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Mr. Sims. Mr. Marsh is undoubtedly tired, and we ought to let him go over until morning.

The CHAIRMAN. Can you give us an idea about how long it will take you to conclude ?

Mr. MARSH. I should say fifteen or twenty minutes, but I should much prefer, if the chairman will permit me, to make that statement in the morning.

The CHAIRMAN. We realize you have had a long siege this afternoon, and we certainly do not want to impose upon your good nature, and I think, then, we will adjourn now.

Mr. MARSH. Will the chairman permit me to make one brief statement to the committee; it will not take long? My reason for asking this permission is that on Friday evening, after having already spoken to the committee, a member of the committee rather charged me with juggling with words in what I had said to the committee. This charge was not made in any captious or unpleasant way, but this member of your committee said to me that what I had said to the committee in regard to the method of delivering cotton in fulfillment of these contractual obligations which had been entered into seemed to him to be nothing but juggling with words. Naturally I was somewhat disturbed at having made that impression. I assured the member of the committee that what I have said was, to the best of my knowledge and belief, actually and specifically exact; that perhaps the appearance of juggling with words which he felt my remarks bore was due to the very fact that I was using words as specifically and exactly as I knew how, but I certainly should feel very great regret if members of the committee should have the impression that, in describing the method of fulfilling this multiplicity of contractual obligations which the operation of hedging gives rise to, I was juggling with words. Perhaps my pride was touched a little bit by the fact that this member of your committee said he did not see why a stock of bricks would not do just as well to fulfill these contractual obligations as a few thousand bales of cotton in the port of New York. I have been thinking, more or less, a good deal about this suggestion or criticism of my remarks since the meeting of the committee, and I have been anxious to find some way to make clear to the members of the committee that these contractual obligations which are fulfilled in the way in which I described are in every legal and moral sense of the word fulfilled, and fulfilled with actual cotton.

May I venture to call the attention of members of the committee to the fact that this system of future trading, which, as Mr. Lever very properly elicited from me, began in a speculation mainly in Liverpool, gradually developed into something a great deal wider and economically more important than speculation. One of the difficulties which we have to overcome in explaining this matter is that the political economists who have discussed the question of speculation and of hedging have got it in its past, in its still undeveloped stage, and if you read Mr. Emory, for instance, whose treatise on speculation on the stock and grain exchanges of the United States, or produce exchanges of the United States, is perhaps as much quoted as any other treatise on the subject, you will find that Professor Emory, of Yale University, has got this trading in futures in its early stages, and has interpreted it in accordance with what men then thought it was; because, unquestionably, in its early stages the whole theory was that this hedging gave an opportunity to unload the risks of the merchant upon a distinct speculative class. You will find in all the treatises on that subject, all the works of the political economists, that that is what they say, that trading in futures affords the merchant an opportunity to get rid of his risks and throw them on a speculative class. And I may say that Mr. Herbert Knox Smith is fully imbued with that idea, and that that obsession of his practically vitiates every word he says about hedging in his whole report. There is not a word of Mr. Herbert Knox Smith on the subject of hedging in that report that is worth anything. It is all ancient history; it is all gone.

Now, Mr. Chairman, since the development of this system of hedging and the proportions which it has attained particularly during the past ten or fifteen years, it has become clear to those who really study what has happened, study the facts as they come up in actual business, that the operation of hedging is only to a small extent an operation by means of which the risks of the merchant are unloaded upon a distinct class of speculators. To anybody who studies the business as it really comes up in the exchange itself it very speedily becomes apparent that hedging is simply a method of distributing the total risks over the whole world; that it is a complex of credit operations by means of which the risk involved in distributing a crop like the cotton crop is finally carried back into Manchuria, carried into India, carried to South Africa, carried to Australia, carried all over the world, and is so subdivided finally, little by little, that it reaches the ultimate consumer. That is what hedging is, as the facts come up to you in actual business, as you see and study and analyze the actual business that is coming into the exchange, and in that complex body of credit operations which we know as hedging, the speculator comes only spasmodically. In a year like this he comes in on a great scale, and a large part of our transactions for weeks at a time are transactions with the speculator on one side and the merchant on the other. But, Mr. Chairman, we have months at a time when the speculator is not there at all, and yet we go right on hedging; the transactions go right on months at a time, when nobody who knows the business could think for a moment that the risks were being unloaded upon a special class of speculators. They are not being unloaded; they are being distributed until they finally get small enough, and the advances or declines get to be of such moderate proportions that nobody is hurt.

One more point and I am through. The whole economic philosophy of this hedging business as it is conducted in a great exchange like New York is absolutely identical in its true theory with the theory of banking and the currency. If you understand the theory of banking and the currency you can understand the economic theory of hedging, and when you once understand it, then you will understand that just as in the matching of old credits and the gradual liquidation of those old credits until finally only an infinitesimal amount of legal money has to be used, so in the matching of these innumerable hedging credits, playing in and out and back and forth all the time, you finally get to a point where a few thousand bales of actual cotton passed from hand to hand fulfill morally and fulfill physically all the contract obligations that have been entered into. That, I say, Mr. Herbert Knox Smith has not a glimmering of in his report where he touches on the subject of hedging. To anybody who has actually watched and studied, the facts as the naturalist studies the phenomena of nature, the report, as far as that is concerned, is not worth considering; it is hopeless, absolutely hopeless.

Mr. BURLESON. Yet he says that is the only justification of the existence of the exchanges, the hedging facilities.

Mr. MARSH. That is his opinion.

(Thereupon, 4.20 o'clock p. m., the committee adjourned until to-morrow, Tuesday, February 15, 1910, at 10.30 o'clock a. m.)



Washington, D. C., Tuesday, February 15, 1910. The committee met at 10.30 o'clock a. m., Hon. Charles F. Scott in the chair.

The CHAIRMAN. Before proceeding with the hearing this morning, I should like to suggest to gentlemen asking questions of the witness that as far as possible they. abstain from purely hypothetical questions, the answers to which in the nature of the case can be nothing more than conjectures. The purpose of the committee is, as far as possible, to elicit information of a direct and explicit character upon which the committee can form its own judgment.

I believe Mr. Marsh was to resume the stand this morning and discuss briefly some phases of the business of the cotton exchange which he has not yet touched upon.

Mr. BURLESON. Before Mr. Marsh proceeds, I desire to ask permission to embody in the hearings, immediately following the decision of the Supreme Court of the United States in the case of the Board of Trade of the city of Chicago v. the Christie Grain and Stock Company, a brief discussion of the law laid down by the Supreme Court in that case. My purpose is to show that the principles of law laid down in the case of the Board of Trade v. Christie in no way conflict with the principles embodied in the Scott bill, and I think it is only right that immediately following the decision this brief discussion of the law as outlined in that decision be embodied in the record.

The CHAIRMAN. Is there any objection to the request of Mr. Burleson?

Mr. MENDELBAUM. Have we not a right to know, first, what that is?

Mr. BURLESON. I am perfectly willing, so far as I am concerned, to hand this discussion over to the gentlemen and let them read it at their leisure.

The CHAIRMAN. Suppose we do that now. I dislike to interrupt the proceedings in order to have it read publicly.


On May 8, 1905, in a suit of the board of trade of Chicago, against the Christie Grain and Stock Company and C. C. Christie, to restrain the latter as a “bucket shop" from using the Chicago Board of Trade quotations, the United States Supreme Court rendered a most important decision. For the first time the highest court in this country directly expressed itself in regard to the absolute legality of contracts for future delivery as traded in on the various regularly organized commercial exchanges. We append hereto an extract from that opinion, No. 224 and No. 280, Mr. Justice Holmes delivering the opinion:

“As has appeared, the plaintiff's chamber of commerce is, in the first place, a great market, where through its eighteen hundred members, is transacted a large part of

the grain and provision business of the world. Of course, in a modern market contracts are not confined to sales for immediate delivery. People will endeavor to forecast the future and to make agreements according to their prophecy. Speculation of this kind by competent men is the self-adjustment of society to the probable. Its value is well known as a means of avoiding or mitigating catastrophes, equalizing prices and providing for periods of want. It is true that the success of the strong induces imitation by the weak, and that incompetent persons bring themselves to ruin by undertaking to speculate in their turn. "But legislatures and courts generally have recognized that the natural evolutions of a complex society are to be touched only with a very cautious hand, and that such coarse attempts at a remedy for the waste incident to every social function as a simple prohibition and laws to stop its being are harmful and vain. This court has upheld sales of stock for future delivery and the substitution of parties provided for by the rules of the Chicago Stock Exchange. Clews v. Jamieson, 182 U. S., 461.

“When the Chicago Board of Trade was incorporated we can not doubt that it was expected to afford a market for future as well as present sales, with the necessary incidents of such a market, and while the State of Illinois allows that charter to stand, we can not believe that the pits, merely as places where future sales are made, are forbidden by the law. But again, the contracts made in the pits are contracts between the members. We must suppose that from the beginning as now, if a member had a contract with another member to buy a certain amount of wheat at a certain time and another to sell the same amount at the same time, it would be deemed unnecessary to exchange warehouse receipts. We must suppose that then as now, a settlement would be made by the payment of differences, after the analogy of a clearing house. This naturally would take place no less that the contracts were made in good faith for actual delivery, since the result of actual delivery would be to leave the parties just where they were before. Set-off has all the effects of delivery. The ring settlement is simply a more complex case of the same kind. These settlements would be frequent, as the number of persons buying and selling was comparatively small.

"The fact that contracts are satisfied in this way by set-off and the payment of differences detracts in no degree from the good faith of the parties, and if the parties know when they make such contracts that they are very likely to have a chance to satisfy them in that way and intend to make use of it, that fact is perfectly consistent with a serious business purpose and an intent that the contract shall mean what it says. There is no doubt, from the rules of the board of trade or the evidence, that the contracts made between the members are intended and supposed to be binding in manner and form as they are made. There is no doubt that a large part of those contracts is made for serious business purposes. Hedging, for instance, as it is called, is a means by which collectors and exporters of grain or other products, and manufacturers who make contracts in advance for the sale of their goods, secure themselves against the fluctuations of the market by counter contracts for the purchase or sale, as the case may be, of an equal quantity of the product, or of the material of manufacture. It is none the less a serious business contract for a legitimate and useful purpose that it may be offset before the time of delivery in case delivery should not be needed or desired.

“Purchases made with the understanding that the contract will be settled by paying the difference between the contract and the market price at a certain time (Embrey v. Jemison, 131 U. S., 336; Weare Commission Co. v. People, 209 Ill., 528) stand on different ground from purchases made merely with the expectation that they will be satisfied by set-off. If the latter might fall within the statute of Illinois, we would not be the first to decide that they did when the object was self-protection in business and not merely a speculation entered into for its own sake. It seems to us an extraordinary and unlikely proposition that the dealings which give its character to the great market for future sales in this country are to be regarded as mere wagers or as 'pretended' buying or selling, without any intention of receiving and paying for the property bought, or of delivering the property sold, within the meaning of the Illinois act. Such a view seems to us hardly consistent with the admitted fact that the quotations of prices from the market are of the utmost importance to the business world, and not least to the farmers; so important, indeed, that it is argued here and has been held in Illinois that the quotations are clothed with a public use. It seems to us hardly consistent with the obvious purposes of the plaintiff's charter, or indeed with the words of the statute invoked. The sales in the pits are not pretended, but, as we have said, are meant and supposed to be binding. A set-off is in legal effect a delivery. We speak only of the contracts made in the pits, because in them the members are principals. The subsidiary rights of their employers where the members buy as brokers we think it unnecessary to discuss.

“In the view which we take, the proportion of the dealings in the pit which are settled in this way throws no light on the question of the proportion of serious dealings for legitimate business purposes to those which fairly can be classed as wagers or pretended contracts. No more does the fact that the contracts thus disposed of call for many times the total receipts of grain in Chicago. The fact that they can be and are set-off sufficiently explains the possibility, which is no more wonderful than the enormous disproportion between the currency of the country and contracts for the payment of money, many of which in like manner are set-off in clearing houses without any one dreaming that they are not paid, and for the rest of which the same money suffices in succession, the less being needed the more rapid the circulation is."

The gentlemen may look it over; and without objection it will be inserted at the place requested, immediately following the Supreme Court decision.

Mr. LEVER. I understand, Mr. Chairman, that this is a discussion of that decision by the gentleman from Texas, Mr. Burleson ?

The CHAIRMAN. That is my understanding. Mr. MENDELBAUM. You have ruled that it will go in if we have no objection after we have read it?

The CHAIRMAN. It will go in if there is no objection on the part of the committee.

Board of Trade of the City of Chicago v. Christie Grain and Stock Company, 198 U. S., 236. The Chicago Board of Trade was incorporated under the laws of Illinois. It maintained an exchange hall for its members where they made sales and purchases of grain and provisions exclusively for future delivery. The quotations of prices offered and accepted on the exchange during business hours were collected by the board of trade and handed to the telegraph companies, which had their instruments close at hand and sent the quotations to the board's offices, many in number. The telegraph companies received the messages under contract not to furnish them to bucket shops or other places for use in bets, for illegal contracts, or to persons not approved by the board of trade. This amounted to a confinement of the quotations to patrons of the board of trade.

The Christie Grain and Stock Company, in some way not disclosed by the testimony, procured the quotations and used them in its business of maintaining a bucket shop. The board of trade brought an action to restrain the Christie Grain and Stock Company from using and distributing these quotations. The defendants resisted the injunction, principally upon the alleged ground that the board of trade was itself, and in defiance of the laws of Illinois, maintaining the greatest of bucket shops, wherein was permitted the pretended buying and selling of grain and provisions without any intention of receiving and paying for the property so bought, or of delivering the property so sold, and that therefore the quotations could not have been legitimate property in respect to which complainants were entitled to the relief sought.

It appeared from the testimony that much the larger portion of the transactions on the exchange involved no physical delivery of any grain, but that settlements could be made on the basis of set-offs, which consisted in setting off contracts to buy wheat of a certain amount at a certain time, against contracts to sell a like amount at the same time, and paying the difference of price in cash, at the end of the business day.

The circuit court of appeals for the eighth circuit decided that the quotations in question were so intimately connected with gambling transactions, held by the court to be within the terms of the Illinois statute, that the board of trade could not invoke the jurisdiction of equity to protect them from use by other parties. From this decision the board of trade removed the case to the Supreme Court upon a writ of certiorari, where it was held that notwithstanding the source of the quotations they were property and were entitled to protection in the hands of the board of trade. The injunction was therefore directed to be granted.

In the course of the opinion occurs the significant language: “If then the plaintiff's collection of information is otherwise entitled to protection, it does not cease to be so, even if it is information concerning illegal acts. The statistics of crime are property to the same extent as any other statistics, even if collected by a criminal who furnishes some of the data."

'It was upon this, and upon no other theory of the case, that the injunction was granted.

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