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hard to resist, and in any community there are always those who are willing to risk a loss if there is even a semblance of a chance to gain. There seems to be a fascination about all games of chance, and as other avenues of satisfying this desire or inclination are shut off by law, the exchanges furnish the greatest means and greatest temptation for people to risk their money; nay, they furnish a greater temptation than all others combined. More millions of money are spent in this manner every year than in all other species of betting in the entire country. Does it stand to reason that an institution that means millions of dollars in profit to those who control it would allow the very means by which it exists to cease to exist? If it can be demonstrated that they have this power, that is positive proof that natural fluctuations are aggravated Tt>y the exchanges.
Before I go into the evidence to show that they not only have the power but exercise it, I will call attention to what may be brought out on the other side of the question that the prices of cotton fluctuated to very extreme points up and down before there was an exchange. Mr. Chairman, that does not necessarily prove that the exchanges have in any way tended to minimize these fluctuations. Conditions were so different before the exchange was established that hindrances to communication and inability to transport from the interior points to the great marts of trade would result in variations in price which would not occur now under the operation of supply and demand alone. We did not have railroads; we did not have telegraphs; we did not have telephones; we did not have the mail facilities in the vears preceding the establishment of the exchange as we have to-day. There were disturbances in the financial world, in the industrial world, and disturbances by nature that caused variations to take place, perhaps reaching as extreme points as they reach now, but we have no right to complain of the rise and fall of values when those results come from natural causes. The fluctuations in price now are of a different nature. They are more sudden, more acute, and more in the nature of a tremor or a quiver, or a constant nervousness, than they were before the exchange came into vogue. You take the maps and diagrams shown by Mr. Herbert Knox Smith in his reports and they remind one of a picture of zigzag lightning. The sudden vibrations in the fluctuations of price on the exchange as marked on the diagrams show that there is a continual uncertainty that can not come from a natural cause. It can be attributed to absolutely no cause except the exchange from whence these quotations come. We may take a sample—and it does not matter what date, whether it be this year, last year, or ten years ago—and show that it can not be maintained that exchanges have a tendency to steady the market.
The Wall Street Journal of January 25 is authority for the statement that during the first twenty-five days of last month there was a decline affecting $560,000,000 worth of wealth- of about 15 per cent, equaling $84,000,000, nearly all of which occurred in two weeks; a shrinkage of $7,036,000. Now, the question is, What caused it? Mr. Chairman, I read from the New York Commercial of this morning. It opens up with the sentence, on page 5, on the cotton question:
Prices went off yesterday under well-organized bear operation.
That is not the law of supply and demand. Down further it says:
May, which had closed Tuesday at 15.05 and opened at a decline of 15 points, was down to 14.71 before 11.30 o'clock, a total drop of 34 points.
At the top of the third column I find:
A little further down I see this comment:
I will not try to interpret what he means. The next sentence I see is: On to Washington! Forward, march!
There must be something doing here. But let us go back to the evidences that the exchange itself causes prices to fluctuate. In the same paper for February 8 I read:
The large sales of spots in Liverpool was an additional stimulant for the bulls, but their efforts met some check when Wall street houses came to the front with profit-taking sales. One big block of the May option was reported as closing out purchases made at 13J cents. The selling sent prices back 5 to 7 points, continuing for half an hour or more.
Farther along in the same column I find this:
May worked back and forth about the 15-cent quotation throughout the noon hour and for the early afternoon. It was a scalping market for the time, with all that the words imply.
What does a "scalping market" mean? Is that normal? Is that business based upon equity, justice, and the golden rule? In the same column, farther on, it says:
Local houses catering to out-of-town buyers reported business more active than in years. Excursions to New York for buyers exclusively have been breaking all records in point of numbers of late.
That means that the suckers are not all dead. Farther down on the same column I read:
Should further advances be recorded, there is a probability of readjustment talk in dry goods and yarn circles. As it is, many lines continue to refuse quotations for more than a few weeks ahead.
Which shows that it has an effect on the price of cotton goods. Now, Mr. Chairman, we will go back a little farther. Does the process of future dealing have a tendency to prevent fluctuations? That is the question we are now discussing. In February, 1904, the July option in New York sold as high as 17.55. Before the month was out the July option sold as low as 13.02, over $20 fluctuation in that month, of one hundred and fifty days ahead. Now, did the spots tally with these futures when July finally arrived?
Mr. Beall. Twenty dollars a bale, that is?
Mr. Brooks. Twenty dollars a bale.
Mr. Beall. Some of the members of the committee are not familiar with the phraseology of this subject.
Mr. Brooks. Did the spots tally with these futures when July finally arrived? No. The July opened by selling as low as 10.18. From 17.55 in February there was a decline to 10.18 the first week in July. How is that for holding prices stable and putting a balance wheel on prices by the exchange? It often happens that a bale of cotton varies in value as quoted by the exchanges as much as $5 a bale in one or two days. There have been instances where it was worse. As to whether or not the exchanges are responsible for these violent fluctuations, I will read the closing remarks of Mr. W. B. Thompson, president of the New Orleans Cotton Exchange, in a published letter of his September 16, 1907:
But we do not believe that the prices are natural or legitimate. The brief experience we have had with the market this season before speculation interfered showed that consumers were willing to pay the prevailing prices and producers were willing to accept them. If business had been permitted to run its natural course probably the increased volume of receipts would have gradually lowered prices. This would have been a natural and acceptable result. But when an outside element, that knows nothing about cotton and has no interest therein except as a medium for gambling profits, arbitrarily interferes between the producer and consumer and undertakes to fix prices by sheer force of money and manipulation, we believe in suspending the rules and striking with the weapon at hand. The producer has the weapon.
That is the president of one of the largest exchanges testifying to the fact that the exchanges do cause fluctuations in price.
It matters not whether these exchanges influence prices up or down, the evil done to the public is just as much to be condemned, whether it injures the consumer or the producer. If it is an artificial barrier or agency or institution whose work brings about an unstable market, it is a menace to the business of the world and we have no choice to take, whether in the long run it injures the producer or the consumer the more. As further testimony upon the point under consideration, I wish to refer you to a government document of the Fifty-third Congress. It is testimony taken by a commission appointed for the purpose of investigating the cause of decline in farm products, and this committee had hearings at the main centers of cotton trading in 1893. I wish to refer you to page 20 of this report and to the testimony of Mr. Jerome Hill, of St. Louis. One paragraph from his testimony reads as follows:
I attribute the low values in part to disarranged financial affairs in the Old World, for part of the time to unlooked-for strikes in Lancashire, and to the illegitimate methods that have become prevalent at the two great export markets, New York and New Orleans, in dealing in contracts on futures.
Mr. Chairman, I refer also to the testimony of Mr. D. C. Ball, on page 34 of this same document. Mr. Ball testified that he was a cotton factor and had been in the business about fourteen years and lived in St. Louis. Here is a paragraph from his testimony:
In a general way my opinion, which is the same as that of the public at large, is that one man or combination of men can, in the face of a general opinion and in the face of the existing facts upon which that opinion is based, either by securing control of all the available cotton that can be used in contracts and then by continuing to bid heavily for future deliveries of cotton, run up the price to an unwarranted extent, or else by offering unlimited quantities of cotton equally depress the price. But these unnatural conditions must eventually correct themselves. The evil of futures lies in the ability of a combination of men being able to accomplish this under existing conditions, as in the interval the actual handling of cotton must continue and is so enormously affected either way thereby. If it is depressed the producer suffers, if it is unduly increased the spinner suffers. In either case the natural course of trade is interfered with, and it is an evil.
Mr. Chairman, I will call your attention next to the testimony given to this same commission by Silas Wade Hampton, of Memphis, Tenn., who testified that he was 55 years old; had resided in Memphis thirteen years; went into the cotton business immediately after the war, at St. Louis first. After one year in St. Louis he went to Cincinnati and then established and carried on a cotton factorage business for fourteen years. From there he removed to Memphis and continued the same business, and for twenty-five years had been in the legitimate cotton factorage business.
I read this testimony because it is from men who ought to know, and it might have more weight than merely to explain or testify to these things ourselves. Beginning at the bottom of page 56, Mr. Hampton used the following language before this commission:
There are many of them connected with banks or are themselves bank officers. Take the house of Latham Alexander & Co., for example; they publish themselves throughout the South, as you know, as dealers in futures, cotton commission merchants, and bankers. Now, these firms with financial backing almost unlimited— I mean the clique there, the cotton ring, one firm can not do it—hold themselves prepared to buy or sell any quantity of futures that may be offered or asked for on either side by outsiders, just exactly as a dealer of faro would sit behind his table and the bettors may come up and choose their bets any way they please. These influential firms, being themselves the buyers or sellers of these future contracts, have this great advantage, that they control the machinery of the exchange where the quotations originate; their influence determines the election of its officers, the adoption of its rules, and they have the system of making and deciding quotations absolutely under their control. There is no one else who has any control or voice in it but members of that exchange. The members of this powerful syndicate have their representatives on the floor to do their buying and selling. They do not themselves often appear on the floor for this purpose, but employ brokers, so that no one else may know too much of their operations. A certain amount of secrecy is necessary, I imagine, to the full success of such business as this.
Beginning at the bottom of page 60 this same gentleman uses the following language:
In one week they turned on the screws and broke it down 1 cent a pound without one change in the material conditions of the trade, not one atom of change, nothing except the power of that ring to do it, broke it head over heels. Even after the break of a cent a pound there were these conditions prevailing; we knew the crop was short one-third, knew the demand was free, and with that condition of things we ought to have at least 10 cents for cotton; the consumption was equaling the product right straight along, and our people believed in 10 cents for cotton, believed that it would react, and went in and bought more, and the more they put up the more New York broke prices, until it got below 8 cento again. It reacted after New York had squeezed them all out. Why did they hold it down? Because these men in the South would continue to hold and put up margins. Some had $8 and $10 per bale margins up, because they believed it was then at the bottom and bound to react, and the more they put up the more New York squeezed them to exhaustion. This is the game they played. Now you can see that with that combination they have there in New York—right there to consult with each other every day and hour if necessary—controlling as they do the rules and regulations of the cotton exchange, having a system which they have been twenty years perfecting, having it all under their grip and ready to act together at any hour, and through their immense money power, in any direction they please, and on the other side nothing but a mass of people all over the country without any combination or consultation, just an unorganized mass, you can see how absolutely helpless one side is. That was last year. The point I want to make is this, that if the crop was one-third short, and though consumption was going on freely, and though the goods were holding up well, still with it all they drove the market price down as low as when they had a 9,000,000-bale crop. There was not a cotton man of any intelligence in this city that, when cotton went to 10 cents in December one year ago—that speculative fever was at its height this time last year and stayed up until New York got ready to put on the clamp—that did not want to back the market then. You had the antioption bill in the Senate and they tried to hold off that break for fear that a sudden manipulative break would pass the bill. I saw it; but the margins were so big and the speculative fever just ran away with them, so that they just had to make the break, and then the temptation to capture the immense margins was too great. They said the antioption bill did it.
On page 62 Mr. Hampton continues:
Now these instances that I have given have come under my own observation as a cotton merchant. They have convinced me beyond all further doubt that the cotton market is absolutely under the control of the "future" men of New York. The machinery they have there enables them to put it up or down according to their interests, and they do it. It brings them in millions, untold millions. When you remember that they handle 50,000,000 bales of these futures, that the crop is only 6,500,000 bales, and the decline or advance on a bale of these futures is just as much as it is on a bale of real cotton, you can see what a preponderating influence that future business has grown to be.
The committee will note that this testimony was given in 1893, and that they then handled 50,000,000 bales a year futures. Does anyone suppose that the present estimate of 100,000,000 bales is an exaggeration? At that time they published the amount of business that they carried on, but since the agitation that was then in Congress they have ceased to publish the amount of transactions recorded in either the New Orleans or New York exchanges. This is for the purpose of keepingthe public from knowing how much graft there is in the business. They charge $15 per 100 bales to those who are not members of the exchange in commissions for carrying on this business—$7.50 to get in and $7.50 to get out. They charge $7.50 per 100 bales to their members for this same work. If we take 100,000,000 futures and put it at the lowest possible estimate, the commissions that they collect yearly must amount to something like $10,000,000.
But in order to refute this charge they claim that not all of the sales made upon the exchange are bona fide transactions yielding these regular commissions. There are what is called "match sales, and "wash sales" and a process that is termed "wringing out," all of which yield no commissions except what is paid the broker on the floor as his wage for his services. This position that thev assume is a confession of a still more objectionable feature to the exchange operations than the mere collection of commissions. I refer you, Mr. Chairman, to the gentleman last quoted, page 62 of the same document, as a man who knew full well the business of which he spoke, for a description or statement of how these wash sales are carried on. Senator George, a member of that commission, asked Mr. Hampton a question:
A "wash sale'' is where there is a bid between the parties, a collusive bid that does not mean anything—no contract?
That is what it means. Those men get together that way. There are not more than a dozen or 20 of those leading houses there who sell the world all the futures they want, buy all the world has to sell, and control the market. These men find out on a certain day they have got 1,000,000 bales sold more than they have got bought. In other words, they are oversold that much, and if they can make a decline on that of a cent a pound it would be $5,000,000 gain. Now, they just put their heads together and agree that to-morrow they will break the market one-quarter cent, say. There are a dozen of them or fifteen. It is like this: To sell 200,000 bales of futures to break the market I will get three or four of my brokers to go in on the floor and sell for me ten thousand of those futures 5 points down on each lot, 2,000 at a time. All the rest do the same. Then I get another lot of brokers and instruct them to go on the floor and buy my ten thousand as offered at these prices. The two sets of brokers do not know anything about it. They do not know but what it is a perfectly legitimate transaction, and they have got their limits to offer and buy on. They go in and make those trades, and the quotations are thus marked one-quarter cent a day—that is 25 pointe. Then these brokers come to me, report what they have bought or sold, ten thousand bales, some from one of the ring, some from another, and not a nickel has passed but what I pay the broker for doing it. That is a "wash sale." The decline Li then telegraphed over the whole world.
On page 63 of the same document I wish to quote one more paragraph from the same witness:
The most culpable details of this future system are kept as nearly secret as they can be. Especially it has been the case since Congress has undertaken to investigate