can also provide in the rules that you must contract for spring wheat or for winter, and deliver one or the other, as contracted, it might develop, as it has at Minneapolis, that the trade should then deal in spring wheat, and that should be the standard, but what would happen to the winter-wheat market?

The CHAIRMAN. I had in mind that any exchange might deal in the grades, but only certain grades would be deliverable on a contract. If you contracted for spring wheat, only spring wheat would be deliverable. What I have in mind is the protection of the millers and buyers.

Mr. THORNE. If you add a benefit to the miller you might add a hardship to the seller.

The CHAIRMAN. We first should determine the quality. I take it all the grades should be in accordance with the official standards of the United States?

Mr. THORNE. Yes, sir.

The CHAIRMAN. And the contracts should specify or qualifyMr. THORNE (interposing)., The rules should provide.

The CHAIRMAN. The rules in the contracts.

Mr. THORNE. Which would be implied in any contract made.

The CHAIRMAN. If hedging, as I understood you, is to be permitted, there should be some limit, either by multiplying the number of bushels owned by a certain figure or a certain number of bushels that might be dealt in as a speculation?

Mr. THORNE. I doubt somewhat the efficacy of the latter method. The CHAIRMAN. Anyway, there should be a limit?

Mr. THORNE. Yes, sir.

The CHAIRMAN. We thank you very much; we are very grateful to you, Mr. Thorne.

Mr. THORNE. I thank you.

(Thereupon the committee took a recess until 2 o'clock p. m.)

AFTER RECESS.

The committee met pursuant to recess at 2 o'clock p. m.
The CHAIRMAN. Judge Burns, we will hear from you now.

STATEMENT OF MR. JOHN M. BURNS, OF WASHINGTON, D. C.

Mr. BURNS. Mr. Chairman and gentlemen of the committee, there seems to be the impression that I am appearing here as a representative of the Department of Agriculture. I think it is only fair to myself and to the department to remove that impression by stating that I am not here by assignment. I am presently employed by the Department of Agriculture in the Solicitor's Office thereof as a law clerk. I have held that position for five or six years, and as such participated to a considerable extent in the actual investigations made pursuant to acts of Congress conducted for the purpose of ascertaining the basic facts, generally speaking, connected with the grain industry, and in such capacity and enjoying such privileges, I necessarily gathered a great deal of information about the grain industry as a whole, and the future trading features of such industry. I do not know precisely to what influence I am indebted for the honor of appearing before this committee. If the invitation came

as a result of any personal missionary work that I may have done, personally or through proxy, with any member or members of your honorable committee, I can only say that I am thankful; but I did not want to lead such member or members into thinking that I was assuming to be an expert on future trading and the multitudinous ramifications of the practical operation of the grain exchanges.

The CHAIRMAN. In order that the matter may be cleared up, let me say that it was suggested that you be called, and the committee resolved to invite you to appear before it.

Mr. BURNS. Thank you, Mr. Chairman.

The CHAIRMAN. Request was made of the Secretary of Agriculture that you appear before the committee and any other representatives he might care to have heard.

Mr. BURNS. Now, Mr. Chairman, for many months, as best I could with my feeble resources, I have been trying to put some fire upon the back of the Department of Agriculture and the Federal Trade Commission with the hope of getting them, severally or jointly, to publish the very comprehensive and very valuable information which the two departments succeeded in gathering some two or three years ago about the manner in which the great grain crops of the country are marketed, manufactured, distributed, and disposed of.

Had I succeeded in getting a prompt publication of those facts I think much of the burden which now confronts this committee as a collective body, and individually, would have been removed.

I want to say that I took my complaint directly to the Secretary of Agriculture, I mean Mr. Meredith, and that, so far as I know, so far as his influence went, he has been exerting that influence to get this data published.

The Department of Agriculture, through its various subordinates, probably a year and a half ago, wrote up from the data on hand, its report on private wirehouses, which necessarily involved a discussion of many phases of future trading. That report, I am informed, was communicated to the Federal Trade Commission. When the administrative branch of the department, in whose deliberations I participated, finished their work, as a matter of routine that report was referred to the Solicitor's Office for such action, legally speaking, as the Solicitor should see fit to take. As his representative I handled that report, and I think it will illumine the situation if I read to this committee my report to the Solicitor on that report:

The chapter on Speculative Commission Houses-these are my views as an officer of the Solicitor's Office officially communicated to the Solicitor

The chapter on Speculative Commission Houses should be materially stiffened. That these large commission houses speculate on their own account and necessarily throw their influence against the interests of some of their customers can not, in my opinion, be censured too severely, and the report should specifically recommend changes which will put an end to such vicious practices.

The chapter on hedging tends to create the impression in the uninformed mind that hedging is a very simple matter. This is clearly erroneous, as the practical application of the seemingly simple principle of hedging is very difficult. The whole discussion of hedging should be angled so as to bring out this weakness. The drift of the article, by inference at least, would lead the uninitiated into the belief that all grain dealers hedge and needs must hedge in order to engage in such business successfully. The evidence gathered, on the contrary, shows that hedging is practiced by the minority rather than the majority of those engaged in the grain business and that the country grain buyers who do not hedge operate side by side with those who do hedge and pay the same price for grain.

It is significant, and the report should somewhere state, that country grain dealers, principally cooperative farmer elevators, specifically forbid their managers to hedge. The psychology behind this prohibition, as revealed by the record, is that hedging on the part of country elevators tends to lead to speculation or gambling and is therefore considered a dangerous practice, and, in addition, it is found that it requires a great deal of skill on the part of the managers of country elevators to properly manipulate the hedging facilities.

The record tends to show that hedging by country dealers is more general in the Minneapolis territory than in the Chicago territory, and that very little hedging is done by the country dealers in the Kansas City territory. Notwithstanding this fact, the record tends to show that the farmer gets a higher percentage of current, terminal prices for his grain in Chicago and Kansas City territory than he does in the Minneapolis territory, where the larger percentage of hedging is done.

In picturing an ideal condition of the market for successful hedging, the report leaves out one of the most important conditions, to wit, that after grain is hedged, in order to avoid loss the cash price and the option price must move on a parity; in other words, if the cash price changes 2 cents per bushel the option must show a corresponding change. It frequently happens that they do not move along uniform lines, and this, in my opinion, is one of the reasons why hedging is not more generally practiced.

Again, I think that the record under proper analysis will show that the existence of ideal hedging conditions is the exception rather than the rule, and that during much of the time the market does not furnish grain merchants or manufacturers with any carrying charge; in other words, the cash wheat may be worth in September $1 a bushel, when the December or May option is selling at a much lower figure. Under such conditions, it would be impossible for one buying wheat in September for the purpose of storing it or holding it until December or May, to provide for a carrying charge or the expense of holding through the future trading machinery. These actual statements illustrate that the article on hedging is entirely too favorable to the system and as written utterly fails to show up, as the record does, the imperfections of the system as an insurance facility for grain merchants.

The drift of all the testimony shows that it is the thought of those in the grain business that the insurance facility growing out of the conduct of future trading is more and more efficient as the volume of business done in options increases, and that the volume of business furnished by those legitimately engaged in the grain business can not suffice to furnish anything like adequate facilities for practical hedging. This supports the conclusion that the volume of the insurance facilities growing out of the operation of the future trading machinery is determined by the amount of trades made by those outside of the grain business; in other words, the speculator or gambler.

It therefore appears that the whole system of future trading rests upon widespread public gambling, and that the proponents of future trading in grain trade are asking for privileges of questionable value, at least, which involve widespread public gambling. Members of the trade invariably decline to discuss this big, economic and moral phase of the situation.

I feel that this fact being clearly established by the record should be featured in any report on future trading and should be discussed from both its economic and moral side.

The report as written, in my opinion, ignores the biggest question involved. and fails to present to the public and to the Congress the picture which we found. Therefore I am contending that the picture drawn by the department should at least be comprehensive and representative of the conditions as we found them and not as we would have them be.

I have not had a chance to read these statements which have been made before this committee-that is, all of them-nor have I had the pleasure of attending the hearings to hear the different parties make them. But as much as I have had an opportunity to read and all that I have heard seem to corroborate in every particular the statements set forth in my report to the solicitor.

I can readily understand how to the uninitiated this whole system of future trading is perplexing and bewildering. I can not forget my own experience as an investigator when I entered into the mystic

maze. I think I was on the job several weeks before I found out that they bought and sold wheat by the pound rather than by the bushel.

Now, gentlemen of the committee, I think this committee will get a great deal of light on the question of hedging if it will get the rules of the New York Stock Exchange. I am informed and believe-I never investigated the New York Stock Exchange, but I am informed and believe that the rules of that body to-day prohibit any person through their machinery from selling stock which he or they do not presently deliver. Mr. Thorne, if I understood him, took the position that much if not most of the gambling connected with the administration of the future pits on the Chicago Board of Trade was due to the habit of selling wheat when the person selling did not actually or potentially possess the wheat and had no expectation whatever of either actually or potentially possessing the wheat.

If the New York Stock Exchange can buy and sell stock optionsprobably I ought not to call them options-but if it can sell stock, and furnish a hedging facility for financial transactions, strikingly similar to some of the hedging facilities furnished by the grain options, and at the same time can prevent any person from selling my stock or your stock or your company's stock or my company's stock without delivery thereof, it is worth while for those who conduct and operate the grain exchanges to seriously and carefully investigate that situation.

Whatever we may think about the morals involved in acting as a go-between in the case of two employers, the great fact remains, if our record is reliable, that the broker members of the Chicago Board of Trade and kindred institutions in the United States do habitually act as go-betweens or agencies for bringing together two citizens who desire to speculate or gamble in grain, to wit, the fellow who wants to bet or wager that wheat is going down and the fellow who wants to bet that wheat is going up. In other words, to make a contract between these two bettors.

I think all the data shows that in many instances members of the exchange make much money or get much more revenue out of the execution of these gambling contracts for their clients than they do out of the execution of cash grain sales. These big brokers hold themselves out to the world, by advertisement and otherwise, as being ready and willing to take any offer to buy or sell for any person, with a few exceptions, to buy or sell grain and charge or collect a commission for the service. Necessarily such member broker of the exchange by his action indicates to you or to me, or to the great public-I should say the numerous public-that his only interest is to protect his patrons' interest, because he invites the bull and the bear to do business with him.

If I think wheat is going up I can go to one of them and say: I want to buy 5,000 bushels of wheat. And he will execute that order if other arrangements are satisfactory. The next second or minute you can go to that member broker and say: I want to sell 5,000 bushels of wheat. And he will take that commission. In other words, he will take both transactions, representing as they do diametrically opposite interests from a speculative standpoint. They represent themselves as being there for the purpose of taking care

of those transactions, that that is their primary and paramount interest.

If it be true that such broker, while these conflicting contracts of their bull and bear customers are pending, and without disclosing that fact to such customers, deliberately enters the market as a buyer or seller of grain, it necessarily throws the influence of that sale or purchase against either the bull or the bear customer, and to tha extent is unfair to the customer injured or it tends to injure, or is a breach of trust at least.

Mr. VOIGT. Do you mind if I interrupt you for a question?

Mr. BURNS. Yes, sir; or, I mean that I do not mind.

Mr. VOIGT. I am in favor of wiping out this gambling on boards of trade if it can be done, but you made the statement that the conduct of a commission man was unfair, and a breach of trust to the customer, because he represented both sides of the transaction.

Mr. BURNS. And does something else, sir, and speculates on his own account at the same time.

Mr. VOIGT. Well, now, assuming that they do all that, the customer knows that these commission men are speculating, doesn't he? He knows that they are executing orders on commission; that he is gambling on the market when it is going up, and that he is gambling by executing orders on the market when going down, and the customer having possession of that knowledge how can the action constitute a breach of trust?

Mr. BURNS. But does he know that the broker himself is also making trades himself on his own account?

Mr. VOIGT. I think the average man who speculates through a broker knows that.

Mr. BURNS. Well, he should know it at least. My point is that he should know it.

Mr. VOIGT. Suppose he does not know it, and he goes in to gamble, then he takes all the risk that a gambler ought to take. So I can not conceive any breach of trust toward the man who wants to go in and gamble on the grain market. In the judgment of many that man is committing a breach of trust himself, or a breach of good faith I might say, in endeavoring to affect the market one way or the other without being interested in actual ownership of grain.`

Mr. BURNS. Gentleman, if I go into a card gambling house and gamble, and there are any house players there I think in the world of sport you will find the universal sentiment to be that I should be so informed. In other words, that the house is not throwing its influence against me in case there are no house players there. Now, of course, we may differ about that. You are entitled to your opinion and I am entitled to mine, but I can not get away from the conviction that the broker and the operator should be segregated, and that is about the only specific recommendation that I have to make to this committee. This committee seems to be eager for specific recommendations as to how to eliminate some of these evils.

Now, the record might go further and show that these big brokers who execute the lambs' contracts, if I may use that expression, and I guess we all understand what the lamb in this case is; it is so easy, and there is a strong intimation in the data gathered that they do do it, it is so easy, and the temptation is so great-and I want to drive