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upon the New York Cotton Exchange which should be exactly the contract which the spinners desired; we pointed out to the spinners that there would be times when this special contract, adapted to their needs, would still add a very much higher price than the regular merchant's contract; none the less they declared that contract was what they wanted and wished to have it tried. We accordingly drew up a contract exactly on the lines of the result of that conference, and we submitted this contract to the board of managers of the New York Cotton Exchange and the board of managers of the New York Cotton Exchange, according to my recollection, unanimously adopted it; in order that it should be put into final effect, however, it had to be adopted by a two-thirds majority of the members of the exchange, after having been posted a certain length of time for the consideration of the members.

While this proposition was posted on the bulletin board and while the members were discussing it and before the day of the vote had arrived, a member of our special committee happened to meet Captain Smythe on the train, and to his intense surprise Captain Smythe said, “Oh, well, we are not interested in it; do not care about it anyway." We heard from Mr. Parker that he was not interested in it, a complete change of front from the conferences which we had had with those gentlemen. Now, naturally, if those gentlemen, having marched up the hill, wanted to march down again, like the King of France, it could hardly be expected that the members of the New York Cotton Exchange would pursue the course which was being urged upon them, and the matter was referred back by the exchange to the board of managers, and that was equivalent to laying it on the table.

Mr. LEVER. Neither Mr. Parker nor Mr. Smythe spoke by authority of the committee they represented on this proposition.

Mr. MARSH. We had some difficulty in finding out whether they spoke by authority of the committee or did not, Mr. Lever.

Mr. LEVER. It is sufficient that you and yours were convinced that the contention of the spinners was correct?

Mr. MARSH. That is not an accurate way of putting it, Mr. Lever. Our committee was convinced that it was something which the spinners thought they wanted and we were convinced that it was something that we could try as an experiment without detriment to the business of the members of the exchange; we were not convinced that the spinners would like it after they got it; in fact, I personally did not believe they would like it after they got it because I was convinced by remarks that were made by these spinners that what the spinners really wanted was to get in back of the spot merchant and to make the Exchange adopt a form of contract which would enable the spinner to eliminate the spot merchant when he thought the spot merchant was charging him too much.

Mr. LEVER. Will you give us the benefit of your idea of the relationship between futures and spots in the effect that futures have on spots?

Mr. MARSH. I do not think they have any effect upon spots.
Mr. LEVER. As a matter of fact do not futures control spots entirely!

Mr. Marsh. I should think that was as unsound an economic proposition as you could frame,

Mr. LEVER. A local buyer, to illustrate it again, in Columbia, S.C., wishing to buy from a farmer one hundred bales of cotton, buys within the limits, thirty points on and fifty points off and does it on futures, off or on futures, and it seems to me that spot prices are largely controlled by future quotations? . Mr. MARSH. Mr. Lever, I was unwise enough, or unhappy enough, to use a certain illustration in talking to one of the representatives of the Bureau of Corporations. I got severely roasted for my illustration, but I will venture to use it again. I said that the thermometer no more determined the weather than the price of futures determines the value of spot cotton. The Bureau of Corporations changed m illustration a little, saying that a steam gauge on a boiler which did not register the exact pressure in the . was not very reliable. I will, however, use the steam gauge illustration which has been furnished by the Bureau of Corporations, and will say that to state that the price of futures regulates the price of spots, even though the spot transactions on the face of them are based upon the price of futures, is exactly the same as saying that what runs the engine is the steam auge. g Mr. LEVER. Is there any relationship between these two? Mr. MARSH. A very close relationship. Mr. LEVER. What is it? Mr. MARSH. The relationship is that the price of futures represents transactions in cotton, and that the market for cotton is determined in the minds of those, who are buying and selling cotton by the transactions that have been made. Mr. LEVER. I understand you, of course, to contend that the law of supply and demand governs the price of spot cotton entirely? Mr. '... And of futures also. Mr. LEVER. And of futures also } The CHAIRMAN. Pardon me for putting a question right there. Then why does it happen, as it did a few weeks ago, that the price of futures dropped to the extent of $14 or $15 a bale, while the price of spots remained practically the same? Mr. MARSH. Mr. Chairman, the price of the spot cotton which those futures represented dropped. The real fact of the case, Mr. Chairman, is that the price of a certain portion of the cotton crop did not drop, but it certainly is true that the price of that large portion of the cotton crop which had already passed out of the hands of producers and which was sold under contracts to speculators in New York, cotton stored in Liverpool and in Bremen and in New York City and in Savannah and Memphis and all over the country, the price of that cotton o The CHAIRMAN. I understood some one—I believe it was Mr. Cone, perhaps Mr. Parker—to say here the other day that at the time of the slump in the cotton market in the New York exchange futures went considerable below spots, whereas, they had previously been above spots, and spots remained practically the same. Mr. MARSH. The spots he was speaking about were the spots in the territory in which he operates. They were not spots in Bremen; they were not spots in Liverpool; they were not even spots in New York City. Mr. Cone, when he talks of spots, always means spots in the Carolinas and in Georgia. Those spots the holders did not turn loose, and if a man in the trade wished to buy those spots, he had to

pay the price which the producers and holders of that cotton asked for it.

The CHAIRMAN. I understand that. As a matter of fact, did the price of spots in the New York market fall in proportion of the price of futures? .

Mr. MARSH. Certainly.

Mr. LEVER. Then there was a difference between the price of spot cotton in New York and Columbia, S. C., of practically $15 a bale in that proportion?

Mr. MARSH. Not as much as that, because Mr. Cone's statement was not literally true. Spots in the South generally fell approximately half what spots in New York and in Liverpool and in Bremen fell.

Mr. LEVER. I asked Mr. Cone the other day, and I think he said you would explain it, and I would like to have you do it, what is the basis of a local cotton merchant's operations, from the beginning of the day until 2 o'clock, when spots are posted in New York ?

Mr. MARSH. What is the basis or what are the bases?

Mr. LEVER. Yes; supposing he has not heard from the market anywhere?

Mr. MARSH. He has not heard from what market ?

Mr. LEVER. From the New York market, as to spots, say, because I understand they are not posted there until 2 o'clock. Then from 9 o'clock in the morning until 2 o'clock in the afternoon the local merchant in South Carolina or Texas will be without a guide as to the price of spots in New York.

Mr. MARSH. I should suppose that the price of spots in Now York would be an insignificant part of the information which a southern merchant would need to determine the value of cotton in his territory.

Mr. LEVER. Would futures have any effect, the quotation of futures, on the market ?

Mr. MARSH. Mr. Lever, futures means transactions in cotton, by buyers of cotton and sellers of cotton, at a price.

Mr. LEVER. We know, Mr. Marsh, that the local cotton merchant will always wait until he has the quotation of futures from New York before he will enter into a contract.

Mr. MARSH. Yes.
Mr. LEVER. Why is that?

Mr. MARSH. For the same reason that the engineer always looks at the steam gauge before he turns the steam into his cylinders.

Mr. LEVER. He wants to know that he has plenty of futures in store to carry along his spot transactions.

Mr. MARSH. Yes, that is a very good way to put it; you could hardly put it better.

Mr. LEVER. So, then, the futures do pull along the spots, and there is a relationship?

Mr. MARSH. What do you mean by "futures," if I may ask?

Mr. LEVER. I am using the general understanding of that term, general definition of it, as we understand it.

Mr. MARSH. I do not think I understand it as you do. I think we are talking more or less at cross purposes.

Mr. LEVER. Suppose you give us your definition of a future transaction.

Mr: MARSH. For thore he turns the sett he has

Mr. MARSH. Of a future transaction, or of futures ?
Mr. LEVER. Futures.
Mr. HAUGEN. You mean contracts for future delivery, do you not ?
Mr. LEVER. Yes; future delivery.

Mr. MARSH. My understanding of a contract for future delivery is a purchase and a sale in contractural form of 100 bales of cotton at a price. It has seemed to me, as I have listened to members of the committee, as though some of you gentlemen had an idea that the conduct of the cotton business was of an excessively mechanical character, as though a spot merchant doing a large business all over the South and all over Europe and with American spinners needed only the tables of addition, subtraction, and multiplication, and went along in that purely mechanical fashion; that he looked at the price of futures in New York, added or subtracted a certain amount, and paid that price for cotton. Now, Mr. Lever, the cotton business is not conducted in any such mechanical way as that. The cotton merchants of the country can not conduct their business in any such mechanical way as that. The cotton merchants of the country base their operations upon a multitude of data. One of the most important of the facts which they consider, of course, is the price at which people actually are contracting with each other for cotton in Liverpool, New York, and New Orleans. But, in addition to that, they are basing their operations upon the multitudinous information they are getting from their southern correspondents as to the supply of this kind of cotton and that kind of cotton and the other kind of cotton, and also upon the information which they are getting from their correspondents abroad and in the spinning centers in this country, as to what spinners are demanding, what grades of cotton are being sought. Do not get it into your heads, gentlemen, that the handling of this great commodity is conducted by men who really need no more sense than schoolboys.

Mr. HAUGEN. What is the price of futures based on, estimates as to the supply and demand ?

Mr. MARSH. No, sir; the price of future delivery is based on what people are willing to buy and sell for.

Mr. HAUGEN. How is it based ? Is it not based on estimates, largely?

Mr. MARSH. No, sir; it is based on what people are willing to buy and sell for.

Mr. HAUGEN. Yes, but the buyer and seller must fix the price largely on estimates

Mr. MARSH. If you ask me what the psychology is of a buyer's mind, and what makes him willing to buy at a given price; and the psychology of the seller's mind, and what makes him willing to sell at a given price, you are asking me a question which, in spite of a good deal of attention to these matters, is absolutely beyond my depth.

Mr. HAUGEN. If you should estimate the crop for next year, say at 15,000,000 bales, it is natural that you would fix the price lower than if it was estimated at only 5,000,000, and the price is fixed on estimates of supply and demand with the buyer and the seller who deal in futures and that which does not exist at the time. The crop must be grown before it is delivered, and the condition of the crop, I take it, has something to do with it.

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Mr. Marsh. That is a question of ultimate psychology, of the motives that move men to take a certain course of action. My contention, or my explanation of the fixing of the price of futures, is that the price of futures is fixed at any moment when two men, one who has some cotton to sell and another who has some to buy, get together and buy it and sell it.

Mr. HAUGEN. I understand that part of it, but what governs ? My contention is it is largely an estimate. If you are a buyer or if you are a seller, you are making an estimate as to the crop that is being grown at the time.

Mr. MARSH. I think perhaps you are exaggerating the extent to which a buyer buys on an estimate, or a seller sells on an estimate. I did not at first catch the full significance of your question. It is constantly happening that men are buying cotton when they are sure cotton is going down—that is, I say sure; they are in their own minds convinced that cotton is going down. And men are selling cotton, making contracts for future delivery of cotton, when they are confident that the price of cotton is going .up. That is constantly happening, and it is happening for this reason, that the mind of man is utterly and absolutely unable to comprehend the immense interrelations of a trade like the trade in cotton and the trade in cotton goods, and men who conduct merchants' business learn very early in their careers that their business is to supply cotton when they can buy it and when they can sell it at the price at which they can buy and sell, no matter what their view of the ultimate course of the market may be. As a matter of psychology it is obvious that if the spinners of the world and the dry goods merchants of the world conceive that the crop is going to be a very large one, they are tempted to hold off, are tempted to reduce, at any rate, their purchases to the minimum with which they can get along for the time being, and in that way an estimate of the crop affects the prices at which they are willing to trade. But it is a very remote psychology that comes to bear.

Mr. HAUGEN. Reports as to the conditions of crops, in a large measure, regulate the price of cotton and wheat. You know what the demand is going to be. If you are growing, say, 12,000,000 bales, and 12,000,000 are required, and the reports come estimating the crop at, say, fifteen or twenty million bales, it goes without saying that the price of cotton would go down, just the same as wheat does in the West.

Mr. MARSH. It does not go without saying. One of the most extraordinary things about the cotton market is that it always goes up when your are sure it must go down, and it always goes down when you are sure it must go up.

Mr. LEVER. That is one of the strange things of the cotton market. I would like to have you explain that.

Mr. HAUGEN. Then supply and demand has nothing to do with fixing the price?

Mr. MARSH. Supply and demand is the absolute master of the price.

Mr. HAUGEN. I understood you to say that it had nothing to do with it; an estimate of 20,000,000 bales or an estimate of 10,000,000 does not change the price of the cotton.

Mr. MARSH. You could not bring out my point better. An estimate of the demand has no effect on the price; an estimate of

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