ucts within the reach of the possibilities of the people to deal with them.

There is just one additional statement which I desire to make. I have in mind a plan of coordination and decentralization of control which I shall later propose. At this time it seems to me to be expedient to submit to your judgment and try to arrive at an agreement upon the fundamental features before giving consideration to detail. The CHAIRMAN. Thank you, Mr. Sumners. The committee will now recess until 2 o'clock.

(Thereupon, at 12 o'clock and 20 minutes p. m., the committee recessed until 2 o'clock p. m., to hear the representatives of the New Orleans Cotton Exchange.)

FUTURE TRADING.

MONDAY, JANUARY 10, 1921.

AFTER RECESS.

The hearing was resumed, pursuant to the taking of recess, at 2 o'clock p. m., to continue hearings on future trading, the morning session having been devoted to a hearing on governmental produce exchanges, Hon. Gilbert N. Haugen (chairman) presiding.

The CHAIRMAN. The committee will come to order. Mr. Dupré, I understand that you desire to have representatives of the New Orleans Cotton Exchange heard by the committee?

Mr. DUPRÉ. Mr. Chairman, the gentlemen representing the New Orleans Cotton Exchange, whom you were kind enough to agree to hear this afternoon, are present. Are you ready to hear them? The CHAIRMAN. We shall be pleased to hear them now.

Mr. DUPRÉ. I will then present as the first speaker Mr. E. S. Butler, president of the New Orleans Cotton Exchange. The CHAIRMAN. Mr. Butler, you may proceed.

STATEMENT OF MR. E. S. BUTLER, PRESIDENT NEW ORLEANS COTTON EXCHANGE, NEW ORLEANS, LA.

Mr. BUTLER. Mr. Chairman and gentlemen, I would like to preface my remarks by stating that I am a cotton exporter and not directly engaged in future business. The cotton exchanges of the country, particularly those of New Orleans and New York, upon which cotton future trading is conducted under the United States cotton future act, section 5, and the rules and regulations of the Bureau of Markets, are commercial institutions which, through the medium of their rules and regulations, under the supervision of the United States Department of Agriculture, facilitate the concentration of all cotton interests-producer, merchant, banker, and consumer-and as a result prices are made for the commodity which are distributed worldwide.

The exchange itself does not buy, sell, or deliver any cotton at all, and its rules are fair alike to both buyer and seller. Since 1884 121 bills have been introduced at various sessions of Congress for the abolition or regulation of cotton futures. The cotton future trading is now conducted under a law which became effective in August, 1914, known as the Smith-Lever bill, and amended March 4, 1919. It should therefore be noted that Congress has not been lax in giving attention to cotton exchanges, nor has the Bureau of Markets, under whose supervision the exchanges operate, since the passage of the Smith-Lever law.

Only two years ago the Bureau of Markets conducted an investigation of cotton exchanges. It seems to the cotton men that after all financial depressions, which naturally cause declines in prices, a number of well-meaning lawmakers introduce bills for the abolition or regulation of future trading. It appears that the declines as shown on the future boards of the cotton exchanges, or the exchanges dealing in futures, are so visualized that the conclusion is readily reached that the future markets must be responsible for the decline; but careful analysis of general conditions will inevitably prove that such is not the case and that the law of supply and demand finally governs.

We do not doubt the sincerity of our representatives or their confidence that their actions represent their constituents, but we do question their knowledge of cotton, cotton statistics, and conditions, concerning the marketing and consumption of cotton and the cotton business as conducted by the cotton exchanges of the country during the past 50 years.

The necessity of selling ahead has long been recognized as essential to the cotton trade. The mills sell their summer wear in the winter, as they manufacture a commodity which requires several months. The millman, in order to protect himself against forward sales of manufactured goods, uses the cotton market as a buying hedge against an advance in raw prices. On the other hand, the bulk of the cotton crop is marketed from August to December, and the market buys this cotton as the farmer sells, often buying a large quantity over and above immediate sales, and uses the future market as a selling hedge to protect itself against any decline in prices, gradually selling the stock of goods accumulated during the summer and buying futures.

The cotton business is not an exact science, nor is any of the machinery connected with buying, marketing, hedging, and selling, nor is the classification which is done by the human eye an exact science. Consequently, we hold no brief for the future contract as a perfect one.

However, not only America but Europe, through the Liverpool Cotton Exchange, has for over 40 years recognized future trading as the most economical and best price insurance which the farmer, merchant, cotton banker, and spinner have yet evolved. The present future contract is the result of an investigation made by Congress, started in 1907, as traded upon in the New York and New Orleans cotton exchanges, a report on which was made in March, 1908, Congress having appointed Mr. Herbert Knox Smith, then Commissioner of Corporations, to make an investigation of cotton exchanges and report.

Subsequently the Committee on Agriculture of the Sixty-third Congress held meetings, and after hearing representatives of the whole cotton trade the result was the adoption by Congress of the present United States cotton futures act, and also directed the Secretary of Agriculture to promulgate standards for cotton grades in the United States. The act was further amended March 4, 1919. There are only two people in the cotton business whose interests are diametrically opposed. One is the farmer, whose object is to secure the highest price for the result of his labor. The other is

the consumer, whose object is to buy his raw material as cheaply as possible. All intervening interests work on fixed commissions or take their chances as to buying or selling profitably. The legitimate speculator operating through the exchange is the only buffer between the farmer and the powerful buyer and consumer, who can readily organize while the farmer can not; and it is easy to see that the farmer can not hope to survive any such unequal contest if the speculator is eliminated and the exchanges closed. The presence of the speculator in the future exchange, always ready to buy or sell or receive or deliver cotton, has undoubtedly served to relieve the trade of the risk of violent fluctuations in value. Speculative markets on the cotton exchange enable the farmer at any season of the year or any day of the season to find a ready sale for his cotton.

While there may have been at times much unwise speculation on exchanges, the exchanges have been useful in stablizing prices, in furnishing correct quotations of the market value of cotton, in eliminating the risk of violently fluctuating prices, in reducing the profits of the middleman, in furnishing a ready market for cotton at its market value, and in maintaining a reasonable parity between future and spot prices, thereby posting the farmer, the merchant, the banker, and the consumer as to the price of cotton daily.

The recent unprecedented decline as well as the abnormal advance in price during the past four years are due to abnormal war conditions, and future cotton trading can not be held responsible therefor. On the contrary, during all this turmoil the future contract functioned as a reasonable price insurance to both buyer and seller, producer and consumer, merchant and banker, engaged in the cotton business.

Many other articles, wool, rice, hides, etc., which are not protected by a future market, have suffered similar or more violent declines in price. What would have become of the country, with the price of last year's cotton crop shortening from over $2,000,000,000 to less than $1,000,000,000, at present prices, in three months if the speculator and hedge buyer had not borne the brunt? Surely it was not the trade. There was and still is a lack of buyers and trade demand to absorb the daily offerings. The absolute reason for the decline in cotton, as well as in other commodities, is the fact that home consumption and foreign demand have been throttled by extraordinary financial conditions as the result of the war, and any bill to tax or to restrict trading in futures will mean the abolition of the cotton exchanges and probably further declines in price.

The future contract is the result of many years of study by cotton men and legislators, and is sufficiently comprehensive to include the bulk of the cotton grown. To destroy the exchanges is to destroy the insurance and cause a chaotic condition to exist for the producer, the merchant, and the banker, and the resulting market will be at the mercy of domestic and foreign speculators who will still have the privilege of insuring their purchases or sales in the Liverpool Cotton Exchange, and foreigners will control the price of one of America's greatest staples.

Those who were engaged in the cotton business in 1914, at the beginning of the war, well remember what occurred when the future exchanges were closed on the 1st of August. Owing to the avalanche

of telegrams received by the exchanges, desperate efforts were made, notwithstanding the uncertainty of the future then, to reopen, and the exchanges were reopened on November 16, 1914. It must be remembered that the closing of the future markets means the closing of the interior exchanges.

The future contract, being an average grade contract-that is, 10 official grades of the United States cotton standards can be delivered against 100 bales-should sell at a reasonable discount under actual offerings of specific grades on the spot market, and it generally does in normal times. However, at the close of business Friday, January 7, 1921, spot middling cotton was quoted at 14 cents in New Orleans, Galveston, Houston, and Little Rock, whereas January cotton the current or spot months in New Orleans quoted at 14.34, showing conclusively that futures at present are commanding a premium, and contrary to being a depressing factor are gradually lifting cotton higher.

On behalf of the New Orleans Cotton Exchange, we wish to thank you gentlemen for the opportunity given us to appear here to-day, and I want to say that I will answer any questions to the best of my ability, and Mr. Dean and Mr. Stern will attempt to do the same.

Mr. TINCHER. Mr. Butler, your illustration there, showing that the future cotton was a little higher than cash, is conclusive to your mind, is it, that the trading in futures was responsible for the stable market?

Mr. BUTLER. That is not exactly the case, but it does prove conclusively that futures are not a deterrent factor.

Mr. TINCHER. I understood you to cite it as an example that it had a beneficial effect.

Mr. BUTLER. It shows that at present, Mr. Tincher, futures are tending to lift the price of cotton rather than to depress the price of cotton, and I think that is so, due to the fact that the public has an opportunity to buy cotton through the future markets, thereby creating more buyers than if it was left entirely to the trade to buy, and only trade buyers.

Mr. TINCHER. It is pretty hard to use the present condition of the price of cotton in the hands of the producer as an example for anything, is it not?

Mr. BUTLER. Why, yes; or the last five years as far as that goes, or any other commodity. We have been in abnormal, times and are

still.

Mr. TINCHER. Suppose your futures were 10 per cent below the cash market; just what effect would it have?

Mr. BUTLER. Well, it is likely they would be in normal times. Dependent entirely upon the price, or more or less proportionate to the price, futures should sell at a discount under cotton.

Mr. TINCHER. Regardless of the time of the year?

Mr. BUTLER. Yes; regardless of the time of the year they should sell at a discount, and they do and have for many years, due to the fact that one is a specific thing that you buy when you know just exactly what you require, whereas if you take a future contract you have to take any one of 10 grades specified by the Government.

Mr. TINCHER. You think it is necessary, in order to furnish a stabilizing effect, that futures be dealt in to the extent of, say, 25 or 50 times the amount of the actual product?