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contract? Is it not a fact that the spinners do not buy their cotton under that sort of contract? Mr. MARSH. Why, certainly; I had, I thought, been perfectly clear Mr. BEALL. It is a fact that they do or do not; which do you mean? Mr. MARSH. It is certain that they do not buy it. I have stated as clearly as I could and as often as I thought the chairman of the committee would have patience to have me state it— Mr. BEALL. Well, we have an abundance of patience. Mr. MARSH (continuing). That the contract which is in current use between the merchant members of the New York Cotton Exchange is a contract intended for use between merchants and is not a contract intended for use between merchants and spinners. Mr. BEALL. Why is it not intended as a contract for use between merchants and spinners? Mr. MARSH. It is not intended for use between merchants and spinners for the reason that the merchant has to buy his cotton as it is produced. The merchant handling the cotton crop of the United States has to take it in bulk. You, sir, come from a cotton State, I believe. Mr. BEALL. Yes. Mr. MARSH. With all due respect for the acuteness of the cotton producers in your State, and I have the greatest respect for their acuteness, you know, sir, that every cotton producer in Texas makes his good cotton sell his poor cotton. , You know as well as I do, sir, that if a farmer has produced 15 bales of cotton, 5 bales of it middling and 5 bales of it good middling and 2 bales of it low middling and 3 bales of it strict good ordinary, there is no merchant living that can get that farmer to sell him the 5 bales of middling and the 5 bales .# good middling and leave the farmer with the 2 bales of low middling and the 3 bales of strict good ordinary. You know as well as I do, sir, that every farmer in Texas makes the cotton merchant take all the cotton he has got. Mr. BEALL. No, I beg your pardon there; I do not know that. On the contrary, I know that in my section of Texas the ordinary farmer ordinarily sells his cotton as it is gathered, at the price that he can get at that time. The first cotton that he gathers is usually the best. Mr. MARSH. Yes. Mr. BEALL. That cotton ordinarily is o of before the lower grade of cotton is gathered, and instead of selling it all to the merchant at one time, he sells it at various times, and consequently, under that system of selling, the good cotton does not sell the bad. Mr. MARSH. Well, I have had Po. extensive experience in buying actual cotton in the State of Texas. I am not at the moment engaged in that business, but I have been engaged in that business, and I have had pretty extensive experience with it, and I have known in my experience of having to buy 20,000 bales of cotton in order to fill a sale of 2,000 bales. Mr. BEALL. But that purchase of 20,000 bales was not from a farmer? Mr. MARSH. It was lists of cotton from up country, some of it farmers' lists and some of it country merchants' lists; but the fact of it was that in order to fill a sale of 2,000 bales of even-running cotton such as a spinner would buy and had bought, the merchant had to take on 20,000 bales, 18,000 bales of which he had not sold to spinners. The future contract in New York is a contract designed to provide in all kinds of seasons, high-grade seasons and low-grade seasons, for the exigencies of the business of the merchant who has to do that very thing which I have described. Mr. BEALL. You take McFadden & Co., who buy cotton in Texas very largely; are they members of the New York Cotton Exchange? Mr. sh. Several members of the firm are. Mr. BEALL. In this 80 per cent that you say is bought and sold on the New York Cotton Exchange Mr. MARSH. I did not say that, sir. Mr. BEALL. You did not saw that? Mr. MARSH. No, sir; I said bought and sold by the members of the New York Cotton Exchange. Mr. BEALL. Taking the thousands of bales of cotton that the McFaddens, through their agents, scattered all through the South, buy, that amount is included in this estimate of 80 per cent?. Mr. MARSH. Certainly. Mr. BEALL. Because down in the South McFadden Brothers, who are members of the New York Cotton Exchange, buy cotton from the farmers and from the merchants for the purpose of selling that cotton to the spinners, and they do sell it to the spinners. That quantity of cotton purchased under those conditions by them is included in the estimate of 80 per cent? Mr. MARSH. Certainly. Mr. BEALL. And so the cotton purchased by Mr. Neville and the other operators who conduct their business through the South, the actual cotton that is bought in the South that is never carried to New York, the cotton that is bought not by reason of their membership in the New York Cotton Exchange, bought by these gentlemen, is included in this 80 per cent Mr. MARSH. I should answer to that question yes were it not for the inclusion in the question of a provision or proviso which I do not assent to. You say “this cotton bought by these gentlemen not by reason of their membership in the New York Cotton Exchange.” If I were to answer that question yes, accepting the implications of that proviso, I should be giving a misleading answer. Mr. BEALL. Well, it is not necessary to be a member of the New York Cotton Exchange to buy the actual cotton down in the South. Mr. MARSH. It is necessary to be a member of the New York Cotton Exchange to buy any such quantity of cotton as Messrs. McFadden & Bro. buy. Mr. BEALL. Why? Mr. MARSH. Because there is no cotton firm in existence which could get the capital or the credit necessary for the conduct of the cotton business on that scale without the use of hedging. Mr. BEALL. The cotton crop of this year in the United States is estimated to be about 10,000,000 bales? Mr. MARSH. Yes. Mr. BEALL. Assuming it has a value of $80 a bale, that would be about $800,000,000? Mr. MARSH. It would.

Mr. BEALL. Now, you say that it is necessary, in order to handle that product of the value of $800,000,000, to have an exchange based upon the system upon which the New York Cotton Exchange is conducted. Every pound of that cotton when manufactured into cloth is increased in value, is it not? Mr. MARSH. It is. Mr. BEALL. About what per cent; from 300 to 400 per cent? Mr. MARSH. Oh, the most varying percentages. Mr. BEALL. Assuming that it is 300 per cent— Mr. MARSH. That is too high. Mr. BEALL. Two hundred per cent? Mr. MARSH. I should say approximately 200 per cent, on the average. Mr. BEALL. Then the product of that $800,000,000 worth of cotton is worth double that amount when manufactured 2 Mr. MARSH. It is. Mr. BEALL. Or $1,600,000,000? Mr. MARSH. It is. Mr. BEALL. It is necessary to have a cotton exchange conducted as it is now in order to handle $800,000,000 worth of cotton? Mr. MARSH. Yes. Mr. BEALL. But it is not necessary to have any kind of cotton exchange in order to have the product of that cotton handled, which is of a value of $1,600,000,000 Mr. MARSH. That is a portentous statement on the face of it, but the situation is really a great deal more simple than that. Mr. BEALL. I wish you would simplify it. Mr. MARSH. The burden of carrying the goods manufactured out of the cotton is distributed through such an enormous number of small merchants, no one of whom is likely to be badly hurt provided he knows the consumptive requirements of his immediate clientele. And now, sir, you come to the real answer to a question which you have asked one or two other witnesses. The question has been, Who bore the loss involved in the fluctuations of the cotton market? Mr. BEALL. Will you let me ask you one or two questions leading up to that ? Mr. MARSH. Yes. Mr. BEALL. There is no question, but what the farmer bears all the burden involved in the cultivation and in the gathering of the crop, is there? §. MARSH. He certainly bears it all. Mr. BEALL. After it is gathered it is necessary that it beginned 2 Mr. MARSH. Yes. Mr. BEALL. Who bears that expense? Mr. MARSH. It is a part of the expense of production. Mr. BEALL. The farmer bears it? Mr. MARSH. Yes. Mr. BEALL. It is necessary to put bagging and ties on it. The burden of that falls upon the farmer? Mr. MARSH. Yes. Mr. BEALL. Now, you are a cotton merchant. I understand from statements made by gentlemen here before us that they are content with a very small profit upon a bale of cotton. Mr. MARSH. I think that is true. Mr. BEALL. Let us assume that that profit is a dollar a bale.

Mr. MARSH. That is a very exaggerated estimate. I can give you exact figures if you want them.

Mr. BEALL. In order to have even figures in asking these questions, I will just assume that, for that purpose.

Mr. Marsh. I should be more comfortable in my mind if you would not assume something that is not true.

Mr. BEALL. Then state what you think would be the average

profit?

Mr. MARSH. I saw not long ago the actual figures of the profit per bale of a successful smaller Texas firm some years ago, but conditions are less favorable for the cotton merchant to-day than they were then, if anything. The largest per bale profit made in any one of the four years covered by the figures was 47 cents.

Mr. BEALL. Forty-seven cents. You are willing to call it 50 cents, I suppose, for convenience ?

Mr. Marsh. No, sir; not one cent above 47. [Laughter.]

Mr. BEALL. It is like the laws of the Medes and Persians; your estimates can not be varied. Well, we will call it 47 cents. A cotton merchant has a customer who is a spinner, who will give him $75.47 for a bale of cotton. Forty-seven cents you think would be a reasonable profit. If there were no other charges the merchant could afford to pay the farmer $75 for that bale of cotton, make his profit, and sell it to the spinner for $75.47; but there are certain other elements of expense that the merchant is cognizant of; for instance transportation charges from the point of purchase to the mill of the spinner. Suppose, for the purpose of this illustration, that item is $4 a bale. How does that affect the price that the merchant will pay to the farmer for the cotton, assuming still that he wants to make his profit of 47 cents ?

Mr. Marsh. He naturally does not pay the transportation charge out of his own pocket.

Mr. BEALL. That reduces the price to the farmer to the extent of $4 ?

Mr. MARSH. Yes.

Mr. BEALL. Then there is a compress charge. I do not know whether I am giving the correct estimate or not, but assume that that is 50 cents a bale. I do not know what it is.

Mr. MARSH. Yes, I think that is correct in Texas.

Mr. BEALL. Assuming that the merchant purchases the cotton from the farmer; he would deduct that 50 cents, would he not?

Mr. MARSH. He would not, directly, under the rules, under the laws of Mr. BEALL. Practically that would be the effect of it?

Mr. MARSH. The transportation charge in Texas includes that 50 cents. The railroad has to pay it.

Mr. BEALL. It includes the amount that the merchant would have to pay, that 50 cents. Then there is the element of risk from fire.

Mr. Marsh. Yes.
Mr. BEALL. There must be insurance?
Mr. Marsh. Yes.

Mr. BEALL. The merchant knows that when he buys a crop, and he takes that into consideration and reduces the price of the bale of cotton to the farmer by what he has to expend for that insurance ?

Mr. Marsh. Yes.

Mr. BEALL. So far the farmer has had to bear all the loss; that is, in an illustration where the merchant knows that he can get $75.47 for that bale of cotton, which is about 15 cents a pound, I take it. Now, suppose that instead of the merchant having that definite information he is confronted with an uncertainty as to whether he will get 15 cents a pound for that cotton or 14 cents; in making his calculation as to what he will give the farmer, will not the merchant take into consideration the probable fluctuations in the value of that cotton and compel the farmer to bear that burden as well? Mr. MARSH. Now, you are assuming that the merchant has no way to protect himself from those fluctuations. That is the assumption ? Mr. BEALL. I am assuming that the merchant is buying a bale of cotton from the farmer, depending upon the future price of cotton determining the amount that he will receive for it. Mr. MARSH. If the merchant is using the market for future contracts, for hedging purposes, he does not deduct the possible loss of 2 or 3 or 4 cents a pound that might arise from the decline in cotton. He gives the farmer the market of the moment when he buys it. § BEALL. Coming to the proposition you started to explain a while ago. Somewhere along the É. there is somebody who is taking into consideration the probable decline in the price, or probable fluctuation in the price, of that cotton. Whether it is the merchant or the speculator, or whoever it may be, somebody is taking that fluctuation into consideration, somewhere along the line. o is it? Mr. MARSH. Somewhere along the line that you have described : Mr. BEALL. Yes; between the farmer and the spinner, between the roducer and the ultimate consumer of that raw cotton; somebody in #. the price of that cotton is taking into consideration the probable fluctuation in price between the time it leaves the hands of the farmer and the time it gets into the hands of the spinner. Mr. MARSH. May I ask before answering your question whom you mean by the “ultimate consumer of the cotton 7" Mr. BEALL. The spinner; the ultimate consumer of the raw cotton. Mr. MARSH. I may be somewhat impertinent, but I do not desire to be so. Does the spinner end the line? Mr. BEALL. So far as the raw cotton is concerned, I think he does. Mr. MARSH. But so far as fixing the value of the raw cotton is concerned, does he end the line? Mr. BEAL1. Yes ; put it that way. Mr. MARSH. Then I must dissent from you, sir, because the manufacturer of the cotton is in exactly the same position that the cotton merchant is in. The price of cotton is of no consequence to the manufacturer of cotton. There are only two parties in the world to whom the price of cotton is of importance. The CHAIRMAN. Pardon me just one moment; may I ask a question right there that I think will bring your answer directly to the point involved 2 Mr. BEALL. Yes. The CHAIRMAN. It has been brought out in the testimony heretofore that the merchant hedges in order to protect himself from loss. Mr. MARSH. Yes. The CHAIRMAN. That the spinner hedges in order to protect himself from loss. Mr. MARSH. Yes. The CHAIRMAN. And the question Mr. Beall, and I think all of us, would like to have answered is, Who bears that risk finally It is

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