Mr. CULVER. No, sir; when the investment is made in December wheat, he takes the actual wheat.

Mr. SIMS. When December comes around; provided he does not beforehand sell out the contract.

Mr. CULVER. He carries that receipt, or the receipt for that much grain, and sells it back as the miller wants it, taking it in on the basis of the May contract.

Mr. SIMS. Now, let me ask you one more question, which I am confident you can answer; and you have been so candid that I believe you will answer it. Do you think it is possible to operate successfully a hedging market, unless it is also patronized by speculators who intend to make the profit out of the contract between the time of the purchase and sale and the date of the ultimate execution of the contract? Mr. CULVER. I do not. They are the safety bank of the grain trade.

Mr. SIMS. I think you have answered exactly right. I agree with

you.

The CHAIRMAN. Do you wish to ask a question?

Mr. E. T. BROOKS. Yes, sir.

The CHAIRMAN. You may do So.

Mr. BROOKS. The telegram that you read there seemed to want to draw a very fine distinction and difference between a bucket shop and an exchange.

Mr. CULVER. Yes.

Mr. BROOKS. Do you agree with the telegram?

Mr. CULVER. Yes, sir; perfectly.

Mr. BROOKS. What I want to ask is, what is the difference, so far as the man engaged in it is concerned, between a purely bucket-shop transaction, and calling in a man between the bucket-shop man and the man that is the customer, and calling him a broker, and paying him a commission for holding the stakes?

Mr. CULVER. One is an organized body of men of commercial honor, and the other-well, I would hate to put in the record what I would like to say with reference to the other class of men. I will modify it, though, and say they are sharks. They have no honor. They do not contemplate delivery. They take their money, and they steal all their quotations, and steal their news from the different markets. You may get a quotation on your board that is right, and you may not. They are the curse of our grain trade to-day. That is the difference between the two bodies. One is a legitimate, honorable body of men and the other is not.

Mr. BROOKS. Have any of the customers of the bucket shops, since they have been outlawed in certain States, turned around and become customers of the exchanges?

Mr. CULVER. Not that I know of. Their contracts would not be taken in our markets, if they were.

Mr. MERRILL. He means the patrons.

The CHAIRMAN. The committee will stand adjourned until 2 o'clock this afternoon.

(The committee thereupon, at 12.15 o'clock p. m., took a recess until 2 o'clock p. m.)

AFTERNOON SESSION.

The committee met at 2 o'clock p. m., Hon. Charles F. Scott (chairman) presiding.

The CHAIRMAN. Ön account of the fact that a hearing before this committee on another subject is set for to-morrow, it is a matter of a good deal of importance that we should conclude the hearings in relation to the grain exchanges this afternoon, if possible.

Mr. MERRILL. We have only Mr. Cushing and myself to be heard now, Mr. Chairman. Mr. Cushing is a member of the New York Produce Exchange. It is not my purpose to occupy much of your time in my remarks, and therefore the matter of time will rest largely with the committee, and will depend largely on the amount of crossquestioning they desire to do. There are a few subjects which I shall want to call your attention to, as the last speaker for the exchanges. If you are ready to proceed, Mr. Chairman, Mr. Cushing is here.

The CHAIRMAN. We are ready to proceed. My remark was intended only to suggest to the members of the committee as well as to the witnesses that the hearing should be as brief as is consistent with presenting the matter properly.

Mr. MERRILL. The only point is that the morning was taken up in cross-questioning largely, far beyond anything we contemplated, and thereby the committee used up the time rather than ourselves, so that if we should be put in the attitude of not completing our representation, we should wish to be heard briefly on another date, and if possible before I leave the city.

The CHAIRMAN. In order that there may be no doubt about it, I will ask the members of the committee and others to refrain from asking questions until your statements have been made. We will hear from Mr. Cushing now.

TESTIMONY OF MR. EDWARD T. CUSHING, REPRESENTING THE NEW YORK PRODUCE EXCHANGE.

(The witness was sworn by the chairman.)

Mr. CUSHING. Mr. Chairman, all these questions have been so thoroughly thrashed out, all the different phases of hedging and manipulation, that I am not tempted to make any further argument. What I have aimed to do is to file the objections of the New York Produce Exchange to the passage of this bill in a memorandum, as it were, making a positive statement without attempting to bring out any arguments in favor of that statement, which I will leave to the committee; so that, if you will allow me, I will present this statement which I have prepared, and I would suggest that if you allow me to do so you will save time, because you will then have it before you for your consideration.

The CHAIRMAN. We would be very glad to have you do that, Mr. Cushing.

Mr. ČUSHING. The enactment of national legislation, which would destroy an established system, in use on the great exchanges engaged in handling the products of agriculture, is a matter of grave importance. If the evidence already submitted by us is in any way defi

cient and this committee desires further information, the exchanges would welcome and assist a special committee in making a most searching personal investigation into every detail of the rules of the exchanges and into every detail of their economic function in handling the crops.

The interests involved are vast and far-reaching, affecting alike the producer, the consumer, and our foreign trade.

The present business system of the exchanges is the outgrowth of experience and in operation has thus far proved the best system which intelligent, practical minds have been able to devise.

Existing methods have been fully sustained by decisions of the Supreme Court, but if it can be shown that any part of the system is against public policy the exchanges would modify their rules to comply with public sentiment.

They have already gone on record at this hearing and now further express their earnest desire to cooperate with this committee in formulating any further rules which are dictated by public policy.

I would ask Mr. Merrill if he would allow us to make that statement for all the exchanges.

Mr. MERRILL. Certainly.

Mr. CUSHING. For personally I only represent the produce exchange.

Mr. MERRILL. Yes.

Mr. CUSHING. The system is complex. Each part is a necessary part of the whole, and the destruction of a part would endanger the whole. The crops for many years have been handled under the present system, which has the advantage of long experience. Legislation hastily entered into could easily upset this system without offering anything better in its place, and could completely disorganize vast business interests. There is no lack of organization among the grain-producing farmers. If there was any widespread dissatisfaction with the method of handling their products, they would be here to-day. They are not here and, as far as can be learned, are generally content in their present wonderful prosperity.

If by legislation, uncalled for, the vast structure of economical order, in handling the crops, should be upset and a panic precipitated in grain, which abundant evidence has been submitted here to show would be more than likely, could not the farmers of the great grainproducing States well say: "We were prosperous and content. We did not want much. All we asked for was to be let alone, and you would not do so?" Any legislation making transactions in agricultural products for future delivery illegal, or any legislation which would restrict the dealing in future contracts as now conducted under the rules of the great exchanges would strike at the root of the whole system, the principles of which are, by the creation of a free and open market for an article of necessity, in its nature highly speculative, to give to the producer and the consumer equal advantages with a minimum cost of handling owing to the distribution of the risk by means of that open market.

If the aim of legislation were the suppression of bucket shops, where the transactions are pure gambling, every exchange in the country would support it, would unite in the formation of a bill to that end, and would unite in enforcing the law, but any bill of doubtful interpretation would directly affect the great exchanges, and the members

would be prevented from handling the crops under present methods until they were protected by a decision of the Supreme Court.

It is absolutely essential for the most economical handling of the grain crops that sales should be made for future delivery and that. there should be an active market for such delivery. Every transaction for future delivery on the.exchanges carries the seller's obligation to deliver the property and the buyer's obligation to receive and pay for it. Failure to do either constitutes a default which suspends a member until he fulfills his obligation. Settlement by offset is allowed by exchange rules and is upheld both as legal and expedient by a decision of the Supreme Court rendered May 8, 1905. The main movement of grain is from the farmer to the country elevator or miller. From the country elevator to the terminal cities, where the exchanges and the great elevator systems are located, and from the terminal cities to eastern and southern millers, distributers, and exporters. Some grain is moved directly East from country stations, and some direct export business is done by the interior terminals, but the main movements is as stated. By the open markets of the exchanges, each one in the line, from the farmer to the consumer, knows at any hour of a business day at what price he can buy or sell, all prices being based on the exchange price for delivery during the future month in which the dealings are then most active. That price is made by consensus of public opinion of value focused on the exchanges. The opinion of value is formed by general information of conditions present and prospective.

The exchanges spend large sums collecting this information, and gratuitously, through their members and through the press, distribute it broadcast, the small dealer and the capitalist standing on the same ground. The best information available is not private information, but public information from the exchanges.

The system of hedging has been so fully explained by the previous testimony that any further explanations would be superfluous.

If grain moved with regularity, no faster than it was wanted, and as fast as it was wanted, hedging would not be necessary, but it does not. At times the movement is far beyond the demand resulting in large accumulations. At other times the movement does not equal the demand and the previous accumulation is drawn on. It is here that the speculator comes in and performs a legitimate economic function in carrying property over times of plethora and supplying it in times of want.

It is the speculator who largely takes the dealer's hedges, and again enables him to buy them in when he makes sales for shipment. Without the speculator, the broad, active market which we now have and which is necessary for the economical handling of the crops would not exist. The speculator, ever ready to buy or sell, prevents violent, abrupt changes. He anticipates demand and supply and works between. He distributes profits, losses, and risks. He is a leveler, in that by his activity he enables the small dealer to hedge, and places him on a level with the large capitalist. He is a useful and necessary part of the whole.

Hedging transactions are obviously so legitimate and so necessary in the handling of the crops that no doubt legislation would provide for them, but, and here is the point as to speculation, if speculation.

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was restricted, the transactions made legal would be impossible to execute, for there would be no market. There is where your speculator comes in. A broad active market with fractional fluctuations between trades is essential to hedge on. The speculator creates and maintains that kind of a market. Without him no market moving with any degree of regularity would be possible.

If it were desirable to permit so-called legitimate transactions and prohibit speculative, the separation would be impossible. Transactions, legitimate or speculative, would be defined by intent. Varying circumstances so often change the intent that no one could define where one began and the other ended.

Exchange transactions are often defined as legitimate or speculative, implying that the speculative transactions are not legitimate. Every transaction recognized by the rules of the exchanges is legitimate. The hedging transactions are entered into by conservative merchants who want to avoid speculation. There are other transactions, and a vast number of them, which are speculative. They are not as conservative as the hedging transactions, but they are just as legitimate and are just as necessary a part of the whole, in that they maintain the equipoise of the market and prevent violent, abrupt changes. The worst form which speculation can assume is an actual or attempted corner of the market. It ruins legitimate business, and public sentiment on the exchanges is against it. Every exchange should have a rule making a close corner impossible. No rule can be made limiting the amount of grain an operator can buy, and his purchases, if large enough, may under favoring conditions create a cornered condition of the market, but a rule can be made to prevent the corner from becoming operative. Such a rule has been in operation on the New York Produce Exchange for many years and has proved a complete success. We have such a rule. The farmer can generally be relied on to break any attempted corner. He is the real price maker, and either by the free delivery of his product or by withholding it can ruin the manipulator. Legitimate speculation avoids manipulation. If it were possible to prevent speculation by legislative act it would not be wise to do so; but, if legislation could prevent manipulation it would be most desirable.

Futures are dealt in largely in the open market on the exchanges of Liverpool, Berlin, Budapest, and Paris and no attempt is made there to restrict speculative transactions. Liverpool a few years ago recognized its system and largely adopted American methods as the best in existence. Since then its trade has increased enormously and is now world-wide.

Now, Mr. Messmore spoke of this Prussian agrarian law that was passed, and said there must be some difficulty about it. I have mentioned it here, and I will tell you later where my authority came from. I do not know what technical points there may be about it.

We have a precedent of the disastrous effect of legislation which abolished trading in futures in the experience of Prussia. In 1896 the agrarian majority passed a law prohibiting transactions in the products of agriculture for future delivery on the theory that speculators by short sales depressed values. The law remained in force until 1900, and was then repealed by the same agrarian vote which made it. Under its operation the farmer received less for his product, the consumer paid more for his food, and the great merchants with