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known who they are, with a view to preparing for any cross-examination ?

The CHAIRMAN. That was the purpose that the chairman had in making this suggestion that the names be presented as soon as possible.

Mr. MANDELBAUM. I represent the New York Cotton Exchange, Mr. Chairman. We have not any special credentials here, but as I understand it, you have been notified by the president of the Cotton Exchange as to the committee.

The CHAIRMAN. I have received his notification. That will be entirely satisfactory to the committee. Mr. Barrett, will you indicate your spokesman ?

Mr. BARRETT. Mr. Brooks will represent us at this hearing.

Mr. CONE. Mr. Chairman, I came up here more as a spot-cotton dealer or mill man, but I would like to make a few remarks during the course of this hearing, more as a spot-cotton dealer and mill owner than as representing any other interests.

The CHAIRMAN. We will be very glad to hear you. It would seem as though the most natural method of procedure would be for the proponents of the measure and its supporters to present their views first, and I will ask Mr. Brooks as representing the producers of cotton if he is ready now to take the stand.

TESTIMONY OF MR. T. J. BROOKS, OF ATWOOD, TENN. (The witness was sworn by the chairman.)

The CHAIRMAN. Let me state first, Mr. Brooks, that it is the custom of the committee to feel pretty free to ask questions of gentlemen appearing before it, the questions of course always being asked with courtesy and in good faith, to elicit information; but we wish to consult the convenience of gentlemen who appear before us, so far as possible, and I would like to ask you whether you would prefer to make your statement first and then have whatever questions the members may wish to ask put to you afterwards, or whether you would prefer to submit to interruptions at any time?

Mr. BROOKS. That would depend upon the amount of time granted. If the time was very limited, I would prefer to make the talk and then be asked questions.

The CHAIRMAN. I think it would perhaps expedite the hearing if the witness should be permitted to make his statement first, and the members would reserve their questions until he has completed his statement.

Mr. BROOKS. Mr. Chairman and gentlemen of the committee, as has been announced, I am the representative of the Farmers' Educational and Cooperative Union of America, the largest agricultural organization in the world, to talk upon this subject of the abolition of future dealing, and if it is the desire of the committee I will give the names of the States that the organization exists in.

The CHAIRMAN. I think it would be well to present such a list, so as to give the committee an idea of the scope of the organization.

Mr. BROOKS. We are organized in Washington, Oregon, Idaho, California, Arizona, New Mexico, Colorado, Nebraska, Iowa, Kansas, Oklahoma, Texas, Louisiana, Arkansas, Missouri, Illinois, Kentucky, Tennessee, Mississippi, Alabama, Georgia, Florida, South Carolina, North Carolina, Virginia, and Indiana; twenty-nine States, if I have named them all.

Mr. Chairman, this is a serious question; it involves hundreds of millions of dollars, and millions of people—the welfare of millions of people, financial and otherwise—and I shall not deal in jest nor. in billingsgate. It shall be our purpose to try to approach this subject from the standpoint of statesmanship and welfare of the mass of the people, and not to argue simply from the standpoint of the selfish interest of any class or any section of the country; and without going into the details of the organization and rise and development of the exchanges with which the committee is doubtless familiar, I think it is best to come at once to those points of cleavage between the advocates of future dealings and those who are opposed to them. Mr. Chairman, innocence in youth is no excuse for misconduct in age, and it does not matter how innocent or how serviceable an institution may be in its incipiency and early development if it develops characteristics that are evil it should not escape retribution commensurate with the crime, and if we can point out that there are evils now committed by these exchanges in the practice of dealing in futures we think that will be the main task for us, as we will not discuss the merits or demerits of any particular bill now under consideration. We trust to the wisdom of the committee and of Congress to frame a bill that will accomplish the purpose intended, and the purpose intended is the thing we wish to discuss.

Mr. Chairman, the exchanges are incorporated institutions composed of brokers who elect their own members, make their own rules, and limit their own membership, at least in part of them, and do not report to the public the volume of business that they do in a year, nor all of the other methods used in carrying on their business. They are not, as they were originally, organizations or institutions primarily for the purpose of bringing together buyers and sellers of spot cotton or grain, as the case may be. The chief function of that exchange is supposed to be to furnish a place and the means by which buyers and sellers come together and carry on their business; but the chief function of the exchange as defined by Mr. Herbert Knox Smith is to-day to furnish uniform quotations through the country and to furnish a place to hedge. Now, Mr. Chairman, it may be within the minds of some people, for reasons sufficient to them, the chief function of the exchange as now operated is to offer an instrument or a temptation for investors, and to get considerable revenue out of the forfeitures of the margins staked on those changes in prices which the exchange deals with. As the principle is universally the same in handling grain and in handling cotton, and as we are not at all considering the subject of stock exchanges, I will confine most of my remarks to the cotton part of this question—the cotton exchange. The methods of the cotton exchanges are not understood by the mass of the people. Many of these rules are adopted solely for the reason that they do not want to be compelled to deliver cotton that is bought through the exchange. Since the custom of giving a through bill of lading from interior points to foreign markets has been in vogue, it has almost destroyed one of these exchanges as a spot cotton market, namely New York. This has necessitated the rules of the exchange being so arranged as to give the seller an advantage in trade, and this is why when futures are

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bought so many bales of cotton are bought, without regard to the value of the cotton, the grade of the cotton, or the condition of the cotton. Middling grade is the basis in classifying cotton. When a buyer that really wants cotton buys, he may have to accept a grade that he can not use. That makes it an undesirable place to call for deliveries, so he seldom makes the demand. In the New York exchange another obstacle has been raised that operates against the buyer; by setting, for ten months ahead or thereabouts, a certain difference in price between different grades. The relative values of these different grades may be quite different from the commercial values of these different grades at certain seasons of the year, owing to weather conditions during the gathering season which determine, to a great extent, the amount of each grade that there is to market for the season. All of these things make it difficult for the purchaser to get the kind of cotton he desires on a future contract, deliverable through an exchange, so most of the cotton that is bought for future delivery is bought from cotton dealers outside of the exchange. I refer to those who go on the exchange and hedge to cover actual cotton which they contemplate buying, but which they have sold to be delivered at a specific price. These are either spinners or cotton merchants.

Mr. Chairman, it does not make any difference whether we take the spinner or the cotton merchant as an illustration, so we will take a cotton merchant who is an exporter. He goes to a mill, we will say, on the 9th day of February, and he makes a contract to deliver to that mill next October 1,000 bales of cotton at, say, 14 cents. He does not positively know that cotton will be 14 cents or above 14 cents or below 14 cents, so that he takes chances on having to pay more for that cotton than he has promised to deliver it for, unless he is allowed to hedge, as it is called; so that he turns around and buys the same number of bales on the exchange to be delivered at the same time that he is to deliver to the spinner. This is done with an understanding in his own mind that the relative prices of futures and spots will remain the same, or approximately so, at least; so that if cotton goes up and this exporter has to pay more for it than he has promised to deliver it for, he wins as much on his hedge as he loses on the real cotton that he handles. Mr. Chairman, that cotton that he actually buys from the American producer through his agents and actually delivers to the mill is not carried through the exchange; it is a separate, independent transaction. The delivery of that actual cotton from the producer to the spinner is a contract that is carried out solely upon its own merits, and this outside issue of this exporter hedging to cover those sales is an independent transaction. They are not linked together, except to the extent that the same man is concerned in both transactions. The books of the exchange carry no record of the actual cotton that is bought and actually delivered. The exchange only has upon its books the record of the hedging that was done by the exporter.

Now, he puts up a margin, and the man against whom his cotton is placed in the exchange by the broker has to put up a margin. The margins vary from $1 à bale up to as high as $10, I have been told, that are required. Those margins are merely required because the fluctuation in price may be such that it will demand more than $1 a bale to pay the difference in prices that the cotton sells for on the date

of delivery and the date that the contract was made. The man against whose account, or margin, or hedge, or the stake that he puts up through a broker on the exchange—the man whose account this exporter is placed against-is nearly always a speculator. He is not apt to be another mill man or another exporter; he is simply a speculator who is willing to take changes on the rise and fall of the market, so that he is not in the market as a hedger. Half of the project is a speculative project, and the other is hedging pure and simple, in nearly all of those cases where hedging is carried on. So that if investing in futures simply as a speculation is gambling, as it is called, then half of almost every proposition of this kind is gambling, and so far as the morals of it are concerned we see no differenec whatever in a hedging transaction and in a purely speculative or gambling transaction in the rise and fall of prices. Mr. Chairman, this exporter will perhaps think that he ought to be allowed this privilege, as it will enable him to make contracts many months ahead to deliver cotton at certain prices, when otherwise he would not be willing to risk the rise in the price of cotton; so that hedges are made with the view that spot cotton may go up, and the hedge is made against the possible loss that would occur in that case; and we would ask, from the standpoint of statesmanship, is it the duty of any class of citizens anywhere, or scattered over the country, to furnish the loss that this business man happens to sustain incidentally in the transactions that he is carrying out? Is anybody under obligation to sustain that loss for him any more than some one is under obligation to sustain the loss of the farmer when he has to take chances with the elements in producing a crop and then take chances with the fluctuation of prices in getting the price for what he has produced ?

We see no cause why a system should be tolerated on the basis that it furnishes protection for a certain class of citizens when that protection must necessarily be at the expense and absolute loss, dollar for dollar, upon the part of some other citizen who is just as important as he is; so we see no justification of hedging, if it is based upon that one claim alone. Besides, there are so many other things that are of as general use almost, the volume of business in which is enormous, even greater than in cotton, that are handled year by year, upon which there is no speculation in futures. There are no futures on wool, I understand, and that enters into almost every use that cotton does. If there is no exchange or future dealing on wool, why should you not carry on the business of handling cotton without future dealings? There is none on hay, there is none on iron, there is none on coal, and there is none on an enormous amount of as important products that require as much ingenuity, as much business sagacity, to conduct business as it does to handle cotton, and we do not see why this special article should be subject to it, nor do we think that it should be subject to it any more than these others. There are no futures on farm machinery, that helps the farmer to produce everything he raises, and farm machinery is made years before it is sold, often. A manufacturer may produce a machine five years before it is sold. Those manufacturers do not hedge in order to be able to know how many machines to make.

Mr. Chairman, it is sometimes argued that hedging is a species of insurance, and that it is just as legitimate as taking out fire insurance or life insurance. I will call your attention to the summary of the report of the Commissioner of Corporations on cotton exchanges, by Mr. Herbert Knox Smith, on page 6, at the top of the page, in which he uses the following language:

Contrary to long-established theory, it has thus lately been urged that hedging is a form of insurance, a “division” of risks. Though often, for convenience, hedging is referred to as "insurance," it is not insurance, nor is it a "division” of loss. Insurance is indemnity for actual destruction of property. There is no destruction of property in changes of cotton values. Loss on one side is balanced by gain on the other side. Hedging is an entire transfer or elimination of a speculative risk; that risk is never "distributed," as in insurance. If the hedging function fails, an entire class of hedgers on one side of the market must suffer to the full amount.

Without elaborating that thought further, I think that statement is clear and covers that point.

If the hedging business was confined to the actual number of bales of cotton raised and sold, I doubt if it would have attracted such widespread attention. As only a certain part of each cotton crop is actually covered by hedges by those who handle the spot cotton, it follows that only that per cent of each year's crop can be legitimately hedged, and this would limit each year's options to something like four or five million bales, or perhaps six million bales, and at the furthest extent it could not exceed the number of bales that were produced in a year, and it seems that the most reliable figures that we can obtain show that 100,000,000 bales are bought and sold on the exchanges of this country every year; so that they can scarcely be called actual cotton exchanges, but are more option exchanges than cotton exchanges.

It has occurred to me in the discussions and talks with gentlemen who are interested in this subject on the opposite side, that almost invariably they leave out any consideration whatever of the welfare of those who lose by investing in futures, and we wish that point to be emphasized, that every time a spinner or exporter or cotton dealer of any kind is saved from loss by this method, somebody has sustained that loss, and it is an absolute loss on his part; he gets no equivalent, but loses the margin that he staked against the margin staked by the spinner or the exporter or the cotton dealer; and we would like to know in what school of ethics, philosophy, or morals is one class of citizens under obligation to sustain the losses in business of another class. We wish to look at this from the standpoint of the greatest good to the greatest number, I repeat. We are not simply claiming that it would put money in the pockets of any particular citizens, and for that reason we would want the law passed to carry out the purposes for which we are contending, and we hope that that is the viewpoint of the committee. We will leave it with the committee and the minds of the people generally as to what class or category this purely speculative feature falls in, whether it is legitimate or illegitimate, whether it is gambling pure and simple, or whether it is a species of business which modern developments have necessitated. We have our own opinions, and we grant to every other his. The word "legitimate" has more than one meaning, perhaps. Anything is legitimate in a legal sense that is tolerated by law. In another sense, only those things are legitimate that are in keeping with ethics and principles of morals. We see no distinction in the methods pursued in the machinery that is operated between hedging and pure gambling on the exchange. The only difference is that the individuals who do the one are also actual traders in cotton, while the

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