FUTURE TRADING.

COMMITTEE ON AGRICULTURE,

HOUSE OF REPRESENTATIVES,

Washington, D. C., Friday, January 14, 1921.

The committee met at 9.30 o'clock a. m., pursuant to adjournment on yesterday, Hon. Gilbert N. Haugen (chairman), presiding. The CHAIRMAN. We will hear from you, Mr. Barteau.

STATEMENT OF MR. SID D. BARTEAU, REPRESENTING FARMER'S ELEVATOR CO., ZUMBROTA, MINN.

Mr. BARTEAU. Mr. Chairman, I am from a farmers' elevator company in southern Minnesota, and the only thing we are interested in is the hedging. So far as gambling is concerned, we would like to have you eliminate that. We have a capital of $3,900, and we have a membership of 140 farmers.

The CHAIRMAN. How many elevators have you? Mr. BARTEAU. We have two elevators in one town. We go to our local bank, which has a capital of $25,000 and surplus, and we can borrow $4,800. We go to the commission firm that we ship our grain to and tell them we want $5,000 to-day, and the next day we go to them again and tell them we want $5,000 more. They say, Have you got your grain hedged?" "Yes." "Draw on us for

what you want.'

The minute you eliminate hedging, we will not be able to get that money, and we do not know how we would do business. Of course, that with the big line elevators we could do business, but the farmers who buy grain on a commission of 2 cents a bushel would be out of it, and the big elevators would be it.

You take our wool this year. We handled last year 25,000 pounds of wool. This year we did not dare to buy wool; there was no market for it. Some farmers have pooled their wool with us. We have not been able to get a market any time this summer that was anywhere satisfactory to us. We have still got the wool, and they have not got any money for it.

Mr. MCLAUGHLIN of Michigan. You evidently believe if you had no opportunity to hedge, if these exchanges did not exist, the grain market would be or might be in the same condition that the wool market is in?

Mr. BARTEAU. I do not know why it would not be. We would be at the mercy of people who were buying it, and how would we protect ourselves? You take the market. I think it commenced on the 1st of November to go down, dropping 10 or 15 or 20 cents a day. On what grain we had to take we had to protect ourselves every day or we would have lost a lot of money.

We had a meeting of our directors Tuesday morning, at 10 o'clock. There were 8 of the 9 there. I told them what I was coming down here for, and it was perfectly agreeable to them.

Mr. MCLAUGHLIN of Michigan. You buy and sell on the exchange then, only to cover your own transactions?

Mr. BARTEAU. That is all we do: yes, sir. Supposing we buy 800 bushels of wheat in a day; we would sell a thousand bushels for the next morning on the opening.

Mr. MCLAUGHLIN of Michigan. How often are you called upon and find it necessary to carry your hedge transaction clear through to delivery?

Mr. BARTEAU. We never do that; do not intend to do it. We ship our wheat mostly to local mills.

Mr. MCLAUGHLIN of Michigan. You are the exception. The rest of them always do, they tell us?

Mr. BARTEAU. No, sir; we do not intend to carry it through at all. We sell that option hedge in Minneapolis, and if we can get the local mill to take it without any commission we save that, from 1 cent up to 2 cents a bushel. As soon as the wheat is sold on the market, we buy that hedge back, and that deal is closed. But we are protected until we can get out onto the market.

Of course, you all know the last three years it has been almost impossible lots of times to get cars. We would get our elevator as full practically so that we could not work. We handle 200,000 bushels, and we only have 60,000 capacity in the two elevators. But that takes more money than our banks can furnish us to carry that.

Mr. MCLAUGHLIN of Michigan. In carrying on your business in that way, do you consider that you are speculating?

Mr. BARTEAU. We consider it is absolutely no speculation; it is a cinch, a profit.

Mr. MCLAUGHLIN of Michigan. Do you consider that you are gambling?

Mr. BARTEAU. No, sir; we are not gambling; we are simply eliminating gambling when we sell that hedge, if we have got the wheat, in our opinion.

Mr. MCLAUGHLIN of Michigan. But you do not contemplate delivery in any case that you hedge?

Mr. BARTEAU. No, sir.

Mr. MCLAUGHLIN of Michigan. I think I understand how you carry on your business. But I do not see why it is not speculation or gambling. I do not see why those who speak about it here are so particular to say it is not speculation or gambling. You are not dealing in the real article at all?

Mr. BARTEAU. In our case, do you think it is a gamble?

Mr. MCLAUGHLIN of Michigan. You may do it so skillfully that the risk is eliminated to a large extent, but it does not make any difference to me what it is. I should come to the conclusion that it does not make any difference what you call the transaction, unless it was either justifiable or necessary, and it is not. I do not care a continental what you call it.

Mr. BARTEAU. I can not understand how there is any gamble on my part at all. I have simply bought a thousand bushels of wheat and I sold. The man on the exchange to whom I sold may be gam

bling-I do not know anything about that; but he has put up to protect me.

The CHAIRMAN. I think his operation is altogether different from others. He sells the hedge, and the fellow who takes the hedge is a speculator.

Mr. MCLAUGHLIN of Michigan. He does not sell anything.

Mr. BARTEAU. I certainly do. If I did not buy that hedge back before the option expired, I would have to deliver.

Mr. MCLAUGHLIN of Michigan. You do not have to do it, and you know it. As far as I can see, it is simply a bet on what the price will be at the time of delivery.

Mr. BARTEAU. Suppose I did not protect myself; would it not be gambling on my part?

Mr. MCLAUGHLIN of Michigan. Yes.

Mr. BARTEAU. If I bought a thousand bushels of wheat and carried it two weeks away the market was going in November, I would have lost $500 probably on every thousand bushels I would have bought. Mr. MCLAUGHLIN of Michigan. I guess that is right.

Mr. BARTEAU. Yes, sir; and then I would be gambling. This way I was not gambling. Of course, that is the way I was brought up to look at it.

The CHAIRMAN. We are grateful to you, sir.
Mr. BARTEAU. Thank you very much.

STATEMENT OF MR. ROBERT MCDOUGAL, REPRESENTING CHICAGO BOARD OF TRADE, POSTAL TELEGRAPH BUILDING, CHICAGO, ILL.

Mr. MCDOUGAL. Mr. Chairman and gentlemen, the few points I wish to bring up are not closely related to each other. They are nevertheless, I think, related to each other in a substantial way to a full understanding of the subject matter which is before you for discussion and determination.

Point 1. The fundamental article of the organic law of the Chicago Board of Trade is its preamble. This preamble reads as follows:

To maintain a commercial exchange; to promote uniformity in the customs and usages of merchants; to inculcate principles of justice and equity in trade; to facilitate the speedy adjustment of business disputes; to acquire and disseminate valuable commercial and economic information; and generally, to secure to its members the benefits of cooperation in the furtherance of their legitimate pursuits.

Point 2 is in supplementation and reenforcement of Mr. Gates's testimony of yesterday.

The immediate as well as the final aspect of the German laws of 1896 repressing the buying and selling of grain, as well as other restrictions, eliminating a free market for grain, were a great disappointment to the whole country as well as the promulgators of the law. The greatest sufferers were the farmers and finally they were the greatest agitators to have the law abolished.

The immediate effect of the law was the impossibility of the buyers the grain merchants could not afford to fill their warehouses and keep the usual reserves for later wants, as they had no protection in the way of future sales should the market decline. Then, again, the miller was prevented from buying except from hand to mouth for the same reasons. The fluctuations became very wide.

Previous to this legislation everybody knew the value of every grain product, whereas after its enactment it became a matter of bargaining on each trade.

As long as future trading was permitted every country newspap through its columns informed the farmer of the value of his product Without an open market the farmer was ignorant of what his products were worth and was taken advantage of where opportunities permitted and dealers were unscrupulous enough to do so.

Furthermore, on account of the increased risk in either buying or selling, the profits of all middlemen were increased in proportion— all at the expense of the farm products.

Germany was forced to repeal this law a few years later and dealers were conceded the right to resume buying and selling for future delivery.

Citations of authority: (a) The annals of the American Academy of Political and Social Science, volume 38, pages 135-141 (191): (b) the Functions of Legitimate Grain Exchanges, pages 52-64–147 (published in Chicago).

Point 3. The war will go down as the greatest destabilizer of price levels that the world has known. The shrinkage of the farmer's inventory in respect to grain prices has been severe and burdensome. but other interests have suffered as much, perhaps more. The farmer has enjoyed his share of war period prosperity and has also probably done his full share of speculating in the past five years. Agriculture has been infected by the inflation germ as seriously as were industry and commerce. Holders of securities have suffered more than the farmers.

While the farmer suffered the first and almost the worst effects of deflation they may be sure that the burdens and distress they bear are borne by others and that the equalization process will run its full course.

Two of the big packers have issued their annual reports for the 1920 fiscal year, one of them showing the common stock dividend not one-half earned, and the other not nearly enough to take care of its preferred dividend. The two leading mail-order houses are no better off, and their sales this winter are 30 to 40 per cent less than a year ago. The farm machinery concerns are operating at 80 per cent of their capacity in the Chicago district, although their business has been cut into, because they feel sure of a fair volume of buying next spring and good volume next autumn, if the crops turn out well. Steel corporation plants are also operating 80 per cent, because they look into the future confidently, particularly those branches which deal directly with rural consumers.

The wholesale grocery trade has lost most of its profits of the last two or three years. The men's fine clothing trade, as reported in the large cities, shows a record of high sales but no profits for the past year. Reductions in all lines are being made and more are coming. The increase in labor efficiency is already notable. Every class of our population is taking its medicine. Some commodities had as perpendicular drop as cereals did. Forget silk as an oriental product and consider sugar which dropped from 31 to below 9 cents à pound -a sheer drop of 59 per cent. The general decline in commodity prices exceeds any ever known in the country. The index number of the Federal Government will record this. Retailers are now

suffering. Chicago leading haberdashers are closing out their entire stock of neckwear at 50 to 75 per cent reduction.

Farmers are better off in this matter than manufacturers and merchants, who must find or create their markets. The farmer has a continuous open world market in the grain exchanges, to close or repress these grain exchanges would be disastrous.

4. You heard yesterday the Supreme Court of the United States holds future contracts on the Chicago Board of Trade legal, not gambling contracts; it sustains the board's property right in quotations and enjoins their use in bucket shops; it declares a set-off has all the effect of delivery and in legal effect is a delivery.

The Supreme Court of Illinois has said:

Legitimate transactions on the board of trade are of the utmost importance in commerce. Such contracts whether for immediate or future delivery are valid in law and receive its sanction and all the support that can be given them.

5. You heard yesterday that a bucket shop is a place for the registration of bets. The board of trade has spent over $400,000 in its legal fight against illegal traffic.

6. Herbert C. Hoover says the Chicago Board of Trade is the most economical and efficient agency for the marketing of foodstuffs found anywhere in the world.

Conclusion and last point: The enactment into law of any bill causing the tearing down or crippling of the present market system in futures would be the most serious blow agriculture has ever received.

Future contracts and cash business, car lots or cargo lots are organically related and indispensable to each other. The following is extracted from the leading financial paper of the United States of issue January 11, 1921:

A free and open market in futures is a necessity which the manufacturers of the world recognize. The foreign miller or cotton spinner must be able, in order to guard himslef against unforeseen natural contingencies like boll weevil and bad weather, to buy his raw material before it is harvested or even planted. There must be somebody willing to sell him that raw material with a guaranty that it will be delivered when the crop is made. If American produce exchanges will not give this guaranty the produce exchanges of Liverpool, London, and Montreal will perform this necessary service to the foreign manufacturer.

The only effect of destroying such a free market here would be to drive hundreds of millions of dollars of legitimate business out of the country. The reaction on the farmer would be a calamity far worse than any depression of prices at present existing. The world market for wheat would dictate the price. Only dealers here with immense capital could afford to handle the farmers' wheat, and then only at a price which would amply protect them, which would be many cents below the middle price in the open market at Mark Lane, London, or in Liverpool or Montreal. It is a temptation in some minds to let Congress go ahead with this legislation and explain it to the farmer afterwards. But the incalculable losses involved, the expatriation of hundreds of millions of tax-paying business at a time when we need every penny which can be collected in taxes even for the most economical adminisirative expenditure, are too serious to be so despairingly dismissed. But such an act would be like a farmer burning down his barn to destroy the rats, or like the immortal Sam Weller, who instanced the gentleman who cut off a little boy's head to cure him of sneezing.

Gentlemen, I heard day before yesterday the testimony of three men-one from Iowa, one from Indiana, and one from South Dakota-to the effect that without the present future markets they could not do business. One of the three declared he would voluntarily get out of the grain business if future trading was done away