the supply has no effect on the price; but the demand and the supply determine the price.

Mr. HAUGEN. There must be an estimate before the crop is grown. The CHAIRMAN. Pardon me just a moment. Is it not true that, when the estimate comes out from the Department of Agriculture indicating an uncommonly big crop of cotton, the price immediately responds to it by falling?

Mr. MARSH. That is true, and, as I said a moment ago in answering Mr. Haugen, estimates affect the motives that men make willing to trade at a price.

The CHAIRMAN. I asked my question because I understood you to say to Mr. Haugen that estimates had no effect on the price whatever. Mr. MARSH. There I am speaking as taking a long-run view of the market. Of course, at a given moment an estimate suddenly thrown on the market will effect men's minds and the market will respond. I mean, an estimate of a very big crop suddenly thrown on the market will make a number of people who might have been on the point of buying say, "We will wait;" a number of other people who had expected to sell at a given price will say, "We can not sell at that price; we will sell at anything we can get." An estimate coming out does affect the market temporarily in that way. But I am taking a long-range view of the market, and when I take a long-range view of the market I say that the course of the market over a period of months is not affected at all by estimates of supply or estimates of demand; it is affected only by the actual supply and the actual demand. The market will go up in the face of the most tremendously bearish estimates, if there is not any cotton for sale there, and it will go down in the face of the most bullish estimates, if there is a great quantity for sale there.

The CHAIRMAN. You make the point entirely clear.

You made a

rather startling statement a moment ago when you said that it was a singular thing in regard to the cotton market that when you were sure it was going up you might absolutely count upon its going down. Mr. MARSH. "Absolutely" is a little too strong.

The CHAIRMAN. Have you ever been able to figure out in your own mind why it happens so often in that way?

Mr. MARSH. Yes, I have been able to figure in a general way, and I will give an illustration which will, perhaps, bring out my meaning a little more clearly. Gentlemen from the South will remember that immediately after the famous Sully year, when cotton went to 17 cents a pound, we had an enormous crop of cotton, the first crop of cotton ever raised in this country of over 13,000,000 bales. As the size of that crop became manifest it seemed clear to everybody who thought about the matter that there was such an overplus of cotton that the price must at least go as low as it had ever been in this country. Here was the most monstrous crop of cotton we had ever raised-at least it looked so and it seeemd a perfectly safe proposition that cotton must go at least as low as it had ever gone in this country. Along in January and February, 1905, the market had gone down under the tremendous movement, amount offered, holding off of spinners, etc., expecting to get it at a lower price. But suddenly it seemed as though the market, for some reason or other, would not go any lower. All students of the market were absolutely nonplussed by it. They could not understand it; they could not see what was

happening. Here was the South selling every week hundreds of thousands of bales of cotton, and yet the market would not go down. It was not until a considerably later time that we found out what had happened, and what had happened was that merchants in Shanghai, importers of cotton cloths into China, had been attracted by the low level of cotton in the United States and had quietly contracted with mills for immense quantities of goods-immense quantities-quantities of goods so great as to be the output of many mills for two whole years, and as these spinners contracted with these Shanghai merchants for these goods, they in their turns hedged, either by buying contracts from cotton merchants, or by buying contracts in the New York market, and there was a demand for cotton of such enormous proportions as nobody would have thought of. Those Shanghai merchants had not been doing anything for a long time. My point is this, Mr. Chairman, that this world is so huge, the number of persons engaged in trade is so huge, that when you get a price movement in a great commodity like cotton that goes to a certain extent in one direction-we will say down-you set in motion the individual operations, not of a hundred, or a thousand, or of ten thousand, but of hundreds of thousands of people, and those operations are absolutely beyond any man's calculating. We can not any of us keep track of it. There is no human way to keep track of it. It is the operation of hidden causes like that which come into effect, when you do not see them in operation, that produces these peculiar results to which you call attention.

Mr. SIMS. Right in that connection, I would like to ask a question on a matter with which I am confident Mr. Marsh is thoroughly familiar— if it was not a fact in the year you speak of that there was a great organization you might say a general uprising in the South-and a great meeting of producers at New Orleans for the purpose of agreeing among themselves to hold actual cotton off of the market, and if that did not affect the price very materially?

Mr. MARSH. All I can say about that is that I know there were many meetings and many resolutions, but I also know that the South kept selling cotton in great quantities.

Mr. SIMS. Do you mean that it did not, in a measure, in a manner, to a certain extent, check sales?

Mr. MARSH. I haven't any idea, but I know the South kept selling

cotton.

Mr. SIMS. I am telling you what I do know. They got together, and they stored a great quantity of cotton down there, to take care of it by storage, and in the end the advance in cotton was offset by the decline in quality of the cotton, because they had had to keep it stored without proper protection from the weather, and I know they did not sell that at the time I am speaking about.

Mr. MARSH. I have heard of that.

Mr. LEVER. I would like to ask you if you have an opinion as to the proportion of illegitimate transactions carried on in the New York exchange as compared with legitimate transactions?

Mr. MARSH. What do you call an illegitimate transaction?

Mr. LEVER. I would call an illegitimate transaction one in which the delivery of cotton is not contemplated by the buyer or seller. Mr. MARSH. You are really asking me a question not quite as personal, but along the same line as that which was asked me on Friday, and which I felt some objection to. I can not tell, and nobody can tell, what proportion of frauds there are in a given body of men.

Mr. LEVER. To make my position clear, I will read from one of your own speeches, Mr. Marsh, and see what you mean by it. I do not want to misrepresent you at all, and certainly not hurt your feelings. This is one of your speeches delivered at Atlanta or at Savannah. Mr. MARSH. At Washington.

Mr. LEVER. You say in that speech:

I am perfectly confident that an actual analysis of the transactions of the New York Cotton Exchange for a day or a week or a month or a year (if such analysis were possible) would show that not 25 per cent of those transactions are speculative.

Just what do you mean by the word "speculative?"

Mr. MARSH. I certainly do not mean illegitimate. I call an illegitimate transaction a transaction on which a man enters with a hidden intention in his own mind that he will not fulfill the contract which he enters into. A speculative transaction is one upon which a man enters for the purpose of making a profit, but fully intending to fulfill his contract, whether he makes a profit or a loss.

Mr. LEVER. What are the other transactions, as distinguished from this 25 per cent you speak of here?

Mr. MARSH. They are the hedging operations of cotton merchants. Mr. LEVER. So that 75 per cent of the transactions of the exchange, in your opinion, would be hedging transactions?

Mr. MARSH. Year in and year out, I should say that, yes.

Mr. LEVER. And 25 per cent would represent what you call "speculative" transactions, but not what we term "gambling" transactions?

Mr. MARSH. Will you read again exactly what I said?

Mr. LEVER. You say:

I am perfectly confident that an actual analysis of the transactions of the New York Cotton Exchange for a day or a week or a month or a year (if such analysis were possible) will show that not 25 per cent of those transactions are speculative.

Mr. MARSH. You will notice there I did not estimate the speculative transactions at 25 per cent.

Mr. LEVER. I understand that.

Mr. MARSH. I did not make an estimate of the amount of speculative transactions at 25 per cent and of hedging transactions at 75 per cent.

Mr. LEVER. I may say, in justice to you, that you go further and say:

Indeed, I believe the proportion is far less than this.

What I was driving at was just what you call a speculative transaction as distinguished from the other transactions on the exchange. Mr. MARSH. I call a speculative transaction in cotton a transaction in which a man buys cotton, believing that it will enhance in value, or sells a contract for the delivery of cotton believing that later he can buy the actual cotton at a lower price, or that he can buy a contract from somebody else at a lower price.

Mr. LEVER. You did not desire to describe, then, a contract in which no delivery was expected?

Mr. MARSH. Certainly not.

Mr. LEVER. Mr. Marsh, you must know that in the various dealings of the members of the New York Cotton Exchange with the public a great many transactions are made through the exchange in which delivery is never intended.

Mr. MARSH. There, Mr. Lever, we get up against the same stone wall which I have seemed to strike several times in answering questions to members of this committee. It goes without saying that when a man uses contracts for the delivery of cotton for hedging purposes, or, we will add, for speculative purposes, it is not his wish or his expectation to receive or to deliver the actual cotton. It is his wish and his expectation that he will liquidate his obligation by entering into another obligation with another party; in other words, substitute a new contract for his outstanding contract. But, when you use the word "intention," Mr. Lever, as contrasted with "wish" or "expectation," you are getting into entirely new ground. If I buy a contract for 100 bales of cotton from the New York Cotton Exchange for speculative purposes, it is my wish and my expectation that I shall not have to take that actual cotton, but that I shall be able to sell my contract out to somebody else without taking the actual cotton. But, Mr. Lever, it is my intention that the cotton called for on my contract shall be delivered to me or delivered to somebody whom I substitute for myself. You know you can get very far afield when you go playing with words. When you talk about a contract and a man's intentions when he enters into a contract, you are dealing with something that the courts have very carefully analyzed and very carefully limited, and a man's intention and his expectation are two different things.

Mr. LEVER. That is very true. Of course, I can quite well understand how, when a spinner telegraphs you an order to buy 10,000 bales of cotton, you have every reason to assume that it is a legitimate transaction.

Mr. MARSH. What do you mean by "a legitimate transaction?" Mr. LEVER. I mean a transaction in which delivery, either to him or his substitute on the exchange, will be made.

Mr. MARSH. Yes.

Mr. LEVER. But when a man not connected with the spinning business-manufacturing business-and they buy practically all your cotton, I understand?

Mr. MARSH. How do you mean?

Mr. LEVER. I believe you made the statement a while ago that your chief customer was a spinner.

Mr. MARSH. I thought you meant a man not connected with the spinning business bought practically all our cotton.

Mr. LEVER. Oh, no; but if a man not a spinner should telegraph you for 10,000 bales of cotton, on a stop-loss order, that might be notice to you that that is not really a legitimate transaction within the rules of the exchange, and that brings you back to Mr. Sims's proposition the other day, that you did not entirely make clear to me; in other words, it seems to me that a stop-loss order coming to a member of the exchange is notice to him that that is not a legitimate transaction.

Mr. MARSH. Is it not legitimate for a man to buy cotton?

Mr. LEVER. Yes.

Mr. MARSH. Is it not legitimate that John Jones, Tom Smith, anybody who wants to and has the money to do it, can buy cotton?

Mr. LEVER. I can understand very well how the spinner would give you a reason to believe that he was entering into a legitimate contract, but when the outsider

Mr. MARSH. Is it not legitimate for the outsider?

Mr. LEVER. It is legitimate, but it is not customary. I do not buy steel, because I do not know anything about it.

Mr. MARSH. There is a very large class who do.

Mr. LEVER. Mr. Patten, for instance, is a wheat and an oats man, and it is not likely he is going to buy cotton for purposes of spinning it and for no other purpose, except for the purpose of speculation. Of course, that is a legitimate purpose. It seems to me that the stoploss order ought to put you on your warning. Suppose you explain to the committee just what the purpose of a stop-loss order is.

Mr. MARSH. A stop-loss order is an order when the loss has reached a certain point, or when a decline has reached a certain point-there may be no loss in the transaction-to sell the cotton out on the market. Mr. LEVER. At the market price?

Mr. MARSH. Whatever you can get for it.

Mr. HAUGEN. That applies to spinners as well as speculators?

Mr. MARSH. That applies to spinners as well as speculators. A man in the South buys 500 bales of cotton while he is under negotiations with some spinner. The negotiations are a little longer drawn out than he expected, and he gets uneasy, and for fear his trade is going to fall through, he says to himself, "I don't want to be held up here with 500 bales of cotton I haven't any market for. If the market goes down to a certain point I will sell a hedge." So he sends me, or some other commission man on the floor, a stop-loss order, to sell a hedge if the market goes down to a certain point. There are multitudes of those orders coming into the market all the time. The very fact of a stop-loss order is no indication a man is speculating.

Mr. LEVER. Mr. Chairman, Mr. Marsh is such a willing and able witness that I would like to ask him to give us, briefly and comprehensively, his idea of the function of a cotton exchange, such as we have in New York.

Mr. MARSH. I wrote a whole speech about that, Mr. Lever.

Mr. BURLESON. Mr. Lever was not here at the time when you went over it fully.

The CHAIRMAN. I think it was very thoroughly covered.

Mr. BEALL. I want to call attention to certain things that were said in this report of Herbert Knox Smith and get your opinion as to the correctness of them. He says:

Operations in future contracts are, in the minds of many persons, of a character exactly similar to wagers on horse races or any other form of bet. Undoubtedly, as far as many individual traders are concerned, this popular view is correct.

Mr. BEALL. I understand that that statement would not meet your indorsement?

Mr. MARSH. I have no way of telling how many persons who speculate in cotton have the mental attitude or makeup of men who

wager.

Mr. BEALL. Let me read this statement:

In actual practice it is undoubtedly true that a large number, and probably a considerable majority, of buyers of future contracts on the leading exchanges do not desire the delivery of actual cotton, and that a majority of sellers, on the other hand, do not contemplate making such physical delivery.

Mr. MARSH. I have already said that a buyer or seller of a hedge is using the contract without the expectation that he himself, without substitution of somebody else, will make delivery or take delivery.