^^^^ 
 information a^sjo ^practices involved, and the exLt ofmo^se^S/"'" 
 
 Seth Thomas, Solicitor. 
 Mr. Hope Is there any reason why you could not give us that 
 opinion, without disclosing the namesi That is, the opinion of the 
 solicitor as to your right to do so? 
 
 f>.f^n Jl^r'- Yf'- ^ *^'5^ t^^* I ^ °^^^^ ^^^^ *he members of 
 the conmiittee had m mind when they made the request 
 
 • \ P^.^""^® that the purpose of the request was to have presented 
 just a little more definite information than has heretofore been given 
 the committee, showing the necessity for those provisions of the bill 
 which relate especially to cheating of customers, cross-trading, and 
 that sort of thing. ^' 
 
 I believe it was the purpose also to inquire as to which of these 
 cases, If any, had been submitted to the exchange officials for action 
 under their rules. 
 
 REGULATION OF COMMODITY EXCHANGES 
 
 69 
 
 Now, I assume this was the purpose of the gentlemen who made 
 the request; that it was not the purpose to put the chief of the 
 Grain Futures Administration in the position of violating his own 
 law, and that it is not your desire to drag into the record the names 
 of a lot of people who had been under suspicion. I can give you 
 the information 
 
 Mr. ToBET. Mr. Chairman, may I ask a question ? 
 
 The Chairman. Mr. Tobey. 
 
 Mr. Tobey. You remember, the other day, Mr. Mehl, you were here 
 when I asked Mr. Coughlin if he would be good enough to file with 
 me a list of the offenses charged and the convictions made of the 
 members of the Board of Trade, from 1929 up to date. 
 
 Mr. Mehl. Yes. 
 
 Mr. Tobey. He did file that list with me yesterday. Of course, 
 I would be the last man that would want those names made public. 
 They are confidential here. The same thing would apply there. 
 But, you have a list, and I would like to compare that list thatyou 
 have with the one I have here. And the reason is obvious. Here 
 are 52 names of members who have either been suspended or expelled 
 from the Board of Trade by virtue of breach of their rules. That 
 being so, you bring in a list of 14. I am particularly desirous of 
 knowing whether the 14 names which came to your attention are 
 on this list here, because if thejr are on this list^ it would tend to 
 show that the Board of Trade, in my judgment, is taking measures 
 to meet what is going on ; but if they are not on this list, those 14, 
 it is obvious that the Board of Trade does not know all that is taking 
 place, has not been wise enough to discover all of the wrong prac- 
 tices that are going on, or having discovered them, has taien no 
 cognizance thereof. 
 
 Mr. Mehl. I think it is admitted that the exchange will have 
 occasion to discipline or suspend under its rules many persons against 
 whom we would have no occasion to proceed under our act. 
 
 Mr. Tobey. True ; but if the names you have there are the names of 
 those who are beating the sales, as was suggested here, or are guilty 
 of corrupt practices, and that is one thing that no notice was taken 
 of by the board of trade, obviously they are not living up to the code, 
 or to ethical standards, so far as protecting their organization and 
 the public where the functions of the exchange are concerned. 
 
 Mr. Mehl. In 1929 our auditors and accountants in Chicago, in 
 connection with their other work, had observed what they thought 
 were practices of bucketing and the taking of customers' orders by 
 brokers into their own accounts. They communicated from time to 
 time to us their observations in this respect, and one of the first cases 
 occurred on September 23, 1929, or rather, that is the date of the 
 preliminary report. 
 
 Now, this case involved the operations of 2 floor brokers and 1 
 clearing member. They were involved in bucketing and cross-trad- 
 ing. That case was brought to a hearing before the Commission 
 consisting of the Secretary of Agriculture, the Secretary of Com- 
 merce, and the Attorney General, on a charge of manipulation. I do 
 not need to describe that case, because it is a matter of record in 
 G. F. A. Dockets 2 and 3. 
 
 The names of the parties and all details concerning the transac- 
 tions may be obtained from the record itself. 
 
 4 
 
 ^^ 
 
70 
 
 BEGULATION OF COMMODITY EXCHANGES 
 
 
 The Comimssion in that case found that although the practice 
 complained of, and as shown by the evidence, might be detrimental 
 to customers and might even amount to fraud, the practices bv 
 brokers of taking customers' orders into their own accounts, at prices 
 tixed and determmed by themselves so as to give such brokers an 
 independent profit, did not constitute manipulation of grain prices 
 within the meanmg of the Grain Futures Act. 
 
 It was a test case to determine that question. 
 
 In the report of our accountant, who first brought that case to our 
 attention, he said that in his investigations of that case his suspicions 
 had become aroused as regards the practices of pit brokers generally 
 m bucketing customers' orders and concealing that fact by the device 
 of cross-trading He said he had examined the records of every 
 clearmg firm on the Chicago Board of Trade, covering 1 day's trans- 
 actions. This included more than 100 firms. I am quoting now 
 from his report: ^ e "v/w 
 
 Many questionable transactions were disclosed and memoranda made for 
 
 ^ZU'^^I;X'yI^'^''''l' '' r^^«"^^ that the plrnT^us'custom 'o? 
 SwSf Jfl^^ ^ between customers' orders is quite prevalent on Uie part of a 
 nunjber of floor brokers who execute the customers' orders for the clearing firm 
 It was found also that many firms make cross-tiades with themselves that to 
 \^ to say they take both the bought and the sold sides of the same transaction. 
 
 Under date of September 24^ 1929, a report was received covering 
 a similar kind of a case mvolvmg another Chicago floor broker who 
 appeared to be taking customers^ orders into his own account. On 
 October 21, 1929, we received still another communication relating 
 to the practice of bucketing customers' orders and cross-tradin<? 
 This involved two other commission firms and three additional floor 
 .brokers. The auditor in his report said : 
 
 At the office of & Co. in the Building, where I had pre- 
 
 vlously found questionable transactions, we found that two floor brokers who 
 cleared trades through this firm had repeatedly and systematically traded for 
 their own accounts, against the accounts of customers, by bucketing the orders 
 Into their own accounts and thereby realizing a profit bv means of the accom- 
 modation cross-trade. • ♦ * At Co. I decided to look into a 
 usually unexplored territory. Our activities, as you know, have usually been 
 devoted to wheat and com. In this case I decided to look into transactions 
 in oats and found that practically all of their trades in oats were executed by 
 one broker who operates almost exclusively for this firm. By following up 
 clues as to methods discovered in other examinations I found that this man 
 systematically and frequently trades against customers' orders which are en- 
 trusted to him for execution. The result is that he has a nice profit in his 
 own account day after day. • ♦ • 
 
 In this firm I also found that another of their floor brokers ♦ ♦ ♦ fre- 
 quently trades for himself and on several occasions took the other end of cus- 
 tomers' orders through the very clever ruse of giving to a fellow fioor broker 
 trading for the same concern the other end of the trade with a definite arrange- 
 ment that the opposite side of each trade was to be put down to his own 
 account ; result, a nice profit and a sure profit in his own personal account. 
 
 Mr. Beam. That is in reference to 1921 ? 
 
 Mr. Mehl. 1929. I am still quoting from the auditor's report: 
 
 In connection with his trades I found a most extraordinarv case in which 
 transactions were deliberately " framed " and arranged in the office after regu- 
 lar hours and after the board was closed, wherein a customer's order was filled 
 at prices out of the official range by deliberately taking one end of the order 
 into the broker's own account 
 
 BEGULATION OF COMMODITY EXCHANGES 
 
 71 
 
 In still another report from our Chicago accountant under date 
 of October 24, 1929, he makes this statement : 
 
 My investigations have disclosed so many cases of unfair handling and execu- 
 tion of trades in job lots as to make it appear that this trading in job lotd 
 is looked upon by many of the floor brokers as a legitimate field for 
 manipulation. 
 
 Now, we have here a file of notes in longhand covering cases 
 which our accountants had noted at that time for further investiga- 
 tion in the event that the present Grain Futures Act was shown to 
 cover these kinds of practices. 
 
 The list includes the names of 24 persons and firms where cross- 
 trading or bucketing of orders were observed. These cases all in- 
 volved Chicago traders. The notes are based on the observations 
 of our accountants who were examining books and records of Chi- 
 cago commission firms at that time. They are lacking in detail 
 because the detailed records concerning the work of our accountants 
 are kept in the Chicago office and what I have here is merely a list 
 of firms and brokers where the bucketing of orders, cross-trading, 
 and so forth, had been observed. 
 
 Mr. ToBEY. Now, Mr. Mehl, that is interesting, but it is all in 
 1929, apparently. What I want to ask you now is, based upon 
 what you found from your examination, were those facts turned 
 over, that evidence, and complaints made to the board of trade, 
 the governing body, and what if anything was their action ? 
 
 Mr. Mehl. I think that is covered by what I propose to present. 
 
 In the spring of 1931, while the case before the commission was 
 still pending, one of our accountants visited Kansas City and made 
 an examination of the records of 15 of the most active clearing 
 members of the Kansas City Board of Trade. The firms examined 
 handled slightly more than 50 percent of the total futures transac- 
 tions of the Kansas City Board of Trade during the month of ApriL 
 In his report covering such examination, our auditor said in part : 
 
 Of the 15 firms visited, the records of 6 showed nothing of interest in 
 the way of irregular-appearing transactions. The six all had rather light 
 trading and will not be considered in the comments which follow. 
 
 During the month of April 1931, the remaining nine firms all engaged in 
 some form of " cross-trading " or " one-sided trade ", most of which appeared 
 to be unnecessary and some of which was obviously done for the purpose of 
 attaining results which could not have been achieved in the regular course 
 of business. 
 
 Eighty transactions of this tj-pe were examined, involving futures contracts 
 for 1,910,000 bushels of wheat, which is slightly more than 10 percent of the 
 total futures business done by these nine tirms during the month. 
 
 The report then describes two general types of trades, first, " a 
 cross trade in which a firm acts as both principal and agent, or as 
 agent for both buyer and seller, getting another firm to run the 
 trade through their books as an accommodation, apparently to give 
 it the appearance of having been executed in the pit," with another 
 firm. The second type is described as " a trade in which only one 
 firm is involved as broker." 
 
 In this report there is listed the names of the nine commission 
 firms where cross-trading and the bucketing of customers' orders 
 were found. 
 
 With reference to the Kansas City cases, it appears that our ac- 
 countant discussed the practices with some of the firms themselves 
 and with officers of the exchange. There could be little purpose in 
 
 
 I'i 
 
72 
 
 REGULATION OP COMMODITY EXCHANGES 
 
 BEGULATION OF COMMODITY EXCHANGES 
 
 73 
 
 taking up individual cases officially with the exchange at Kansas 
 City for the reason that it seems to be the contention of commission 
 firms there that they cannot do business unless they do engage in 
 these practices. They claim that the Kansas City market is too 
 narrow to enable the execution of customers' orders in that market 
 at all times, and that under such circumstances a Kansas City com- 
 mission firm will execute a customer's order for Kansas City futures 
 by taking it into its own account at what it considers a fair execu- 
 tion for the customer and then hedge its own position by an offset- 
 ting trade in the Chicago futures market. 
 
 I say that this is the contention of the Kansas City commission 
 houses, because I have heard Mr. George Davis explain this situation 
 on frequent occasions. I doubt whether even he is aware of the fact 
 that as much as 10 percent of the trading is apparently of that 
 character. 
 
 Now, even assuming that commission firms deal fairly with their 
 customers and do not take advantage of the opportunity which is 
 theirs, the practice of cross-trading, at best, is a deceit upon the 
 customer. It is done only in order that the name of some firm other 
 than the commission firm which handles the order shall be confirmed 
 to the customer as being on the other end of the trade. The fact is 
 that the commission firm acts as both principal and agent in these 
 transactions and, through the device of cross-trading, hides this fact 
 from its customers. 
 
 Mr. Hope. Eight there, let me interrupt you. Are those practices 
 you mentioned in violation of the rules of the Kansas City Board of 
 Trade ? 
 
 Mr. Mehl. Well, I would rather have Mr. Davis answer that ques- 
 tion, but I ^ 
 
 The Chairman. I understood him to say it was. 
 
 Mr. Mehl. I think they are. 
 
 The Chairman. I know they say it is in Chicago. 
 
 Mr. Mehl. I will put it this way. I think that technically at least 
 they are violations of the exchange's rules. Is that right, Mr 
 Davis? ^ ' 
 
 Mr. George H. Davis. I would like to answer that, Mr. Chairman 
 when you see fit. ' 
 
 The Chairman. I would like to ask Mr. Mehl this question • We 
 were handed these floor broker's cards. I cannot find anything on 
 those that would give the clearing house any information as to 
 where or when those practices are engaged in. How does the clear- 
 ing house get that information ? 
 
 Mr. Mehl. I have not seen those particular cards, but I do not 
 believe that the clearing house gets information as to the parties 
 from the trading cards. 
 
 The Chairman. Then, it appears that they could indulge in as 
 much of that type of trading as they wanted to, so long as some one 
 did not report them from the floor. 
 
 Mr. Mehl. Those trading cards are not turned over to the clear- 
 ing house; they are turned over to the commission firms from whom 
 the orders come. 
 
 The Chairman. What is turned over to the clearing house? 
 
 Mr. Mehl. One commission house simpler confirms through the 
 clearing house its trades with other commission firms. It is simply 
 a report and a means of settlement by clearance. 
 
 The Chairman. Is the hour of the trade submitted on those 
 reports ? 
 
 Mr. JVIehl. No, I believe not. 
 
 The Chairman. Well, how could they tell from those reports? 
 How could the clearing house determine or find out if the man 
 rushed in just before a trade, and took care of part of the trade by 
 taking the option side ? 
 
 Mr. Mehl. I do not believe it was Mr. Coughlin's intention to 
 suggest that the clearing house, from the reports made to it, could 
 know who the ultimate parties and who the brokers are in any of 
 these trades. The clearing house deals only with the commission 
 firms. The clearing house does not know either the ultimate cus- 
 tomers or the floor brokers who execute the trades. 
 
 The Chairman. Well, as I understood it, he said the clearing 
 house would see that those rules were enforced, and I was wonder- 
 ing how they got the information on which to enforce them, or 
 what they based their information upon. 
 
 Mr. Mehl. Now, going back to the Chicago cases, some of these 
 may have been discussed with exchange officials. I cannot say from 
 our records here in Washington which, if any of them were so dis- 
 cussed. But, in the very first case, namely, the case known as 
 dockets 2 and 3, the exchange officials did not seem very much in- 
 terested. In that case a customer first complained direct to the 
 Chicago Board of Trade concerning an execution which was re- 
 ported to him at a price outside of the recorded price range. It 
 happened to be a job lot; that is, in multiples of 1,000 bushels 
 rather than in multiples of 5,000. The exchange first disposed of the 
 complaint by a simple statement to the effect that job-lot orders 
 were frequently executed at prices varying from the round-lot 
 prices. The customer thereupon complained to the Grain Futures 
 Administration. Our Chicago supervisor made an investigation and 
 took the matter up with the Chicago Board of Trade. A committee 
 was appointed by the board of trade to investigate, with the result 
 that the broker was suspended for 2 days, or possibly it was 5 days. 
 Later, when the department had decided to make a test case against 
 three members, including this particular broker, the board of trade, 
 after reopening the case, suspended the man for 2 years. Noth- 
 ing was ever done about the other broker and the clearing member, 
 although the facts as to these were fully developed in the hearing in 
 dockets 2 and 3. 
 
 Mr. ToBEY. Mr. Mehl, that had to do with job lots? 
 
 Mr. Mehl. That is right. 
 
 Mr. ToBEY. Do you have some information there dealing with 
 round lots? 
 
 Mr. Mehl. Yes. 
 
 Mr. ToBEY. I wanted to know what you have on round lots. 
 
 Mr. Mehl. In the memoranda of the Chicago cases, there is a 
 notation to the effect that round lots are involved. 
 
 Now, it is possible that the Grain Futures Administration should 
 employ a staff large enough to check more closely the activities of 
 
74 
 
 BEGULATION OP COMMODITY EXCHANGES 
 
 REGULATION OF COMMODITY EXCHANGES 
 
 75 
 
 members and report to the exchange any and all apparent violations 
 either of board of trade rules or of State or Federal laws. I am 
 afraid, however, this would not add greatly to our popularity with 
 either the exchange officials or exchange members. 
 
 Mr. ToBEY. Is that essential? 
 
 Mr. Mehl. Well, we try to get along. We feel that our work is 
 more eiiective if we do. 
 
 Mr. ToBEY. Well now do you want to state here, to this gatherino', 
 for the record, that your department feels that no legislation should 
 be enacted by the House of Kepresentatives or Congress, that would 
 not maintain popularity. 
 
 Mr. Mehl. No; we have gotten thoroughly reconciled to that 
 situation. 
 
 Mr. DoxEY. Is there any reason why the Government or an agency 
 of the Government should not check up on that, if it is not corrected 
 by the board of trade itself? What could you do, if you could not 
 do that? 
 
 Mr. Mehl. In doing that sort of work, under our present grain 
 futures act, we are put in the position of engaging in what the mem- 
 bers and the trade regard as snooping and looking into things that 
 are outside of the purposes of the act. 
 
 Mr. DoxEY. What could you do in remedying the situation other 
 than making an investigation and reporting to the board of trade ? 
 
 Mr. Mehl. That is all we can do. 
 
 The Chairman. I do not see how you could justify a lot of expense 
 on that kind of an investigation. 
 
 Mr. DoxEY. Now, if this bill is passed^ can you do anything? 
 
 Mr. Mehl. Yes ; this bill prohibits cross-trading and bucketing. 
 
 Mr. DoxEY. Then you will have some reason to make the investi- 
 gations. 
 
 Mr. Mehl. Yes, sir. 
 
 Mr. Doxey. Because you can go a step further toward bringing 
 about results, can you not ? 
 
 Mr. Mehl. As a matter of fact, I think with the penalties under 
 the law that those practices will disappear. 
 
 Mr. Andresen. Does not the present law prohibit cross-trading 
 and bucketing? 
 
 Mr. Mehl. The Grain Futures Act! 
 
 Mr. Andresen. Yes. 
 
 Mr. Mehl. No. 
 
 Mr. Andresen. They can indulge in that now? 
 
 Mr. Mehl. Yes. As to the case mentioned, our theory was that 
 it might be covered as a form of manipulation, but the judgment of 
 the commission on the law was that it did not amount to a manipula- 
 tion of grain prices — affecting grain prices broadlv. It just affected 
 certain orders and was not manipulation within the meaning of the 
 Grain Futures Act. 
 
 Mr. Andresen. xVs I understand you, then, the Grain Futures 
 Administration has no jurisdiction over cross-trading and bucketing? 
 
 Mr. Mehl. That is correct. 
 
 Mr. Coffee. Has not the code corrected that ? 
 
 Mr. Mehl. The code does not deal with cross-trading or bucketing 
 operations. It is devoted solely to establishing minimum margin re- 
 
 quirements and establishing certain limits on daily price fluctuations, 
 and so forth. 
 
 Mr. Andresen. What do you do when you get a complaint; do you 
 take every complaint up with the business-conduct committee of the 
 board of trade, or do you just forget it? 
 
 Mr. Mehl. When we receive complaints from customers, claiming 
 that firms have defrauded them or have taken advantage of them, it 
 is our practice to take it up with the business-conduct committee; 
 but I am frank to say, in response to Mr. Tobey's inquiry, we have 
 not, for the reasons stated, placed before the exchanges all of these 
 cases which I indicated we had for further investigation and which 
 looked like cases of bucketing and cross-trading. 
 
 Mr. Tobey. Mr. Mehl, have you brought this evidence before this 
 committee in previous years? 
 
 Mr. Mehl. I beg your pardon ? 
 
 Mr. Tobey. Have you brought b^ore this committee this evidence, 
 in seeking this legislation, before v 
 
 Mr. Mehl. I think not. 
 
 Mr. Tobey. I wonder why? 
 
 Mr. Mehl. I do not know. The (question of cross-trading, bucket- 
 ing of orders, and desirable legislation to correct it has been brought 
 to the attention of Congress and the committees of Congress as far 
 back as in 1928; but what I meant to say is that we have not at- 
 tempted to tell in detail what our auditors have found in respect to 
 cross-trading. 
 
 Mr. Hope. Well, now let me ask you this right at that point : What 
 authority do you have under the present laws to make these audits 
 and investigations, by which you can secure the information which 
 you are giving us now? 
 
 Mr. Mehl. Well, we have general authority to examine the books 
 and records of the members of contract markets. 
 
 Mr. Hope. Whenever you think something may be going on 
 illegally ? 
 
 Mr. Mehu I beg vour pardon. 
 
 Mr. Doxey. You do it under the provisions of the law which give 
 you the right to examine the books and records to ascertain whether 
 or not there is manipulation of prices going on; is that it? 
 
 Mr. Mehl. Yes. 
 
 Mr. Tobey. A sort of a fishing expedition? 
 
 Mr. Mehl. No ; I would not call it a fishing expedition 
 
 Mr. Tobey. You just simplv go out and see what you can find out? 
 
 The Chairman. Had you finished, Mr. Hope? 
 
 Mr. Hope. Well, I am not sure whether Mr. Mehl answered my 
 question. What I asked was, whether your right to go into the bools 
 and records comes from the provisions of the law which gives you 
 the right to investigate transactions which might involve a manipula- 
 tion of market prices? 
 
 Mr. Mehl. Yes. 
 
 Mr. Hope. And, under that g<*neral provision, you can go into the 
 books and records of any of the traders on the contract markets ; is 
 that right? 
 
 Mr. Mehl. Those who are members of the exchanges. 
 
 Mr. Hope. Those who are members of the exchanges ? 
 
 't 
 
76 
 
 REGULATION OF COMMODITY EXCHANGES 
 
 EEGULATION OF COMMODITY EXCHANGES 
 
 77 
 
 Mr. Mehl. Yes. 
 
 Mr Hope. And, it was in pursuance of an investigation of that 
 
 m^tttln * wi r* '"•''* ^"^ •" pursuance of some suspected 
 
 SThe bSkT-anrTrP^^Ir^ ''J " '"'' -^ ^^ ^f^ systematic exami^tion 
 or tne books and records of commission firms generally and we do 
 
 ^LirATv.*- ' ""^ find reasons to suspect them. Ve just thTnk ft is a 
 healthful thing-a helpful thing-to have our auditors make peri^! 
 SolnT/VT' ""V*" ^''^'"S expeditions, but as a TegZr Sne 
 
 Mr £ WhT- ^"""^ '=**'"\*'"^ «* ^^'^ examinations. 
 ;„* Hope What is yo.ur authority under the present law to ffo 
 
 W toToiTt^^ir--'^^ ' '"^•'"' *>»- --^ authori?;d?yf^ 
 Mr. Mehi,. We have authority to examine the books and records 
 pertammg to cash and futures transactions on extract markete 
 They are required under the present Grain Futures Act to k^o rec 
 ords showing the details of all futures and cash tratsactionf^hfch 
 
 grjai^na^wt?--^^^^^^^ T'^- ^« t^ 
 
 j^s^a^nTbpLrrifyXti^^^^^ 
 
 trade on a contract market without having any particular nurnose tn 
 view m doing so; is that right; or, without havil^g any s^Sn thS 
 something wrong might be going on ? ^ ^ suspicion that 
 
 Mr. Mehi,. Yes. 
 
 Mr. Hope. That is, without any limitations, you can make that 
 examination and obtain that information. ' -^ " *^"" "»»«« »»«* 
 Mr. Mehl. That is right. 
 Mr. Hope. That is all. 
 
 <^m/ tI^"^^"- ^'■- Ju^'^y- •*••* y**" ^^»^« a question? 
 •Mr. loBET. No, Mr. Chairman. 
 
 The Chairman. Mr. Kleberg. 
 
 in5l",^!5°™w ^ 7°?'? ^'^^ to ask Mr. Mehl this question : FoUow- 
 ing up Mr. Hope's interrogation, if you find, upon invekhratZ 
 
 on wutr ""^'"^ ^^""^ y*?" *° «'«"«^« that manfpSaZls^gSg 
 ir are your powers thereon ? ^ ^ 
 
 .,''■ ¥ehI". The next step is, if we are satisfied there is evidence 
 of manipulation, is for the Secretary of Agriculture to file «fnZT^ 
 complaint stating a place and timi of hSrand rSuirinnhi 
 
 case, ana after the respondent has put in his ca^ tha ,.o^t^!.^- u 
 
 Mr. Mehl. Providing their acts, or the acts complained of, fall 
 within the limited scope of the present Grain Futures Act. 
 
 The Chairman. Any further questions? 
 
 Mr. Beam. As a result of those investigations made from 1921 
 up to and including the present time, what action has been taken, 
 if any, by this committee composed of the Attorney General, Secre- 
 tary of Agriculture, and the Secretary of Commerce? 
 
 Mr. Mehl. Well, I told you of that one case which was typical 
 of the 24 cases, or 33 cases in all, including the Kansas City cases. 
 I will be glad to read from the findings of the Commission in that 
 case 
 
 Mr. Beam. Just how many; that is all I am interested in; how 
 many of all of these cases are you talking about? 
 
 Mr. Mehl. That was the only one of that type of case brought 
 before the Commission. 
 
 Mr. Beam. That is, in which the Commission has dealt with any 
 disciplinary action. 
 
 Mr. Mehl. The Commission held that cross trading, taking orders 
 into the broker's account, was not manipulation within the meaning 
 of the Grain Futures Act, in that it did not affect the general level 
 of the prices ; it affected only the price in respect to those particular 
 orders. 
 
 Mr. Beam. All right. As I understand, not one case was disci- 
 plined by this court of inquiry. 
 
 Mr. IVJLEHL. That is right. 
 
 Mr. Beam. In all of the investigations that you have made. 
 
 Mr. Mehl. That is right. 
 
 Mr. Beam. And the purpose of this law is to correct that? 
 
 Mr. Mehl. Yes, the purpose of this bill. It is only fair, perhaps, 
 to say that following the proceedings in that case, dockets 2 and 3, 
 our auditors reported there was improvement; that there seemed to 
 be much less cross trading and bucketing of orders by floor brokers 
 while that case was pending before the Commission. 
 
 Now, what the situation has been since, the Commission in its 
 opinion of November 9, 1933, decided that these practices were not 
 violations of the Grain Futures Act, we do not know. Perhaps we 
 have been negligent in not making investigations since that time to 
 cover this particular field. But, in this connection, it should be 
 remembered that for a number of years past there have been hopes 
 of legislation which would enable us to deal more directly and 
 effectively with practices of this kind and without which we can do 
 nothing in our own right under the Grain Futures Act. 
 
 While the exchange representatives may now take the position 
 that we have been negligent in not bringing cases of irregularity to 
 their attention, I want to assure you that they have never in the 
 past shown any disposition to want us to act as their policemen in 
 the enforcement of their rules and regulations. That does not applv 
 to the work that the grain futures administration and the boards of 
 trade are now doing under the grain exchange code. Since the 
 gram exchange code went into effect, we have had very happy and 
 satisfactory relationships with the business conduct committees, 
 and It is only fair to say that the code authority, within the limit^^ 
 of the code, is trying— sincerely trying— to do a good job. There 
 
 114603— 35— SBB B — -6 
 
 •ifi 
 
 •^^ 
 
 [iS 
 
78 
 
 REGULATION OF COMMODITY EXCHANGES 
 
 ^no quarrel between the grain futures administration and the code. 
 We think it has been a fine thing. 
 
 Mr. Flannagan. Mr. Chairman, may I ask the witness a question? 
 Ihe Chairman. Mr. Flannagan. 
 
 Mr. Flannagan. As I understand the code does not cover the 
 ®^ir \t^ ^^^^^ ^ correct in this bill; is that right? 
 Mr. Mehl. That is riffht. The code covers the field of minimum 
 
 ""^^^ V^'^''-'"^"'^''^'. ^^^ P^^^^^g «^ certain fixed limits within 
 which the price may fluctuate from one day to the next, and estab- 
 lishes a business conduct committee, and requires the eichanges to 
 *PP,?^^^* supervisor to enforce the code requirements. 
 Ihe Chairman. Mr. Kleberg. 
 
 Mr. Kleberg The code, then, in other words, does not fill the 
 
 ^f^^-l^^^^ with reference to cross trading and bucketing? 
 
 Mr. Mehl. No; it does not deal with those matters at all 
 o^^^; .^^«- I.jnight ask this question, if the exchange would 
 t3^ II , "" definite set-up outlawing cross trading and bucketing, 
 
 \ir tJ ^ ^ problem to a certain extent ? 
 
 fi,?f ""fV [" ^ 1^^"^ *^® ^''m'? exchange representatives will tell you 
 that the rules already prohibit those practices. 
 
 Mr. Kleberg. One more question. There is a provision under the 
 code whereby amendments to this code can be made, and then setting 
 out the procedure to make such amendments. 
 
 If the trade would suggest on their own motion an amendment 
 to the code covering these questions, would there then be any real 
 necessity for the passage of this law? ^ 
 
 Mr. Mehl. I think so. 
 
 Mr. Kleberg. I am interested to find out why. 
 
 Mr. Mehl. Because I do not think it was ever intended that the 
 g-am exchange code should be a substitute for legislation. It is I 
 think, ]ust what Its name implies, « a code of fair competition for the 
 gram exchanges and members thereof." I call your attention to 
 article 7— the firet section m article 7— which is entitled " Uniform 
 Irade Practices", readmg as follows: 
 
 Section 1. In addition to the matters covered by this code, the several 
 exchang^ have regulated and are expected to regulate the trade prlctl^w^f 
 
 S,'ilT^*'lf^ "^^ ^' ***^*" respective members under rules ^d reSons 
 which have been, are now, or shaU hereafter be in effect. ^eguiauons 
 
 The Chairman. Mr. Kleberg, are you through? 
 
 Mr. Kleberg. Yes. 
 
 Mr. Andresen. Mr. Chairman. 
 
 The Chairman. Mr. Andresen. 
 
 Mr. Andresen. The cases you mentioned were back in 1929? 
 Mr. Mehl. Yes. 
 
 Mr. Andresen. That is correct, is it not? 
 Mr. Mehl. I believe that some were in 1931. 
 Mr. Andresen. 1931? 
 
 Mr. Mehl. It was while this case in dockets 2 and 3 was pending 
 Mr. Andresen. Have your auditors continued to examine the boofo 
 in the same manner as they did from 1929 to 1931? 
 
 • ^L¥F^A- -^^l. ^^ ^ ^*^*®^' ^^^^^ *^»<^ decision was handed down 
 m 1933 holding that we had no authority to deal with those prac- 
 tices, our auditors have not made any examinations on that point 
 
 regulation op commodity exchanges 
 
 79 
 
 Now, it is possible that our accountants in Chicago could give us 
 some further information, but I do not find anything in the files 
 which shows any report of such violations since that time. 
 
 Mr. Andresen. Have you had any complaints since 1931, and up 
 to the present time, of these practices being engaged in? 
 
 Mr. Mehl. No; these cases of bucketing and cross trading rarely 
 come to our attention as the result of complaints. This one case 
 came up because the customer thought the execution was entirely 
 outside of the range of recorded prices. That is why he complained. 
 As long as the reported executions are kept within the range of 
 recorded prices the customer has no means of knowing whether his 
 orders are bucketed. 
 
 Mr. Andresen. Then, you have only received one complaint since 
 
 1931 ? 
 Mr. Mehl. Involving that particular point; yes. 
 
 Mr. Andresen. What was done in that particular case; was it 
 referred to the business conduct committee? 
 
 Mr. Mehl. Yes. It was referred to the exchange officials. 
 
 Mr. Andresen. And what was done? 
 
 Mr. Mehl. They first advised the customer that job-lot transac- 
 tions were frequently executed at prices varying from the round-lot 
 prices, which is the recorded price, and the customer then complained 
 to the grain futures administration. 
 
 Our supervisor at Chicago had an accountant make an examina- 
 tion of the books of the clearing firm and of the brokers who handled 
 that transaction and took it up with the exchange officials. Then 
 they suspended this one broker who handled this particular order 
 of the complaining customer. I do not know whether it was for 2 or 
 5 days, liien, later, when the grain futures administration decided 
 to test the law to see whether or not we could deal with those prac- 
 tices under our present act, as a form of manipulation, the Chicago 
 Board of Trade reopened the case and the man was suspended for 
 2 years. 
 
 Mr. Andresen. Is that the case Dr. Duvel referred to here the 
 other day? 
 
 Mr. MinL. Oh, no; I do not think so. 
 
 Mr. Andresen. Well, what was that case ? 
 
 Mr. Mehl. I do not know. He is to follow me on the stand. 
 
 Mr. Andresen. Well, he can give the information. 
 
 Mr. Coffee. Mr. Chairman. 
 
 The Chairman. Mr. Coffee wanted to ask a question. 
 
 Mr. Coffee. I want to find out if there is any demand from the 
 grain dealers out in the Western States for this class of legislation. 
 
 Mr. Mehl. I beg your pardon. 
 
 Mr. Coffee. Is there any demand among the grain dealers out in 
 the Western States, who are particularly interested in a liquid market 
 for this class of legislation? 
 
 Mr. Mehl. From the grain dealers? 
 
 Mr. Coffee. Yes. 
 
 Mr. Mehl. Well, if there is, I would not say that it is very vocal. 
 
 Mr. Coffee. Well, are they not interested as anyone in having a 
 liquid market and an unhampered market for hedging their opera- 
 tions? 
 
 Mr. Mehl. Oh, yes. 
 
 
 u 
 
80 
 
 BEGULATION OP COMMODITY EXCHANGES 
 
 ^. CoFraE. And they are particularly interested in anything that 
 IS of benefit to, outlet benefit, to the market for their particular 
 purposes ? r ^ »* 
 
 Mr. Mehl. Yes. 
 prSice^sf^ ^""^ ^^^^ ^""^ particularly interested in the grain 
 Mr. Mehl. Yes. 
 
 nffhl V^"""" ^^'^ \^''^ ^^^^^ ^^- ^^ ^^"^s«' the representatives 
 ot the farm organizations are more competent to speak on that ques- 
 
 pioducers. We have rather assumed that the leading farm organi- 
 quesdon"^ '"^^''''* *^^ ^'" *''*^ speaking for the producers on that 
 
 The Chairman. Mr. Gilchrist 
 
 Mr. Gilchrist. Is there anything in the code which limits the 
 amount of either short or long holdings that any one operator or 
 ^^7^^^^^"^*®^^^*^ °^*y ^^^^ ^^ ^^y particular day or time ? 
 . T' ^f— ; ?.''' ^."^? ^'\^ ^^y *^^s- The code recognizes the prin- 
 ciple of limitation indirectly by fixing a 25.percent minimum mar- 
 
 ^?/^^/!J^^®"^^^*^ ^^ speculative lines above 2,000,000 bushels 
 
 Mr GnxjHRisT. As I recall, that was about the recommendation 
 or authority of your administration a year ago, was to limit it to 
 somewhat like 2,000,000 or 3,000,000 bushels,' was it not? 
 Mr. Mehl. Yes; that figure has been suggested for wheat, I 
 
 Mr. Gilchrist. I think the figure given us then was 3,000,000 bush- 
 els at any one time, although they still left that amount open for 
 ^^iY^Ji'^^^^^^J^^tion of the Secretary. I think this bill does, too. 
 
 Mr. Mehl. Yes. 
 
 Mr. Gilchrist. He can limit it; the Secretary can limit it to such 
 amount as he thinks proper? 
 
 Mr. Mehl. Yes. 
 
 Mr. Gilchrist. Under this bill. 
 
 Mr. Mehl. I think the figure that Dr. Duvel has always mentioned 
 as a suggested figure has been 2,000,000 bushels. 
 
 The Chairman. We desire to thank you, Mr. Mehl. 
 
 Mr. Mehl. Thank you. 
 
 STATEMENT OF GEOEGE H. DAVIS, VICE PRESIDENT OF THE 
 TEEMINAI ELEVATOR GRAIN MERCHANTS' ASSOCIATION, AND 
 CHAIRMAN OF THE CODE AUTHORITY OF THE GRAIN EX- 
 CHANGES, OF KANSAS CITY, MO— Resumed 
 
 Mr. Davis. May I answer that first statement, for just a moment? 
 
 The Chairman. Yes. 
 
 Mr. Davis. Mr. Chairman and members of the committee 
 
 The Chairman. We would like to have that statement made, and 
 then we will try to finish the hearings. 
 
 Mr. Davis. Dr. Duvel's statement is the very best argument we 
 could possibly have against the licensing features of this bill. 
 
 He refers to figures. Figures do not lie. But I just want to give 
 the effect of those figures. In the first place, the December wheat 
 
 regulation of commodity exchanges 
 
 81 
 
 we mentioned yesterday was simply as an illustration. We started 
 out by quoting that and saying that that was at a premium. 
 
 Now, the figure in that market report there — I do not know 
 whether the doctor knows it or not — I would not say he did ; but we 
 have had two short crops of wheat. They have been entirely protein 
 wheat. Protein wheat sells for from 5 to 15 cents a bushel premium 
 over ordinary wheat. Of course, we have had only 2 or 3 cars of 
 wheat a day. Some days in December we had no wheat at all on the 
 trading floor owing to the short crop; but there were 18,000,000 
 bushels in the elevators. 
 
 Now, as a matter of fact, my own firm delivered 280,000 bushels 
 of ordinary wheat on December contracts in the last 15 days of 
 December, because Washburn Crosby and two other mills were long 
 that week. They had bought it months before. 
 
 The Chairman. Were those contracts made after December 15 and 
 executed, too? ^ 
 
 Mr. Davis. We made them. We went short, then bought. They / 
 w^ere bought on delivery basis, but they wanted that wheat for s^J> 
 specific purpose. Now, the man who had sold them did not have any I 
 wheat. He could not go out and buy protein wheat on the floor and \ 
 deliver it. So that price went to a premium over May wheat, and J 
 during the last half of the month my own firm delivered 280,000 / 
 bushels of wheat which we sold at 3 cents over May, and we would / 
 have delivered them 3,000,000 bushels of wheat if that had not I 
 satisfied the contracts. 
 
 Now, that put us in the market, and we were buyers of wheat 
 wherever we could buy it. Now, this is an unusual year. It does 
 not apply usually. We simply used the word " December " to show 
 that you gentlemen could properly get what I was talking about. 
 I know that wheat did not even sell at 95 cents in Kansas City in 
 December, but I was trying to give an illustration that would carry 
 the thought to you. 
 
 r Of course, coming here, I can agree to all the doctor said, every 
 w?)rd of it, but that is why we are afraid of this licensing provision, 
 that a man sitting down in Washington cannot tell the conditions 
 in Kansas City. '\ 
 
 Now, I want to spend just 1 minute on this Kansas City cross- 
 trading business. 
 
 Mr. Hope. Let me ask you a question about the matter you were 
 just discussing. I think the committee — at least I did — got the 
 impression from your statement yesterday that no one would buy 
 cash wheat in the illustration you used, say, during the latter half 
 of December, unless it was lower than the current future, so that 
 it could be delivered at a profit. 
 
 Mr. Davis. Futures? 
 
 Mr. Hope. Futures. 
 
 Mr. Davis. Correct. 
 
 Mr. Hope. For that month? 
 
 Mr. Davis. Correct. 
 
 Mr. Hope. Now, of course, that has not been the case in this last 
 December. 
 
 Mr. Davis. Yes ; because this law was not in effect. 
 
 Mr. Hope. But, if this law had been in effect ? 
 
 t» 
 
82 
 
 REGULATION OF COMMODITY EXCHANGES 
 
 Mr. Hope. Nevertheless, it follows does it nnf if ii.;. i 
 
 in the lairpart of D^emh;r \T\^ ""Si""^^ "?'«'« those trades 
 market for more whear ' '''"'^*' ""* '^''^^ ^'^n i" *•»« 
 
 Mr' DAv-fs ^'^^.."''"'v y^r "c?* '^^^ ""'de those trades? 
 
 would fct?arg"aftV'tL^1[»v ofV'T ^^"> 
 
 have made any new t^de^ "^"^ **' December, I could not 
 
 JL^^JaTTfThe moSif "^^ '""'^^ ^* *"^ *^-- »« -g^t Just say 
 opSitfon"'- " ^""^ P"* '" *'^* ^''^^ ^l^y. ^« -ill withdraw our 
 
 delf^er?"^^ ^"" '^^'^ "'*' '^''^^ *« «'>"«><1«'- whether or not you could 
 
 buXelJ'C y/afa^^" £L* Zl'T^'^"'''^' '"'^^'^ «,!'«««'««> 
 140,000,000 bushels. Thk fs an unusSf'Sr ^l "*""'"*"y ?''* 
 few cars coming in rlailv R.f* t -n • ^ *'^- ^''^'^® -ere only a 
 
 I promised°rfo"cot£e tt Vll'teseX "cL*r ^*'" T"*- 
 answer those questions Because Mr. Coughlin wants to 
 
 cross'ti^de:. "'"" *'^ *^"^"^ ^''•*=*-«°t "^^-t Kansas City on 
 
 Mr^**£hti"'?4h\inTrL^^^^^^^ of Dr.Duvel and 
 
 representative, ha^d 8 Lnfhs to put evervtw'i^X'' ^'^°r?..*'^« 
 thought was necessary. ^ everything m this code that they 
 
 Now, we worked and worked and workpd nvor ;* «,. i ^ • , . 
 
 "Krai vty: ste Sr -^ '" .KkS ,s L" 
 
 BBGULATION OF COMMODITY EXCHANGES 
 
 83 
 
 of you gentlemen are not familiar with. Kansas City. It is a long 
 ways away, but it is the biggest primary hard- wheat market. ^ 
 
 Now it WAS customary in years gone by to buy wheat at Kansas 
 City at 10 cents less than the Chicago price, which is the freight 
 difference between Kansas City and Chicago. Well, that resulted 
 in a heavy movement on Chicago and the farmer was out 10 cents / 
 under Chicago, and wheat was selling at about 10 cents under/ 
 Chicago, so some of us back in 1898 agreed to trade in 5,000 bushelsf 
 a day to make a futures market, because the natural speculative 
 market is Chicago. 
 
 Now, we kept that up and we have maintained a market for 
 futures in Kansas City and we have done it by our own efforts. 
 Omaha tried to have a market. It failed. The St. Louis futures 
 market virtually failed. Wichita tried it. Hutchinson tried it. 
 Their markets have failed. But Kansas City has gone on. 
 
 Now there are firms out there such as my own that when we get 
 2,000 cars of wheat a day, and it depresses the difference between 
 Kansas City and Chicago, we have one of our brokers buy wheat in 
 the pit and sell in Chicago, because we know after the movement is 
 over it will narrow up some. 
 
 Then we have other brokers hedging our cash purchases out on 
 the floor. We have three brokers in that pit. It is a small pit, 
 about a fourth the size, or a fifth the size of Chicago's. 
 
 Now, at times, inadvertently, one of our men over here (indicat- 
 ing), with an order to buy wheat to go to Chicago, or some customer, 
 as I outlined yesterday, may be the only bidder for wheat when we 
 get a signal out to the cash trader to a broker who is hedging to 
 sell 10 wheat. That is what they do (indicating with signal) and, 
 he, openly, in the pit, offers 10 wheat, and our broker may be, the 
 other broker may be the only buyer, the only man bidding for wheat. 
 
 Now, we do not want to put that marfiet away down and stop 
 the flow of wheat in there. So we take that. 
 
 Now, we have a system of time clocks that sends every quotation. 
 This order that comes from the wire room is timed by a time clock. 
 It is timed when it is filed and goes back. It is a very simple matter 
 for your business conduct committee to check that trading card you 
 have, Mr. Chairman. It shows what time the order came up. It 
 shows the time clocked; and furthermore, the reporter shows what 
 the market was at 10 : 37, we will say, and if this order was reported 
 back at 10: 37, at the market, our board of directors would say that 
 we technically violated our rules, but in the interest of the farmer, 
 which is my contention, that the lutures market is a simple economic 
 market for handling the farmer's grain, therefore, we have violated 
 no rules. 
 
 The Chairman. Can you not put one of those completed single 
 individual records in the record, leaving the names blank? 
 
 Mr. Davis. We could get one irom Chicago. From Kansas City 
 it would take 3 days. Chicago would take 1 or 2. 
 
 Mr. Gilchrist. I would like to ask the same question that I asked 
 Mr. Mehl about what provisions if any, are contained in the code 
 which limit the amount of holdings that any one operator may 
 have at a given time. 
 
 . ■ 
 
1 
 
 84 
 
 BEOTTLATION OF COMMODITY EXCHANGES 
 
 .J^illt^ ^P."'"* '* ^""^ *'*? P"^*"'^ »* tJ»e Code Authority which 
 
 ?h!'p«ilff- "^1 "P y**^'"- *""*' t*' *•»« l^^t of oir ability t^ insure 
 the execution of the provisions of this code and to provide for the 
 
 nHro ?r by the exclianges and members thereof witK the provisions 
 by the Secretary '" """^ regulations as may1,e issued 
 
 H«n"*Jvr "'■*' *o.'»^««tJKate vioktions. We are to insure the execu- 
 liZ. n PT'"??^^' *b'« T<*« by investigation of suspected viola- 
 ■T oT^'jl^^f'"/^'.''"*'"-] "" tbe limit of margins, as Mr. Duvel 
 vtrf.^«n 2.000.000 bushels, that takes a 25-cent-a-bushel inargin, whrch 
 Virtually puts it out. ' 
 
 ^r.^I'^u ^^^^i^^f« ^^ section 6, on page 9, each exchange shaU vest 
 m Its board of directors or board of governors, or in an appropriately 
 constituted committee, authority, subject in each case to the approval 
 of the Secretary, from time to time to modify, or abolish, the limi- 
 tations on daily fluctuations in the price of futures provided in 
 section 4 of this article, and shall vest in such board of directors 
 board of governors, or committee plenary authoritv from time to' 
 time to establish, modify or abolish (1) limitations on the amount 
 of members or nonmembers' open contracts, for the purchase or 
 sale of futures, and (2) margin requirements in excess of but not 
 less than the minimum margin requirements fixed in section 3 hereof. 
 
 iMow It requires then a business conduct committee and under the 
 business conduct committee, under this code, when established, super- 
 visors to do the very things that have been mentioned here. 
 
 Ihe supervisor has assistants who are auditors. They check mem- 
 bers books at any time. They may bring them in, and if they have 
 violated any rules the business conduct committee must prosecute 
 their cases. If they do not, the Code Authority takes charge of the 
 and 'h '^d ^^ ^"^^ ^^ ^^ ^^ ^^^^^^ ^^ *^® Secretary of Agriculture 
 
 The Chaibman. We desire to thank you, Mr. Davis. 
 
 Now, any witnesses who have appeared may have the privilege of 
 filing a statement for the record. ^ f^ 
 
 ^^^IS!?^ 2L?^' ^- THATCHEE, WASHINGTON EEPBESENT- 
 ^l^^,2? ™^ FAEMEES^ NATIONAL GRAIN COOPEEATIVE. 
 AND THE NATIONAL AGEICULTUEAL CONGEESS ''^'''''''^ 
 
 Mr. THATcmR. My name is M. B. Thatcher. I am the Washing- 
 ton representative of the Farmers' National Grain Cooperatives, and 
 the National Agricultural Congress. 
 
 In connection with the question raised by Mr. Coughlin and some 
 of the statements made by the witnesses yesterday as to whv the 
 representatives of the farm organizations were not appearing in 
 these hearings calls for just a short explanation. 
 
 W;e have been appearing for vears with specific proposals for 
 consideration of Congress. In this particular case, in connection 
 with this hearing, we understood they were limited to the question of 
 licensing floor brokers and in that regard the testimony would be 
 
 REGULATION OF COMMODITY EXCHANGES 
 
 85 
 
 limited to the opposition. That was our understanding. We have 
 gone far afield in some three or four hearings. I merely want to 
 state that for the record, as to why we have not appeared m this 
 manner. If you care to extend the hearings and give the producers 
 organizations an opportunity to appear and testify on all of these 
 questions that have been under controversy, then we must have an 
 opportunity to call our technical men. 
 
 The Chairman. Mr. Thatcher, the farm organizations appeared at 
 the last session, practically all of them, and endorsed the pending 
 bill. 
 
 Mr. Thatcher. That is right. . . , ^ ^^ » 
 
 The Chairman. Have they changed their position in that matter? 
 
 Mr. Thatcher. They have not. 
 
 The Chairman. They still endorse it? 
 
 ^Lf'i* Thatcher "ITes. 
 
 The Chairman. Then, I do not think it is necessary to hear them. 
 
 Mr. Thatcher. Thank you, Mr. Chairman. 
 
 Mr. Wickham. Mr. Chairman, Mr. Coughlin, who is more familiar 
 with this situation than anyone else, would like to have about 7 or 8 
 
 minutes. ,, ^ , ,. ^ • ^ -^^ ^ 
 
 The Chairman. We can give Mr. Coughlin 4 minutes, if he wants 
 
 to take that. 
 
 STATEMENT OF JAMES J. COUGHLIN, PBESIDENT OF THE BEO- 
 KEES' ASSOCIATION, CHICAGO BOAEB OF TEABE— Kesumed 
 
 Mr. Coughlin. Mr. Chairman and members of the committee. 
 
 The Chairman. I will ask the committee not to interrupt with 
 questions so that Mr. Coughlin may have the full time. 
 
 Mr. CouGHUN. I am familiar with the particular instance men- 
 tioned by Mr. Mehl because in that case I appeared as counsel for 
 two of the respondents. 
 
 That particular case grew, I think, out of one of the most extraor- 
 dinary conditions ever to exist on the board of trade. The trans- 
 actions that were complained of took place in July of 1929. 
 
 Now, first of all, let me call your attention to this : During that 
 time the board of trade was occupjring temporary quarters pending 
 the construction of its new building. Those temporary quarters 
 were about one-fourth the size of the quarters we were accustomed 
 to. During that period, as you know, the great so-called Coolidge 
 bull market was in full swing in stocks. In July of 1929 the Agri- 
 cultural Marketing Act was passed. About mid-summer there de- 
 veloped a tremendous apprehension over a crop failure in Canada, 
 so that during this period, through the impetus gained from the 
 passage of the agricultural marketing act, the reaction from the 
 stock market, and the conditions created by the Canadian crop scare, 
 we had, I think, the biggest trading in point of value that I have 
 ever seen on the board of trade. We traded in those days in excess 
 of 200,000,000 bushels of wheat a day, whereas our total trade today 
 in all grains is approximately 20,000,000. That gives you some idea 
 of what we were laced with. 
 
 ! 
 
 i • 
 
86 
 
 EEGULATION OP COMMODITY EXCHANGES 
 
 During that time we did not have enough brokers- we did not 
 have enough telephones; we did not have enouXme'Jngers- wj 
 did not have enough space, and it is simply a hLja^mlS thlt 
 
 f:^^^.^^TlhSt^ S a^|eltta^nytf.^i| 
 
 C UDonTurth^r"^ the director charged was suspended for 5 dajS 
 was upon further mvestigation suspended for 2 years and the othpr 
 
 SchaTge. "''* *^""^'''*^*' ^y the^investigating^TomStJl of te 
 
 Subsequently, in March of 1930, 6 months after this hapoened th« 
 Gram Futures Commission filed its two complain s E ^om 
 ?or'?U "hT '" '*'T?« j° ^P'"- The counsef who was a^oiS 
 
 'Si^^peTrittnVgei^"'^' ^"^ ^ '^-^ ac^UtS^T^ 
 
 thl^LrZf trL'^r i *"" ^"^"'^ ^<^ ^'^^ tl^* agreement that 
 and briefs were tl be fiW commission on the record then made 
 fi^ "•'?i'' were lo De Wed. The Government was to file its hriof 
 first. No time was fixed for the filing of the briefs hnfU 
 agreed that they would be filed with l^asonable Si pSch I asH 
 ?aid'MTv *=°"r^^''!* ^'' considered reasonable fispatch and he 
 
 1 vp,^ ^.\ ^'"^^y *^"y^. ^^'^t by; 6 months; a year we^t bv^ 
 
 2 years went by; and sometime after the expiration of 2 v^^s II 
 Government brief was filed. Mine was filed 30 days thereafter' 
 
 . In September of 1932 the case was at issue beW the commis 
 
 monV'The Hvl T"" '^"^^ '''' termination of the takSg T^. 
 mony. The Hyde Commission was then in office. The Hyde Com- 
 
 sTr?rof''l9^V"Th"* «ffi«^«/ithout disposing of the cTs^e in the 
 spring of 1933. The present commission took the case up aAd when 
 we appeared here in Washington and argued it before them Gov 
 ernment counsel concurred in my motion to dismiss all but one of 
 the defendants out of the case. In other wordSr^%^S*«*^^ the 
 procedure was started the Government-dgciaS^^^I^J^cas^ 
 against this man, so the matter^stDod-there,-^-^^^^^^^^ 
 -.^en some few weeks afer that hearing, the commission dis- 
 mlgsed the case, not for want of jurisdiction-and, I want to correct 
 your impression about that-but, for the simple reason thaV no c^ 
 whatever had been shown under the Grain p'utures Act 
 iMow, If that three and one-half year period that it required to 
 
 ?s1f„r« t! \^^' TM"*** ^ tel^.n,as typical of what the^rocedur^ 
 IS liable to be under this act, I think the committee ought to know iT 
 I want to call your attention to one other fact in this caste 
 because it is very significant. The immediate question in that ca^ 
 
 ThVJfl ^" K ' v"^ "' "°* 'T^ *'?*^'"g- The complaint aHeged S 
 these three brokers were guilty of executing order^at prices varyin" 
 from one-half to 2 cents a Whel out o! line with^the rISd 
 
 REGULATION OF COMMODITY EXCHANGES 
 
 87 
 
 prices. There was not one scintilla of evidence offered by the 
 Government to show that that was true. When I examined the 
 Government auditors ', 
 
 The Chairman. Mr. Coughlin, I do not think that we can go into 
 each individual case. If you want to, you may file a statement. 
 
 Mr. Coughlin. Yes, I will just drop that point. I think that 
 I have brought out what I wanted to show. 
 
 The Chairman. I think that you have made clear your position 
 in the matter. 
 
 Mr. CouGHUN. But, it occurs to me that if after all of these 
 years; considering the varying conditions under which we operate; 
 considering that we have 1,500 members that are scattered to the 
 four winds; that there have been some 14 or 15 complaints of 
 irregularities made and only one of which has been called to the 
 attention of the directors of the board for disciplinary action, it 
 seems to me that the Grain Futures Administration has given us 
 just as clean a bill of health as we could conceivably ask for. 
 
 The Chairman. We thank you, Mr. Coughlin. 
 
 Mr. Coughlin. Thank you. 
 
 The Chairman. I would like to put in the record one page of 
 last year's proceedings showing the tremendous transactions and the 
 future trades that cause most of the complaints. 
 
 The matter referred to is as follows : 
 
 DiscTUssiON OP Wheat Trading, Committee Hearings, April 3, 1934 
 
 Mr. Hope. What constitutes the largest operation or transaction that you have 
 
 & I'ecord of ? 
 
 Mr. Du\'eL We have had a number running over 2,000,000 bushels. During 
 the lb years prior to March 1933 there were 16 speculators that reach 2,000,000 
 bushels or m<»re. There was one at 16,000,000, and here is another at 8,000,000 
 or 10,000,000. 
 
 Mr. Hope. What is the largest single case? 
 
 Mr. Dm'Ei.. I beg your pardon? 
 
 Mr. Hope. The largest speculative transaction? 
 
 Mr DuvEL. That is evidenced here on this chart. At that time two traders 
 had 23.000,000 bushels. That was in 1926. At that time they controlled 32.6 
 percent of the total contracts in the dominant futures, their combined holdings 
 representing nearly 23,000,000 bushels short. The general public was support- 
 ing the market and carrying the extra load occasioned by the selling of these 
 two speculators. They were not carrying " hedges ", as is so frequently claimed 
 for the large speculator, and there is not question but that their selling exerted 
 a very depressing influence on the prices to the detriment to the wheat pro- 
 ducers who were at the time in the midst of their market operations. While 
 these large short lines were being accumulated, the price of the December 
 future declined nearly 18 cents per bushel. That was from about the middle 
 of July until the 8th day of September. That was in 1926. The United States 
 wheat crop that year was 831,000,000 bushels. The short sales by these two 
 traders represented nearly 3 percent of the entire crop. 
 
 The Grain Futures Administration says that in September 1926 one specu- 
 lator was short at one time as much as 12,545,000 bushels in December wheat 
 alone. He was short over 10,000,000 bushels from August 30 to September 13, 
 1926. 
 
 STATEMENT OF ROBEET P BOYLAN, PEESIDENT CHICAGO 
 
 BOARD OF TBADE— Resumed 
 
 Mr. BoYLAN. Mr. Chairman, did you receive this morning a com- 
 munication from Mr. Farlow? 
 
 ' 
 
Ml 
 
 iii 
 
 • 
 
 88 
 
 BEGULATION OF COMMODITY EXCHANGES 
 
 The Chairman. Not unless it has come in since the hearing started. 
 Mr. BoYLAN. I would like for that to go into the record. 
 Ihe CHAmfAN. Without objection, it will be so ordered. (The 
 communication referred to is as follows;) 
 
 Fabmbbs Grain Dbalers Association of Illinois, 
 
 Officb op Sbobbtabt, 
 Hod. Mabvin Jones, February 9. ms. 
 
 Chairman Souse Committee on Affriculture, 
 
 House Oflice Building, Washington, D. C. 
 w^^? ¥*• ^^^^l Enclosed please find copy of a resolution which was adopted 
 nL?^^"""^ vote at the thirty-second annual convention of the FanSere 
 Grain Dealers Association of Illinois at Springfield, 111., on February 7 
 Respectfully yours, * 
 
 Fabmebs Gbain Dealebs Association of Ilunois, 
 Lawbence Fablow, Secretary. 
 
 T,n3^rfrol^/i ^ ^vfj-^^eady cash market for grahi and aU other food supplies 
 now prevails and its continuance is vital to the people of this Nation, and 
 tn H^r^^' ^^? *?u°^'^ pending before the Congress of the United States a bill 
 to Ucense and further regulate the activities of handlers of grain and other 
 products known as the Jones Bill, and 
 
 ^^r}^^^^^t' .^^ P»*<>^7sions of said bill jeopardize the existence of a free and 
 ^^\^^^^^\.^l arbitrarily placing full control of all marketing activities in 
 ttie hands of three members of the Cabinet who may not have ^had practical 
 
 rf^J? «n°d^frS^'*^'''? *"^ ^?f^*^^^ interferes with a recognized cunstitutiona 
 right and freedom of our citizens, 
 
 Tliei-efore, we the Farmers Grain Dealers Association of Illinois, renre- 
 ^^LT^/^^""^ marketing agencies of farmers who handle mo^e than 
 50 percent of the grain marketed In Illinois, vigorously oppose the passaee 
 nnr^^ttn^'^-" ^'"^ and instruct the officers of ' thil associatiorto presSt^S? 
 ^^^^^V °? ««<^^^ai" terms to the Honorable Secretary of Agriculture, to 
 each Member of Congress, and to the public press. i^unure, to 
 
 The Chairman. I desire to thank you, gentlemen 
 
 The committee will close its hearings. The committee will stand 
 
 adjourned, to meet at the call of the chairman. 
 
 (Thereupon, at 11 :57 a. m., the hearings in the above-entitled 
 
 macter were concluded.) 
 
 El Paso, Tex., 
 
 Hon. R. E. Thomason, February 4, 1935. 
 
 House Representatives Office Building, 
 
 Washington, D. C. 
 Jones H. R. 3009 apparently entering wedge license all brokers dealine 
 commodities and place them subject Secretary Agriculture giving him op^^^^^^ 
 tunity crush anybody at variance his ideas speculative markets in my o?Inion 
 
 J. C. Peyton. 
 
 El Paso, Tex., 
 HOD. R. E. THOMASON, M. C, J-etruarw 4, ms. 
 
 House Office Building, 
 
 Washington, D. C. 
 
 T,S*1p^a*^S/^?o^°'^^5^^'k'^''T' P^^^^°^ ^^^ products under licensing of 
 Mple A, will place added burden upon such producers and packers and 
 seriously ipterfere with private business. If consistent with your views oSr 
 local merchants request your disapproval of this bill. 
 
 W. R. Blaib. 
 
 REGULATION OF COMMODITY EXCHANGES 
 
 89 
 
 EXCERPTS FROM HEARING HELD BY COMMITTEE ON AGRICUITITRE IN 
 SEVENTY-THIRD CONGRESS, ON H. R. 8829, A BILL TO AMEND THE GRAIN 
 FUTURES ACT 
 
 Washington, D. C, Tuesday, April 3, 1934. 
 
 Statement of J. M. Mehl, Assistant Chief Grain Futures Administration, 
 United States Department of Agriculture 
 
 Mr. Mehl. Mr. Chairman and members of the committee, I shall discuss first 
 the Grain Futures Act and then outline briefly the principal provisions of the 
 amending bill, H. R. 8829. I shall not attempt to give any detailed explanation 
 either of the bill or of the act, but will try to give, in 10 minutes, a general resume 
 of the act and of the bill. In order to do so, I shall probably have to adhere 
 rather closely to a plan of presentation that has been worked out with this 
 view in mind. . 
 
 The present Grain Futures Act became effective in 1922, after its predecessor, 
 the Future Trading Act of 1921, had been declared unconstitutional. The 
 Future Trading Act was based on the taxing power of Congress. The Grain 
 Futures Act is predicated on the power to regulate commerce. The constitu- 
 tionality of the Grain Futures Act has been fully sustained and the general 
 scheme of regulation embodied in the act has withstood every court test. 
 
 I shall not go further into the history of the Grain Futures Act except to say 
 that it was passed by Congress against the will of a powerful opposition, and, 
 as finally enacted, does reflect a compromise on a number of important points. 
 It was passed bv Congress as a purely preliminary measure, to be followed by 
 further and more specific legislation based on experience. The record of the 
 hearings clearlv indicate this. It has been said that the act is without any 
 teeth, but we who have worked under it for 10 years prefer to say that it is in 
 need of some modern "bridgework", and we believe that the pending bill will 
 serve this purpose. 
 
 A matter of great importance in these considerations is the legislative theory 
 underlying the present Grain Futures Act. It is based, at least in part, upon the 
 theory that the exchanges themselves would cooperate with the Government in 
 making the law efifective. In other words, it is the theory of self-regulation under 
 Government supervision. Incidentally, I may say this is the theory also back 
 of the trade-practice provisions of the Grain Exchange Code, regarding which 
 you will no doubt hear more lat«r on in these hearings. 
 
 Under the Grain Futures Act it was thought that, if the theory of self -regulation 
 did not work out satisfactorily and if the exchanges would not or could not 
 eliminate certain abuses, the law would be invoked to close them. But no one 
 wants to close the exchanges. That would punish the innocent as well as the 
 
 guilty. 
 
 The provisions of the present Grain Futures Act and the authority of the 
 Government under the act may be described broadly as follows: 
 
 Trading in grains for future delivery on and subject to the rules of any board 
 of trade is made unlawful unless conducted on an exchange designated as a 
 "contract market" by the Secretary of Agriculture. 
 
 In order to be designated as a contract market, a board of trade or an exchange 
 must undertake first to prevent manipulation of prices and the cornering of 
 grains by members of the exchange. It must prevent its members from dis- 
 seminating false and misleading crop and market information. It must prevent 
 discrimination against cooperative associations in the matter of membership and 
 trading privileges, and it must require its members to make reports to the Secre- 
 tary of Agriculture and to keep certain records open to inspection by properly 
 authorized agents of the Government. 
 
 If any board of trade violates any of these conditions, the only remedy is to 
 revoke its designation as a contract market. Obviously the Government should 
 not be forced to penalize those who use the market in order to punish those who 
 abuse them. This situation is corrected in the pending bill by authorizing the 
 issuance of cease-and-desist orders against an exchange and against its officers 
 and agents which, if ignored or violated, will be a criminal offense punishable by 
 fine or imprisonment. 
 
 The present act gives the Government power to proceed directly against indi- 
 viduals in just two classes of cases: First, if any person makes a trade for future 
 delivery on any board of trade except a contract market, or if such trade is not 
 evidenced by a record in writing showing the parties, prices, etc., or if 
 any person knowingly or carelessly delivers for transaction through the mails or 
 in interstate commerce misleading or knowingly inaccurate reports concerning 
 
 i 
 
 t 
 
90 
 
 BEGTJLATION OF COMMODITY EXCHANGES 
 
 ^?,i^« """^^^ information such person is guUty of a misdemeanor and, upon 
 1 y,r, or°bX """* *''*° **°''^ °' imprisoned for not more than 
 
 Second, if any perron manipulates or attempts to manipulate the market once 
 of fh/<£rt'.?' IS otherwise violating the provisions of the act, upoTcompfa"St 
 ^nltnL ♦ J! -Sf '^ °! Agneulture, a commission consisting of the 4cretary of Agri- 
 culture, the Secretary of Commerce, and the Attorney General may issue an oi-aer 
 
 The present act gives the feretary of Agriculture no general powerto make 
 rules and regulations to further the purpose of the act as I whole hL po^^r to 
 bv hoi:^'nf^?.^ regulations is limited to prescribing the kind of Reports S)Cmade 
 «i^P«on ^{ptJl^^le members and to the keeping of books and records open to in- 
 5^^ Ti. J^-®*^® '^ no authority m the act to limit speculative trading in any 
 way. There is no authonty to deal with cheating or fraudulent praftices^ 
 
 Fnwi \^f 'x^fP/'ifw' describes the scope and authority of the present Grain 
 w^^L^S*' ^i^ this further observation: That the Secretary of Agriculture is 
 vested with authonty to make investigations and studies regarding thi operations 
 S i&'hnl*;f.^1' and to publish the results for the benefit of Cong^eL^and ?h^ 
 public, thus clearly indicating in the act itself its preliminary and exploratory 
 
 meThotVcon\^^^^^^ '^ ^'"''^P' ^' experience, more cor^plete anS sS 
 
 Referring now to the pending bill the following important provisions are noted- 
 
 with ^yfi hf n^?*'"^"/''''?'^'^^ '^^^*^^ ^.^^ ^^^"^ "P«" customers in connection 
 ?yl K^^i.^t^'^^'^'f °^i^^^^^« ^'^ outlawed and prohibited under severe penalties 
 J t-K^/'^®^'''^ of orders, making of wash sales, cross trades, and so forth are 
 prohibited as are also transactions known as '^indemnities", "puts and calls ^ 
 and so forth. Brokers are prohibited from taking the other side of customers' 
 ordera without the prior consent of such customers. Commission mercSlte 
 handling orders for customers are required to be licensed brthe Secretary of 
 Agriculture, and margin moneys collected from customers must bTtreated Ss 
 trust funds and may not be used to extend the credit or margin the trades ^ 
 
 Sher.^'n^J'Jhl^fi^ 'r ' T' \' ^^^°^ ^^^^' ^^^^^^ ^^ops are outlawed and 
 members of the legitimate exchanges are protected by making it unlawful for 
 
 taVZTJ^ rrr."*. ^T'^ ^*^^^^y *^ ^ * ^«°^^«^ ^^ * contract i^/ket or 
 to represent falsely that orders are executed by or through such member. 
 
 ..J w- ''®**''y of Agriculture is given general power to promulgate rules and 
 regulations reasonaby necessary to effectuate the provisions of the act He mav 
 require that commodities delivered on futures contracts shall be of grades confoTm^ 
 mg to United States standards, if such standards have been XiX estawS 
 
 fni^L''}'^ "^T^r ^^i*"^ ^*^^^ inspection of such commTd^Tt ierwhere ^^^^^^^^ 
 inspection is available. He may require that contracts which call for fulfilhneiit 
 ^l-^^'^K®'",^ '^"r?^ * specified month shall not be made after a date fixed byh^ 
 which shaU not be earUer than the 15th day of such delivery monthfand he ^y 
 ^rt'^l^^* ^ '^'V^'' ''^H'vf «^delivery shall pass from the seller to'the buyeTat 
 least 3 days or not more than 10 days prior to the date of delivery. We tWnk 
 these provisions wiU eliminate so-called "congestion" and "squeez^" occinring 
 m dehvery months, or in the event that prices are run up sharply during thTlast 
 trading days of any month, will afford farmers and others who have ^aki to mlrklt 
 an opportunity to take advantage thereof. "iarKct 
 
 or.^^?^^'^^''^'^~.^'''^ V^i? P^^^aPs is the most important feature in the bUl— a 
 «nH T''AfV''''''''^*J^'^ ""^ the Secretary of Agriculture, the Secretary of Commerce 
 and the Attorney General, is authorized to fix definite limitatioiis upon p^refv 
 speculative transactions. In the case of wheat, for example the comi£«I.\ n 
 might fix a trading limit of 2,000,000 bushels, which w^uKekntLrn^^^^^^^ 
 thereafter could have a speculative interest in wheat futures in excess^? 2 OM mn 
 The same or a different limit might also be fixed upon theTmiunt any persoTcoTd 
 buy or ^11 during any one business day. The limit might be different f^rdiVe^eiit 
 S^ralJonr '''"* "'^^'*'' ^^^ "^'^^ ^ ^^^'^"^ ^^^ buy'ing and seiii^^^ 
 
 Hedging transactions are exempted, and are defined in such a way as to make 
 certain that such operations will not be interfered with. 
 
 Ihe rights of cooperative marketing associations in their relations with the 
 commodity exchanges are more clearly defined and more adequatSy wfegilaSded 
 
 BEGUJLATION OF COMMODITY EXCHANGES 
 
 91 
 
 The exchanges are required to furnish the Secretary of Agriculture promptly 
 with copies of bylaws, regulations, and changes therein, and to allow inspection 
 of their books, records, minutes, and so forth, as well as the records of their sub- 
 sidiaries. Exchanges also must require warehouses, in which or out of which 
 commodities are delivered on futures contracts, to make reports, keep records, 
 and permit warehouse visitation, as required by the Secretary of Agriculture. 
 
 The Grain Futures Act, as amended, will be known by the short title of "Com- 
 modity Exchange Act." The word "grain", wherever it appears in the act, 
 will be stricken and the word "commodity" or "commodities" substituted. 
 
 The word "commodity" is defined to mean wheat, com, oats, barley, rye, 
 flaxseed, grain sorghums and mill feed. 
 
 In its amended form, the act will be readily applicable to any other commodity 
 which Congress from time to time might determine should come within the 
 protection of the act. 
 
 Now, these are the principal provisions of the pending bill. They appeal to 
 us to being entirely reasonable and fair. They will not hamper or interfere 
 with anj legitimate market or speculative activity. They provide only such 
 measures of governmental regulation and control as are appropriate and needful, 
 if the exchanges shall at all times live up to their responsibility as public markets 
 entitled to public confidence. 
 
 Mr. Glover. Mr. Chairman, I would like to ask a question right there. 
 
 The Chairman. Mr. Glover. 
 
 Mr. Glover. Mr. Mehl, in section 2, I notice that you change the present 
 Grain Futures Act by striking out the word "grain" wherever it appears, and 
 inserting in lieu thereof the word "commodity" or "any commodity", or "com- 
 modities." 
 
 Mr. Mehl. Yes. 
 
 Mr. Glover. And in section 3 (a), the word "commodity" is defined. In that 
 section you use the following words: 
 
 "The word 'commodity' shall mean wheat, com, oats, barley, rye, flaxseed, 
 grain sorghums, and mill feeds." 
 
 Now, in that you are leaving out one of the most important grains that I know 
 anything about. At least, the greatest in my section of the country, and I was 
 just wondering why you leave that out. I refer to rice. 
 
 Mr. Mehl. I was almost certain you would take offense at that, although that 
 is not why we left it out, Mr. Glover, of course. 
 
 Mr. Glover. Then I assume that you would have no objection if I should offer, 
 at the proper time, an amendment to take care of that. 
 
 Mr. MEHL. We will have no objection whatever to that, Mr. Glover. I 
 might say that the only reason we left it out was because we have been unable to 
 find a futures market in rice. Now, it may be that there is one. 
 
 Mr. Glover. I think I can point one out to you; and I will do that for your 
 benefit. 
 
 Mr. Mehl. I do not think we will have any objection whatever to having rice 
 included. 
 
 Mr. Glover. All right. 
 
 The Chairman. Any further questions? If not, we desire to thank you, 
 Mr. Mehl. 
 
 Mr. Mehl. Thank you. 
 
 The Chairman. Dr. Duvel. 
 
 Statement op Dr. J. W. T. Duvel, Chief, Grain Futures Administration, 
 
 Department of Agriculture 
 
 Dr. Duvel. Mr. Chairman and members of the committee, Mr. Mehl has 
 given you a little r<Ssum6 of the Grain Futures Act and the present proposed bill; 
 and, as he says, we feel, on the basis of our experience for the last 10 or 12 years 
 in administering the Grain Futures Act, that there is nothing in the present 
 proposed bill that would interfere in any way with fair and honest trading in 
 futures by those handling orders for customers. 
 
 I shall give only a brief statement for the record covering a little more history of 
 the trading in grain futures. 
 
 Future trading in grain originated in Chicago approximately 75 years ago. 
 Rather early in its history speculative operations assumed a very important part 
 in the sale of grain for future delivery. This naturally was followed by complaints 
 from producers and others, resulting from what seemed to be unwarranted price 
 fluctuations. These complaints, in turn, reached Congress with a demand for 
 
 < 
 
■r 
 % 
 
 I 
 
 92 
 
 BEGULATION OP COMMODITY EXCHANGES 
 
 leeislation to prevent or to control sales of futures for specuUtive purposes. 
 The first bill was introduced in the Forty-eighth Congress, in 1884. Hon. Sea- 
 bom Reese, of Georgia, introduced this bill Its P^.^P^se was to prohibit by 
 denying the use of the mails. The second bill was introduced m the Forty- 
 ninth Congress by Hon. Clifton R. Breckenridge, of Arkansas. This biU was to 
 
 regulate futures trading. , . , x- i. j t« looi +k^ 
 
 However 37 years elapsed before legislation was enacted. In l»^l tne 
 Futures Trading Act, providing for regulation of grain exchanges, became a law. 
 It was immediately attacked in the courts and its regulatory Provisions were 
 declared unconstitutional as an unwarranted use of the taxing power^ Congress 
 followed with a similar measure based on the interstate commerce clause of the 
 ConsTuution. This act, known as the "Grain Futures Act of 1922" was con- 
 testS^ in the courts, which resulted in a sweeping decision by the Umted States 
 Supreme Court upholding the constitutionality of its regulatory provisions. 
 This is the act under which we are now functiqping. x j- • 
 
 The Grain Futures Act provides for the licensing of futures exchanges trading in 
 iffain gives certain rights to cooperatives, requires that books and records shall 
 bTi^n to inspection,^nd that such reports shall be furnished as the Secrecy 
 mav dire^ iTalso provides for such investigations as the Secretary may deem 
 necessarv in the interest of the public and for the information of Congress. 
 
 Tior to ?he passage of the drain Futures Act information as to the volume of 
 tra^ne or the volume of contracts open on the Chicago Board of Trade was not 
 avaUable It was not known even by the officials of the board. This information 
 is now compiled by the Grain Futures Administration and made public each day. 
 This knowledge serves a very useful purpose. Reports also are required covering 
 aU acSs invoWin^^^^^ number of bushels. Since last July these reports 
 
 cover XccouT^^ of 200,000 bushels or more, By this means a very close super- 
 vision is maintained over speculative activities, and the mere fact that such 
 Iccounts must be reported aids materially in curbing excessive speculative opera- 
 tions detSSIntal to the market. Unfortunately, however, the act contains no 
 authority to limit excessive speculative operations on the part of traders who^^ at 
 times, buy or sell in quantities larger than the market can absorb without a wide 
 And unwarranted movement in price. . . , . . . . 
 
 I want to point out some of the high lights in our experience m admimstering 
 this act during the past 10 years, more particulariy to suggest to you questions 
 tSit you might like to ask in order to bring out the facts which should be presented 
 fOT the record before going into the principal feature in the proposed bill, which 
 limits individujd speculative lines. ,, . ., 
 
 An intensive stSdy of the effects of large-scale trading on P"ce mov«me^ ^ 
 shown that concentrated buying or selling of wheat futures in amounts of 2,000 000 
 bushels or more results in an abnormal price movement m more than 80 percent 
 of ?he c^s Trades within a day by a single individua in much larger amounts 
 we notTncommon. Our records show that occasionally the transactions of a 
 ri^gle trader amount to more than 10 percent of the day's business. Operations 
 of this kind in no sense represent a free and open market. t j- -^ i 
 
 In the matter of open contracts, very similar situations arise. Individual 
 speculators frequently accumulate lines of 5,000 000 bushels, and occasiona 
 S uSSe^ amounts. These lines are sometimes "long" and sometimes "short. 
 Howeverf Inasmuch as those commonly referred to as the general pubhc are 
 genCTsdly buyers for "long" accounts, the professional speculator is likely to 
 find his most profitable field in short selling. . 
 
 One oMhe most outstanding examples of short selling m inordinate Mnounts 
 was a case where two traders, designated as A and B, held 32.6 percent of the 
 contracts open in the dominant future, their combined holdings being nea.- y 
 23 (WO WO bushels short. They were not carrying - hedges ", as is so frequently 
 clahned for the large speculator, and there is no question but that their selhng 
 exeri^ a very depressing influence on prices to the detriment to the wheat 
 proS^ers whJ were at the time in the midst of their market operations. While 
 these large short lines were being accumulated, the price of the December future 
 
 decUnernearly 18 cents per bushel That was f^om^^b«.^Vfn%wl I'lnd 2^ 
 until the 8th day of September. May I call your attention to charts 1 and 2, 
 the former showing the combined position of 42 traders and the latter the position 
 
 of two of the group. . , ^ - 
 
 Mr. Hope. That was this last year? 
 Dr. DuvBL. That was in 1926. 
 
 Dt' D^L.^Th^t was in 1926. The United States wheat crop that year was 
 831,000,000 bushels. The short sales by these two traders represented nearly 
 
 BEQULATIOXr OV OOMMODITT EXOHANQBS 
 
 93 
 
 3 percent of the entire crop. It was equivalent to 15 percent of the crop of the 
 great wheat State of Kansas. It was 30 percent of the Oklahoma crop that year. 
 It was more than 50 percent of the crop of each of the States of Ohio, Illinois, 
 Nebraska, Montana, and Washington; two and three-fourths times the wheat 
 crop of Iowa. It was nearly twice the production of each of the four States of 
 South Dakota, Maryland, Virginia, and California, and was about one and 
 one-third times the crop of Michigan. 
 
 The most prolonged and persistent short selling by large traders covered the 
 period from April 1930 to October 1932. Over the period of more than 2>4 years 
 the large speculators who held futures in amounts of 600,000 bushels or more, 
 when taken as a group, were net short 643 days out of a total of 769 days, or 83.6 
 percent of the time. The more important features of these transactions are fully 
 set forth in Senate Document 61, of the Seventy-third Congress, which is a report 
 submitted by Secretary Wallace under date of May 13, 1933. 
 
 I might state that the document is very brief, and if you have not read it, I 
 think it would warrant your going over it carefully. 
 
 In order to secure a more comprehensive picture of operations in wheat and corn 
 futures, an investigation was made covering the market position of all traders as 
 of June 30 and their trading on July 1, 1931. A report of this investigation is now 
 in course of preparation. Of a total of 9,525 traders in the market, 7,000, or 
 74 percent, were speculative. The number of traders on the long side of the 
 market was four times greater than the number on the short side of the market. 
 In other words, there were 4 buyers to 1 seller. And, I might add, that is usually 
 the case; that is, a great deal of the time you have more buyers in the market than 
 sellers. That is true by reason of the fact that the buyers are made up largely of 
 the general public, the people who trade in small lots, while the sellers are usually 
 the large professional traders and the hedgers. 
 
 Of more than 5,000 traders who had an open interest in wheat futures on June 
 30, 1931, a total of 2,224, or 21 percent, held job lots only; that is, less than 5,000 
 bushels. Of the 5,000 traders in wheat, 3,973, or nearly 80 percent, were specu- 
 lators. Of these 3,973 speculators, 3,174, or 80 percent, were long; 548, or 14 
 percent, were short; and 251, or 6 percent, were both long and short. 
 
 Of the 3,174 speculators who were long, 762, or 24 percent, held but 1,000 bush- 
 els each. An additional 561, or 17 percent, held 2,000 bushels each. 
 
 There was a total of 1,592, or 50 percent, of the traders holding a long position, 
 who were interested in job lots only; that is, less than 5,000 bushels; including 
 the small traders, who were long an even 5,000 bushels, there was a total of 2,309, 
 or 73 percent. 
 
 This is representative of the traders who carry not only the hedging load but 
 the weight of the short selling by professional speculators whenever they are oper- 
 ating on the short side of the market. This is more clearly set forth in the fact 
 that on July 1, 1931, one trader sold 1,200,000 bushels; and another 1,000,000 
 bushels. The combined sales of these two traders, aggregating 2,200,000 bushels, 
 oflFset the purchases on that date of 663 small traders. 
 
 The Chairman. How much wheat was actually delivered on that date? Have 
 you that information? 
 
 Dr. DuvEL. No; I do not, Mr. Chairman. The quantity of wheat delivered 
 normally under these contracts averages about one-fourth of 1 percent of the total 
 volume in the transaction. 
 
 The short sales of these 2 large traders represented more than 6 percent 
 of the day's business, and at the close of the market 1 of these traders was short 
 5,420,000 bushels, or 6.6 percent of the total contracts open on that date. The 
 market closed with a net loss of 2^ cents per bushel. 
 
 It is important, however, to keep in mind that large speculative traders are not 
 always short sellers. That was very clearly demonstrated during the sharp 
 advance in wheat prices last summer. Imbued with sincere confidence in the 
 President and aided by the prospective short crop, speculators, both large and 
 small, were eager to buy wheat futures. This orgy of speculative buying unfor- 
 tunately resulted in a too rapid advance in prices and the accumulation of 
 excessive speculative lines. 
 
 When the reckoning day came and some of the larger holders attempted to 
 take profits, while others sold short in the apparent belief that prices were too high, 
 there was a precipitous decline of more than 25 cents per bushel in 2 days. This 
 occurred on July 19 and July 20, 1933. Subsequently, about the middle of 
 October, there was another drastic decline and the evidence shows that the market 
 would have been completely demoralized as a result of excessive speculative 
 
 114603— 35— SIR B- 
 
li 
 
 94 
 
 BEGUIiATION OF COMMODITY EXCHANGES 
 
 activity had it not been for the prompt action of the Government in making 
 purchases of large quantities of wheat for emergency relief. 
 
 Ability to deal adequately with the situation at that time was aided materially 
 by the information which the Grain Futures Administration was in position to 
 supply as a result of reports covering all important accounts. 
 
 As previously stated, our studies show that concentrated large-scale operations 
 result in abnormal price movements in more than 80 percent of instances. In 
 this connection, it is necessary to keep in mind that markets do not advance 
 because there are more purchases than sales; neither do they decline because 
 there are more sales than purchases. The two are always equal. There cannot 
 be a purchase without a sale. Prices, however, are influenced more by the 
 manner in which purchases or sales are made, how the orders flow into the market, 
 and how they are executed, than by the volume alone. For example, our studies 
 show that successive sales from a single source aggregating two or three million 
 bushels in the course of an hour's trading exerts a far greater influence upon 
 price than the same volume of orders originating from widely different sources 
 and executed in small amounts. 
 
 It is often contended that large traders merely anticipate price changes, that 
 by their better foresight and greater ability they are able to determine in advance 
 when conditions justify an advance or decline in price of a kind to give them a 
 profit. 
 
 If we accept this assumption, then we must also assume that the ability to 
 prophesy is in some way passed around from day to day from one speculator to 
 another. We must assume also that the ability with which each trader is able 
 to pierce the future and to properly measure the fundamental factors which 
 influence the market is directly proportional to the extent of the price movement. 
 But when measured by this yardstick, it is apparent that these large traders do 
 not successfully anticipate price changes. On the other hand, the evidence 
 accumulated shows, in the majority of instances, that these wide price changes 
 are due primarily to the sheer force of large-scale trading. Putting on a load 
 greater than the market can absorb without moving prices out of line always 
 results in wide price fluctuations. 
 
 The theory is frequently advanced that large speculators are necessary to 
 carry the hedges. If this were true in the fullest sense, their trading should be 
 larger in years of abundant supply when heavy stocks accumulate. On the con- 
 trary, speculators are more active in years of short crops and small supply. 
 This applies to small sp>eculators as well as large-scale operators. 
 
 It is also contended that short selling by large traders increases as prices ad- 
 vance and diminishes as prices recede. This is on the theory that short selling is 
 a price stabilizer in that it prevents prices from going too high, and that cover- 
 ing keep prices from going too low. Investigation, however, shows that large 
 traders more frequently sell short on declines than on advances in price. Ex- 
 perience teaches them not to fight an advancing market, but to do heavy selling 
 after the top has been made and prices turn downward. 
 
 The covering of a large short position is equally well managed by the experi- 
 enced trader. The statement is made frequently that a short seller is a potential 
 buyer. Theoretically, this is correct. His short sales must be closed by buy- 
 ing back the same future; that is, he must cover his short position, assuming 
 that he does not intend to deliver the actual grain. Those who stress this view 
 make every effort to leave the impression that the short seller covers his position 
 by buying back his futures openly in the pit. This view sounds right to those 
 who do not know the technique of the large professional traders. It can be and 
 sometimes is done that way, but professionals generally resort to a method which 
 is much more profitable to themselves. They resort to the use of "privileges", 
 or what is more commonly known as "puts and calls." 
 
 It is only fair to say that the grain exchange code recently approved by the 
 President eliminates the trading in privileges. But at the same time I want to 
 give you some of the background to show how large speculators operated through 
 the use of privileges. 
 
 Covering through privileges can be explained best by examples of actual 
 transactions. For instance, on the 17th of a certain month, when farmers were 
 marketing wheat heavily, one trader was short 3,815,000 bushels. At the close 
 of the market on that day, he sold bids, good for the next day, to the extent of 
 1,200,000 bushels. On the following day he sold in the futures market an addi- 
 tional 300,000 bushels, thereby materially aiding in forcing the price down through 
 the bids. 
 
 The market closed at a loss of 2% cents. Bids were good. While he was not 
 able to secure futures for all of the bids sold, there was put to him 600,000 bushels. 
 
 BEGULATION OF COMMODITY EXCHANGES 
 
 95 
 
 Thus he was able to cover 600,000 bushels at an artificially depressed price, which 
 was influenced in part by his sale of futures amounting to 300,000 bushels. 
 
 On the 19th of the month he again sold futures to the extent of 1,200,000 
 bushels, increasing his short position to 4,715,000 bushels, and the market closed 
 with a net loss of three-fourths of a cent. On the same day he sold bids good for 
 the next day to the extent of 1,000,000 bushels. The following day he added to 
 the weight already on the market by selling an additional 500,000 bushels of 
 futures, bringing his total short position up to 5,215,000 bushels. 
 
 The price broke 1% cents, and the market closed 1% cents lower. Bids again 
 were good and the 500,000 bushels sold by this trader helped to make them so. 
 There was put to him on bids 735,000 bushels, thus reducing his short position 
 by that amount without purchasing a single bushel in the open market. 
 
 This is the way some of the "potential" buyers operate. 
 
 I give you that background as an illustration, because we find a large propor- 
 tion of the large traders, as a rule, entering the market by selling short, and sub- 
 sequently covering through bids. They can operate to better advantage on the 
 short than on the long side, because the general pubUc, as a rule, are buyers and 
 not short sellers. The general public comes into the market on the buying side. 
 They do not know how to sell short. 
 
 And, as I have stated previously, we find that there are from 4 to 5 buyers to 1 
 seller. They represent all classes of persons and are widely scattered throughout 
 the country. But as to the volume, the speculative selling is concentrated in a 
 few hands. 
 
 In this connection I wish to refer to the period from April of 1930 to June 1932; 
 that is, when our prices were declining. That is the period when the large 
 traders were short 643 days out of a total of 769. That is pretty well illustrated 
 by chart no. 3, which covers the period from April 1930 to June 1932. If you 
 will take occasion to examine Senate Document No. 61, of the first session of the 
 Seventy-third Congress you will find a much fuller explanation of the important 
 points. You can tell from this chart where the crest appears. The heavily 
 shaded portions show points of speculative short selling. 
 
 Mr. Hope. May I ask a question there? 
 
 Tlie Chairman. Mr. Hope. 
 
 Mr. Hope. What constitutes the largest operation or transaction that you 
 have a record of? 
 
 Dr. DuvEL. We have had a number running over 2,000,000 bushels. During 
 the 10 years prior to March 1933 there were 16 speculators that reached 2,000,- 
 000 bushels or more. There was one at 16,000,000, and here is another at 
 8,000,000 or 10,000,000. 
 
 Mr. Hope. What is the largest single case? 
 
 Dr. DuvEL. I beg your pardon? 
 
 Mr. Hope. The largest speculative transaction? 
 
 Dr. Duvel. That is evidenced here on this chart. At that time two traders 
 had 23,000,000 bushels. That was in 1926. At that time they controlled 32.6 
 percent of the total contracts in the dominant futures, their combined holdings 
 representing nearly 23,000,000 bushels short. The general public was supporting 
 the market and carrying the extra load occasioned by the seUing of these two 
 speculators. 
 
 During the collapse in the market last year most of the large accounts were on 
 the long side. We had one series of accounts under single control that ran orac- 
 tically 16,000,000 bushels long. ^ 
 
 Another series of accounts, involving five traders acting on the advice of a single 
 individual, aggregated around 20,000,000 bushels long. Large lines of this 
 character invariably exert a very disturbing influence on the market before 
 they are closed out. The character of these accounts is shown in chart 4. 
 
 In the former case the accounts were lodged in three different sections, one 
 coming out of New York, another from Chicago, and a third from the Pacific 
 coast, but under single control. 
 
 This chart, no. 5, represents the market position of 13 different accounts, con- 
 trolled by 10 traders, and involving approximately 30,000,000 bushels. In their 
 efforts to take profits the price collapsed. A single group during the 2 days of 
 July 19 and 20 liquidated a little over 6,000,000 bushels. The entire group 
 liquidated 15,000,000 bushels. The market will not absorb 15,000,000 bushels 
 without affecting the price very seriously. 
 
 The Chairman. Why do those who are engaged in these operations object to 
 having their names disclosed? 
 
 Dr. DuvEL. Traders give many reasons for objecting to disclosure of names, 
 To disclose names of large traders and their market position would, of course. 
 
^^ 
 
 I 
 
 m 
 
 REGULATION OF COMMODITY EXCHANGES 
 
 place the large traders at a great disadvantage and would make operation 
 impossible. 
 
 The Chairman. They would not be able to operate because they are selling 
 something they do not have. If the trader intended to make delivery or was able 
 to make delivery under his contract, if he were seUing 2,000,000 bushels of wheat 
 that he had in his bin, he would not be hurt by having his name disclosed, 
 would he? 
 
 Dr. DuvEL. No; that is true, in that situation. 
 
 The Chairman. But if he sells 2,000,000 that he does not have in his bin, it 
 might hurt his position among some of the same people to have his name 
 disclosed 
 
 Dr. DuvEL (interposing). Well, he could not sell. 
 
 The Chairman. He could not sell? 
 
 Dr. DuvEL. No. 
 
 The Chairman. In other words, when he is operating on thin air and you 
 disclose his name, vou spoil his playhouse, is not tnat about it? 
 
 Dr. DuvEL. Well, the reason they give for objecting to giving their names is 
 that it makes it impossible for them to operate with safety. 
 
 The Chairman. If the transactions that they were engaged in were legitimate, 
 there could not be much objection to disclosing their names, it seems to me, but 
 if they were trying to manipulate the price and to deceive the public, they would 
 object. It is the old, old story, ' ' Men love darkness rather than light because theu* 
 deeds are evil." 
 
 Do you see any real objection to the names of these "big dealers , so-called, 
 being disclosed, or to giving the Secretary of Agriculture the authority to disclose 
 them at the request of any Member of Congress or Governor of the State? 
 
 Dr. DuvEL. In my opinion, such step would lead to much disturbance. A 
 disclosure of the names of large traders having an interest in current futures — 
 that is, with contracts actually open — would immediately demoralize the market. 
 The average individual would not like to disclose his own line, whether he had a 
 long line to be liquidated or a short line which he had to cover. It would be hardly 
 
 fair to do so. , ^ .^ . ^^ * 
 
 The Chairman. Of course, it might demoralize the market, it is true, for a 
 short time; it might temporarily cause an upset of conditions. But I think if a 
 report were made of the names of these parties and that report made available 
 to the public later on, giving the public a knowledge of how these transactions are 
 carried on, it would bring about more orderly marketing and there would not be 
 BO much fluctuation in the actual price of the commodities. 
 
 Dr. DuvEL. You mean, disclose the names after the transactions have been 
 completed? 
 
 The Chairman. Yes. 
 
 Dr. DuvEL. Of course, we have done that in part in connection with investiga- 
 tions in response to Senate resolutions as reported in various Senate documents, 
 by assigning numbers to certain large traders. We have not given the names, but 
 we have assigned numbers so that the transactions of the different traders in each 
 of those reports can be followed through in detail. 
 
 The Chairman. It is probably not fair to ask you that question. I would hke 
 to ask the gentlemen on the other side when they come up what good reason they 
 have for declining to have their names disclosed. We may want to ask to come 
 back then and analyze some of the reasons assigned by them. 
 
 Dr. DuvEL. All right. 
 
 The Chairman. After they have been heard. 
 
 Dr. DuvEL. I will be glad to do that, Mr. Chairman. 
 
 Mr Gilchrist. The present bill does not carry that provision, does itT 
 
 The Chairman. Yes; there is a provision in the present bill giving the Secre- 
 tary of Agriculture certain authority; but it does not give him authonty to make 
 the names public; it requires that records be kept to show the names of all persons 
 involved in the transaction, and this record shall be open to the inspection of 
 the Department. 
 
 Mr. Gilchrist. That is what I mean. , , ,^ ^. ^. *u * •* 
 
 The Chairman. I was trying to find out what the objection was so that if 
 necessary we might add an amendment. , xu u-iwv * -j 
 
 Mr. Gilchrist. Is there anything in the provisions of the bill that provides 
 
 for disclosing the names? .. . , . * xu u i 
 
 Dr DuvEL No. The present act as it stands now gives us access to the books 
 and records and to call for such reports as the Secretary of Agriculture may deem 
 necessary At the outset we required reports of all accounts involving 500,000 
 bushels or more. Since the crash in the market last July we have required reports 
 
 REGULATION OF COMMODITY EXCHANGES 
 
 97 
 
 ! 
 
 on all accounts of 200,000 bushels or more. These reports show pretty well what 
 is going on in the market, but we have considerable difficulty in getting many of 
 these reports promptly and in due form. In certain quarters evasion has been the 
 policy. 
 
 For example, when we had the reporting requirment fixed at 500,000 bushels, 
 it was really appalling to see how many diflferent accounts were held in amounts 
 of 495,000 bushels — just under the reporting requirement. 
 
 Mr. Gilchrist. Can you give out the names now? 
 
 Dr. DuvBL. As the law now stands, we are prohibited from disclosing the 
 names, unless the traders have been guilty of some violation, some wrongdoing, 
 in which case the names are disclosed through public hearings as provided in 
 section 6 of the act of 1922. 
 
 Mr. Gilchrist. What section of the proposed bill grants that authority? 
 The Chairman. You will find that on page 13, section 4. 
 
 Dr. DuvEL. For your information along that line, I would like to call your 
 attention to this particular chart here. This shows the operations of trader " Z." 
 His orders were placed with eight different commission houses, all nonclearing 
 members. From these eight nonclearing members the orders were redistributed 
 through 14 different clearing members before they reached the pit for execution. 
 Through this process of dilution the full factd were not disclosed until weeks later 
 after a careful examination of the books and records. 
 
 Mr. Hope. Why could you not get these accounts when they were sent to 
 you; is that because they were so small, or because they were scattered through 
 the records in such way that they did not appear? 
 
 Dr. DuvEL. The regulation provided that they report on 600,000 bushels or 
 more. These orders were so scattered that most of the accounts did not come 
 within the reporting requirements. We find many accounts of 495,000 bushels. 
 When we follow through on accounts of this character it is not uncommon to 
 find them coupled with accounts in the name of the wife, some relative, or even 
 an imaginary individual. 
 
 The Chairman. Any further questions? 
 
 Mr. Glover. I would like to ask a question or two. 
 
 The Chairman. Mr. Glover. 
 
 Mr. Glover. Dr. Duvel, you spoke of the short seller and the effects that he 
 had on the market. This information and this knowledge concerning these 
 short sales you have, do you not? 
 
 Dr. Duvel. Yes; we get that. 
 
 Mr. Glover. Now, what have you done to prevent the effect that it had on 
 the market; what has been done by the Department with those that have been 
 guilty of short selling? f 
 
 Dr. Duvel. Of course, they are not violating the act. 
 
 Mr. Glover. They have not violated the act? 
 
 Dr. Duvel. No; short selling is not a violation of the act. 
 
 Mr. Glover. But you have some regulations, and rules, which they have 
 violated? 
 
 Dr. Duvel. None that cover the matter of short selling. Neither do we have 
 regulations that prevent the splitting of accounts to keep under the reporting 
 requirements. For that reason the amount was reduced from 500,000 to 200,000 
 bushels. 
 
 Mr. Glover. You are authorized by law to prescribe rules and regulations, are 
 you not, that would prevent that? 
 
 Dr. Duvel. No. 
 
 Mr. Glover. You do not have that authority? 
 
 Dr. Duvel. Not under the present law, except as we require reports from 
 individual traders. 
 
 Mr. Glover. Now, if the names of these parties who were trading\inTthe 
 futures market were made public, if the public had that information, a thing Uke 
 that would not happen, would it? If the public knew just what was going on 
 they would not permit it to go on, would they? 
 
 Dr. Duvel. I think probably there would be no futures market under such 
 conditions. I think it is much the same as in any other transaction. Most 
 persons in business do not want others to know what they are doing until they 
 nave accomplished it. 
 
 Mr. Glover. Do the bulls and the bears ever get to the point where they lie 
 down peacefully and play together? 
 
 Dr. Duvel. Well, that sometimes happens, I guess. 
 
 Mr. Glover. That is usually the way they depress the market, is it not? 
 
 Dr. Duvel. How is that? 
 
I 
 
 98 
 
 REGULATION OF COMMODITY EXCHANGES 
 
 Mr. Glover. They always depress the market when they do that, do they not? 
 
 Dr. DuvEL. Well, if it works that way, yes. There might be a decline some- 
 times, and sometimes an advance in the market, depending on the leadership. 
 
 In this bill it is proposed to amend the Grain Futures Act to make unlawful 
 transactions such as "wash sales" and ''cross trades", and "indemnities". 
 
 Mr. Glover. You said awhile ago, as I remember, that onlv about one-fourth 
 of 1 percent of the sales represent actual deliveries; is that right? 
 
 Dr. Duvel. That is about right. 
 
 Mr. Glover. Now, take cotton, as I understand, sometimes thev wiU buy 
 and sell 130,000,000 or 140,000,000 bales of cotton, when aU of us know that 
 there is not more than 24,000,000 or 25,000,000 bales raised in the world. Does 
 that not have a great deal to do with depressing the market price of cotton? 
 
 Dr. Duvel. It is generally recognized, of course, that the volume of futures 
 sales must exceed the sales of actual cotton in order to maintain the futures 
 market. There must be many more sales than is presented by actual deliveries. 
 Cotton sold for futures delivery on the exchanges averages 10 to 12 times the 
 crop. About the same ratio applies to wheat. 
 
 Mr. Glover. Well, these traders in cotton, any number of them, do not know 
 anything at all about what the cotton crop is going to bo. If you were to require 
 them to trade in actual cotton, to make delivery of the commodity, do you not 
 think that would prevent a lot of this fluctuation in price? 
 
 Dr. Duvel. I do not know that it would, Mr. Glover. The advantage in the 
 exchange is that it furnishes a ready market. A great deal of the volume of 
 trading, of course, is purely speculative. Most buyers do not intend to take 
 delivery; neither do the sellers expect to make delivery. The theory is, however, 
 that a futures exchange furnishes a ready market on which purchases or sales 
 can be made at all times on a very much smaller margin than would prevail other- 
 wise. In the case of wheat, I should say, the average margin to the traders who 
 supply liquidity to the market is perhaps somewhere around one-sixteenth of 1 
 cent per bushel. 
 
 Mr. Glover. Now, so far as this bill is concerned, does it not amount to about 
 this — an attempt to regulate a wrong, rather than to abolish outright the wrong 
 itself? Is that not about what it amounts to? 
 
 Dr. Duvel. Regulation, as provided in this bill, recognizes the advantages of 
 futures exchanges in that they furnish a ready market at all times, and a market 
 on which the producer and the merchant can sell or buy grain at the prevailing 
 price. 
 
 Mr. Glover. But it does permit of gambling in the amount that vou indicate 
 here up to, say, 2,000,000 bushels, or some such amount, does it not? 
 
 The Chairman. The bill provides that the commission can fix the trading 
 limit. 
 
 Dr. Duvel. This bill authorizes the commission to fix the trading limit; yes. 
 
 Mr. Glover. What basis do you contemplate fixing that on? 
 
 Dr. Duvel. Well, in the case of wheat, our investigations indicate that the 
 limit should be around two or three million bushels. 
 
 Mr. Glover. Two or three million bushels? 
 
 Dr. Duvel. Yes; but the commission is authorized to fix different limits for 
 different commodities, as well as to fix a different limit on selling than is applied 
 to buying. 
 
 Mr. Glover. We had quite a bit of testimony before, when this matter was 
 pending in Congress, with reference to fixing prices, particularly on cotton, when 
 some cotton firm in the South, or in the East, for instance, next fall, in September 
 of this year, will fix the price for cotton for September of next year. They do not 
 even know how much cotton is going to be planted, or what the market will be 
 next year, when they fix the price of cotton a year ahead of time. How do you 
 think they can do that? 
 
 Dr. Duvel. Well, they gage that by general conditions, based on previous 
 years, as to how much cotton has been raised, the average conditions during past 
 years, and somebody is willing to sell it, and somebody is willing to buy it. 
 
 Mr. Glover. Is it not just a proposition, as a general rule, of a bunch of these 
 pit operators getting together, or perhaps one man will come up to another and 
 say, "I will sell you so many bales of cotton "? In other words, it is just a specula- 
 tive proposition; and under that scheme, so far as the sale and the buying is 
 concerned, it is made at a price fixed by them, which has a detriment on the 
 farmer or the man who is going to sell the crop. 
 
 Dr. Duvel. In the last analysis, that is the way they fix it. I might say, 
 "Mr. Glover, I will sell you so much cotton basis, September, at 14 cents." 
 
 REGULATION OF COMMODITY EXCHANGES 
 
 99 
 
 Mr. Glover. Yes, I understand; and you do not have any cotton and I do 
 not have any idea of taking any cotton. It is purely a speculative trade, and 
 those are the kinds of trades that I think ought to be abolished. 
 
 Dr. Duvel. A futures contract provides, of course, that the buyer must t^ke 
 delivery if the contract is held open. At the same time it is gnerally conceded 
 that most buvers of futures do not expect to take delivery and have no intention 
 of doing so when the trade is made. A very small percentage of the contracts 
 are settled bv delivery of the commodity. 
 
 Mr. Glover. Do these traders in that market have any financial responsibility 
 or know anything about what is going on in the way of actual delivery? I mean, 
 do thev have contracts which could actually be enforced against them- 
 
 Dr. Duvel. Yes; I think there is no difficulty about that, if the contract 
 stands. If I should buv 10 Mav wheat and leave it open, and did not attempt 
 to sell it, I would have to take the 10,000 bushels of wheat upon delivery during 
 the month of May. 
 
 Mr. Glover. If you are able to take delivery. 
 
 Dr. Duvel. If I am able? 
 
 Mr Glover Yes 
 
 Dr. Duvel. Yes; and if I cannot, there is a penalty for failure to fulfill my 
 
 obligation. ,^ x. i. x u o 
 
 Mr. Glover. But if the buver cannot pay the penalty, then what happens f 
 
 Dr. Duvel. He would be just like anyone else who fails to pay for what he has 
 T)urchased 
 
 Mr. Glover. But he really does not expect to take delivery when he buys it. 
 
 Dr. Duvel. There are very few cases of defaults on contracts. That happens 
 once in a while, but very seldom. Of course, if he could not take delivery and 
 pay for the wheat, and refused to liquidate his contract, he would be subject to 
 discipline by the exchange. 
 
 The Chairman. Any further questions? 
 
 Mr. Chase. I would like to ask Dr. Duvel one or two questions. 
 
 The Chairman. Mr. Chase. .• i i 
 
 Mr. Chase. Your statement, Doctor, interested me very much, particularly 
 your general statement with reference to wheat, and your reference to the exchange 
 code. Do you know when the exchange code was signed? t u t 
 
 Dr. Duvel. Sometime in March. I cannot give you the exact date. I believe 
 it was the 20th. 
 
 Mr. Chase. A few days ago? 
 
 Dr. Duvel. Yes. . t^ x. , • 
 
 Mr. Chase. The reason for my question is this: Does the code m any way 
 accomplish the purposes which this bill seeks to accomplish? 
 
 Dr. Duvel. In part, yes. The Grain Exchange Code, for instance, eliminates 
 trading in indemnities; that is one of the purposes we outline in this proposed bill. 
 
 Mr Chase. Yes. The reason I asked the question is because you referred to 
 certain procedure that had been outlined by the code, and I was wondering 
 whether in the preparation of this bill you gave consideration to the possible 
 effects of the procedure outlined in the code. ^ 
 
 Dr Duvel. While indemnities come within the class of practices outlawed by 
 the code, it is primarUy a temporal y measure. If we could have any assurance 
 that we are always going to have a code, and that indemnities would be prohibited, 
 we would not need that provision in the bill. 
 
 Mr. Chase. In other words, this is more in the nature of permanent legislation, 
 while the code is considered purely temporary? 
 Dr. Duvel. That is right. 
 
 Mr. Chase. Rather than permanent legislation? 
 Dr. Duvel. That is right; that is the way we look at it. An emergency 
 
 measure . 
 
 Mr. Chase. Will any provisions in this bill militate against the enforcement 
 
 of the code? „ . . .t^ •. . -a 
 
 Dr Duvel. Not in any sense; no. For instance, the code, in many instances, 
 goes further than we do in this bill. The code, for example, provides for a mini- 
 mum margin. We make no provision of that kind in this bill; we say nothing in 
 the proposed bill about minimum margins. There is a provision in the stock- 
 exchange bill concerning minimum margins. . , . r 4.u 
 
 In that connection, we believe, based on our past experience, that so far as the 
 commodities are concerned, it is more desirable to provide for the piotection of 
 margin money, and leave to the commission houses themselves the matter of 
 fixing the amount of the margins required from various classes of customers. 
 
 m 
 
 fi 
 
100 
 
 BEGXJLATION OF COMMODITY EXCHAirOES 
 
 I 
 
 On the commodities exchanges certain classes of speculators and others are 
 able to secure credit but in many cases the credit so extended represents margin 
 money taken from one class of customers and used to extend credit on margin 
 the trades of others. Our aim is to protect the customers' margin money and 
 thereby protect the market as a whole. Moreover, excessive speculation in this 
 bill is controlled by limitation rather than by higher margins which are not so 
 readily applifcable to commodities as to stocks. This, however, will not interfere 
 m any sense with the margin provisions of the code. In fact the extra margins 
 required under the code point to a greater need for the protection of margin money 
 than has existed heretofore. 
 
 There are other provisions in the code, of course, that are not in the proposed 
 bill. 
 
 Mr. Chase. You speak of the difficulty of securing access to or inspection of 
 the books: Is that covered in the code? Does the Grain Exchange Code give 
 authority to the Secretary to inspect the books? 
 
 Dr. DuvEL. Not any more than we have at the present time; we have the 
 same authority to inspect the books. We have considerable difficulty sometimes, 
 and I think that difficulty may be reduced through the operation of the code. 
 Under the licensing provision of this bill the examination of records should be 
 greatly facilitated. We have experienced much difficulty in securing proper 
 reports from certain commission firms while others have given the fullest coopera- 
 tion. We have other commission houses where we have difficulty identifying the 
 individual accounts. We have some records now that will illustrate that; one 
 large operator had three different accounts with one commission house. 
 
 Another house which had eight accounts for the same person; and another 
 with seven accounts in the same house. Correct identifications were secured 
 after very much delay. 
 
 Mr. Chase. May I ask you whether the charts to which you refer are incor- 
 porated in the report of which you spoke? 
 
 Dr. DuvEL. This one is. Here is one that is not, but I think that you can 
 find these charts, some of them, by referring to Senate documents. 
 
 Mr. Chase. What was the number? 
 
 Dr. DuvEL. I think this one is in Senate Document 264, Seventieth Congress, 
 second session. 
 
 Mr. Chase. May I ask you a question for my own personal information: I 
 notice you provide here for a new commission consisting of the Secretary of 
 Agriculture, Secretary of Commerce, and the Attorney General. Is this the 
 wish of the Department, the request of the Secretary of Agriculture? 
 
 Dr. DuvEL. That is the same as in the present Grain Futures Act; the authority 
 18 vested in a commission composed of the Secretary of Agriculture, the Attorney 
 General, and the Secretary of Commerce, and we are leaving that, so far as that 
 provision of the bill is concerned, except that this bill gives to the Secretary of 
 Agriculture alone the authority to deal with licensing the commission houses, 
 and the revocation of such licenses. But the major provisions deahng with the 
 exchanges as a whole are left under the authority of the commission. 
 
 Mr. Chase. But you are dividing the responsibility with the commission so far 
 as fixing the trading limit is concerned? 
 
 Dr. DuvEL. Yes. That provision is in the present act. 
 
 Mr. Chase. The reason I ask that is because it seems to me that we are 
 overloading the Secretary of Agriculture, and I cannot see why one human being 
 should be required to undertake so many responsibilities as are being placed on 
 the shoulders of the Secretary of Agriculture, and I was wondering whether or 
 not the Department had requested this authority, or that this additional burden 
 should be put on the Secretary. 
 
 Dr. DuvEL. Yes. While the Secretary is loaded with a great many duties at 
 the present time, transactions involving agricultural commodities are so clearly 
 related to agriculture that it would be extremely difficult to have it function 
 efficiently under an entirely independent organization. It would mean much 
 duplication and involve additional expenditures that would seem to be unwar- 
 ranted. 
 
 Mr. Chase. Your feeling is that the Department thinks this could be incor- 
 porated in this way? 
 
 Dr. DuvEL. Yes. 
 
 Mr. Chase. Under the duties imposed upon the Secretary? 
 
 Dr. DuvEL. In the last analysis, of course, the burden must rest largely on 
 the Grain Futures Administration. 
 
 Mr. Chase. You spoke of a number of special cases where it was not proper 
 for you to give the individual names. May I ask you if it was possible under 
 
 BBOULATION OP COMMODITY EXCHANGES 
 
 101 
 
 the existing law for the Department in any way to control the situation by 
 suggestion or request? 
 
 Dr. DuvEL. I beg your pardon? 
 
 Mr. Chase. Was it possible to control the objectionable trading, to which 
 you referred, by making suggestions to the members of the exchange? 
 
 Dr. DuvEL. We have worked with the business conduct committee of the 
 exchange. When I speak of exchanges, I think of Chicago, which represents 
 about 85 percent of the futures transactions. 
 
 We have had a working arrangement with the Chicago Board of Trade whereby 
 large speculative lines, either long or short, of 6,000,000 bushels, are brought to 
 the attention of the business conduct committee, and in a number of instances 
 they eliminated the hazards by requesting the traders to refrain from increasing 
 their position in the market. Much good has been accomplished in that way. 
 
 Mr. Chase. Your present procedure is to advise with the business conduct 
 committee and make your recommendation through them? 
 
 Dr. DuvEL. Yes; we have been working with the business conduct committee 
 since 1926, with two important exceptions. On two diflferent occasions the 
 reporting requirements covering special accounts were suspended. The first 
 from February to October 1927 and again from October 1932 to July 1933. 
 
 The reporting of special accounts to the Grain Futures Administration has 
 never been in high favor with the trade. Every possible kind of argument has 
 been made against it. It has been fought through the courts. It has been 
 vigorously contended that the disclosing of the position of large traders to the 
 Government keeps buyers out of the market. No claim has ever been made 
 that these reports keep short sellers out of the market. 
 
 When the reporting requirements were first suspended in 1927 to test the 
 justice of the claims, subsequent investigation showed that seven large traders 
 operated at some time during the period to the extent of 2,000,000 bushels or 
 more. Six of these traders were in the market when the reporting requirements 
 were suspended. All six were on the short side of the market. One had a short 
 interest of 4,000,000, which was later increased to more than 8,000,000 bushels 
 short. The price declined about 7 cents per bushel. 
 
 Again, in October 1932, the reporting requirements were lifted under the same 
 strong claims that were put forth by the trade in 1927 and with the further 
 assurance that the exchanges themselves would set up the necessary machinery 
 to safeguard the market against overspeculation. Within a few days following 
 the lifting of these reporting requirements the price again had declined nearly 7 
 cents per bushel. The last chapter of this second experiment in the suspension 
 of reporting requirements is best recorded in the collapse of the market last 
 July, with a smash of 30 cents per bushel in the price of wheat in 2 days, and it 
 was necessary to close the market to prevent complete demoralization. 
 
 Effective July 24, 1933, the reporting requirements were reinstated and the 
 specified amount for the accounts to be reported was reduced from 500,000 to 
 200,000 bushels. 
 
 A more complete statement covering the latter period is contained in Senate 
 Document No. 61, Seventy-third Congress, first session. A detailed report cover- 
 ing the former period is contained in Senate Document No. 264, Seventieth 
 Congress, second session, and Senate Document No. 123, Seventy-first Congress, 
 second session 
 
 Mr. Chase. Will the provisions of this bill, H. R. 8829, permit the Depart- 
 ment to remedy the situation you have just outlined? 
 
 Dr. DuvEL. Yes; it will be impossible for any speculator to buy or sell such 
 large amounts. Equitable rules with known limits for trading can be fixed 
 before the game sta^. 
 
 This point on the chart shows another sharp decline in price in October 1933, 
 when Chicago December wheat sold down to 67 >4 cents per bushel and the May 
 future down to 70 cents. At this point Mr. Harry L. Hopkins, Federal Emer- 
 gencv ReUef Administrator, came to the rescue and bought wheat for emergency 
 relief. Except for this support through purchases for emergency relief, the price 
 of wheat undoubtedly would have gone to much lower levels due to forced 
 liquidation of a vast number of speculative accounts for lack of adequate margin. 
 
 In my opinion, the market would be in a stronger position today had it been 
 
 J)ossible to prevent the accumulation of such tremendous speculative holdings 
 ast July. 
 
 A similar situation existed in 1925. The price of May wheat on the 28th day 
 of January 1925 reached a high price of $2.05 J^. On March 13 and 17, 1925, prices 
 collapsed in much the same way as they did last July, with a break of 14% cents 
 
 ^1 
 
102 
 
 REGULATION OP COMMODITY EXCHAlSrOES 
 
 r 
 
 on the 13th of March and llH cents on the 18th. By the 3d of April the market 
 recorded a low price of $1.36J^. You probably read a part of that story in the 
 Saturday Evening Post. The reason for the collapse in 1925 was the same as 
 in 1933— overspeculation. 
 
 The price movements of the various wheat futures at Chicago, together with 
 the open contracts and the daily volume of trading, are shown in chart 7. This 
 also shows the drastic break in July and the secondary decline in October, when 
 Mr. Hopkins routed the bearish trend. Chart 8 shows the price changes when 
 the market was staggering on October 17, 1933. 
 
 Mr. BoiLEAU. May I ask a question? 
 
 Mr. Glover. Yes, Mr. Boileau. 
 
 Mr. Boileau. This bill, as I understand it, gives the Secretary of Agriculture 
 or the commission the power to fix the limit at 2,000,000 bushels, with the general 
 idea of protecting the market; is that right? 
 
 Dr. DuvEL. That is right. 
 
 Mr. Boileau. Now, that is imnortant in order to protect the public. What I 
 am trying to find out is whether there is a provision in the bill that will prohibit or 
 prevent a few traders from getting together in someone else's name, and each buy 
 2,000,000 bushels or over? 
 
 Dr. DuvEL. Yes; if he is responsible for the trade 
 
 Mr. Boileau. My point is this: Is there anything to prevent a dozen people, 
 for instance, from getting together and each buying 2,000,000 bushels, and in that 
 way destroy the effect of this provision? 
 
 Dr. DuvEL. They cannot do so as a group. Of course, it will be difficult to 
 check such operations. 
 
 Mr. Boileau. Is it going to be possible for a dozen men, legitimately, to buy 
 2,000,000 bushels each? ^ 
 
 Dr. Ddvel. Under this bill? 
 
 Mr. Boileau. Suppose they want to do so individually, but depend upon the 
 advice of some one man. 
 
 Dr. DuvEL. You would have to prove that they were doing it together. 
 
 Mr. Boileau. If they were to get the advice of some individual, they could 
 accomplish the same thing, could they not, and to that extent negative the pur- 
 pose of this provision? Is there anjrthing in here to prevent their doing that? 
 
 Dr. Duvel. There is some difficulty there. 
 
 Mr. Boileau. It seems to me there would be. 
 
 Dr. Duvel. Under this bill you would have the same control over the group, 
 BO far as violation is concerned. 
 
 Mr. Boileau. I want to suggest that it might be wise to limit the total amount 
 of futures sales. 
 
 Dr. Duvel. Well, that seems practically impossible if we are to maintain a 
 futures market. 
 
 Mr. Boileau. What you are actually trying to do here, is it not, is to limit 
 the total amount of futures sales? 
 
 Dr. Duvel. So far as the individual is concerned. What we are interested in 
 is in maintaining the market, and at the same time to guard against excessive 
 speculation and unfair practices. 
 
 For instance, in this case, representing the operations of five traders, as shown 
 here, we found upon investigation that the trading by this group was guided by 
 one individual, although those five accounts showed up separately. This started 
 on the 27th day of May, each taking about the same share. 
 
 Mr. Boileau. What would you be able to do in that situation if this bill is 
 enacted? 
 
 Dr. Duvel. You would have to show that the five were acting in unison; that 
 they were operating as a group or pool. 
 
 Mr. Boileau. Is there anything in this bill to prevent these individuals from 
 getting together and acting on the advice of someone 
 
 Dr. Duvel. I beg your pardon? 
 
 Mr. Boileau. Is there anything in this bill that would prohibit those individ- 
 uals from carrying on such a transaction as that? 
 
 Dr. Duvel. If you will look at page 4— — 
 
 Mr. Boileau. Of this bill? 
 
 Dr. Duvel. Yes; page 4, paragraph (A), at the bottom of the page, it states: 
 
 "It shall be unlawful for any person (A) directly or indirectly to buy or sell, 
 or agree to buy or sell, under contracts of sale of such commodity for future 
 delivery or subject to the rules of any contract market, any amount of such 
 commodity during any one business day in excess of the trading limit or limits 
 fixed by the Commission in such order or with respect to such commodity." 
 
 BEGULATION OF COMMODITY EXCHANGES 
 
 103 
 
 Now, these indirect transactions is where somebody would be violating the law. 
 
 Mr. Boileau. That is where you have collusion. Assume, however, that 
 there are a dozen people interested in the same proposition and that they seek 
 your advice, none of them going beyond the limit fixed by the Commission; that 
 they go in there purely for the purpose of making a profit 
 
 Dr. DuvBL (interposing). Somebody would have to act for them, to give the 
 buying and selling orders. 
 
 Mr. Boileau. If any member or group of them violate this provision, that is 
 one thing; but my question is, assume that these men all act individually, and 
 place confidence in you and let you take charge. 
 
 Dr. Duvel. When they get into the group, there would be a limitation placed 
 on them. 
 
 Mr. Boileau. And suppose their dealings were as much as 2,000,000 bushels 
 each. 
 
 Dr. Duvel. You are assuming that each individual would be working inde- 
 pendently in his own dealing? 
 
 Mr. Boileau. Yes. 
 
 Dr. Duvel. In that instance his transaction would be limited to 2,000,000 
 bushels or under, or whatever amount is fixed by the Commission. 
 
 Mr. Boileau. And if they worked in a group 
 
 Dr. Duvel. If they are working in a group, it would be limited to 2,000,000 
 bushels; that is, where they are working as a unit. 
 
 Mr. Boileau. Yes. 
 
 Dr. Duvel. Where, for instance, you have five individuals whose total trans- 
 actions represent more than 2,000,000 
 
 Mr. Boileau (interposing). There is nothing in this proposed bill that would 
 prevent that, is there? Suppose that they kept their individual accounts 
 separately; each one of them had a separate account, and all of them had confi- 
 dence in you, and they sought and acted upon your advice; would that not affect 
 the public in the same way? 
 
 Dr. Duvel. The effect on the public would be the same; yes. 
 
 Mr. Boileau. They would not be violating the law, would they? 
 
 Dr. Duvel. Yes; that is what I was trying to point out; we want to make 
 that a violation of the law the same as if each individual's transactions amounted 
 to that much. 
 
 Mr. Boileau. But this group or pool's transactions are so limited that no one 
 man has responsibility for the individual group; in other words, each indivi<^ual 
 is acting in his own interest, except he seeks the advice of someone else. Is that 
 a violation of the proposed law? 
 
 Dr. Duvel. It would be extremely difficult to prove that they were acting as a 
 pool, in that instance, perhaps. 
 
 Mr. Boileau. If I am dealing on the exchange I have a right to accept your 
 advice and to act on it. 
 
 Dr. Duvel. Yes; if you are operating independently, but on the futures mar- 
 ket it is not possible to have an operation such as you speak of; you have to act 
 quickly, and you practically turn the matter over to some individual to operate 
 for you, and in that way they are operating a pool; five men may be combining 
 their interest and operating through some individual. 
 
 Now, if you want to go out and buy 500,000 bushels, and someone else wants 
 to go out and buy 500,000, or a million bushels, why, presumably, that would be 
 perfectly all right so long as they were operating independently. 
 
 Mr. Boileau. But the effect of that would be the same, would it not, if they 
 are acting independently; it would have the same effect upon the general public, 
 would it not? 
 
 Dr. Duvel. The effect is there. It is impossible to eliminate all of the diffi- 
 culties, of course. 
 
 Mr. Boileau. You could eliminate the unfavorable reaction, could you not, 
 by restricting the total amount of futures sales? 
 
 Dr. Duvel. You mean on the exchange as a whole? 
 
 Mr. Boileau. Yes. 
 
 Dr. Duvel. During each day. That would be impossible; the market could 
 not function in that way. 
 
 Mr. Hope. I have one or two questions. 
 
 The Chairman. Mr. Hope. 
 
 Mr. Hope. Duvel, in line with the question raised by Mr. Boileau, what you 
 are trying to do is not to diminish the volume of trading but to prevent one 
 individual or a group of individuals from either buying or selling so much that 
 it would have an undue influence on the market? 
 
 •!: 
 
 t; 
 
 I; 
 
 U 
 
 i 
 
104 
 
 EEGUIiATION OF COMMODITY EXCHANGES 
 
 Dr. DuvEL. Yes. 
 
 Mr. Hope. That is your object? 
 
 Dr. DuvEL. Within the limits fixed by the Commission. 
 
 Mr. Hope. Now, in speaking about the fluctuations on the market, I under- 
 stood you to say that there could not have been these fluctuations unless there 
 had been these large holdings on the part of certain individuals. Is it not true 
 that the general public at that time was also buying? 
 
 Dr. DuvEL. The general public was buying. The general public was buying 
 in here [indicating], but they went out or were sold out later. 
 
 Mr. Hope. I mean that there was enough buying on the part of the general 
 public, at least, to account for a part of that fluctuation? 
 
 Dr. Duvel. That is entirely possible. That was fully demonstrated in January 
 1925. When the price reached around $1.80 the large traders, as a group, began 
 to liquidate. At the same time the general public speeded up their buying and 
 forced prices on up to a high of $2.05% per bushel. 
 
 Mr. Hope. When the public gets the idea that it can make money out of 
 speculation there is nothing to prevent it from engaging in it to such an extent 
 as to result m greatly increasing the price 
 
 Dr. Duvel. You are quite right. 
 
 Mr. Hope. As the matter now stands? 
 
 Dr. Duvel. That is right. 
 
 Mr. Hope. And in that case there might be some value, might there not, in 
 having a few short sellers who would hold the thing in check? 
 
 Dr. Duvel. Except, of course, we never get the general public into the market 
 to any considerable extent until some individual trader, or a group of larger 
 traders, gets the machinery in proper order. The small traders, as a group, want 
 to see prices advancing before they take a chance. 
 
 Mr. Hope. These bull movements are all started by the large traders; is that 
 correct? Later the public get in. 
 
 Dr. Duvel. That is generally true. Of course, we have to keep in mind, in 
 thinking of the futures market, that all persons participating in the futures 
 market do so with the expectation or hope of making a profit. They do not 
 expect to take a loss; they expect that the market will advance and yield them a 
 profit. Small traders are not so able to stand losses, consequently they want to 
 see prices advancing before they buy. 
 
 Mr. Hope. Now, with reference to the question of hedging: You will recall, as 
 will the members of the committee who attended the previous hearings when this 
 question was under consideration, that at that time the millers expressed the view 
 that it was necessary to hedge and that it is necessary to have an entirely free 
 market for them to buy their hedges wiien they need to do so. 
 
 Now, do you think that the limitations included in this bill will prevent legiti- 
 mate hedging? 
 
 Dr. Duvel. No; not in the least. 
 
 Mr. Hope. You think that there will still be a sufficient volume of trading 
 80 that there will be opportunity for them to hedge? 
 
 Dr. Duvel. Yes; ample. There is one indication in the chart which will show 
 that, Mr. Hope. That is illustrated here on this chart, showing the transactions 
 in hedging. As you will note, this chart shows that the millers' hedging transac- 
 tions offset to the extent of about 70 percent, 
 
 Mr. Hope. That runs through a period of a year? 
 
 Dr. Duvel. Yes; that is for a period of 1 year. 
 
 Mr. Hope. But would that be true for a shorter period? WTiat I mean is 
 this: Millers usually are heavy buyers after a crop movement begins. At that 
 time they would hedge by selling futures against their purchases. Later on, 
 when they are selling flour, they would be buying futures. Now, during any 
 particular period or, say, during any 1 month, would these hedges offset one 
 another to the extent you mention? 
 
 Dr. Duvel. There is a considerable variation in that respect, as you see here. 
 
 Mr. Hope. So that you could not say, for any particular period, that represents 
 70 percent of the hedging at that point? 
 
 Dr. Duvel. No; you could not say that. 
 
 Mr. Hope. That would not be correct? 
 
 Dr. Duvel. I would not want to say that. 
 
 Neither do I, in this connection, want to leave the impression that I am opposed 
 to short selling. You cannot have a futures market without it. You have to 
 have some short selling to have a futures market. In considering that point, of 
 course, we must keep in mind one major point. Whether it is desirable to 
 
 BEGULATION OF COMMODITY EXCHANGES 
 
 106 
 
 maintain or abolish futures markets. We cannot have a futures market unless 
 we have a certain amount of short selling. That is the only way it can operate. 
 
 Mr. Hope. Do you think you would still have an active market if you should 
 put a limitation upon the volume of sales? 
 
 Dr. Duvel. Yes; there is no doubt in my mind on that point. Of course, you 
 never can measure exactly what adjustments will follow any new legislation. 
 
 A great many people believe that there should be some way to keep the incom- 
 petent or poorly informed out of the markets. There are many who buy and sell 
 wheat futures who know but little about wheat and much less about the world 
 supply or the fundamentals of a futures market. That class should not trade. 
 However, that is an entirely different question, one which we do not undertake 
 to answer. 
 
 Mr. Hope. What you want to do is to regulate that. 
 
 Dr. Duvel. Yes; and moreover, whenever you eliminate this class you destroy 
 the futures markets. We have no desire to destroy the futures markets, but we 
 believe they can be made better and safer by proper regulation. 
 
 Mr. Hope. How do you account for the fact that the present wheat market is 
 very much above the world market? Do you think that is because of speculation? 
 
 Dr. Duvel. Speculation. We have been above the world market for 4 years. 
 
 Mr. Hope. Yes. If we had had no futures trading do you think that the 
 present price would be above the world market? 
 
 Dr. Duvel. No; unless there was a fixed or a minimum price, I do not think 
 that it would be. 
 
 Mr. Hope. At this time the Chicago price is approximately 20 cents above the 
 Winnipeg price — 20 cents a bushel — which evidences the fact that the speculators 
 in this country think that it is worth while to buy wheat at that price, does it not? 
 
 Dr. DuvBL. It ties up, of course, with the control of acreage, the monetary 
 situation, and various other factors, but it is true that the speculator who holds 
 or buys futures does so with the belief and faith that his trade will yield a profit. 
 In other words, when a man is interested in buying wheat at 80 cents a bushel 
 he does so because he thinks that he will be able to realize a profit on wheat 
 bought on that basis; otherwise he would not care to buy. If he did uot think 
 the wheat price would go above that level he would not buy it. 
 
 Mr. Hope. Yes. 
 
 Dr. Duvel. But we do believe that with the provisions in this bill there 
 will be no interference, in any sense, with the man who wants to do a fair and 
 honest business. The proposed amendments will necessitate some readjustments. 
 
 Mr. Hope. How do you account for the fact that the millers and others who 
 are interested in maintaining hedging have consistently opposed this type of 
 legislation? They evidently do not agree with you that this legislation will still 
 enable them to hedge with entire freedom. 
 
 Dr. Duvel. In my opinion, it is because the majority of millers do not have 
 occasion to become familiar with the inner workings of speculative training. I find 
 nothing in our studies to indicate any justification of their views on that point. 
 
 Mr. Glover. You spoke about wheat being above the world price. Do you 
 think that the tariff has had anything to do with keeping the price above the 
 world price — the world market? What effect do you think it has had? 
 
 Dr. Duvel. At times it is an important factor; but in my opinion it is not a 
 factor under existing conditions. 
 
 The Chairman. Any further questions? 
 
 Mr. Gilchrist. I notice you have used several charts. I was wondering 
 whether those could be made a part of the record. 
 
 Dr. Duvel. I will be glad to offer them. 
 
 The Chairman. We will see if they can be made a part of the record. 
 
 Dr. Duvel. They will be available to you at any rate. They are contained in 
 various Senate documents and bulletins of the Department, copies of which will 
 be furnished to the members of the committee. 
 
 The Chairman. We desire to thank you. Do you think you could be here 
 tomorrow? 
 
 Dr. Duvel. Yes. 
 
 The Chairman. We would like to have you here. 
 
 Now we would like to have the names of any other witnesses who desire to be 
 heard tomorrow. I am going to ask that you leave your name with the clerk 
 so that we may have a list of those who desire to appear tomorrow. 
 
 We want to limit the hearings insofar as possible with the view to formulating 
 legislation. We have had a rather full questioning of Dr. Duvel, but we will try 
 to arrange the time of the witnesses tomorrow from the list we get. 
 
106 
 
 REGULATION OF COMMODITY EXCHANGES 
 
 Mr. Hope. Mr. Chairman, I understand that the cooperative org^anizations 
 are going to be represented here tomorrow, and I would like to suggest that we 
 have a representative from the credit administration present. 
 
 The Chairman. I think that is a good suggestion, and unless there is objection, 
 we will ask one of the representatives of that administration to be here tomorrow. 
 
 The committee will adjourn until 10 o'clock tomorrow morning. 
 
 (Whereupon, at 11:45 a. m., an adjournment was had until 10 a. m., of the 
 following day, Apr. 4, 1934.) 
 
 Washington, D. C, Tuesday y April 17 y 19S4, 
 
 The committee was called to order at 10 a. m., Hon. Marvin Jones (chairman) 
 presiding. 
 
 The Chairman. The committee will come to order, please. 
 
 Mr Mehl, from the Department, is here, and we will be glad to hear him. 
 
 Statement of J. M. Mehl, Assistant Chief, Grain Futures Administration, 
 Department of Agriculture, Washington, D. C. 
 
 Mr. Mehl. Mr. Chairman and gentlemen of the committee, for the record 
 again, my name is J. M. Mehl, Assistant Chief of the Grain Futures Adminis- 
 tration, Department of Agriculture. I wish at this time to make it entirely 
 clear that there is no quarrel between the Grain Futures Administration and the 
 exchanges as regards the merits of the futures-trading system. We have never 
 hesitated to defend that system, and we have never hesitated to place ourselves 
 on the side of the exchanges in any controversy affecting their continued existence. 
 We have even defended short selling, as the chairman knows, and have been 
 "panned" pretty hard at times because of that position. 
 
 We have been willing to go a great deal further in defending the future stra- 
 ding system than Mr. Siebel Harris was willing to go the other day when he stated 
 that the only justification for futures trading was as an insurance exchange. 
 Mr. Harris is perhaps one of the best-informed men in the business, but I think he 
 does the futures- trading system an injustice when he says that its only excuse for 
 existence is the hedging utility provided thereby. 
 
 In the first place, when properly conducted, the futures-trading system fur- 
 nishes the finest and most delicately balanced machinery for registering price 
 opinion that could possibly be devised. It enables world opinion of price to 
 focus in one place and enables everyone to know exactly what that opinion is. 
 
 Without the futures-trading system there is reason to believe that the grain 
 business of this country would be under control by a few lai^e terminal elevators 
 who would fix the price of grain to farmers. 
 
 Again, the desire to speculate, as Mr. Harris pointed out, is an inherent instinct 
 of the American people that cannot be changed, at least not overnight. But, 
 through the medium of futures trading, we are enabled to have organized specu- 
 lation, centering in a few large market places and where, if this bill beomes a law, 
 we can have some control over it; eliminate its abuses, and make of it something 
 to be proud of instead of something always to be apologized for. 
 
 In appearing before this committee Dr. Duvel has put forward certain facts and 
 figures showing the urgent need for legislation of this kind. He has done so as a 
 friend of these exchanges, behieving that this legislation will help them attain 
 and maintain their proper place in our economic structure and enable them to 
 enjoy a somewhat larger measure of public confidence. 
 
 Under these circumstances we were just a little disappointed the other day in 
 the remarks of Mr. Bob Boy Ian, the intrepaid vice president of the Chicago 
 Board of Trade. We were somethat disappointed that the exchange representa- 
 tives should be so quick to charge the Grain Futures Administration with bad 
 faith and the Secretary of Agriculture with a betrayal of their interests in bringing 
 to issue at this time the case against Arthur W. Cutten. 
 
 As Dr. Duvel will explain to you the Cutten case could not have been started 
 earlier because it was not ready sooner. Mr. Boylan apparently overlooked the 
 fact that the complaint itself grew out of, not what Mr. Cutten was doing back 
 in 1930 and 1931, but out of the fact that the reports which were made to us at 
 that time were false and we had no means of knowing what he was doing in the 
 market in 1930 and 1931. Now, Dr. Duvel will cover that story more completely 
 than I have attempted to cover it. However, the case was not delayed for the 
 purpose of having Mr. Cutten tried in 1934 instead of 1930. Mr. Boylan gives 
 the Government entirely too much credit for foresight when he intimates that 
 it was delayed for that purpose. The case could have been delayed; it could 
 have been delayed until Congress had adjourned. We appreciate this might 
 have been more satisfactory to the exchange interests, but surely we do not on 
 
 REGULATION OP COMMODITY EXCHANGES 
 
 107 
 
 that account need to apologize for doing our plain duty under the law. This 
 committee, I think, is entitled to have the information, especially at a time 
 when it is considering legislation dealing with such matters. 
 
 As for the publicity given that case, everyone must recognize that the name 
 of Arthur Cutten is news everywhere. We could not have kept it out of the 
 newspapers if we had tried. The Department in this case sinaply followed the 
 usual course of releasing a statement containing such information only as every 
 newspaperman in Washingten would have been demanding, and rightly so, 
 within a few hours after the complaint had been served upon Mr. Cutten. By 
 means of this release the information was given to all, at the same time, both as 
 a matter of convenience and of plain fairness. 
 
 Now, I have listened intently to the arguments that have been advanced 
 against this bill. I beUeve it is quite fair to say that those arguments have been 
 directed, not against the provisions of this particular bill but against the idea 
 of legislation in general. They are founded on the philosophy that legislation 
 of every kind, touching the affairs of the exchanges, must be defeated at all 
 costs. Stripped te the bone these arguments run something like this: "There 
 are too many laws, and some bad laws. Therefore, we ought to stop making 
 laws." According to that argument, Congress should have adjourned in March 
 a year ago. Of course, Mr. Boylan teld us there had been no legislation since 
 the 4th of March 1933, but I have been unable to figure out in my own mind 
 whether he was trying to be complimentary or sarcastic. 
 
 It has been argued that future trading cannot exist if this bill becomes a law. 
 The same claim was made in 1921 and 1922 when the Futures Trading Act and 
 the Grain Futures Act were being considered. In 1925, 3 years later, we had 
 the largest volume of speculative trading on the Chicago Board of Trade ever 
 known, namely, 28 billion bushels. 
 
 Mr. Glover. And how much grain was grown, actually grown, in that year? 
 
 Mr. Mehl. In 1925? I do not know just what the total amount of cash 
 grain handled on the Chicago Board of Trade was that year. It is only fair to 
 say that this was a period of extremely large speculative trading, but that is not 
 my point. I am not attempting to say that 28 billion bushels was too much. 
 I am merely saying that the fears of the exchanges that the Futures Trading Act 
 and the Grain Futures Act would stop future trading proved to be groundless. 
 
 The Chairman. Mr. Mehl, the value of the exchange for hedging and insurance 
 purposes is injured rather than helped by the extreme periods of manipulation, 
 whether it is extremely short or long. 
 
 Mr. Mehl. I should sav that is true when 
 
 The Chairman (continuing). In other words, if it is kept on a more stabilized 
 basis, for normal activities, it will be safer for hedging purposes than if it is 
 manipulated by the big fellows. , , ,. 
 
 Mr. Mehl. I should sav that is true, if the large volume of trading is brought 
 about by the operation of large speculators. But, of course, you will have periods 
 when, without manipulation in the market, there will be increased speculative 
 interest on the part of the smaller traders. 
 
 The Chairman. Yes. , xi. xv . 
 
 Mr. Mehl. And that will come in times when crops are small rather than when 
 
 they are large. ^ , ^ ^ j.. , . 
 
 The Chairman. I want to call attention in that connection to four articles by 
 Arthur W. Cutten that appeared some months ago in the Saturday Evening Post, 
 in the issue of November 1932, and three successive issues, in the Saturday Even- 
 ing Post, in which Mr. Cutten undertakes to justify these ultralarge activities, 
 and in these articles he discusses the tremendous fluctuations in the market, 
 without any change in the amount of cash grain available. 
 
 Mr. Mehl. Yes. , •, x i x • i..* 
 
 The Chairman. And in discussing the various causes he undertakes to justify 
 
 them as affording an opportunity to the miller and others to hedge their purchases. 
 It seems to me that with proper control of these extreme periods it would be a 
 
 much better and safer market. 
 
 Mr. Mehl. Yes. . . .^ -, ^ ' x. 
 
 The Chairman. And a safer means of insurance given to the dealer m cash 
 
 grain, in which the miller could hedge his purchases and have some measure of 
 
 assurance regarding the price. , ^ , x • x-r xv. 
 
 He justifies all of these tremendous activities or undertakes to justify them; 
 
 The Chairman. And the fluctuations, with a tremendous wide range, occurring 
 sometimes two or three times a day, so that the man having an ordinary margin, 
 put up for hedging purposes, could be wiped out, and he would have no insurance. 
 
 II 
 
 ( 
 
4 
 
 108 
 
 REGULATION OP COMMODITY EXCHANGES 
 
 Mr. Mehl. Yes. 
 
 The Chairman. It seems to me that they would be much better oflF to have 
 reason able regulations in having an insurance market, an opportunity to 
 opera vo 
 
 *u^'l'u^o"I:J^t*'^*®^^^*°^^- ^®^' ^^- Chairman, my purpose was not to show 
 that the 28 billion bushels traded in in 1925 was necessary in order to provide a 
 hedging market. To the extent that the operations of the large speculators 
 contributed to the situation you have described, they are harmful and should be 
 placed under control. We believe this bill wiU accomplish that purpose. But 
 the point I was trying to make is that the Grain Futures Administration is not 
 at war with the exchanges regarding the futures market. We rather concede 
 that as long as the hedging system is interwoven in the present method of handling 
 gram it is necessary, perhaps, to have some speculation to absorb the hedges. I 
 am sunply pointing out that on that question we have never hestitated— we 
 may be wrong, but I am iimply teUing you the facts— we have never hesitated to 
 put ourselves on the side of the exchanges in saying that so long as hedging is 
 necessary, there must also be permitted some speculative trading. Therefore 
 it does not seem quite fair on their part to charge us, as they have charged us 
 here, with bad faith and a betrayal of their interest in bringing before this com- 
 mittee certain facts that have come to our attention during the 10 years we have 
 been operating under the Grain Futures Act. 
 
 It has been asserted that the futures-trading system cannot endure and cannot 
 function as a hedging facility if trading limiatations are imposed which will 
 prevent any speculator from having more than 2,000,000 bushels of wheat futures 
 at any one time. 
 
 As Dr. Duvel has said, there are only about eight persons in the entire United 
 btates who at any one time ever have as much as 2,000,000 bushels or more, 
 but when they are in the market they know no limit. And they do not hesitate 
 to take advantage of every technical situation in the market, and we believe 
 
 Mr. Chase. May I interrupt you with a question? 
 
 Mr. Mehl. Yes. 
 
 Mr. Chase. You say Dr. Duvel says that there are only about eight of these 
 men? 
 
 Mr. Mehl. Well, Dr. Duvel mentioned 16, but that covers a period of about 
 10 years. 
 
 Mr. Chase. Sixteen? 
 
 Mr. Mehl. Yes; if you take it through the years; the greatest number who 
 ever get about 2,000,000 bushels is about eight. Of course, all of those are not 
 m the market at the same time. 
 
 Mr. Chase. Is it your thought, Mr, Mehl, that the purpose of this legislation 
 is to control the manipulations of those 8 or 16 men? 
 
 Mr. Mehl. Yes. 
 
 Mr. Chase. That is the primary purpose? 
 
 Mr. Mehl. No; not altogether. Of course, that 2,000,000 bushels is just a 
 suggestive figure. When the Commission under this bill fixes the limitation, it 
 naay be 2,000,000 bushels. It may be more, it may be less. That is the figure 
 that I am mentioning because it has been thrown out as a suggested figure. 
 
 Now, are we to believe that what has been called the greatest grain market in 
 the world depends for stability, for liquidity, and for life itself, upon the operations, 
 of eight large speculative traders, and that the market cannot function and can- 
 not exist without these large speculators? If that be true we are in a bad way. 
 Some more help from that crowd like we had last summer, and have had in times 
 past, and the machinery of futures trading will be put out of commission for good. 
 
 The trouble with the market right now is not legislation, or prospects of legis- 
 lation; it is just a natural reaction from the excesses of last summer. 
 
 Mr. Marshall. Would you permit an interruption, Mr. Chairman? 
 
 Mr. FuLMER. Yes, Mr. Marshall. 
 
 Mr. Mehl. Certainly. 
 
 Mr. Marshall. Regarding to that last-summer proposition: I have asked 
 two or three witnesses about that, and from the remark you have just made I am 
 wondering whether your idea differs from the opinion that you have expressed. 
 In fact, some of them did not express any opinion, and I am just wondering if 
 you can express one. It seems to me we should have had an opinion from those 
 who are in a position to know the cause of the large fluctuations from 42 cents a 
 bushel up to $1.28 and then back to 71. 
 
 Mr. Mbhl. Yes. 
 
 Mr. Marshall. I take it from your remarks that that was due to the pro- 
 fessional trader; is that your opinion? 
 
 BBGULATION OF COMMODITY EXCHANGES 
 
 109 
 
 Mr. Mbhl. There were undoubtedly some excessively large accounts in the 
 market at that time. 
 
 Mr. Marshall. I am just wondering whether it is your opinion that the pro- 
 fessional trader caused that. 
 
 Mr. Mehl. Well, perhaps it is a little difficult to draw the line between the 
 professional trader and the nonprofessional trader. But I think Dr. Duvel can 
 tell you much more than I can about that. I have directed my testimony more 
 along the lines of a rebuttal to some of the points that were brought out by the 
 opponents of this bill. I do think, however, that Dr. Duvel is prepared to tell you 
 about a line of 17 million bushels in the market last July, during the time when the 
 reporting requirements of the Grain Futures Administration were suspended and 
 when our Department did not know anything about these large lines. 
 
 I would much prefer to have Dr. Duvel discuss that, because, as I say, I am 
 better prepared to discuss other points. However, I do not wish to appear to be 
 dodging or evading your questions. 
 
 Mr. Marshall. I understand; I am not desirous of embarrassing you. 
 
 Mr. Mehl. I understand. 
 
 Mr. Marshall. I have asked that question of two or three witnesses, and have 
 been interested in that point. I would like to have someone give me the reason 
 back of this fluctuation from 42 cents up to $1.28, and then back to 71. 
 
 Mr. Mehl. Yes. 
 
 Mr. Marshall. Do you think if we had had this legislation that fluctuation 
 would not have taken place? 
 
 Mr. Mehl. Well, of course it is hard to say what might have happened under 
 different circumstances, but I believe it is our honest judgment that it would not 
 have happened; that the price would not have gone up, perhaps as high as it did 
 under that tremendous speculative impetus, and therefore, there would not have 
 been such a crash. That is merely our opinion. 
 
 The Chairman. Mr. Fulmer has a question. 
 
 Mr. Fulmer. You stated a few moments ago, Mr. Mehl, that the course of 
 prices at this time is not governed by legislation or of prospective legislation. 
 
 Mr. Mehl. Yes. 
 
 Mr. Fulmer. I notice in the market reports of yesterday, following an an- 
 nouncement made by the administration concerning silver legislation, that the 
 price of wheat fell, in a short time, 5 cents a bushel. You do not think that has 
 any effect on the market? You do not think they took advantage of those reports 
 to put the market down? 
 
 Mr. Mehl. Mr. Fulmer, I think perhaps my statement was misunderstood. 
 I was not referring to prices. I was rather referring to the fear of the exchanges 
 that this bill was going to kill speculation. I said there was no reason for that 
 fear. There is very httle speculative trading in Chicago at this time, and I said 
 that was not due to the fear of legislation but was due to the excesses of last 
 summer; just a natural reaction. They have to wait to get another stake. 
 
 Answering your question as to what happened in the market yesterday, I am 
 not prepared to state, but it is reasonable to suppose that perhaps a statement 
 of the kind you refer to might have had some effect on the market. 
 
 Mr. Fulmer. And in another announcement or statement based on a report 
 of the conference on the Bankhead bill, prices went down again. While as a 
 matter of fact, that bill as reported out and passed by the Senate is exactly the 
 bill as it was passed by the House. 
 
 Mr. Mbhl. Yes. We will all admit that those things occur. 
 
 Mr. Fulmer. I would like to know if there is anything in this bill that would 
 prevent that type of speculation, on a story of that kind, by which they run the 
 price of wheat up and down 5 or 10 cents. 
 
 Mr. Mehl. Mr. Fulmer, frankly, I do not believe that the bill can operate to 
 iron out and straighten out every price curve. We all know that with a com- 
 modity so subject to change and subject to varying speculative opinion as wheat, 
 affected as it is by so many different factors, it is too much to expect that from 
 any bill. And we would not want to remove all flexibility in the market, the 
 ability to respond to change in conditions or change of opinion 
 
 Mr. Fulmer (interposing). Do you think it is a good thing for business if a 
 few speculators can, on some rumor, put grain prices up or down 5 or 10 cents a 
 bushel? 
 
 Mr. Mehl. No; I think that is a bad thing. But while we favor this bill, I 
 would not want to say that the passage of this bill would prevent a change in 
 price, such as took place yesterday. I do not know. 
 
 114603— 35— SBB B- 
 
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 110 
 
 BEGULATION OF COMMODITY EXCHANGES 
 
 Mr. DoxET. May I interrupt to ask if you mean to say, in response to Mr. 
 Fulmer's question, that the suggested legislation would not limit that condition 
 
 Mr. Mehl. I do not know. 
 
 Mr. DoxEY. You do not know? 
 
 Mr. Mehl. I would not undertake to say. What we hope to accomplish by 
 this bill is to eliminate the fluctuations and the drastic changes in price that come 
 about through operations of the large speculators, who have no interest in the 
 market and who have no interest in agriculture, but who are in the market for 
 just what they can get out of it. 
 
 Mr. DoxET. Could you legislate to prohibit all forms and kinds of speculation? 
 
 Mr. Mehl. I doubt very much if you could do so. I have always contended 
 that without a futures trading system, you would still have speculation in the 
 cash commodity. 
 
 Mr. DoxEY. In other words, speculation is an instinct in human nature. 
 
 Mr. Mehl. And wheat, by the very nature of the commodity — universally 
 used as a food — is bound to be a subject of speculation. That condition will 
 exist always. 
 
 Mr. Marshall. May I ask a question right along that line? 
 
 Mr. Mehl. Yes. 
 
 Mr. Marshall. I notice that the report of yesterday shows corn itself dropped 
 along with wheat. And what surprises me is that it is below the amount the 
 Government is loaning on corn in the West. 
 
 Mr. Mehl. This bill is not in any sense a price-fixing measure. We do not 
 think it is intended to eliminate every fluctuation from the market, although we 
 hope it will eliminate those fluctuations that come about by artificial and 
 unnatural means; that is one thing we hope for it. 
 
 Mr. Marshall. The fact that the price of corn has gone below the amount the 
 Government is loaning on corn would tend, I suppose, to have a depressing eff'ect, 
 because it could be assumed that the Government will have corn on its hands — 
 will have to take over some of the com. 
 
 Mr. Mehl. Well, possibly that is true. I could not answer that question. 
 
 Mr. BoiLEAU. May I ask a question, Mr. Chairman? 
 
 The Chairman. Mr. Boileau. 
 
 Mr. Boileau. You stated awhile ago, Mr. Mehl, that you did not expect this 
 bill to result in a perfect system? 
 
 Mr. Mehl. Yes. 
 
 Mr. Boileau. Is it your opinion that this bill takes care of all the abuses that 
 now exist? 
 
 Mr. Mehl. Well, that is a rather large order. I should say that it takes care 
 of those abuses which during the 10 years of our experience under the Grain 
 Futures Act we have been able to point out as abuses that should be eliminated 
 from the market. 
 
 Mr. Boileau. What I am trying to get at, and I am only trying to get informa- 
 tion, is this: I would like to find whether you people think this is the best bill that 
 can be devised, or whether it is possible to devise a better method for regulating the 
 marketing of grain, or just what is your opinion about it? 
 
 Mr. Mehl. In the futures-trading system? 
 
 Mr. Boileau. Yes; the future trading, with these various proposed changes 
 in the law. 
 
 Mr. Mehl. I think it is. 
 
 Mr. Boileau. What I really want to know is, do you think that the amend- 
 ment that you have suggested to the proposed bill would do all that you think 
 can be done at this time? 
 
 Mr. Mehl. At this time, in the light of present information; yes. 
 
 Mr. Boileau. That is what I mean. 
 
 Mr. Mehl. But it is not a perfect system. 
 
 Mr, Boileau. It is not a perfect system, but as perfect as you can make it now? 
 
 Mr. Mehl. Yes. 
 
 Mr. Boileau. That is what I was trying to find out. I thank you. 
 
 Mr. Mehl. Yes. Now, with reference to the 2,000,000-bushel limit which 
 has been mentioned in these hearings as a purely suggestive figure, it should be 
 borne in mind that a commission, consisting of the Secretary of Agriculture, 
 Secretary of Commerce, and Attorney General, will fix these limits according to 
 what appears to be reasonable under all circumstances. It may be more than 
 2,000,000 bushels or it may be less; but in fixing a definite limitation the Com- 
 mission is going to act advisedly and with caution, and in this respect the law, 
 this bill, is more flexible than the margin provisions of the Grain Exchange Code. 
 
 REGULATION OP COMMODITY EXCHANGES 
 
 111 
 
 If the Commission should make a mistake and fix the limit too low, it can easily 
 be remedied. The exchanges have no cause for fear on that point. They ought 
 not to worry about their ability to persuade the Commission to fix a reasonable 
 limit, when on two occasions in the past they have been able to persuade two 
 different Secretaries of Agriculture to suspend entirely one of the most important 
 provisions of the present Grain Futures Act, the reporting requirement. On both 
 occasions the market, instead of advancing, as it was claimed it would, declined. 
 It is possible that the Government may be less gullible in the future, but there is no 
 reason for believing that the Government will not be fair. 
 
 Mr. Grimes, who testified here and who has worked very hard on the grain- 
 exchange code, raised a question regarding the responsibility of the Grain Futures 
 Administration in connection with the price debacle of last summer. In his 
 testimony here he asked, as anyone might ask, whether our office, the Grain 
 Futures Administration, did not contact with the business conduct committee of 
 the Chicago Board of Trade and advise with it concerning the situation that existed 
 at that time. We did not, and the reason is plain. 
 
 The arrangement which the board of trade had made with the Secretary of 
 Agriculture in the latter part of October 1932 was still in effect. I'he reporting 
 requirements under that agreement had been suspended and the business-conduct 
 committee of the board was to require its own reports and police its own affairs. 
 
 The reporting requirements of the Grain Futures Administration had been 
 suspended once more to try out the theory of self -regulation, and the Grain 
 Futures Administration had no means of informing itself concerning that situation. 
 I will say, however, that on the 13th day of May, 2 months before the price col- 
 lapse, the present Secretary of Agriculture, Henry A. Wallace, had called upon 
 the Chicago Board of Trade to furnish him with an abstract of the reports which 
 the business-conduct committee was getting on its own responsibility. To the 
 best of my knowledge, that information has not been furnished to this day. 
 Am I taking too much time, Mr. Chairman? 
 Mr. Hope. I would like to ask a question, Mr. Chairman. 
 The Chairman. Mr. Hope has a question. 
 
 Mr, Hope. It has been suggested during the course of the hearing that it was 
 not necessary to have legislation at the present time because of the adoption of 
 the grain-exchanges code. I would like to have your opinion as to how far you 
 think the code will eliminate the abuses which you say the bill will correct. 
 
 Mr. Mehl, The grain-exchange code was the next point which I had expected 
 to discuss, Mr. Hope. 
 Mr. Hope. Very well. 
 
 The Chairman. You may proceed, Mr. Mehl. 
 
 Mr. Mehl. Mr. Hope, we have no quarrel with the exchanges as regards the 
 grain-exchange code. In fact, we have labored with the exchanges and with the 
 exchange representatives, trying to get a code that was workable. In their panic 
 of fear that there would be legislation they have been willing to write into the code 
 almost anything, whether it was workable or not. We are trying to work with 
 them. We are going to do the best we can. We shall help in every possible way 
 to make the grain-exchange code a success. 
 
 But the position taken by the exchanges now, namely, that the code is to take 
 the place of permanent legislation is utterly at variance with the position taken 
 at the time the code was being considered. When certain reform measures were 
 urged to be included in the code it was said that these were more properly regarded 
 as subject matter for legislation. 
 
 Now, if there are any provisions in the code that are not in this bill and which 
 the exchanges desire should be perpetuated, why not write them into this bill, 
 so that their benefits may be permanent? If they are good for a year and are 
 helpful in the same direction as this bill, why are they not good also as permanent 
 measures and as a part of this bill? In any event, we must not forget that the 
 grain-exchange code is a voluntary code and can in no sense operate as an amend- 
 ment to the Grain Futures Act or as a substitute for this bill. Therefore it is 
 rather diflScult to see how the code argument is really germane to this discussion. 
 Mr. Boileau. You say that the code is a voluntary proposition? 
 Mr. Mehl. Yes. 
 
 Mr. Boileau. Has not the Government the right under the N. R. A. to force 
 the code upon those who do not come in voluntarily? 
 
 Mr. Mehl. I think the Government has the right under the N. R. A. to write 
 a code if anj' industry does not come in voluntarily, but the policy, I understand, 
 has been to let the industry come in voluntarily rather than to force a code upon 
 it. 
 
i 
 
 
 112 
 
 BEGUIATIOK OF COMMODITY EXCHANGES 
 
 Mr. BoiLEAU. Yes; but after it signs the agreement it is bound by the code^ 
 in other words, after they sign the agreement and the code is completed they are 
 bound by the provisions of the code. 
 
 Mr. Mehl. Yes. 
 
 Mr. BoiLEAU. And they have signed this code, have they not? 
 
 Mr. Mehl. I understand they have. 
 
 Mr. BoiLEAU. So that they are really bound by it now. 
 
 Mr. Mehl. Yes. 
 
 Mr. BoiLEAU. Yes. 
 
 Mr. Hope. May I ask you a question there, Mr. Mehl? 
 
 Mr. Mehl. Yes. May I just state again that the code is not operative as an 
 amendment to the Grain Futures Act, however. 
 
 Mr. Hope. In other words, as I understand it, the code proposes to control 
 excessive speculation by imposing heavier marginal requirements after certain 
 limits in trading are reached. 
 
 Mr. Mehl. Yes. 
 
 Mr. Hope. And, of course, this bill is seeking to get at the same thing by giving 
 the Ck)mmission power to limit the amount of trading a man may engage in. 
 
 I would like to have your opinion as to whether the method of marginal control 
 would be as effective as the method that you advocate in this bill? 
 
 Mr. Mehl. Well, in my opinion, if the purpose of the higher margin, which is 
 25 percent on a line over 2,000,000 bushels, is to place a limitation upon large 
 speculative lines, I should think it would be preferable to have a definite and 
 fixed limitation so that it would operate with certainty and with fairness to all. 
 The margin requirements under the code will aflfect only the man who does not 
 have the financial means with which to meet them. Il the purpose of the higher 
 margin is to limit large lines, then I should say the provisions of this bill are more 
 desirable because they will operate more certainly and more fairly. In the light 
 of our observation we think the method provided for in this bill will best accom- 
 plish the purpose of limiting speculative lines. 
 
 Mr. Hope. Do you think that the high marginal requirement in the code will 
 tend to discourage speculation? 
 
 Mr. Mehl. Yes; I think it will. 
 
 Mr. Hope. You do not think it will go far enough; is that your opinion? 
 
 Mr. Mehl. Well, I am not prepared to pass definitely on that, because we do 
 not know what eflFect it is going to have. This part of the code does not take 
 effect until the 1st of August. It is reasonable to believe that it will tend some- 
 what to reduce speculation. 
 
 I was very much surprised the other way when counsel for the Chicago Board 
 of Trade informed us that four cooperative associations were members of the 
 Chicago Board of Trade, that all of those were Capper- Volstead organizations, 
 and that none other were entitled to membership on a contract market. That was 
 news to me, and I was disposed to argue that last point with Mr. Ellis after the 
 hearing, but the quashed me by referring to the opinion of the United States 
 Circuit Court of Appeals in the Farmers' National Grain Corporation case. 
 
 I read that decision again, and I am willing, for the time being, at least, to accept 
 Mr. Ellis's view. If counsel for the board of trade, representing the best legal 
 talent in the country, and the United States Circuit Court of Appeals agree upon 
 a proposition, it ought to be taken seriously. I am taking it so seriously that I 
 am going to suggest at this time a change in this bill. 
 
 Mr. DoxEY. Right at that point, do you accept his interpretation of that 
 decision? 
 
 Mr. Mehl. I am just assuming that it is correct. 
 
 Mr. Doxet. You will remember that I asked him some questions about that, 
 and, in fact, he admitted that it was not the strength of the exchange case so much 
 
 as the weakness of the National Grain Corporation case 
 
 Mr. Mehl. Yes. 
 
 Mr. DoxET. Because they did not show that they were a Capper- Volstead 
 association. 
 
 Mr. Mehl. Yes. 
 
 Mr. DoxET. You were here and heard the statements about that? 
 
 Mr. Mehl. Yes, Mr. Doxey; but for the purpose of this discussion I am willing 
 to take his view of it. 
 
 Mr. DoxEY. I think it is a pretty violent presumption to take that view as 
 being correct. 
 
 Mr. Mehl. Well, for the purpose of this discussion only, Mr. Doxey, I was 
 assuming that it was correct. 
 
 REGULATION OF COMMODITY EXCHANGES 
 
 113 
 
 There are thousands of cooperative associations in this country that cannot 
 possibly qualify as Capper- Volstead organizations. There is no reason why they 
 should, since they are law-abiding and have no need for claiming the immunity 
 from prosecution under the antitrust laws provided for by the Capper- Volstead 
 Act. 
 
 There are hundreds of cooperative elevators in Iowa, Illinois, Kansas, Nebraska, 
 Texas, and Oklahoma, and the Dakotas that make no claim to being Capper- 
 Volstead organizations. There are many in the IlUnois Farmer Grain Dealers' 
 Association represented by Mr. Grommon and Mr. Farlow. Mr. Farlow, in this 
 statement yesterday, said that only about 40 percent of the members of his 
 association were Capper- Volstead organizations. 
 
 I doubt whether the Plainfield Grain Co., Mr. Grommon's own local company, 
 pretends to be a Capper- Volstead organization, although it is one of the four 
 named by Mr. Ellis — 1 do not know that it was named by him — but I am sure 
 it was among the four which he says enjoy membership privileges on the Chicago 
 Board of Trade. 
 
 The reason I question whether it is a Capper- Volstead organization is because 
 Mr. Grommon said there were 415 members in the company, but that it had 
 1,800 active accounts, so there must be four times as many customers as there are 
 members. 
 
 Would it not be the irony of fate, after the fine help Mr. Grommon and Mr. 
 Farlow gave the exchanges in opposing this bill, if the board of trade should 
 discover that the Plainfield Grain Co. is not a Capper- Volstead organization 
 and kick it off? 
 
 I have nothing against the Farmers' National Grain Corporation. I appreciate 
 why this organization is interested in section 6a, and I disagree with Mr. Ellis* 
 contention that section 6a, proposed to be added by this bill, changes the sub- 
 stantive law. It does nothing of the kind. It merely changes the method of 
 procedure, preserves the status quo of the parties pending appeal, and I think 
 «very layman and every lawyer will agree that is a pretty good law. 
 
 Mr. Doxey. Do you 
 
 The Chairman. Can you suspend for a few minutes, Mr. Mehl? 
 
 Mr. Mehl. Yes; but I would like to complete just this one thought. 
 
 The Chairman. Very well. 
 
 Mr. Mehl. I have nothing against the Farmers' National, but I do have a lot 
 of feeling for the local farmers' elevators, such as represented by Mr. Farlow's 
 organization, because for many years I was intimately connected with this type 
 of cooperative and have been more or less of a farmers' elevator "fan" all my life. 
 I want this type of cooperative to have the privilege of representation on contract 
 markets also, and therefore suggest that on page 2 of this bill, H. R. 8829, the 
 definition of "cooperative association" be so enlarged as to remove any doubt 
 regarding the right of any bona fide cooperative association, otherwise qualified, 
 to have the benefit of the Grain Futures Act, regardless of whether it is a Capper- 
 Volstead organization or some other type. 
 
 Now, in closing, Mr. Chairman, I want to say that we appreciate why the 
 exchanges desire to avoid legislation. We appreciate that to some extent such 
 legislation seems to them to be a reflection upon their ability to govern them- 
 selves. It should not be so considered, for in a business that is so involved and 
 has so many ramifications, and where temptation and human selfishness are so 
 intimately related to the public service which these markets perform, it is simply 
 .inevitable that some independent and unbiased body should act as umpire and 
 .see that there is fair play and fair dealing as between the various interests involved. 
 
 The Chairman. We desire to thank you, Mr. Mehl. 
 
 Mr. Mehl. Thank you, Mr. Chairman. 
 
 The Chairman. We will next hear Dr. Duvel. 
 
 Statement of Dr. J. W. T. Duvel, Chief Grain Futures Administration, 
 Department of Agriculture, Washington, D. C. 
 
 Dr. Duvel. Mr. Chairman and gentlemen of the committee, I realize the 
 time of the committee is limited this morning and I hardly know where to begin. 
 But I would like to make a very few comments on some of the provisions of the 
 bill. In the first place, there seems to be some misunderstanding as to what this 
 bill covers with reference to commodities. Some members of the committee, 
 I fear, have the idea that it is intended to cover new commodities. We have in 
 this bill wheat, corn, oats, barley, rye, flaxseed, grain sorghums, and mill feeds. 
 

 ■ 
 
 114 
 
 REGULATION OP COMMODITY EXCHANGES 
 
 Mill feeds, one of the commodities named, is the only one in the bill that is 
 not in the present Grain Futures Act, and that is put in because mill feeds are 
 so closely related to grain. 
 
 In section 4a of the act, which relates to the commission, consisting of the 
 Secretary of Agriculture, the Secretary of Commerce, and the Attorney General^ 
 the question has been raised a number of times as to the creation of this commis- 
 sion and the authority given to it. 
 
 This is not a new commission. This is the same commission as now provided 
 for by the Grain Futures Act. This bill, however, takes away from that com- 
 mission some of their present responsibilities and assigns them to the Secretary 
 of Agriculture for the sake of simplicity of operation. 
 
 It does, however, leave to this Commission the power to deal with the Broad 
 problem of fixing limits. Our feeling is that such power is safer in the hands of 
 the Conmiission than in the hands of the Secretary. There are some people^ 
 however, with whom I have discussed this matter, who think that the authority 
 to fix the limit of speculative trading should be delegated to the Secretary. If the 
 committee so desires, we in the Grain Futures Administration have no objection. 
 But the recommendation has been made that this power be left with the Com- 
 mission so that there will be 3 men instead of 1 charged with that responsibility. 
 
 It likewise has been advocated here that any limitation fixed is going to ruin 
 the futures market so that it cannot function as a hedging market. 
 
 From the arguments presented it is clearly evident that when this matter 
 comes before the Conmiission we are going to be subjected to the same difficulty, 
 the same arguments, that we have met here. Personally, I think perhaps it 
 would be as well to settle the matter of limits on speculative trading by writing 
 it into the bill, especially as such limits may apply to wheat and com; fix the limit 
 in the bUl and have it over with. 
 
 Mr. Mitchell. I do not understand how it operates, but you can pick up the 
 paper now and see how the price of corn is jumping up and down 5 and 6 cents a 
 bushel. Now you are talking about regulating the margin while that is going on, 
 from day to day; the price just jumping up and down. For instance, the Govern- 
 
 :ing about now you are going to stabilize tne price. 
 
 Dr. DuvEL. Well, the actual stabilization of the price is extremely difficult. 
 
 Mr. Mitchell. How is that? 
 
 Dr. DuvEL. The actual stabilization is extremely hard; where you have a 
 futures market there is sure to be some fluctuation. 
 
 Mr. Mitchell. What keeps it jumping up and down that much? One day 
 it is up and another down, and who is served by it? 
 
 Dr. DuvEL. Let me give you a little background for that. I think Mr. Mehl 
 stated the situation very well when he said that the wide fluctuation yesterday 
 is simply the outgrowth of the situation which developed last summer. That 
 slate has not yet been wiped clean, and it must be wiped out some way. 
 
 Mr. Mitchell. Will this bill stop that kind of practice, or can you suggest 
 how you can stabilize the price to the producer? 
 
 Dr. Duvel. Our experience over 10 years indicates that practically all of these 
 wide fluctuations are coupled directly with the transactions of some large operator; 
 not always, but in the majority of cases. Therefore we believe that by some 
 limitation of speculative operations on the part of individuals who trade in large 
 volume, will, in large measure, prevent these wide fluctuations. Aside from that 
 there is no other way to prevent it, except as provided in the code, to fix limits 
 through which the price can move in any one day. 
 
 Mr. Mitchell. I am just mystified at a situation where the Government will 
 advance 45 cents a bushel on corn and then read where it is down to 42 or 41 
 cents; and closed at 46 or 47 cents; that is just shell gambling, is it not? 
 
 Dr. DuvEL. And the market opened 1% lower this morning. 
 
 Mr. Mitchell. Yes. 
 
 Dr. Duvel. And wheat at 1^ less this morning. 
 
 Mr. Mitchell. There should be some way to get at that. 
 
 The Chairman. Dr. Duvel, if it will not interrupt your line of thought I 
 would like to ask you a question. 
 
 Dr. Duvel. Yes. 
 
 The Chairman. The question was raised here as to the delay in filing the pro- 
 ceedings against Mr. Cutten. I would like to have you tell us why earlier action 
 was not taken. 
 
 BEGULATION OP COMMODITY EXCHANGES 
 
 115 
 
 Dr. Duvel. 
 Mr. Hope. 
 Dr. Duvel. 
 Mr. Hope. 
 Dr. 
 
 Dr. Duvel. Mr. Chairman, I will be glad to answer that question. Perhaps it 
 is just as well to do that now because some of these other matters have been 
 covered more or less completely. 
 
 The charge has been made that there was delay in order to bring it out at the 
 time of this hearing. It was likewise stated that the information was available 
 and if it had been brought to the attention of the business-conduct committee in 
 1930 and 1931, that committee would have taken action. 
 
 The gentleman who made that charge, Mr. Boylan, forgets, or apparently 
 overlooks, or did not have the opportunity to ascertain, that the complaint is 
 based on the fact that these reports were not made in 1930 and 1931. We did 
 not have the information through failure of Mr. Cutten to make proper reports. 
 
 The Chairman. Mr. Cutten did not make the reports? 
 
 Dr. Duvel. Did not report as required under the law. 
 
 Mr. Hope. To the boani of trade? 
 
 No; to the Grain Futures Administration. 
 Under your regulations? 
 Yes; under our regulations. 
 Issued pursuant to the Grain Futures Act? 
 Duvel. Our regulations require commission houses to report accounts 
 whenever they reach 500,000 bushels or more; likewise, individuals are required 
 to report their transactions in the market when they have 500,000 bushels or 
 more under their control. 
 
 Mr. Boileau. That is under the Grain Futures Act? 
 
 Dr. Duvel. Report them to the Grain Futures Administration. 
 
 The Chairman. And Mr. Cutten paid no attention to the regulations of the 
 Department? 
 
 Dr. Duvel. He made some reports, but the majority of his operations he did 
 not report. His operations were scattered through a great many different com- 
 mission houses, and some of the commission houses through which he carried on 
 his transactions failed to report them. Therefore it would seem clearly evident 
 that we could not have brought these violations to the attention of the business- 
 conduct committee in 1930 and 1931. 
 
 The Chairman. When did you get the final report on his transactions? 
 
 Dr. Duvel. The last information was secured on March 13, just 30 days prior 
 to the time that Mr. Boylan made these charges; March 13, 1934. 
 
 Mr. Boileau. May I ask you a question there? 
 
 Dr. Duvel. I would like to give you the whole story. 
 
 The Chairman. Let us have the full story before the questions. 
 
 Mr. Boileau. All right. 
 
 Dr. Duvel. As a result of the heavy short selling in 1930 and 1931, as I showed 
 you the other day on this chart [indicating], covering the period from April 1930 
 through June 1932 — it was deemed desirable to make a survey of all transactions 
 in futures as of a given date so that more specific data would be available for the 
 members of this committee and others as to the operations of all classes of traders, 
 both large and small. This investigation covered the oi)en commitments as of 
 the close of business June 30, and the trading on July 1, 1931. 
 
 As a result of that survey which we started the latter part of 1931, we un- 
 covered these large accounts. That information was compiled, in part, in 1932, 
 and then for the first time we realized that many of the accounts belonging to 
 Mr. Cutten had not been reported to us as required by the regluations under the 
 law. 
 
 We then undertook to ascertain a complete record of all accounts that had not 
 been reported. I do not care to go into it too fully, and probably it is not fair 
 to undertake to set forth all of this matter at this time in advance of the hearing, 
 which is set for May 14, but this question seems to be of vital importance to thia 
 committee and to the country as a whole, and to the market that we want to 
 preserve. 
 
 Our reporting requirement at that time was 500,000 bushels or more. Account 
 after account showed 495,000 bushels; and so long as accounts did not reach 500,- 
 000 bushels the commission houses did not have to make a report. 
 
 Having that information and knowing that this trader was in the market, we 
 assigned an auditor to complete the investigation and to ascertain just where 
 these trades were and something of the character of them. That investigation 
 continued through 1932. As the information was brought together from the 
 various houses it did not harmonize. The purchases and sales would not check 
 out. 
 
N 
 
 jT^ 
 
 116 
 
 BEGULATION OP COMMODITY EXCHANGES 
 
 Therefore, in November 1932, we called the auditor to Washington and asked 
 for all information assembled up to that time. He arrived here on November 
 29, 1932. 
 
 The Chairman. Will you suspend for Just a minute? 
 
 Dr. DuvEL. Certainly. 
 
 (After informal discussion the chairman retired and Mr. Fulmer was desig- 
 nated to preside.) 
 
 Mr. Fulmer. You may proceed, Doctor. 
 
 Dr. DuvEL. After we went over that information it still could not be har- 
 monized or checked. About the middle of 1933, 1 think it was in July, the data at 
 hand was laid before the solicitor of the Department, who agreed that the regu- 
 lations under the Grain Futures Act had been violated. Immediately thereafter 
 he undertook to secure a special attorney to handle these matters because the legal 
 work in the Department was so heavy that this case could not be handled by the 
 regular staff. 
 
 In the latter part of October 1933 we secured the services of Mr. Leo F. Tierney, 
 of Iowa, to handle some of these cases, and he has been working on them ever 
 since. 
 
 And when he got into this case he found there were still further discrepancies. 
 Mr. Tierney was then called away, or was assigned to take charge of another 
 case at St. Paul, a matter involving grain standards, which was foreign to this. 
 In February he held at Cleveland, Ohio, a hearing in the Ettinger and Brand 
 case. In the meantime, however, the Department was completing, under Mr. 
 Tierney *s direction, the data involving Mr. Cutten's transactions. The Ettinger 
 and Brand hearing involved a somewhat similar case. 
 
 Mr. Tierney went direct to Chicago from Cleveland and he has been there 
 practically ever since, and we have been pushing him and have been urging him 
 to get this work completed without delay. But the last record necessary was 
 secured on March 13, 1934, after which he proceeded to draw up the complaint, 
 which happened to come at this time. 
 
 If this hearing had been carried out as originally scheduled it would have 
 been over a day prior to this release on April 11. Had we undertaken to hold 
 up the complaint, and released it 30 days from now, or after Congress had ad- 
 journed, what would this committee, or any committee of Congress, have to say 
 as to why we withheld this information? You would be justified in holding that 
 the filing of the complaint was delayed in order to avoid the information being 
 disclosed to the committee. 
 
 Mr. BoiLEAu. May I ask a question? 
 
 Mr. Fulmer. Mr. Boileau. 
 
 Mr. Boileau. Would I interrupt you? 
 
 Mr. DuvEL. That is all right, Mr. Boileau. 
 
 Mr. Boileau. You say you first got this information in the early part of 1932? 
 
 Dr. DuvEL. Early part of 1932. 
 
 Mr. Boileau. And did you not have enough information at that time to begin 
 your proceedings against Mr. Cutten? 
 
 Dr. Duvel. No. 
 
 Mr. Boileau. Did you not have suflBcient information to justify you in pro- 
 ceeding against Mr. Cutten? 
 
 Dr. Duvel. We did not have. The information we had did not check; that is 
 why we sent the man to Chicago. 
 
 Mr. Boileau. You might not have had a complete case of all the transactions, 
 but did you not have enough to cover a complete transaction? In other words, 
 was not the information you had at that time suflBcient for you to proceed against 
 him on one of the charges? 
 
 Dr. Duvel. We did not think so; no. 
 
 Mr. Boileau. You did not. 
 
 Dr. Duvel. No. 
 
 Mr. ToBEY. May I ask a question? 
 
 Mr. Boileau. Just a moment, that I may complete. This information that 
 you got on March 13 was essential before you could proceed in the case, was it? 
 
 Dr. Duvel. That was very important. 
 
 Mr. Boileau. So that was the first time you got a sufficient amount of informa- 
 tion together to know whether he was violating the law, and also sufficient evi- 
 dence upon which to base a complaint? 
 
 REGULATION OF COMMODITY EXCHANGES 
 
 117 
 
 Dr. Duvel. We did not have suflicient information until we brought together 
 whatever evidence was available to make the complaint. 
 
 Mr. Boileau. Well, as I understand, there were 43 different violations charged 
 against this man over a period of years, something like that, was there not? 
 Dr. Duvel. I think it was 43. 
 Mr. Boileau. Roughly speaking, I mean. 
 Dr. Duvel. Yes. 
 
 Mr. Boileau. Was not each one of those a separate and distinct violation on 
 his part? 
 
 Dr. Duvel. Well, they all hooked together, more or less. 
 Mr. Boileau. Well, each one of them was a separate and distinct offense, was 
 it not? 
 
 Dr. Duvel. I presume that they were. 
 
 Mr. Boileau. Could not the Government have taken either one of these 
 offenses, or these complaints that you knew of, at an earlier date? 
 
 Dr. Duvel. Of course, I think you understand the policy of the Department 
 at the present time is not to proceed against any person unless we have complete 
 information. That is the attitude of the Government, at least, of the Depart- 
 ment; it tries not to embarrass people until it has the facts. It is not trying to 
 fine or send people to jail but is trying to arrive at what is just, and we wanted to 
 be sure that these different accounts all hooked together in one case. 
 
 Mr. Boileau. It seems to me that you would not have had to wait until you 
 had 43 of them. Dr. Duvel, or have waited until that many had occurred before 
 you could have proceeded. And my questions are not asked in any way for the 
 purpose of embarrassing you or the administration; but if violators find that the 
 Government is going to be lax, well, of course, it is logical that they will not take 
 it seriously. And when we see that one man has 43 different charges against him 
 and has not been brought to task, it seems that something is wrong in the Govern- 
 ment's execution of the law. I would just like to know why some action could not 
 be taken more quickly. 
 
 Mr. DoxET. Over a period of how long a time did this investigation continue; 
 what period was covered? 
 
 Dr. Duvel. It covered a period of 2 years. 
 
 Mr. DoxEY. The first violation had not been barred by the statute of limita- 
 tions before you got the facts on the last one, had it? 
 Dr. Duvel. No. 
 Mr. DoxEY. All right. 
 
 Dr. Duvel. As I say, for the sake of economy, we cut off in 1931. What has 
 been happening since 1931 I do not know. 
 
 Mr. Doxey. Pardon me; I did not mean to interrupt you. 
 Mr. Boileau. That is all right. 
 Mr. Tobey. May I ask a question? 
 Mr. Boileau. May I finish? 
 Mr. Fulmer. Mr. Boileau, go right ahead. 
 
 Mr. Boileau. I would like to have you explain just a little further why it is 
 that this procedure did not start on some of the earlier offenses. Why did you 
 have to wait until you piled up 43 offenses before getting evidence to start prose- 
 cution? 
 
 Dr. Duvel. As I say, it was a question of compiling all the information that we 
 had; and the first time it was all in or, rather, when we thought it was complete 
 
 was in the latter part of November 1932; that is when our auditor came on 
 
 Mr. Boileau (interposing). Why was it necessary that you should complete 
 all of the 43 charges before taking any action? Why should you complete the 
 evidence in 43 charges and hold up the matter until the 13th of March before 
 filing the complaint? 
 
 Dr. Duvel. It just happened that we developed the 43 cases as we got into 
 them. That's merely the form in which Mr. Tierney drew the complaint. 
 
 Mr. Boileau. Did you not have some of them together? That is quite a large 
 number. Why was it necessary for you to wait before you started prosecution 
 on some of them? 
 
 Dr. Duvel. In our judgment, we did not have suflScient evidence. 
 Mr. Boileau. Let me ask you this further question, and I think I will be 
 through. 
 
 Dr. Duvel. Yes. 
 
 Mr. Boileau. Apparently the Department piles up 43 charges before it takes 
 action in a case of this kind; and I was wondering whether or not there were any 
 other cases that have been investigated by the Department, involving other 
 violations on the part of other individuals, that you have not prosecuted? In 
 
 , 
 
I 
 
 f 
 
 ■ 1 
 
 ; i 
 
 ^^Ei 
 
 118 
 
 REGULATION OF COMMODITY EXCHANGES 
 
 other words, has the Department now some cases under investigation of violations 
 where you have not started proceedings against the individual for violating pro- 
 visions of the Grain Futures Act, and are still pending? 
 
 Dr. DuvEL. We have — you mean that are now under investigation — of course, 
 the Ettinger and Brand has been disposed of. We have others. 
 
 Mr. BoiLEAU. Yes. 
 
 Dr. DuvEL. We have some other cases. 
 
 Mr. BoiLEAU. You have quite a number of them? 
 
 Dr. DuvEL. No; there are not so many of them. 
 
 Mr. BoiLEAU. Are there any violations of the Grain Futures Act or any of the 
 Federal regulations issued pursuant to that law 
 
 Dr. DuvEL (interposing). Not any considerable number. 
 
 Mr. BoiLEAU. What I am trying to determine is whether or not the Commis- 
 sion down here, the Grain Futures Administration, or any other agency regulat- 
 ing the marketing of wheat has found any violators of the Grain Futures Act or 
 has adjudicated any cases or determined any cases or settled any cases. In 
 other words, have there been any suspensions or any fines imposed under the Grain 
 Futures Act, or have you simply called them in where you found them violating 
 the law, gave them some warning, and told them that they were violating the 
 law 
 
 Dr. DuvEL. Of course, we have had a good many cases which we have handled 
 with the business-conduct committee. 
 
 Mr. BoiLEAU. Have there been any cases where there has been a suspension? 
 
 Dr. DuvEL. In some instances. 
 
 Mr. BoiLEAU. What are some of them? 
 
 Dr. DuvEL. Of course, you understand under ti.e Grain Futures Act our 
 authority is limited to getting this information; we are limited as to the penalty 
 and, of course, as to the action that we take in the case. 
 
 Mr, BoiLEAU. You say there are some cases that you have presented to the 
 business-conduct committee? 
 
 Dr. DuvEL. Yes. 
 
 Mr. BoiLEAU. How many instances have there been in which you have made 
 complaint and started proceedings, in which you have worked with the business- 
 conduct committee, that have resulted in members being suspended? 
 
 Dr. DuvEL. I should say there were five or seven; I do not remember. 
 
 Mr. BoiLEAU. Five or seven? 
 
 Dr. DuvEL. Yes; there have been investigations, of course, and w^e have 
 cooperated with the business-conduct committee. 
 
 Mr. BoiLEAU. In a period of 10 years you have had five cases 
 
 Dr. DuvEL. The board of trade has suspended seveial. I do not have the 
 definite figure in mind. 
 
 Mr. BoiLEAU. How many investigations have you people caused to be made 
 by the business-conduct committee? 
 
 Dr. DuvEL. By the business-conduct committee? 
 
 Mr. BoiLEAU. Yes. 
 
 Dr. DuvEL. I cannot answer that now. 
 
 Mr. BoiLEAU. Can you tell me how many of that number have been found free 
 from blame by the business-conduct committee? 
 
 Dr. DuvEL. Well, it has been our practice to work along with the business- 
 conduct committee and to avoid taking any action wherever we could until they 
 had opportunity to correct the complaint— — 
 
 Mr. BoiLEAU (interp)08ing) . Well, are there very many cases now pending 
 before the business-conduct committee or before your Department that you 
 believe you could successfully start proceedings against when the evidence is 
 complete? 
 
 Dr. DuvEL. No; there are not a great number. 
 
 Mr. BoiLEAU. Could you give me approximately the number where the facts 
 are not complete? 
 
 Dr. DuvEL. Well, we have two or three other cases that we are working on 
 now, but I do not feel justified in discussing them at this time. 
 
 Mr. BoiLEAU. I did not ask that. I only asked for the number of cases, 
 whether or not there were quite a number of violations that have not been brought 
 to light. It occurs to me that frequently some of these violators are permitted 
 to go along, after they are discovered, and are not brought out for a considerab e 
 period of time, and some of these individuals may feel like taking a chance, 
 thinking they would not be aprehended or stopped by the Government. 
 
 Dr. DuvEL. I might give you some light on that situation in a case that we 
 have had before the Commission, that was disposed of not so very long ago. 
 
 REGULATION OP COMMODITY EXCHANGES 
 
 119 
 
 That was a case, however, which originated a good many years ago and in- 
 volves section 4 (b) of the present bill as it relates to cheating and defrauding 
 of customers, which is made a criminal offense under this bill. It has been argued 
 before this committee that section 4 (b) is not necessary because such offenses 
 are covered by exchange rules. However, I would like to review that case. 
 
 Mr. DoxEY. Was there a final adjudiction in that particular case to which 
 you refer; and if so, what was the penalty? 
 
 Dr. DuvEL. The case to which I now refer? 
 
 Mr. DoxEY. Yes. 
 
 Dr. DuvEL. I will read you what the Commission had to say about it. This 
 was a question where it was contended that the brokers had taken customers' 
 orders into their own account. This is found in the statement of facts: 
 
 **As to the charge of manipulation the evidence indicates that respondent" — 
 ^^ I will omit the names, as I think that is not material here — 
 "while acting as pit brokers for their principals, were entrusted with certain 
 orders for the purchase and sale of wheat for future delivery on and subject to 
 th^ rules of the Chicago Board of Trade for the account of customers of such 
 principals; that instead of executing these orders by bona fide purchase and sale 
 transactions with other members of the Chicago Board of Trade, as they were 
 required to do under the board of trade rules, they took these orders into their 
 own personal accounts on the books of the third respondent, at prices determined 
 and fixed by themselves; that these prices were fixed and determined so that, 
 with possibly one exception, they were within the range of prices in effect some- 
 time during the period that the orders were in their possession for execution." 
 
 Mr. DoxEY (interposing) . What was the penalty meted out to them? 
 
 Dr. DuvEL (reading): 
 
 "While practices of the character here involved may be detrimental to cus- 
 tomers and may even amount to fraud, we, nevertheless, find difficulty in adopt- 
 ing the view that these constituted manipulations of the market price of grain 
 within the meaning of the Grain Futures Act. These practices may constitute 
 serious evils affecting the economical marketing of grain in a way to burden in- 
 terstate commerce. They may be matters which ought to be remedied by 
 legislation." 
 
 That represents the findings of the Commission. Inasmuch as one of the de- 
 fendants in that case previously admitted his part in the irregularities, we ex- 
 pected to settle that case without the necessity of an extensive hearing. How- 
 ever, we had to take 1,700 pages of testimony before that case was finally settled, 
 and it was drawn out for 2 or 3 years. 
 
 It is only fair to say, in the meantime he was suspended by the board of trade. 
 
 That action was brought by the Government solely in the interest of the insti- 
 tution with the belief that it would strengthen the hands of the board in cleaning 
 its own house of similar practices. We expected their support, at least hoped 
 to receive it, because we had other cases like it. But from the time that case 
 was filed until it was settled, and perhaps up to this time, we have been con- 
 demned for the action. In fact, the defendants, three of them, were defended 
 in part by an attorney who is a member of the board and who operates in the 
 pit practicaUy every day; whereas this case should have been used to strengthen 
 the hands of the exchange in cleaning its own house of practices of this kind, 
 and that was the sole purpose for which the action was brought. Because there 
 is no penalty under the present act for such unfair practices we are recommending 
 the provision as embodied in section 4 (b) of the bill. It has been contended that 
 this section is not necessary, that the exchanges can take care of violations of 
 this character, but it is my sincere belief that it is needed. However, I hope that 
 it never will be necessary to invoke it. 
 
 I want to illustrate further with a case which involved a broker handling job- 
 lot orders aggregating 32,000 bushels where the broker failed to execute any of 
 the orders, as he was supposed to do, but took them into his own account at a 
 profit of $160. 
 
 Mr. ToBEY. May I ask a question? 
 
 Mr. FuLMER. Mr. Tobey. 
 
 Mr. ToBEY. You say that you did not have enough information to proceed 
 until recently against this man Cutten, and yet the Department has had infor- 
 mation, found information on the records of many different accounts of 495,000 
 bushels each when the legal limit was 500,000 bushels, and upon your investigation 
 you found that they were under one account. Now, why is it not possible for 
 the Government to act on that information? Why could not the Department, 
 when it first found that information, have taken steps to prosecute the violator 
 instead of waiting until they had built up 30 or 40 cases? 
 
i 
 
 120 
 
 REGULATION OF COMMODITY EXCHANGES 
 
 You say that you did not have enough information and that you wanted to 
 find out the facts, and yet you had this evidence of these transactions involving 
 496,000 bushels, manifestly a subterfuge. Why is it the Government could not 
 have taken that information and proceeded with that evidence? That is just 
 the reason why the American people have lost confidence in the enforcement of 
 these regulations by the Government. 
 
 Now, let me ask you another question. You say Tiemey was called away 
 on another job. Why did you not put on a dozen men instead of one man, and 
 get that information speedily so that you could start your proceeding? 
 
 Dr. DuvEL. Of course, we are operating, or undertaking to operate, with a 
 limited appropriation. 
 
 Mr. ToBEY. You could have gone out and produced the evidence, or you could 
 have recommended to Congress that you needed additional appropriations. If 
 you knew you had a case the Secretary could have secured authority to prosecute 
 with administration backing. The American people want to know why the De- 
 partment is not enforcing these regulations; that is why they are disgusted with 
 it, disgusted with the lack of ability on the part of the Government, in just the 
 kind of a situation that has been exhibited here today. 
 
 Now, if the Secretary of Agriculture, under the Grain Futures Act, did not have 
 adequate authority or did not have enough men, you could have come before the 
 Congress and asked for additional authority, or ask for a law with sufficient teeth 
 in it to put a stop to these practices. Have you ever made any demand for such 
 a law? 
 
 Dr. DuvBL. I have been asking for that since 1925. 
 
 Mr. ToBEY. You have been coming to other Congresses; but this is a new 
 Congress. 
 
 Dr. DuvEL. And that request still stands; that demand still stands. 
 
 Mr. ToBEY. And if you do not have enough funds to employ additional help 
 to check up on these violations, why do you not make a demand for it? 
 
 Dr. DuvEL. Well, as I said a while ago, this matter was put in the hands of 
 our solicitor, and he has had a number of other things to handle, and he had to 
 get a special attorney to handle the case. 
 
 Mr. ToBEY. Government inefficiency, I understand. 
 
 Mr. DoxEY. Have you ever requested, or has your Department ever requested 
 additional appropriations to handle cases of this kind? 
 
 Dr. DuvEL. I do not know that it has. 
 
 Mr. DoxEY. Or told us that your appropriation was not sufficient to carry out 
 the enforcement of the provisions of this act? 
 
 Mr. ToBEY. Why could not the Department have taken action 2 years ago 
 to bring this case to light instead of waiting until now? 
 
 Dr. DuvEL. Of course, if we had known then, 2 years ago, what we know now, 
 action could have been taken. 
 
 Mr. DoxEY. What action did you take? 
 
 Dr. DuvEL. The only action we could take under the present law is to refer it 
 to the solicitor, file the complaint, and demand that the trader show cause why 
 he should not be denied the privilege of trading. 
 
 Mr. ToBEY. Is not the present law, the Grain Futures Act, sufficiently strong 
 to enable you to take action without all this delay to put a stop to a lot of this 
 manipulation? 
 
 Dr. DuvEL. That is the very reason why we are here now making the same 
 recommendation that we made in 1925, asking for some authority to put a limit 
 on these large speculative lines. 
 
 Mr. ToBEY. But you have given us instances of 495,000; no business house 
 would take that length of time to make the investigation; they would go out and 
 have that information in a short time. Mr. Cutten, if he wished the facts about 
 a competitor, would have secured them in a week's time. 
 
 Dr. DuvBL. But they are not guilty; they are not violating our law; they 
 must report transactions involving 500,000 bushels and over. 
 
 Mr. ToBEY. But you could have gone into the books and gotten that informa- 
 tion, with additional help, could you not, to see that they were trading in excess 
 of 500,000 bushels? 
 
 Dr. DuvEL. Of course, we could not put a large force on that one case. 
 
 Mr. ToBEY. It just seems to me that a Government department, on which we 
 are spending hundreds of millions of dollars, could operate more quickly and 
 efficiently, and that is why thousands of the taxpayers of this country are dis- 
 gusted with its delays. 
 
 Dr. DuvEL. I can only ask you to suspend judgment until we find out what 
 is involved in this case. 
 
 REGULATION OP COMMODITY EXCHANGES 
 
 121 
 
 Mr. ToBEY. How long will that be — 2 years more or 4 years more? 
 
 Dr. DuvBL. If it goes into the courts, maybe yes. 
 
 Dr. ToBBT. And in the meantime the patient will have died. 
 
 That is aU. 
 
 Mr. Mitchell. Dr. Duvel, how long have you been with the Department? 
 
 Dr. Duvel. I came with the Department in 1902. 
 
 Mr. Mitchell. You have had about 32 years' experience? 
 
 Dr. Duvel. No; I was out for a time during the war. 
 
 Mr. Marshall. May I as a question? 
 
 Mr. Fulmer. Yes, Mr. Marshall. 
 
 Mr. Marshall. This is somewhat along the similar lines that have just been 
 covered. It seems to me that if Mr. Cutten's activities are looked upon as 
 resulting in a real injury to the markets of the country, from the standpoint 
 of the farmer, and if his activities have been going on all during these months, 
 and such activities are injurious to the market in which the farmer sells his 
 commodity, it seems to me that this case should have received attention long 
 before one day last March. 
 
 Dr. DuvBL. We have not any authority under the present Grain Futures Act 
 to limit trading — Mr. Cutten or any other individual can buy a million bushels 
 of wheat or sell a million bushels 
 
 Mr. Marshall (interposing). It just seems to me that you could have made 
 this investigation, that you now say was completed in March, in less than 2 years' 
 time, and given the information to the public, if you were going to try the case 
 before the bar of public opinion; that could have been done much sooner. 
 
 Dr. Duvel. Well, of course, it was not our purpose to try him before the bar 
 of public opinion. 
 
 Mr. Marshall. Well, you say you have nothing else that you can do; and if 
 that is the only way you could take action, it seems to me that could have been 
 done sooner. 
 
 Dr. Duvel. That is not the only thing; we have furnished the information as 
 soon as it was available to the solicitor. And information of that kind or char- 
 acter is not such to which you can assign a whole army of persons to secure; it is 
 highly confidential information, and the policy of the Department, which it has 
 always followed, is to use every possible means to protect the operations of indi- 
 vidual traders. 
 
 Mr. Doxey. Dr. Duvel, if you had asked for any definite or specific appropri- 
 ation to carry on this work, do you think it would have been denied? 
 
 Mr. Duvel. Well, we have had appropriations which have been cut at times 
 including those intended for this class of work. 
 
 Mr. DoxEY. But you did not make a direct appeal to Congress for any definite 
 sum to carry on this work. 
 
 Mr. Duvel. As far as this case is concerned, we have gone as far as we felt 
 j ustified in going with the information that we had at the time. Just as soon as 
 we secured the necessary information, we presented it to the solicitor and he 
 promptly arranged to go ahead with it. 
 
 Mr. Doxey. I did not want to enter into any argument, but I just wanted to 
 know whether that was the reason, that you had been denied any request for 
 appropriation for this purpose. 
 
 Mr. Duvel. No. 
 
 Mr. Mitchell. May I ask a question? 
 
 Mr. Fulmer. Mr. Mitchell. 
 
 Mr. Mitchell. If you cannot regulate these exchanges, if it is a business that 
 cannot be regulated, then would it not be better for the country as a whole, if 
 they refuse to be regulated, for them to be put out of business? 
 
 Mr. Duvel. Well, personally, I have always been a believer in the future-trad- 
 ing system. 
 
 Mr. Mitchell. Do you not think there is much more harm resulting to the 
 country as a whole than of benefit accruing under this character of procedure? 
 
 Mr. Duvel. Well, the only way I can answer you is by saying that we have 
 had 80 years of futures trading, and if you should, with definite legislative action, 
 take away, at a single blow, the present system, it would leave the grain-marketing 
 machinery in a veryuncertain position. 
 
 Mr. Mitchell. Why not let the grain producers handle it and stop all this 
 speculation? Let it be controlled by the law of supply and demand. 
 
 Dr. DuvBL. Our position is that there are certain abuses which should be 
 corrected and that there should be an amendment to the Federal law authorizing 
 the Department to control those abuses so that we could deal with the persons 
 who are responsible for such abuses. 
 
 1 
 
 t 
 
m 
 
 'iii 
 
 122 
 
 REGULATION OF COMMODITY EXCHANGES 
 
 The present Grain Futures Act is largely an act that was passed as a preliminary 
 measure to make it possible to study the whole problem of futures trading, with 
 some limited penalty provisions; but it does not contain the authority that is 
 needed. 
 
 As I mentioned at the opening of this hearing, in 1926 there were two traders 
 who held 32.6 percent of the open contracts in the market. That was not a viola- 
 tion of the law. That was a detriment to the producers and to the welfare of 
 the general public, but it was not a violation of the law. 
 
 Mr. Mitchell. Do you think. Dr. Duvel, that during the 30 years that you 
 have been connected with this work the American people have been injured rather 
 than helped by this speculative system, with all of the suicides and tragedies 
 connected with it? 
 
 Dr. DuYEL. We have been trying to study this with a view to correcting those 
 evils, finding some way to improve upon it. That is the reason why we are asking 
 for this legislative authority. 
 
 Mr. Mitchell. Yes. 
 
 Dr. DuvEL. That has not been tried. The best answer I can give to the ques- 
 tion is that under the futures trading system grain is marketed at a lower margin 
 of cost than any other commodity in our country. It is true that there are 
 abuses, but this system affords a ready market to the producer. There have been 
 many abuses, and still are, and what we are trying to do is to find an effective 
 way of eliminating them. 
 
 Mr. Mitchell. In a situation where the Government is loaning 45 cents a 
 bushel on corn, and where we find, as we say today, through manipulation, corn 
 selling at 40 cents a bushel, that means somebody is being robbed, does it not? 
 That is just larceny, robbery, or burglary. 
 
 Dr. Duvel. Well, Mr. Mitchell, so far as the loans that are made by the 
 Government are concerned and the problem of the grain futures market which 
 we are dealing with here; there is no relationship between the two. If the price 
 continues to go down the Government will be the owner of some corn, probably. 
 
 Mr. Mitchell. Do you not think this has a depressing effect upon the price 
 that the American farmer is going to receive for his grain? Why not let the law 
 of supply and demand exert itself; in the end it would not hurt the American 
 farmer as much as this speculation. 
 
 Dr. Duvel. I do not think it would be wise at this time to go that far. 
 
 Mr. Mitchell. You would not justify petty larceny until grand larceny is 
 committed? 
 
 Dr. Duvel. No. 
 
 Mr. Mitchell. That is all. 
 
 Mr. Chase. May I ask a question? 
 
 Mr. FuLMER. Mr. Chase. 
 
 Mr. Chase. In your opinion you did not have suflScient evidence in 1933 to 
 prefer charges in the Cutten case? 
 
 Dr. Duvel. In 1933? 
 
 Mr. Chase. Yes; last year. 
 
 Dr. Duvel. We thought we had. 
 
 Mr. Chase. You thought at that time that the charges could be proved? 
 
 Dr. Duvel. That is the reason we presented the matter to the Solicitor of the 
 Department. 
 
 Mr. Chase. And the Solicitor 
 
 Dr. Duvel (continuing). And it was a question of getting a special attorney 
 to handle it. 
 
 Mr. Chase. Getting a special attorney? 
 
 Dr. Duvel. Yes; because the attorneys in the Department, due to pressure 
 of other duties, could not handle it. 
 
 Mr. Chase. How long did that take? 
 
 Dr. Duvel. After the special attorney was secured and it was about 30 days 
 before he reported for duty. 
 
 Mr. Chase. How long a time was used in securing the special attorney? 
 
 Dr. Duvel. It was about 3 months. 
 
 Mr. Chase. It was about 3 months? 
 
 Dr. Duvel. There were a considerable number of interviews with attorneys 
 during that intervening time. 
 
 Mr. Chase. That was after the complaint was completed? 
 
 Dr. Duvel. Just before the report was filed. I cannot give you the exact 
 time. 
 
 Mr. Chase. The date on the copy of the charges is the 9th day of April 1934. 
 It was completed just before that? 
 
 REGULATION OF COMMODITY EXCHANGES 
 
 123 
 
 Mr. Chase. 
 Dr. Duvel. 
 Mr. Chase. 
 Dr. Duvel. 
 
 Dr. Duvel. The report was completed, the information was in our office, and 
 turned over to the attorney to handle. And he went right ahead with it, and it 
 just took the usual course through the Department. 
 
 Mr. Chase. You stated that the attorney was Mr. Tierney? 
 
 Dr. Duvel. Mr. Leo F. Tierney. 
 
 Mr. Chase. Yes. There is shown on this copy of the charges a notice for 
 release to the press at 3:30 p. m. on April 11. Was this article released to all 
 newspapers throughout the country? 
 
 Dr. Duvel. Yes. 
 
 At this time; April 11? 
 Yes. 
 
 Was it released at a general press conference? 
 Released at a general press conference. I was not there, but 
 that is my understanding of it. 
 
 Mr. Chase. So there was no point in the chUrman's or my reference to the 
 Washington Post, the article in the Washington Post 
 
 Dr. Duvel (interposing). No. 
 
 Mr. Chase. It was a general press release? 
 
 Dr. Duvel. General press conference. 
 
 Mr. Chase. And an article similar to that in the Washington Post appeared 
 in the New York. Times and the Baltimore Sun? 
 
 Dr. Duvel. Yes. 
 
 Mr. Chase. And possibly hundreds of other papers throughout the country? 
 
 Dr. Duvel. Yes. 
 
 Mr. Chase. The reason I ask is because you and Mr. Boylan seem to be some- 
 what at variance in your ideas; and you say that there is no connection between 
 the Cutten case and this hearing? 
 
 Dr. Duvel. No. 
 
 Mr. Chase. None at all? 
 
 Dr. Duvel. That came along, as I say, in the usual course. It was completed 
 and went through the Solicitor's office and handled in the ordinary way. 
 
 Mr. Chase. The fact that these charges were signed on April 9 and that the 
 press release was made at 3:30 p. m. on April 11 does not indicate anything more 
 than a coincidence? 
 
 Dr. Duvel. The Secretary never releases information of that kind until the 
 conaplaint is served; until the complaint is delivered to the individual. 
 
 Mr. Chase. In your judgment, Dr. Duvel, the fact that these charges were 
 preferred, that the complaint was filed, that the press conference was held, and 
 that the release was made, and that the article appeared in the daily papers all 
 over the United States at the same time, and in connection with the press story 
 of these hearings which we are now holding, was merely a coincidence? 
 
 Dr. Duvel. I think that it had nothing whatever to do with the Cutten case. 
 If on Saturday Jjefore it was served, Mr. Cutten had decided to take a trip to 
 Canada or some other place and could not have been reached, there would not 
 have been any press release and nothing would have been said about it. 
 
 Mr. Chase. Let me ask you this further question: This action against Mr. 
 Cutten is brought under the present law, the existing Grain Futures Act? 
 
 Dr. Duvel. Yes. 
 
 Mr. Chase. It is an action under the present law, not under the code or under 
 the proposed legislation, but is brought under the law that has been in effect for 
 some time, and was in effect in 1932? 
 
 Dr. Duvel. That is right. 
 
 Mr. Chase. That is all. 
 
 Mr. FuLMER. Mr. Doxey. 
 
 Mr. DoxEY. Dr. Duvel, I do not want to prolong this discussion nor do I want 
 to appear facetious, but who is the Solicitor in the Department, to whom you 
 refer, that handles these matters? 
 
 Dr. Duvel. Mr. Seth Thomas. 
 
 Mr. Doxey. From the statement you have just made it would seem that you 
 had some considerable difl^iculty in selecting or finding an attorney available to do 
 this particular work. Is that the main reason for the delay in the action? 
 
 Dr. Duvel. Well, he had some difficulty in securing one; there was about a 
 3 months' p)eriod 
 
 Mr. Doxey (interposing). I was just wondering whether it had occurred to 
 anyone down there, if they were anxious to get an attorney, that they could call on 
 some Member of Congress; we could give you the names of attorneys; that was 
 not done, was it? 
 
I 
 
 I 
 
 ■ 
 
 p 
 
 124 
 
 BEGUIiATION OP COMMODITY EXCHANGES 
 
 Dr. DuvEL. Not so far as I know, Mr. Doxey. 
 
 Mr. DoxET. Have you ever called on them? 
 
 Dr. DuvEL. I beg your pardon? 
 
 Mr. DoxET. Have you ever called on them for a list? 
 
 Dr. DuvBL. No. 
 
 Mr. DoxBT. I realize that the legislative and executive branches of the 
 Government are entirely separate and should be, but I am just suggesting this 
 out of a spirit of cooperation, that, if you had asked me, I could have given you 
 the names of some attorneys, some good, reliable attorneys, who could have taken 
 action in this matter. 
 
 Mr. BoiLEAU. May I ask another question? 
 
 Mr. FuLMER. Yes. 
 
 Dr. DuvEL. May I just state further, that we brought this matter to the atten- 
 tion of the Solicitor and that it was handled in the regular course, and when it 
 was put into his hands there is nothing further we could do. 
 
 Mr. BiERMANN. Well, it seems to me that most of the gentlemen on this com- 
 mittee are lawyers, and ought to be able to understand that matters of this kind 
 are often dragged along for several years. I do not know why you should be so 
 concerned about this delay. 
 
 Dr. DuvEL. I have na apology to make for the action of the Department. 
 My only regret is that our Solicitor did not have this information before and that 
 we were not able to complete this case so that you might have all of the facts 
 before you today. 
 
 Mr. BiERMANN. It would take some time to complete the case anyhow. 
 
 Dr. DuvEL. Yes. 
 
 Mr. BiERMANN. Sometimes these cases are run along for years after the lawyers 
 get them in their hands. They cannot always dispose of them so quickly. 
 
 Mr. BoiLEAU. Dr. Duvel, I do not want to have you gain the impression from 
 the questions I have asked that I am criticizing the Department's handling of 
 this affair. The purpose of my questions is to find out whether there is some- 
 thing needed to improve the law; anything that we can do so far as improving 
 the legislation is concerned. Do you feel that the recommendation that you 
 have made here is sufficient to enable you to correct such abuses as you feel 
 exist, insofar as that is possible? 
 
 Dr. Duvel. We have felt that the bill as it is written probably goes as far as 
 we are justified in going at the present time, and that it will take care of all major 
 abuses. 
 
 Mr. BoiLEAU. And that you can prevent recurrences of these abuses? 
 
 Dr. Duvel. We hope that will be possible. 
 
 Mr. BoiLEAU. Now, under your regulations at the present time, do you have 
 any effective way to deal with a man whose transactions exceed 500,000 bushels? 
 I understand that he must make a report. 
 
 Dr. Duvel. Yes. 
 
 Mr. BoiLEAU. Well, you have had difficulty in getting those reports, you said. 
 Suppose that the man does not make a report, such reports as he is supposed to 
 make under the present law; and you have had some difficulty, is that correct? 
 
 Dr. Duvel. Getting proper reports has offered some difficulty. 
 
 Mr. BoiLEAU. Yes. Now, you propose to have a limitation of say 2,000,000 
 bushels, under the proposed set-up; is that right? 
 
 Dr. Duvel. Well, whatever limit the Commission should arrive at; it may be 
 2,000,000 bushels. 
 
 Mr. BoiLEAU. Let us assume that it will be 2,000,000. I understand. 
 
 Dr. Duvel. Yes. 
 
 Mr. BoiLEAU. Assume that the Commission puts a limitation of 2,000,000 
 bushels, or that you should provide such a limitation in this bill, and that an 
 individual should exceed that limit, have you anything in this legislation that 
 would enable you to get that information or to deal with the violator of that rule 
 or regulation? 
 
 Dr. Duvel. There is not anything except the present method we have of going 
 out and getting that information from the books. 
 
 Mr. BoiLEAU. Well, I understand that. Now. is there not this danger, that 
 you are going to be faced with the same situation, same, identical situation, in this 
 bill so far as getting that information is concerned and in determining whether 
 there has been a violation of the rules by individuals engaging in excessive trades, 
 above the 2,000,000 bushel limit, that you have at the present time? What 
 assurance have you that they will not go ahead, in violation of those rules, and 
 disregard the 2,000,000-bushel limit? 
 
 REGULATION OF COMMODITY EXCHANGES 
 
 125 
 
 Dr. Duvel. Nothing except that there is a provision in this bill making it'a 
 criminal offense. 
 
 Mr. BoiLEAU. That is the only difference. 
 
 Dr. Duvel. That is about all. 
 
 Mr. BoiLEAU. Is there not some way that you can suggest to get this informa- 
 tion without all this difficulty? It seems to me that there should be some more 
 effective means of getting these reports. 
 
 Dr. Duvel. No more than there is a way of preventing violations of any 
 law — for example, to keep a man from driving through a red light unless there is a 
 policeman watching him. j 
 
 Mr. BoiLEAU. Well, put a policeman on it. 
 
 Dr. Duvel. You have to check up on them occasionally. 
 
 Many of the commission houses cooperate with us to the fullest extent; others 
 resist and make it difficult to secure the information. There may be, on the 
 part of some, an honest reason for not divulging their business transactions. 
 Some of the clearing members simply tell us not to bother them, but to go ahead 
 and get what we need from the records. In others we have to spend much time 
 in explaining the authority under the law, whereas the information might be 
 secured in a few minutes. 
 
 Mr. BoiLEAU. What are some of the provisions in this bill, if it should become 
 a law, that would enable you to take action against the violator of the rule of the 
 commission, the individual who exceeded the 2,000,000-bu8hel limitation? 
 What is there in this bill providing that such acts are criminal? 
 
 Dr. Duvel. In the present law? 
 
 Mr. BoiLEAU. No; in the bill as it is now proposed. 
 
 Dr. Duvel. Well, if they fix a limitation, a trading limit, and that is exceeded, 
 there is a penalty provided of $10,000 fine; I think it is. 
 
 Mr. BoiLEAU. Just provides a fine? 
 
 Dr. Duvel. It also provides for imprisonment of from 1 to 5 years. 
 
 Mr. BoiLEAU. The same as under the present act. Now, have there been any 
 fines assessed for violation of the Grain Futures Act up to the present time? 
 
 Dr. Duvel. No. 
 
 Mr. BoiLEAU. In the 10 years that it has been functioning? 
 
 Dr. Duvel. There may be some cases where there was a penalty involved 
 
 Mr. BoiLEAU. Under the present act. 
 
 Dr. Duvel. There may be some cases. 
 
 Mr. BoiLEAU. But so far as violations are concerned, during the 10 years that 
 vour Department has been operating under the Grain Futures Act there have 
 been no cases tried 
 
 Dr. Duvel. Well, I would not say that no cases have been made involving the 
 criminal penalty. 
 
 Mr. BoiLEAU. You do not believe, to your best recollection, that during the 
 10 years there have been any acts that amount to a violation of the criminal 
 provisions; that is, that have i>een brought to the attention of your Department? 
 
 Dr. Duvel. Well, there are very few provisions under the present law that 
 involve criminal offenses. 
 
 Mr. FuLMER. How long will it take j^ou to complete. Doctor? We are going 
 to have to stop before long. 
 
 Mr. DoxEY. How long would it take you if we did not ask you questions? 
 
 Dr. Duvel. Well, most of the points have been covered. I can stop at any 
 time you think advisable. 
 
 Mr. Goodman. I would Mke to ask a question or two, Mr. Chairman. 
 
 Mr. FuLMER. Mr. Goodman desires to ask you some questions, Doctor. 
 
 Mr. Goodman. Could the iniquities that are complained of now be reached 
 under the code adopted by the board of trade, the grain exchanges? 
 
 Dr. Duvel. You would have the same difficulty in the code that you have 
 under this bill. 
 
 Mr. Goodman. Yes; but under the code which has been signed by the exchanges 
 and has been approved by the President, they can reach them, can they? 
 
 Dr. Duvel. Of course, the code places no limitation upon trading. The code 
 only increases the marginal requirements 25 percent over a certain limitation. 
 
 Mr. Goodman. Would not the code authority be in better position to control 
 this matter of investigation than having it left under the Department's regula- 
 tions; and those operating under the code than by trying to reach them by legis- 
 lation? 
 
 Dr. Duvel. In exactly in the same position as under the law; they would have 
 to go through the same procedure, have to deal with dummy names. I believe 
 
 114603— 35— SBR B- 
 
 -» 
 
 1 
 
126 
 
 BEGULATION OF COMMODITY EXCHANGES 
 
 I 
 
 that insofar as the commission houses are concerned there would be no trouble 
 with 90 percent of them. 
 
 Mr. Goodman. The thought I have in mind is that the board of trade, having 
 control over the machinery of the code, could act much more effectively than the 
 Department in getting information and reaching the violators. 
 
 Dr. DuvEL. I do not think that it would change that aspect of it. 
 
 Mr. Goodman. Then, do you believe that the code should be forgotten if the 
 bill is enacted into law? 
 
 Dr. DuvBL. No. I am in full sympathy with it; but there are some pro- 
 visions in the bill that are not in the code, and some in the code that are not in 
 the bill. It is well to try them out. 
 
 Mr. FuLMER. Have you finished? 
 
 Mr. Goodman. Let me ask just one or two more questions? 
 
 Mr. FuLMER. Yes, Mr. Goodman. 
 
 Mr. Goodman. Would it not be better to operate under the code, since the code 
 could be changed if it is found to be ineffective in dealing with the iniquities 
 complained of, whereas if this bill is enacted into law it is pretty hard to change 
 it in order to meet any of those problems? 
 
 Dr. DuvEL. The code, by operation of law, expires in June 1935, which is only 
 14 months away. 
 
 Mr. Goodman. Yes, that is true; but at the same time the code has been 
 adopted, and would it not be well to try out the experiment rather than to place 
 on the statute books a very definite law, a bill which is so hard to change? 
 
 Dr. DuvEL. Well, that is the same argument that has been presented here 
 before when proposed legislation has been submitted, by those who oppose the 
 -enactment of it. Now, they say, "Wait until the next session of Congress", 
 -and when the next session of Congress comes along they will have some other 
 reason and ask you to wait until some other plan has been tried out. 
 
 Mr. Goodman. That may be true; but would it not be well to try the experi- 
 ment with the code and if it is found not to operate entirely satisfactorily, then a 
 law can be passed? I just wanted to get your opinion on that. 
 
 Dr. DuvEL. No. 
 
 Mr. Chase. I have one other question. 
 
 Mr. Fulmer. Mr. Chase. ' 
 
 Mr. Chase. Dr. Duvel, when was this bill drafted? 
 
 Dr. DuvEL. I beg your pardon? 
 
 Mr- Chase. When was this bill, H. R. 8829, drafted; when was it completed? 
 
 Dr. DuvEL. Well, I cannot give you the exact date. 
 
 Mr. Chase. Approximately; was it in January, February, or in December, or 
 perhaps March? 
 
 Dr. DuvEL. It was early in February, I believe. 
 
 Mr. Chase. February? 
 
 Dr. Duvel. Yes; something like that. 
 
 Mr. Chase. When was information about it furnished the public? 
 
 Dr. Duvel. About the bill? 
 About the bill. 
 
 When was information about this bill first supplied the public? 
 Given to the public. 
 I do not know that it was given until it was introduced in the 
 
 Mr. Chase. 
 Dr. DuvBL. 
 Mr. Chase. 
 Dr. Duvel. 
 House. 
 
 Mr. Chase. 
 
 Duvel. 
 
 Chase. 
 
 Duvel. 
 
 Chase. 
 
 Dr. 
 Mr. 
 Dr. 
 Mr. 
 bill? 
 Dr. 
 Mr. 
 
 That would be March 26, 1934. 
 
 Yes; whatever the date is. 
 
 Not until about that time? 
 
 Yes; about that time. 
 
 Did Mr. O'Neil or Mr. Taber have advance information about this 
 
 Duvel. Not that I know of. 
 
 Chase. You will recall that one of them testified here that he was author- 
 ized by action of his board of directors in December, and the other by action of 
 his board in January, later supplemented by action of his board in March or 
 April to appear here in support of this bill. I presume that was in reference to 
 general authority concerning the principle involved. 
 
 Dr. Duvel. Of course, prior to the introduction of the bill it was known there 
 was a demand for the present bill or some of the proposed amendments. I do 
 not know what time that occurred. 
 
 Mr. Chase. That evidently served as the basis for their statement. 
 
 Dr. Duvel. That was quite a little while prior to the introduction of the bill, 
 although I think there was a temporary draft of the bill, submitted by the Secre- 
 
 REGULATION OF COMMODITY EXCHANGES 
 
 127 
 
 Dr. Duvel. 
 Mr. Chase. 
 Dr. Duvel. 
 Mr. Chase. 
 Dr. Duvel. 
 Mr. Chase. 
 
 tary with the approval of the President, to this committee under date of Feb- 
 ruary 14. 
 
 Mr. Chase. Doctor, do you still think that there is no significance in that 
 press release of the 
 
 Dr. Duvel (interposing). That was not considered at all; that was turned 
 over to the solicitor and went through the usual channels. 
 
 Mr. Chase. Now, let me ask you about Mr. Crawford. Questions were asked 
 about the case of a man named Crawford. When did he buy? 
 
 Dr. Duvel. Mr. Crawford was a trader and had been trading in the market 
 for quite a while. 
 
 Mr. Chase. When were his operations which have been criticized, directly or 
 by inference? 
 
 Dr. Duvel. Well, Mr. Crawford has been criticized a good deal. I will say this 
 for Mr. Crawford: He has been unjustly criticized in some things. He was a large 
 speculator, as he admits, and has always admitted. 
 
 Mr. Chase. May I ask you if it is true, as has been suggested here, that he 
 started with a capital of $25,000? 
 
 Dr. Duvel. I do not know. 
 
 Mr. Chase. Could he have been a large operator with that capital? 
 
 Dr. Duvel. Not with that capital. 
 
 Mr. Chase. Then he must have had a large capital to have been a large 
 operator? 
 
 Mr. Duvel. He was a large operator. Whether he started in with $25,000, or 
 when he started in, I do not know; I do not know anything about that. 
 
 Mr. Chase. Do you know when he was buying in the market? 
 When he was buying? 
 Yes; you say he was a large operator. 
 Yes. 
 
 Do you know when he was buying? 
 I would have to look that up. 
 
 What I am getting at. Dr. Duvel, is that some questions have 
 been asked here about his operations, and I know very little about it; but I would 
 like to know whether or not there was an infraction of the law, and if there was 
 an infraction of the law, whether you took action; and if you did, what action 
 you took. 
 
 Dr. Duvel. Mr. Crawford traded in large quantities of grain, not only wheat 
 but other commodities. I do not know what his largest interest was, but he did 
 more heavy trading during that period, I guess, between October 1932 and July 
 1933, when the rules or regulations concerning reporting requirements were 
 suspended, at the time when the Chicago Board of Trade undertook to regulate 
 itself, keep its own records, and to clean its own house and prevent excessive 
 speculation. That was the situation when Mr. Crawford was 
 
 Mr. Chase (interposing). Did he lose any money? 
 
 Dr. Duvel. We have no information; we were not getting reports at that time, 
 and even though we had been getting reports, there is no provision in the law 
 preventing a man from buying or selling 10,000,000 bushels or 20,000,000 bushels; 
 that is not a violation of the law. Mr. Crawford, however, was one of the few 
 men who, during all of this period, reported his transactions each day, although 
 he was not obliged to do so. Some of the reports we have had may show that 
 his tradings were large, but large trading in itself is not a violation of the law. 
 
 Mr. Chase. On the basis of your statement that this press-release statement 
 concerning Mr. Cutten has nothing to do with this bill, there was no particular 
 purpose in bringing the Cutten case into consideration of this bill, was there? 
 
 Dr. Duvel. There was not, and I am very sorry that it was interjected into 
 the discussion. 
 
 Mr. Chase. Then, the members of this committee may disregard entirely the 
 discussion of the Cutten matter in considering this bill? 
 
 Dr. Duvel. It does not have anything to do with it. It has nothing to do 
 with it. 
 
 Mr. Chase. Some questions were asked about it. 
 
 Dr. Duvel. We knew that there were some big lines traded in on the board of 
 trade, that there were some large transactions, and because of the information 
 we had around May 13, after there had been an advance of about 25 cents a 
 bushel. Secretary Wallace called upon the board of trade to furnish him informa- 
 tion that was being reported to the board of trade on these special accounts. And 
 my inquiry in the office a few days ago indicates that letter has never been replied 
 to and that the information was not furnished. There was a statement before 
 
 [ 
 
128 
 
 REGULATION OF COMMODITY EXCHANGES 
 
 this committee the other day that there was no line exceeding 2 million bushels. 
 The records show otherwise. 
 
 Mr. DoxEY. Have you completed? 
 
 Mr. Chase. I have one or two more questions I would like to ask. 
 
 Mr. DoxEY. Go right ahead. 
 
 Mr. Chase. In view of some of the questions that have been asked and state- 
 ments that have been made concernins; the provisions of the proposed legisla- 
 tion, I would like to ask, Dr. Duvel, if it is true that this bill is aimed primarily 
 at the Chicago Board of Trade? 
 
 Dr. DuvEL. It is not aimed at the board of trade. 
 
 Mr. Chase. Is it intended to control them; is that your idea? 
 
 Dr. DuvEL. Eighty-five percent of the trading is done in Chicago, and any 
 price movement in other markets moves along with Chicago. 
 
 Mr. Chase. Then, do I understand 
 
 Dr. DuvEL (continuing). And naturally, Chicago is affected most. 
 
 Mr. Chase. There is nothing else back of it? 
 
 Dr. DuvEL. That is all. 
 
 Mr. Chase. Now, may I ask you this question: Have the members of the 
 Chicago Board of Trade been helpful to you in your department or antagonistic 
 toward you? 
 
 Dr. DuvEL. They have been both. For instance, we have members on the 
 Chicago Board of Trade and on other exchanges, and some large commission 
 houses, who have authorized us to examine their records at any time and have 
 said to us, "Don't bother us when you want to examine our records; you know 
 where the books are, and you have authority to go there and get what you want, 
 and if you cannot find it our men will be glad to help you." 
 
 We have other houses, as I said awhile ago, where every time we find it neces- 
 sary to examine the records more time is consumed in explaining our authority 
 under the law than is required to do the actual work involved in the examination 
 of the records. Frequently it does not require more than 10 minutes to get all 
 the information needed. 
 
 We have repeatedly urged upon the Chicago Board of Trade to impress upon 
 its members — those trading on the board — that they must give us access to 
 their records. 
 
 That has been partially complied with and partially not. 
 
 Now, just one word with reference to the case against Mr. Cutten. I do not 
 have any grudge against Mr. Cutten. Personally, he is a delightful gentlenian, 
 as are all of these large traders. I have met a number of them during this period. 
 But prior to 1933 there have been only 16 who have had transactions involving 
 2,000,000 bushels or more, and 3 of them have gone to their final resting place. 
 Those whom I know personally are delightful people; they are interested in 
 profits; they are anxious to make money 
 
 Mr. Chase (interposing). Let me ask you one further question. Do you 
 object to speculation* 
 
 Dr. DuvEL. No. 
 
 Mr. Chase. Do you regard it as necessary in the marketing of grain? 
 
 Dr. Duvel. As long as we have the futures market; yes. 
 
 Mr. Chase. And it is the manipulation by operators that you are seeking 
 authority to control? 
 
 Dr. Duvel. Yes. 
 
 Their manipulations in the market? 
 
 That approach manipulative operations, excessive speculation. 
 
 And you think the passage of this bill would help to accomplish 
 
 Mr. Chase. 
 Dr. Duvel. 
 Mr. Chase. 
 that purpose? 
 Dr. Duvel. 
 Mr. Chase. 
 
 I think it would; yes. 
 
 Then may I ask you this question: In what particular, or why, 
 do you regard the code as ineffective? Is it because it is purely temporary or 
 because it lacks teeth, or is it because it is not comprehensive enough? 
 
 Dr. Duvel. Well, in the first place, it is temporary. In the second place, it 
 does not go far enough, in my opinion. 
 
 Mr. Chase. In what respect does it not go far enough? 
 
 Dr. Duvel. Well, I will answer your question, but I want to say, as Mr. Mehl 
 has already told you, that we are interested in the code and are going to do every 
 thing we possibly can to help make it a success. 
 
 So far as the 25-percent marginal requirement of large traders is concerned, I 
 dc not I elicve it can be enforced. I would like to see it enforced, and we are 
 going to do everything we can to enforce it and to make the code a success. 
 
 REGULATION OF COMMODITY EXCHANGES 
 
 129 
 
 Now, on the question of margins, I personalh* feel that the grain and com- 
 modity markets offer different problems in the matter of margins than we find 
 in the stock market. A commodities market is handled in a different way. If 
 large-scale speculative trading is detrimental to the market — and there is no 
 doubt about it in my own mind — it would seem desirable to provide some means 
 of restricting it. If there is to be a limit, it should be fixed in advance and not 
 changed in the middle of the game, and made the same for all traders. While an 
 increase of margins on large trades, as re(}uired under the code, may serve to 
 restrict some speculative operations, it will result in even greater advantage to 
 the trader having sufficient funds to meet such increased margins. Heavy con- 
 centrated trading is generally closely associated with excessive price fluctuations. 
 That is what took place last July when the price of May wheat dropped from 
 $1.28^ to $0.97Ji, or more than 30 cents per bushel, in 2 days. On July 20 we 
 had the largest single dav's trading in wheat in the historv of the board of trade — 
 163,117,000 bushels. The next largest day was OctoVSer 24, 1929, with total 
 trading in wheat of 156,126,000 bushels and a price decline of 11^ cents. 
 
 Mr. Chase. Your statement is that you do not think the code will control that 
 situation? 
 
 Dr. Duvel. No; I do not believe it can be properly policed. 
 
 Mr. Chase. It will not relieve it? 
 
 Dr. Duvel. It places some restriction on the large traders and in many cases 
 will be effective. 
 
 Mr. Chase. The code can be amended? 
 
 Dr. Duvel. Yes; the code can be amended 
 
 Mr. Chase. Mr. Mehl made a statement that the bill was drafted primarily 
 to control operations of some 8 to 16 men; is that your opinion? 
 
 Dr. Duvel. Well, insofar as that limit is concerned, we know that there are 
 only 8 to 16 of them during this period; we have never had over 16. 
 
 Mr. Chase. Up to 16? 
 
 Dr. Duvel. Yes. 
 
 Mr. Chase. Since what time? 
 
 Dr. Duvel. Since 1925, up to the end of 1932, only 16 individuals have ever 
 reached 2,000,000 bushels or more. 
 
 Mr. Chase. And in your judgment^ this general legislation is necessary to 
 control the operations of those 16 men? 
 
 Dr. Duvel. Well, there are only a few of them. 
 
 Mr. Chase. Yes. 
 
 Dr. Duvel. There have been only a few whose operations were that large. 
 
 Mr. Chase. Are you authorized to answer questions relative to the policy of 
 your Department? 
 
 Dr. Duvel. Well, the questions of policy are left to the Secretary, of course. 
 
 Mr. Chase. Yes. 
 
 Dr. Duvel. Questions of policy are left to him. 
 
 Mr. Chase. That is all. 
 
 Mr. Mitchell. Just one question. From what I understand you to say, the 
 Commission is without power and has not been able to control the market fluc- 
 uation; the N. R. A. cannot possible control it, and the exchange will not control 
 it, then why have the shell game at all? Why not just abolish it by law and let 
 our farmers earn their living by the sweat of their brow, as the Bible says? 
 
 Dr. Duvel. My answer is that I do not know. 
 
 Mr. Mitchell. Nobody seems to be able to control it. 
 
 Dr. Duvel. But I would like to say that we have been working under this 
 system for 80 years, and I would like very much to see the abuses corrected so it 
 can operate with greater fairness. 
 
 Mr. Mitchell. It has just been a shell gamC; has it not? 
 
 Dr. Duvel. There are abuses, of course. 
 
 Mr. Mitchell. It is just a shell game, and first you see it, and then you do 
 not see it. Why not just abolish it and let the law of supply and demand have 
 an opportunity to operate? 
 
 Dr. Duvel. My ambition — I may say that I believe in the futures market — 
 and I sincerely hope, sometime before I die, to see the Chicago Board of Trade 
 an institution of such standing that when you go out into the country and talk 
 with the producer you will find him well informed as to how his commodity is 
 handled and he will stand up for the futures-trading system and say that we have 
 the best marketing machinery of any plan ever developed. I do not know 
 whether that is possible, but I have that ambition. 
 
 Mr. Mitchell. It will require some change. 
 
f 
 
 i 
 
 I 
 
 '^K 
 
 130 
 
 REGULATION OF COMMODITY EXCHANGES 
 
 Dr. 
 Mr 
 Dr. 
 Mr 
 
 DuvEL. I beg your pardon. 
 
 Mitchell. There will certainly need to be some radical changes made. 
 DuvEL. I would like to see it given another trial. 
 Mitchell. That is your hope, at least? 
 
 Dr. DuvEL. Yes. 
 
 Mr. Mitchell. And in your opinion you think it should be permitted to exist? 
 
 Dr. DuvEL. Yes. 
 
 Mr. FuLMER. How much longer do you think it will take you, Dr. DuvelT 
 We will have to complete the hearings in a short time. 
 
 Dr. DuvEL. I can stop most any time, Mr. Fulmer. 
 
 Mr. Fulmer. You w\\\ have the privilege of extending your remarks, of course. 
 
 Dr. DuvEL. Most of it has been discussed. 
 
 Mr. DoxEY. Just in conclusion. I do not want to inject myself into this, but 
 I will say, Dr. Duvel, that the committee appreciates your position and the 
 position of the Department. Now, this thought occurred to me in the answer 
 to a question that Mr Chase brought out, and I say this merely for the purpose 
 of the record. He indicated that some member of the committee, by questions, 
 brought forward the Crawford case. I think the record will bear me out, and I 
 make the statement, that a statement from one of the i;vitnesses referred to the 
 July episode, which is nothing more than the Crawford case, continuing from 
 October 1932 to July. 
 
 I do not think it was the purpose of any member of this committee to bring 
 that into the discussion here, but it was brought up in that way, and since that 
 has been injected into the record, I want to ask you this question: 
 
 By what authority, or at whose suggestion, were the rules suspended from 
 October 1932 to July 1933 for the purpose of permitting or allowing the Chicago 
 Board of Trade to clean its own house? 
 
 Dr. Duvel. So far as I know, I will answer by the best information I have. 
 
 Mr. DoxEY. Yes. 
 
 Dr. Duvel. It was at the request made of the Chicago Board of Trade at 
 that time. It was, however, approved by the Secretary. 
 
 But I would like to add one thing further; it was stated here the other day that 
 the exchange was closed July 21 and 22 because the personnel were overworked 
 and could not go on any longer. Now, personally, I do not believe that was the 
 real reason. 
 
 Mr. DoxEY. That is all. 
 
 Mr. BoiLEAU. Dr. Duvel, you stated, as did Mr. Mehl, that 16 typically large 
 operators have bought 2,000,000 bushels or over during the time since 1926, and 
 yet you have no law, no criminal law, at the present time against them. 
 
 Dr. Duvel. No. 
 
 Mr. -BoiLEAU. Would you object to giving to this committee the names of 
 those 16 men who apparently have exercised such a tremendous influence on the 
 price of grain? 
 
 Dr. Duvel. That is one thing that the law prohibits; as it stands now, we 
 cannot give their names. 
 
 Mr. BoiLEAU. But these 16 men do have a tremendous amount of influence on 
 the price of grain; is that correct? 
 
 Dr. Duvel. Yes. 
 
 Mr. BoiLEAU. And it is your opinion that their operations largely control the 
 price of grain? 
 
 Dr. Duvel. As I stated the opening day of this hearing, in 80 percent of the 
 cases where there was a large fluctuation in price we had large concentrated 
 speculative transactions. 
 
 Mr. Fulmer. We desire to thank you. We have some correspondence here 
 which we have had requested to be read, but unless there are some objections, it 
 will be inserted in the record. 
 
 The committee will stand adjourned subject to the call of the chairman. 
 
 (Thereupon at 12:20 p. m. the committee adjourned.) 
 
I 
 
 130 
 
 REGULATION OF COMMODITY EXCHANGES 
 
 Dr. DuvEL. I beg your pardon. 
 
 Mr. Mitchell. There will certainly need to be some radical changes made. 
 
 Dr. DuvEL. I would like to see it given another trial. 
 
 Mr. Mitchell. That is your hope, at least? 
 
 Dr. DuvEL. Yes. 
 
 Mr. Mitchell. And in your opinion you think it should be permitted to exist? 
 
 Dr. DuvEL. Yes. 
 
 Mr. FuLMER. How much longer do you think it will take you, Dr. Duvel? 
 We will have to complete the hearings in a short time. 
 
 Dr. DuvEL. I can stop most any time, Mr. Fulmer. 
 
 Mr. FuLMER, You will have the privilege of extending your remarks, of course. 
 
 Dr. DuvEL. Most of it has been discussed. 
 
 Mr. DoxEY. Just in conclusion. I do not want to inject myself into this, but 
 I will say. Dr. Duvel, that the committee appreciates your position and the 
 position of the Department. Now, this thought occurred to me in the answer 
 to a question that Mr Chase brought out, and I say this merely for the purpose 
 of the record. He indicated that some member of the committee, by questions, 
 brought forward the Crawford case. I think the record will bear me out, and I 
 make the statement, that a statement from one of the witnesses referred to the 
 July episode, which is nothing more than the Crawford case, continuing from 
 October 1932 to July. 
 
 I do not think it was the purpose of any member of this committee to bring 
 that into the discussion here, but it was brought up in that way, and since that 
 has been injected into the record, I want to ask you this question: 
 
 By what authority, or at whose suggestion, were the rules suspended from 
 October 1932 to July 1933 for the purpose of permitting or allowing the Chicago 
 Board of Trade to clean its own house? 
 
 Dr. Duvel. So far as I know, I will answer by the best information I have. 
 
 Mr. Doxey. Yes. 
 
 Dr. Duvel. It was at the request made of the Chicago Board of Trade at 
 that time. It was, however, approved by the Secretary. 
 
 But I would like to add one thing further; it was stated here the other day that 
 the exchange was closed July 21 and 22 because the personnel were overworked 
 and could not go on any longer. Now, personally, I do not believe that was the 
 real reason. 
 
 Mr. Doxey. That is all. 
 
 Mr. BoiLEAU. Dr. Duvel, you stated, as did Mr. Mehl, that 16 typically large 
 operators have bought 2,000,000 bushels or over during the time since 1925, and 
 yet you have no law, no criminal law, at the present time against them. 
 
 Dt. Duvel. No. 
 
 Mr. BoiLEAU. Would you object to giving to this committee the names of 
 those 16 men who apparently have exercised such a tremendous influence on the 
 price of grain? 
 
 Dr. DuvEL. That is one thing that the law prohibits; as it stands now, we 
 cannot give their names. 
 
 Mr. BoiLEAU. But these 16 men do have a tremendous amount of influence on 
 the price of grain; is that correct? 
 
 Dr. DuvEL. Yes. 
 
 Mr. BoiLEAU. And it is your opinion that their operations largely control the 
 price of grain? 
 
 Dr. DuvEL. As I stated the opening day of this hearing, in 80 percent of the 
 cases where there was a large fluctuation in price we had large concentrated 
 speculative transactions. 
 
 Mr. FuLMER. We desire to thank you. We have some correspondence here 
 which we have had requested to be read, but unless there are some objections, it 
 will be inserted in the record. 
 
 The committee will stand adjourned subject to the call of the chairman. 
 
 (Thereupon at 12:20 p. m. the committee adjourned.) 
 
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