Cotton future contract trading and adverse legislation

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\A_r\Pr.

Cotton Future Contract Trading

CHAPTER I. Cotton Exchanges and Prohibitory Legislation

The threatened passage of the Scott Anti-Cotton-Future Bill at the last session of Congress aroused so vigorous a protest from the bankers, business men and many farmers of the South, that theadvocates of drastic legislation along these lines may well pause in order to give more mature consideration to so radical and far-reaching a measure.

It is not only advisable that the members of Congress should look further into the effects of such legislation before committingtheir constituents to the trial of a possibly disastrous experiment, but these constituents themselves, and especially the farmers — they being most directly and to the greatest extent affected thereby — should demand that measures affecting their welfare be based upon intelligent and public spirited investigation and-l?onclusions, and not upon demagogic appeals to prejudice.

Econoiiiic laAvs are like the laws of nature — if indeed they arenot the laws of nature. They are unchangeable and inexorable and the man or the community or the nation which undertakes to nullify these laws, or to interfere with the operation thereof, or to run counter thereto, will be broken as a twig in the hand of a giant. The old Dane who undertook to stay the incoming progress of thetide by virtue of his royal command, was not more preposterous and futile than is the latter-day legislator, who makes a demonstration in Congress for the repeal of the law of cause and effect.

The late Scott Bill and similar legislation pending, represents not only an attempt to try an experiment in legislation upon one -class of citizens alone and upon one section of our cotintry only, but is the concrete expression of a reckless desire to meddle with the complex machinery of a great trade system, upon the unhampered operation of which depends the welfare of many millions of people.

It is not to be denied that the operation of the trade system hy which the cotton crop is moved from the fields and distributed to the four corners of the earth, is afflicted with some drawbacks, some imperfections ' and some abuses. But this is true of all trade systems and of all human enterprises, undertakings and developments. These distempers of the body economic have been and will be seized upon by the seeker after notoriety, emolument or power, as the means whereby popular prejudice may be set ablaze and he, by the light of it. see the way to the goal of his desires. . But the true leader, the patriotic citizen and the public-spirited press should approach these problems from another standpoint. The aim of such teachers and workers should be first, to investigate and study the problems in order that the truth may be known, and then to direct their efforts to the end that the good may be appropriated, preserved and expanded, and the evils eliminated and destroyed.

Approaching the Cotton Exchange and Future Trading problem in this spirit, we should primarily advise ourselves definitelv and accurately as to the nature and functions of the Cotton Exchange and of Future Trading; then we should examine into the part that these institutions and this trade system play in the modern methods of marketing and distributing the cotton crop : then we should study the advantages and benefits derived from the operation of the agencies in question: and then we should inquire into the evils complained of, the nature and source thereof ; and finally, we should, in the light of the information obtained, address our efforts towards such, regulation, restriction, prohib'^tion and encouragement, as-- would on the one hand eliminate all that is objectionable and injurious, and on the other preserve and strengthen all that operates, for the interest of the great cotton industry and for the advantage of the producers of the great trade asset of the South.

Following the foregoing outline we propose in the first article to discuss the legitimate Cotton Exchange, what it is and what it is not; and what the results upon the cotton producer and the cotton, trade would be if its functions were suspended by legislative prohibi-- tion.

COTTON EXCHAN^GE AND BUCKET SHOP DIFFEEENTIATED.

In the agitation that a few years ago swept the country, the terms "Bucket Shop" and "Cotton Exchange" were used indiscriminately as if — and indeed as was concluded by many — they meant the same thing. At the time in question a very real evil was in existence throughout the South, and very reprehensible: conditions prevailed. - Speculation was then rampant, not only in the Southern States, Imt throughout the entire country as well. Mem who desired to profit by this mania for speculation esta1)lished' offices or so-called "Cotton Exchanges" in a multitude of towns both large and small throughout all the South. "These people made' it possible for men of small means, clerks, and even women and' children to speculate or gamble, as they untruthfully announced,, "in cotton'' These offices were not Cotton Exchanges, but Bucket" Shops, and the speculators in these offices were not trading in cotton or in cotton contracts, but were simply betting with the proprietor upon the fluctuations in price that occurred in the cotton market. It is important that the distinction between a Cotton Exchange and a Bucket Shop should be clearly understood. In a legitimate Cotton Exchange binding and e'nforceable contracts are made for present

-and future delivery of cotton^ and the prices at whicli such cotton is bought and sold^ both for present and future delivery, are posted upon the blackboards of the Exchange and telegraphed throughout the world so that all who are interested may know what traders are ^?aying for cotton and, consequently, be apprised of the value thereof. In a Bucket Shop no contracts whatever are made. Xobody buys any cotton or sells any. The proprietor of the Bucket Shop, for the purpose of masking his game, adopts the nomenclature of the leg-timate exchange and of the actual cotton trade. But in fact all he does is to bet his victims that the i^rice of cotton, as registered by actual contracts and trades in the Cotton Exchange will go up or down, as the case may be ; and all the victims of the bucket shopper do, is to take the other end of the bet. The Cotton Exchange, if fairly and equitably conducted, is no more to be condemned and destroyed because of the practice of bucket-shopping, than is the ocean liner to be condemned and prohibited from crossing the seas because some individuals see tit to bet with each other on the speed at which the vessel will travel.

But, as has been said, the terms "Cotton Exchange" and ■■'^Bucket Shop"' were used indiscriminately, with the result that to the many who did not understand the difference, the actual evil which thev observed proceeded from the Bucket Shop in their town, was inaccurately attributed, and denunciation thereof applied, to the Cotton Exchanges in the great markets of the world. Thus the Cotton Exchanges, no matter what their faults may be, have been through inaccurate and unthinking generalization, accused and condemned for faults in no just sense attributable to them, and for evil practices which the Exchanges have done their very best to •destroy.

THE LEGITIMATE COTTON EXCHAl^GE.

The legitimate Cotton Exchange is a place where buyers and ^sellers are brought together and trading conducted at less expense, with more facilit}^, and in greater volume than could be done if the traders were separated; it is an organization which establishes communication with the other markets, both foreign and domestic, and collects information as to values and conditions, and statistics and reports as to the progress of the crop, the state of the dry goods trade, and the amount of cotton taken by spinners; it frames rules for the government of its members and the trading between them, among them.selves, and with non-members; and finallv it establishes tribunals before which disputes may be settled and punishment intiicted upon offenders against honorable conduct in business.

Originally the trading in the Cotton Exchanges was limited to *'Spot" transactions, i. e., to th? purchase and sale of cotton actually in hand. But as production increased and consumption grew, it was found that a need existed for trading in future contracts, or in other words, for buying and selling cotton for delivery at some time in the future. In order that such trading should be conducted with satisfaction and efficiency, the Exchanges in Avhich such trading prevailed, adopted a form of binding contract which must be signed by the parties thereto, and formulated rules governing the conduct of the business.

In the course of time there came into the markets a class of traders who, although they did not manufacture cotton goods themselves, were willing to buy cotton when the}^ thought the price was too low, in order that they might sell later at a profit. These traders, therefore, competed with the spinners. They not only bought and sold cotton for present delivery, but also bought and sold contracts for future delivery. The supply of contracts furnished by these traders, as well as by those who had cotton which they wished to sell, and by spinners who wished to buy to fill future consumptive needs, constituted what is known as the Future Market, and made possible the very important facility of "hedging."

The prices for future deliver}^ made by trades in future contracts rejDresent the consensus of opinion of the traders as to the probable value of cotton at such future time. If the Future Market is in the producers' country where the great majority of men hopethat cotton will advance in value and are by this hope influenced in their opinion^ then the prevaling future prices in such market will be relatively high. If, on the contrary, the Future Market is located in the spinners' country where most men hope that cotton will go down and, consequenth^, believe that it will do so, then the prevaling future prices in such market will be relatively low. In order that the trade may be advised of present conditions and be able to form some opinion as to prices in the future, the Exchanges at a large expense collect reliable data covering all the conditions both of crop and trade, that go to make prices. This information so gathered, is by the Exchange disseminated throughout the country, with the result that every day and at all times during the day the farmer or the merchant, even in the small towns of the country, know what cotton is worth in all the markets, are apprised of conditions which would likely affect prices, and hence cannot be misled or duped by intending buyers, into selling cotton for less than its value.

The laws of the several Southern States have practically eliminated the evil of bucket shopping heretofore referred to. But. now the effort is made in Congress not only to prevent betting on the fluctuations in the price of future contracts, but to prohibit the maling of future contracts; not only to close up the Bucket Shops, but to destroy the legitimate Exchanges as w^ell. "We will hereafter discuss more in detail the beneflts derived by the farmer and all legitimate interests through the agency of future trading per se, and the loss tliat would be occasioned if such trading were prohil)ited. Here we will call attention to the most obvious ill results that would follow the enactment of a law directed against Ihe legitimate American Exchange:

1st. If the American Future Exchange was closed^ then there would remain only the Liverpool and Continental Exchanges inr operation. These exchanges are Spinners' exchanges. No cotton is; produced in those countries^ but there are many mills. The spinner desires to buy cotton as cheaply as possible^ and in any future market dominated by the spinner and his friends the prices would naturally and inevitably be forced down as low as possible. With no resistance on the part of the producer and his friends^ the: contest would be one-sided and unequal^ and hence the price-making, 'power would be surrendered to foreign interests^ and the farmerwould have to sell at the low prices fixed by the spinners in Liverpoolj Bremen and Havre.

2nd. If the American Future Exchange was closed then all the information as to the price of cotton in all the markets of the world and all the information as to conditions which go to make up' the price and the price outlook, would be no longer disseminated- The buyer and spinner would know what the Liverpool Exchangeand the other foreign exchanges were doing, but the farmer and the merchant, especially in the small towns, would be in the dark. Thus the producer would be at the mercy of the buyer, and all the American cotton trade would be at the mercy of the foreign spinning, interests which would be intent upon buying cotton as cheaply as. possible.

These preliminary considerations are commended to the serious' thought of the farmer and of all those who are his friends. Before' supporting any anti-future bill, those interested should be very sure that the measure would not produce the results outlined above- Some legislation is necessary in order that the operations of the* exchanges should be equitably regulated, but this question, like all others of legislative agenc}^, should be handled with discretion and discrimination.

10 CHAPTER II.

Anti-Option Legislation.

Extreme legislation as a general thing is like a two-edged sword — it cuts both ways. Legislation not always extreme often acts in the same manner if not given proper consideration. The tariff question for example : Free trade is ideal. To be enabled to buy in the cheapest market and sell in the dearest without let or hindrance, is the sum and substance of free trade. "We want free bagging and ties for baling cottom because the tariff on these is a burden to the cotton proditcer and helps the bagging and steel trusts, but we do not want free foreign raw cotton, because the Egyptian cotton grown by cheap labor comes in direct competition with our long staple, and its encouragement cuts profits on the home product; and so on along the line. We are free traders in theor\\ because the theory is ideal, l3ut like all other things good on their face, it is subject to numerous exceptions.

And so it is with legislation: what on its face may seem good and fit, may prove on application not unmixed with evil.

Xot a few among our best thinkers among the farmers have believed the only way to abate the evils that have fastened upon the cotton trade is to abolish the Exchanges. To prevent the making of contracts for the purchase or sale of cotton for future delivery, unless coupled with conditions practically prohibitive.

This is what the so-called Scott Bill proposes.

But are there not two sides to this matter? Xo one questions the sincerity of the advocates of the Scott Bill; but would the measure, if adopted, accomplish the ends sought? Would it abolish futures ? It would in the great Exchanges of Xew Orleans and Xew York as far as interstate commerce in the United States is concerned. It would drive away millions upon millions of dollars of

American capital which now help us to move our crops and obtain cash mone}^ for them with the same facility and promptness that one ^vith money in bank can cash a check. But how about Liverpool and Havre and Bremen ? They would go on the same as ever, only, with our American Exchanges crippled and unable to put up a tight in behalf of American cotton, the foreigners might dictate prices. Is it to be supposed that they, the representatives of the foreign spinners, would work in favor of the American farmer? Would they pay any more for our cotton than they could help? Past history does not show it. How about the future? Would the leopard change his spots ? They would try to buy their raw cotton as low as possible and sell their manufactured goods as high as possible. The British lion makes a handsome picture as far as lions go, but it is safest to keep American heads out of his mouth. France and Germany are our good friends in the way of trade for what they can make out of us. Germany tried prohibition of futures, but has changed her law and Bremen is about commencing the Future business again. Bremen has already made enough on arbitrating American cotton to build the handsomest Exchange in the world. Is it so sure that we need such a radical change as the Scott Bill would force ? Do our farmers want to be brought face to face with the spinners, with none to intervene between them? We market in the first six months of the year nearly twice as much cotton as the spinners need in the same time. Who then is to take or carry the surplus when the mills buy only as they need the cotton, if we drive away the capital which has been performing that service?

The capitalist or speculator will not consent to carry cotton unless he is able to hedge against a possible decline. The average buyer in the country will not buy our cotton unless at a wide margin and even at that he will hesitate if there are no American future markets in which he can hedge. The small buyer who now competes for our cotton in country towns will be driven out altogether.

One has only to go ov-er the newspaper files before the establishment of futures, to show what would be in store for us if we return to old conditions. These are matters which require serious consideration at the hands of farmers.

Look at the record this and last year : Last year we got for our cotton crop including the seed, $902,000,000. This year we will receive more than one thousand millions of dollars for the crop, including the seed. The calculation is easy. Already up to the close of March we had sold $818,000,000 and the remnant of thecrop which is selling at an average of $75 per bale and over will bring $84,000,000. Add to this $125,000,000 for the seed and we have a total of one billion and twenty-seven millions.

Xo two crops bi^ or little ever brought near such amounts.

And 5'et all the time throughout these two remarkable years themills have been crying bad trade, short time. These results have, been obtained under a system of trade, including futures. Would that have l3een the case had the middleman who carried the surplus, been unable to hedge his purchases? Would he have been able to eay to the mills ''the cotton is worth the money and if you don't buy it at the price I will, and will make you pay more when you are forced to buy?"'

Suppose these men who took die chances had been driven out by law, would we have ol}tained nearly two thousand millions of dollars, for the two crops? That is a more than serious question. Some of the advocates of the Scott Bill claim we would have gotten more. But how? The spinners have not paid us one cent more than the\ were forced to. If they could hare had their own way, they would have j^aid ten to twentv dollars a bale less. Take the records of the past ten years and we will find that $45 to $55 per bale has not been an unusual price for cotton. What would such figures havb meant compared with $T5 and over for tlie two years just ending. Anywheres from four hundred millions to seven hundred millionsof dollars.

We do not say that such would have been the case, but it is not beyond the bounds of possibility. Would it have been conservative to take the risk ?

We do know that if existing business methods are disrupted the result, for a time at least will be chaos, and while a new order is being established who will pay the losses? Do not all costs incident to marketing come out of the cotton itself?

While the future system has been in force the trusts with all their billions of money have not dared to interfere with cotton. They have tackled Sugar and Iron and Bagging and Lumber and Oil and other commodities which have no futures. In cotton every man who considers cotton is cheap has an opportunity to buy through the future market and the combined means of the many, offsets even the great assets of the trusts. Even the Eoth^childs have always steered clear of cotton.

Would it not, therefore, be wise to exercise some conservatism in dealing with this important matter ?

If the institution of futures is of ^benefit we should conserve the good in it. What is bad should be eliminated, but in the elimination that which is of benefit should not be destroyed.

Bucket Shops should be prohibited throughout the United States; they are only bettors on the price of cotton as established in the Exchanges. Jlo contract should be permitted that does not give to the buyer the legal right to demand the cotton and none that does not give to the seller the right to deliver the actual cotton, and no contract should be permitted that is not settled upon the actual prices which prevail from day. to day for the grades of cotton specified therein. No contract should be permitted which specifies that differences between the difi^erent grades shall be arbitrarily fixed for months upon months regardless of the actual market prices therefor.

The banks are under government supervision, why not cotton? Why not try supervision instead of abolition ?

The United States government has through its Bureau of

Corporations completed perhaps one of the most exhaustive investigations of the Exchanges and the Cotton Future Business that has ever been made in relation to trade matters. The report of Commissioner Herbert Knox Smith embraced every phase of future contracts, their advantages and the correctives needed to bring the system into line with the interests of the grower of cotton.

A measure in keeping with Commissioner Smith's recommendations is well worthy of trial. This with Government supervision to enforce the law in letter as well as in spirit, it is claimed, will remove objections now urged while retaining its advantages as an adjunct to the marketing and sale of the cotton crop.

Would not that be a better plan than risking a radical experiment, the result of which may or may not prove doubtful?

Chapter III

Nature of the Future Contract; and Method of Trading.

Having in a former issue discussed the functions of a legitimate Cotton Exchange with particular reference to future contract trading; and having differentiated such an Exchange from the nefarious institutions designated as Bucket Shops^ and distinguished the future transactions conducted in the former from the gambling ventures undertaken in the latter; it is now in order to give some more particular attention to the nature of the future contract and the method of trading therein.

FUTUEE CONTRACT A BINDING OBLIGATION.

Much misunderstanding has existed and much misinformation has been disseminated in regard to the contract for future delivery of cotton. It has been dogmatically affirmed by anti-future advocates that the future contract was a sham and a mere subterfuge invented for the purpose of giving apparent legitimacy to a purely gambling hazard. Wliile it is true that there is and has been and must be speculation in future contracts^ it is not true that the contract for future delivery under the rules of a legitimate Exchange is unreal or a delusion and a sham. On the contrary^ such contract to deliver or to receive cotton at some specified time in the future^ is a binding obligation specifically enforceable both under the rules of the Exchange and in the courts of law. If any one doubts the validity and reality of such contracts let him sell on the Exchange a hundred bales of cotton to be delivered in some future month, or let him buy for reception at some future time, and if he does not, before the maturity of the contract, dispose of the same or transfer his obligation to some one else, he will find that he must deliver or receive, as the case may be, or else pay the same penalty he would pay in the case of a. breach of any other contract. And furthermore, Tiot only is such future contract enforceable, but it is aiso secured; •each party being required to put up collateral sufficient to protect the 'Other party from loss in the event that the one party or the other fails to specifically receive or deliver according to the obligat'on in the contract.

Briefly the form of the future contract and the methods of trading therein is as follows : A, who is a principal, gives an order to B, who is a broker, to buy say 100 bales of cotton to be delivered in October. Y, who is a principal, gives an order to X, who is a l)roker, to sell, say, 100 bales of cotton for October delivery. B, the "broker, bids a price per pound, basis middling, for the said 100 bales. X, the other broker, accepts the bid and sells for the delivery stipulated and at the middling basis price agreed. B and X, the brokers, thereupon enter into a binding contract in the form prescribed by the Exchange whereby the one agrees to receive and the other to deliver the actual cotton covered thereby, at the time and at the price stated, and furthermore each is required to give to the other security that the contract will be carried out according to the terms thereof. A and Y, the principals in the premises, are responsible to B and X, -who are acting as agents or brokers, and B and X are representing their principals A and Y. The contract is now made and signed and the obligation of all parties fixed and determined.

If the principals A and Y, give no further instructions in regard to the contract, when October comes, X, the broker, must deliver to B, the other broker, 100 bales as per contract and B must receive and pay for said cotton. In such case X delivers the cotton for account of his principal Y, and B, receives the same for. account -of his principal A. This is the simplest form of future contract trading.

But suppose that after the contract has been signed and entered into by B and X^ the brokers ; A, the principal who has bought the 100 bales, decides that for some reason he does not v/ant to take 'delivery in October. Perhaps he had bought the -contract for the purpose of hedging a sale of some specific grade or some special kind of cotton which he had contracted to deliver to a spinner, not having said cotton in hand at the time : When, therefore, he had purchased the specialty, he would have no further need for the future contract. In such case he would tell B, his broker, to sell his contract, or in other words, to find some one who would take his place and assume the obligation to receive the cotton in October. C, an entirely new party, wants, at this time, to buy 100 bales for October delivery. He, therefore, through his broker, at a price -assumes A^s obligation as principal to the broker, B; the contract between B, the broker, and X, the other broker, remaining intact. In the same way, Y, the other principal in the original obligation, may desire to be relieved of his obligation to deliver the 100 bales in October, he having in the meantime disposed of the 100 bales of cotton in hand against which he had sold the contract as a hedge. He, therefore, tells his broker X, to get some one to take his, Y's, place and assume his obligation to deliver the cotton. W, another new party, desires at this time to hedge some cotton he has in hand, by selling the same for October delivery. He, therefore, through his broker, at a price, assumes the obligation of Y, the original principal in the premises. The contract between B and X, the brokers, remains intact and each is bound as firmly as ever, the one to receive and the other to deliver 100 bales in October, but the principals, to whom both brokers look for performance, are new. Thus the principals may change any number of times before the maturity of the contract, but when it does mature, it must be liquidated in accordance with the terms thereof. The two brokers are responsible to each other for this performance,, but they discharge, their obligation to each other for the account of their respective ultimate principals.

.From the foregoing it will be seen that the future contract entered into under the rules of a properly organized and equitably regulated exchange, is not a nefarious or dishonest subterfuge but adpfinite and binding obligation : and fuithermore, it will appear that these contracts having been once properly and validly issued^ may be bought or sold or transferred in the course of trade, just as apromissory note, *or other obligation, once issued, mav be bought or sold or transferred for a consideration.

LAEGE YOLr:\IE OF TEADIXG LOGICAL A:N"D XECESSAEY.

"When the modern trade methods of moving the crop are understood, no difficulty will be experienced in appreciating the fact that from the time the farmer parts with possession to the time when the cotton reaches the ultimate consumer, it passes through many different hands and is the subject of diverse and successive ownership. The same lot of cotton passes from the farmer to the merchant, and from the merchant to the buyer and from the buyer to the spinner or from the buyer to another buyer or exporter, and from such other buyer or exporters to still others until it reaches the spinners' hands and is spun into cloth, sold to the cloth merchant and finally to the man who wears the clothes made therefrom.