The court investigated, however, the good faith of the transactions on the exchange and concluded that as conducted there, they were not inconsistent with a legitimate business purpose and that as a general proposition there could be nothing harmful to trade and commerce in the bona fide purchase of grain for future delivery and the subsequent sale of the same amount, the transaction being settled upon the basis of the difference in price at the time of the purchase and sale.

That such was the opinion of the court is plainly evidenced by the following language in the opinion:

"The fact that contracts are satisfied in this way by set-off and 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 fluctuation 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."

Then the court distinguishes between 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 (which were held in Embrey r. Jemison, 131 U. S., 336, to be gambling contracts and unenforceable), and purchases made merely with the expectation that they will be satisfied by set-off; tacitly reaffirming Embrey v. Jemison and intimating that the latter forms of contracts were not necessarily prohibited by the statute of Illinois and that such contracts were not devoid of merit "when the object was self protection in business and not merely a speculation, entered into for its own sake." It was further said in the opinion-and this plainly presents the view of the court that the transaction in the board of trade did not contemplate mere wagers or pretended buying and selling without intention of receiving and paying for the property-that:

"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."

That the court was fully impressed with the fact that legitimate and enforcible contracts, and not speculations on the future prices of grain where no acceptance or delivery was intended, were the objects of transactions on the board of trade, is further manifested by the following language:

"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."

A comparison of the foregoing decision with the provisions of H. R. 67, "A bill to prohibit interference with commerce among the States and Territories and with foreign nations, and to remove obstructions thereto," discloses no conflict whatever in the law applicable to each. H. R. 67 in no way whatever, either in terms or spirit, hinders or obstructs legitimate transactions for future delivery of cotton, nor indeed in the settlement between seller and purchaser at a future date upon the basis of the difference in price, if subsequent events should warrant the parties in so doing.

It is wholly and entirely based upon the theory of those illegal speculations in cotton futures where no delivery or receipt of the cotton is ever intended, and which have been denounced as gambling contracts in so many decisions, both federal and state, that it is useless here to enumerate them.

It applies to contracts for future delivery of cotton the test of that wholesome, equitable, and well-known principle of law that there shall be mutuality of right in requiring an honest fulfillment of the terms of the contract; that is, that the seller shall have the right to require the purchaser to accept the cotton, and that the purchaser shall enjoy the reciprocal right to require the seller to deliver the cotton. To admit that any other principle should govern these contracts is to acknowledge at once that they are gambling contracts within the denunciation of both the common law and numerous statutes. And further, the bill deals with telegraph and telephone messages respecting that class of contracts universally declared by the courts to be illegal, and if its terms should be misconstrued and perverted so as to attempt its enforcement upon lawful transactions it would be the error of the Government, not the mischief of the bill. A complete defense is made to anything in this bill when the party prosecuted establishes the legitimacy and good faith of his transaction. The telegraph and telephone companies are completely protected when they require the senders and recipients of messages respecting contracts for future delivery of cotton to furnish them with the affidavits provided for in the bill.

It would seem unnecessary in this discussion to review the numerous decisions of the courts pronouncing void contracts for the sale and purchase of commodities where no delivery or acceptance is in the contemplation of the parties, but merely a settlement upon the basis of the differences in prices at some future day. The citation of Embrey . Jameson (131 U. S., 336), should be sufficient at this day to set the matter at rest. It was there decided:

"A contract for the purchase of 'future-delivery' cotton, neither the purchase nor delivery of actual cotton being contemplated by the parties, but the settlement in respect to which is to be upon the basis of the mere 'difference' between the contract price and the market price of said cotton futures, according to the fluctuations in the market, is a wagering contract and illegal and void, as well under the statutes of New York and Virginia, as generally in this country."

It is a most significant fact that in the case of the Board of Trade of Chicago v. Christie Grain and Stock Company not one syllable is to be found denying or in the remotest degree questioning the soundness of the decision in Embrey v. Jameson. This is sufficient to overthrow any argument that that case held such contracts to be lawful and legitimate. And further, not one of the numerous cases, either federal or state, denouncing such transactions is cited in that opinion for the purpose of predicating upon it an unfavorable comment by the court. It would be so extraordinary for the court to reverse all these decisions without some allusion to even one of them, that such an intention can not be imputed to it. It lies on the face of the decision that no such intention was in the minds of the justice who wrote the opinion and those who concurred in it.

In the opinion in the case of Board of Trade v. Christie Grain and Stock Company, at p. 248, occurs this language:

"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)."

Turning to the case of Clews v. Jamieson, it is found that in that case there was a bona fide contract to sell stock and that there was no understanding whatever between the parties that it should be fulfilled by payments of the difference between the contract and the market price at the time set for delivery. The conclusions of the court are contained in the following syllabus:

"It plainly appears in this case from the pleadings that the sales and purchases of stock were in fact made subject to the rules of the stock exchange, and all the transactions regarding the sales and purchases must be regarded as having taken place with direct reference and subject to those rules.

"A contract, which is on its face one of sale, with a provision for future delivery, is valid, and the burden of proving that it is invalid, as being a cover for the settlement of differences, rests with the party making the assertion.

"There is nothing in these contracts which shows that they were gaming contracts and in violation of the statutes of Illinois; and there is no evidence that they were entered into pursuant to any understanding whatever that they should be fulfilled by payments of the difference between the contract and the market price at the time set for delivery."

The very rules of the stock exchange under which the contract of sale was made excluded fictitious sales and provided that any member of the exchange who wa interested in or associated with, or whose office was connected directly or indirectly by wire or other contrivance with any organization, firm, or individual engaged in the business of dealing in differences or quotations on the fluctuations in the market

price of any commodity or security without a bona fide purchase and sale of said commodity or security in regular market or exchange, should be deemed to have committed an act detrimental to the interest and welfare of the exchange and should be suspended.

It can not be disputed that a contract for the future delivery of commodities even not at the time in the possesion of the seller or even though not in existence at the time the contract is made is valid and enforcible. But this falls far short of sustaining the proposition that such contracts where there is no intention of delivering or even of acquiring the property to deliver and where the contract is to be settled upon differences in prices are valid and enforcible. The second paragraph of the last syllabus plainly distinguishes between the two.

The argument that H. R. 67 is contrary to the decision in Board of Trade v. Christie Grain and Stock Company is based upon a willful failure to distinguish between contracts, on the one hand, for bona fide sales of commodities to be delivered in the future, or to be settled, if the parties subsequently decide to so discharge their obligations, by payment and acceptance of the losses by decline in the market-the only basis for recovery if suit were instituted for damages and contracts, on the other hand, for the ostensible, but unreal, purpose of settling the contract by payment of differences in prices at the time delivery is due.

It is with the latter sort of contracts that the bill deals and that it is a valid and useful exercise of the power of Congress to protect commerce from the evils of an unlawful practice can not be successfully denied.

H. R. 67 in none of its provisions prohibits the settlement of contracts for future delivery of cotton, on the basis of set-offs, when the parties at the inception of the contract intended in good faith to fulfill its obligations, but subsequently decide to adjust their agreement by payment of differences in the contract price and the price of the cotton on the date delivery is due.

TESTIMONY OF MR. A. R. MARSH—Continued.

Mr. MARSH. Mr. Chairman, what I should like to talk about, briefly, is the situation which has developed, primarily in connection with the New York Cotton Exchange, but in reality in connection with all use of contracts for future delivery, by reason of the extensive report of the Commissioner of Corporations upon the cotton exchanges of the country.

The New York Cotton Exchange, ever since its organization, being composed (as I have said to the committee) of cotton merchants, has been keenly solicitous that its rules and regulations should be just and fair, and responsive to the actual requirements of the cotton trade as conducted by merchants. This was shown very early in its history. When the New York Cotton Exchange was first organized, its by-laws and rules were to a large extent a reflection of the by-laws and rules of the Liverpool Cotton Association, which was formed somewhat before the New York Cotton Exchange. The Liverpool Cotton Association had framed its contract for future delivery in such a way as to limit the deliveries of cotton to grades from low middling up. It was not many years after the New York Cotton Exchange was organized before the cotton producers of the South generally represented to the members of the New York Cotton Exchange that they were producing cotton below low middling in grade, and that it was an injustice to them that these lower grades of cotton should not be tenderable upon contracts in New York. In response to those representations from cotton producers, and convinced by their study of the cotton business that it was a just and proper step to take, the New York Cotton Exchange widened the range of deliveries, and admitted to them these grades of cotton which were produced in the South, which had to be handled by merchants, which had to have a market; and from that time to this the

grades of cotton deliverable in New York have represented the cotton crop as nature produces it, and as the producers have to dispose of it. From the time of the organization of cotton exchanges and the framing of rules and regulations under which the business should be conducted, a point of controversy constantly agitated has been the method of determining the valuation of grades of cotton other than middling. The cotton crop consists of a large number of grades. Middling cotton makes up only a small portion of any crop. In framing a contract for future delivery, all the exchanges made middling cotton the starting point in reckoning the money value of the hundred bales delivered on a contract. But as the proportion of middling cotton in any crop was necessarily small, and as other grades had to be delivered, there immediately arose the question as to the valuation of these other grades for delivery purposes.

The Liverpool Cotton Association, being primarily a market for buyers and consumers of cotton, had framed its rules with regard to this complex and controversial subject in such a way as to be favorable to buyers and consumers. The method adopted in Liverpool was that the different grades of cotton, when delivered, should be valued at their market value on the day of delivery. This method of valuing these different grades is what has recently come to be termed the "commercial difference" method. I say, this principle was adopted first in Liverpool, which was a buyers' and consumers' market; and it was favorable to buyers and consumers of cotton because it gave an opportunity, in case grades that were sent forward from the United States for delivery became temporarily overabundant, to change the difference before that cotton arrived in Liverpool, and save the buyer and the consumer any temporary market decline in the value of that cotton.

Both of the American exchanges adopted this same principle, taking it from Liverpool, in the early stages of their history. I may say at this point that during the early period of the history of the cotton exchanges the theory of these operations was very imperfectly understood. The whole thing has been a kind of organic development. It is only little by little that the most expert merchants have been able to penetrate to the real principles underlying the conduct of their business. And this method of treating the valuation of the different grades when delivered on contract was not closely studied in all of its ramifications and in all the results that it would produce.

As time went on it was found that this method of valuing the different grades gave rise to constant controversies and gave opportunities for certain abuses. For example, if a large operator was going to take delivery of a large amount of cotton and had reason to suppose that a good deal of that cotton would be of certain specific grades, it was easy for him to produce the impression through the market that those grades were overvalued and that they ought to be reduced in value. The methods by which this manipulation (as it is called) was accomplished were of course various. I am not saying that in many cases the operator himself may not have been convinced in his own mind of the correctness of his position. When a man has a large pecuniary interest at stake, it is very difficult for him to prevent his mind from being affected by that which he would like to see come to pass. To such an extent is this true that one of the members of the New York Cotton Exchange, whom I believe we all regard as the man

who can look himself squarest in the face of all the members of the exchange, has said to me repeatedly that he is unable, when he has an interest, to exercise a calm and unbiased judgment.

The controversies occasioned by this method of arriving at the valuation of the different grades finally resulted in a feeling in the New York market that there was something essentially wrong, something essentially unjust and unfair, in making it possible or leaving it possible for influences which might prove a little later not to have been based upon real market conditions to affect this very important matter. And so, in 1897, the New York Cotton Exchange decided that it would abandon that method of arriving at the valuation of the different grades of cotton, and, instead, would have a valuation of these grades made only twice a year, in September and in November, leaving the valuation to a large committee of seventeen men who should determine, as far as human wisdom could determine, the valuation that should be placed upon the different grades for each particular crop.

This system, adopted in 1897 by the New York Cotton Exchange, was obviously open to one criticism-the criticism that it was and is illogical. If you are going to value your different grades twice a year, no logical reason can be advanced why you should not value them three times a year; and if three times a year, why you should not value them four times a year. On the other hand, if you are going to cut down the valuations to twice a year, no logical reason can be advanced why you should not cut them down to once a year; or, if you are going to cut them down to once a year, why you should not make your valuation once and for all, and let it stand.

As I say, these were the logical objections that might be advanced and may still be advanced against the method which the New York Cotton Exchange adopted in 1897. All that can be said in defense of the illogical position which the New York Cotton Exchange took is that in affairs of this kind, as you gentlemen all know, complete logicality is always slow to be obtained. The whole history of the English race is the history of illogical conclusions. It is the history of men seeing something wrong and taking a step toward the correction of it. The New York Cotton Exchange saw that something was wrong, and it took a step toward the correction of it. And the system adopted in 1897, in spite of its illogicality, was a step toward the establishment of a defensible principle in connection with the valuation of the different grades of cotton deliverable on contracts.

This system worked well in the New York Cotton Exchange from 1897 down to 1906. The old complaints of manipulations and abuses, the old irritations which had arisen out of men's feeling a sense of injustice done them, ceased. But in 1906 a situation arose which brought this whole question once more upon the carpet. In the end of September, 1906, there came a storm covering a very large part of the cotton-producing area of the South; and in a night the relative proportions of the high and the low grades of cotton in that crop were completely reversed. In a night a crop which had promised to be of the normal proportions of the high and the low grades became a crop with an abnormal proportion of the low grades and an extraordinary scarcity of the high grades.

After this storm took place it was a long time before the full significance of it became apparent even to the most expert cotton mer