chants. We had had storms before, like the Galveston storm in 1900-storms of great power, and covering a very large amount of territory. But the Galveston storm of 1900 produced no such result upon the relative proportions of the high and the low grades of cotton as did the storm of September, 1906. The question of what should be done with the valuation of the grades deliverable upon contract became an acute one, and grew more and more acute as October and November advanced. Toward the end of November, 1906, the revision committee of the New York Cotton Exchange had its meeting, its members being fully aware of the extremely diverse opinions which various members of the exchange held with regard, first, to the actual effects of the storm, and second, with regard to what course ought to be adopted in taking care of those effects. The revision committee did not decide to do what logically it might well have been called upon to do, viz, to reduce severely the valuation of these lower grades of cotton. And so far as I can learn the chief reason why it did not exercise this discretion in the way I have described was that there was a very strong feeling that after all the valuation of the lower grades of cotton, as they had stood in the past, represented the real economic value of those different grades of cotton to the spinner.

That feeling, Mr. Chairman, was a feeling which a good many of us had very strongly. I myself had it very strongly. I was not a member of the revision committee; but I held very strongly to the opinion that there was an element of injustice involved in marking down the values of these lower grades of cotton simply because the producers of cotton in the South had suffered a grave misfortune. And it did not seem to me, personally, at that time, a just or fair thing for the cotton merchants of the New York Cotton Exchange to proceed to aggravate the trouble and distress of the producers of cotton by marking down the valuation of the only cotton that many of them had to sell. And I am obliged to say, Mr. Chairman, that on the basis of strict logic, if the principle of a revaluation were to be pushed to its logical conclusion, there should have been a considerably greater revaluation of these lower grades than actually took place. That, I think, every member of the New York Cotton Exchange will freely admit. All that can be said is that we were forming the best judgment we could, and that the considerations which actuated us were not considerations of our selfish advantage, but were considerations of the general good of the cotton trade and of the cotton producers of the country.

But as time went on, Mr. Chairman, and it became apparent that the damage done by that storm was even greater than had been believed by even the most pessimistic, it became also apparent that with the Liverpool Cotton Exchange and the New Orleans Cotton Exchange maintaining their old system of marking down the value of these low grades, which had become for the time superabundant, there would be a tendency to use the New York Cotton Exchange as the exclusive hedge against these large quantities of low-grade cotton. That actually took place, with the result that the value of the contract for future delivery in the New York market began to decline relatively to the price of middling cotton, and began to decline relatively to the price of the contract for future delivery in New Orleans and in Liver

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pool. Immediately, sir, there arose a tremendous outcry and very bitter criticism. Those who had been using the New York contract as a hedge against their sales of cotton to spinners, particularly their sales of the higher grades of cotton which the storm had made scarce, found the value of their hedge depreciating as compared with the cost to them of buying the grades which they had contracted to deliver. They found that their hedge was not doing for them what they had expected, and they declared roundly that the New York Cotton Exchange was responsible for their losses; that the system of the New York Cotton Exchange was unsound and uncommercial; and that the New York Cotton Exchange ought to be brought to book. This cry, sir, was taken up all through the South; and particularly was it taken up by those persons through the South who hold the entirely erroneous opinion that the price of middling cotton is governed by the price of future contracts. It was argued that this decline in the price of future contracts in New York was occasioning heavy loss to the producers of cotton in the South; that the producers of cotton in the South were being robbed because the buyers of cotton were basing their purchases upon the price of future contracts in New York, and were consequently taking away from the cotton producer a portion of the just value of his property.

You all know, gentlemen, the outcome of this. You know the agitation which reached Congress the agitation which led to the passage of the bill instructing the Bureau of Corporations to investigate the cotton exchanges of the country.

The Bureau of Corporations started upon this work in 1907. The representatives of the bureau came to New York, as they went throughout the South and to New Orleans. They were given every kind of information which members of the New York Cotton Exchange could afford them. They were given the opinion (which, at that time, were necessarily extremely diverse) of members of the New York Cotton Exchange with regard to the situation. The books of many members of the New York Cotton Exchange, absolutely closed to other members of the exchange, were freely put at the disposal of the representatives of the Bureau of Corporations. And finally, early in 1908, the Bureau of Corporations issued the first part of its report upon the cotton exchanges of the country.

When this first part of the report of the Bureau of Corporations appeared, it is needless to say that members of the New York Cotton Exchange eagerly read it and eagerly discussed it. They found it to contain a very large body of statistical and other material which had never before been gathered together, and which, in the hands of a competent interpreter, or as the basis for a competent interpretation of the principles of the cotton trade, was of great value and will always have great value. But, Mr. Chairman, I must frankly say that members of the New York Cotton Exchange were somewhat dazed by a certain attitude taken by the Commissioner of Corporations in writing this report. In writing the report the Commissioner of Corporations took an attitude which was somewhat novel in the history of the relations between the Government of the United States and the merchants or any body of merchants in the United States. Let me read a little of what the Commissioner of Corporations said, to indicate what it was that dazed and perplexed members of the New York Cotton Exchange.

On page xxi of Part I, the Commissioner of Corporations says:

It is contended by many that such a return to the commercial-difference system would, because of the disadvantages of New York's location, destroy the business of the New York Cotton Exchange. There is little reason to believe that any such result would occur. However this may be, the New York Cotton Exchange, if it can not exist under a just and equitable system, has no excuse for existence at all. The present New York system of fixed differences is uneconomic, in defiance of natural law, unfair, and, like all other attempts to defy natural law, results in such complex and devious effects that the benefits of its transactions accrue only to a skilled few. And a little later, on page xxxiii, we find the Commissioner of Corporations saying:

Moreover, the effect of a difference system upon the business of the New York market alone is not a proper basis for framing the rules of an exchange. The first consideration is that these rules shall be equitable and commercial. If the New York Cotton Exchange can not exist under such rules, then it has no right to exist at all.

Mr. Chairman, there for the first time, so far as I know, in the history of these United States of America, there reached the ears of free citizens, free merchants, using their free discretion in the conduct of their business, living in the open, with every rule and every regulation which they were employing published freely to the whole world, the voice of the bureaucrat, laying down for those free merchants a certain rule which he has determined is the only just and equitable rule for them to follow, and declaring or threatening that if they do not adopt that rule, whatever their own judgment may be, they have no right to exist.

I do not think it is generally appreciated what effect a pronouncement of that kind must necessarily have upon free citizens of the United States who are breaking no law, who are pursuing their activities in the way in which, up to the present time, free merchants and free citizens have been expected to pursue their activities.

Having seen this bureaucratic attitude of the Commissioner of Corporations, dazed and perplexed by it, the members of the New York Cotton Exchange then proceeded to examine this report to ascertain whether it had that other kind of authority, higher than the authority of a government official-the authority of large and sound knowledge of the facts, of judicious discrimination in the use of the facts, and of wise deduction from the facts.

When we came to examine the report from this point of view, Mr. Chairman, we could not see that there was in the report authority of an imperative and compulsive kind. We found, sir, that although the Commissioner of Corporations had collected most carefully a large mass of material, yet that here and there throughout the pages of the report there occurred such obvious misinterpretations of fact, such constant misplacing of emphasis upon facts, such readiness to jump at conclusions, and, worst of all, such befuddlement in the elucidation of the principles which the Commissioner of Corporations himself was trying to lay down, that the report did not have for us that kind of intellectual authority which I have described. Let me set forth a little the kind of thing that made those members of the New York Cotton Exchange who gave careful study to this matter hesitate to accept offhand the conclusions and the monitory instructions of the Commissioner of Corporations.

In the first place, we found that the Commissioner of Corporations had, from the very start, neglected the most obvious and the most

fundamental principle in dealing with the situation, viz, that the New York Cotton Exchange is an association of cotton merchants. That fundamental fact, which I have tried to lay before the committee, was completely obscured in all the discussions of the Commissioner of Corporations. The complaints of spinners who wished to use the New York Cotton Exchange as spinners and not as merchants were accepted as a sound basis for the conclusions of the Commissioner. The complaints of speculators, who would have liked a contract suited to their particular ends, were given the same weight as the statements of the most responsible merchants in the association. And, throughout, this vital and fundamental distinction was entirely obscured and overlooked.

mid

Then we found, sir, running through the report, a most extraordinary confusion of terms. We found the Commissioner of Corporations constantly talking about "spot cotton" when he meant dling cotton." To him the price of spot cotton is always the price of middling cotton. The only figures he himself gave in his report as to the proportions of middling cotton in any crops of cotton indicated that in one crop there was 19 per cent of middling, and in the other crop which he discussed there was 29 per cent of middling. All the rest of the cotton in those crops, on his own figures, was not middling cotton. And yet spot cotton in the whole report of the Commissioner of Corporations is middling cotton-19 per cent in that one crop, and the other 81 per cent of the crop is not spot cotton at all.

Mr. Chairman, we found statements which would probably seem to members of this committee comparatively insignificant, but which to cotton merchants like ourselves had a great deal of significance, as indicating the genuineness of the knowledge of the Commissioner of Corporations about the subject that he was treating. For example, we find him saying that the permissibility to deliver low grades of cotton has this result. In Part II of his report, page xv, he says: In the third place, the producer is encouraged to grow and pick a low quality of cotton.

Mr. Chairman, you know the old Latin saying, "Ex pede Herculem"-you can tell whether or not a man is Hercules by looking at his foot; you do not have to look at his whole body. And when, running through the report, we found first this and then that statement of the character that I have just read, we thought we had a view of the foot, and that it was by no means the foot of Hercules. [Laughter.]

Yet, Mr. Chairman, here was what purported to be an exhaustive examination of the business of the New York Cotton Exchange, with deductions very unfavorable to the New York Cotton Exchange. And the New York Cotton Exchange is not a body of merchants who will simply throw off criticisms of this kind and disregard them. As soon as the report had been digested, the New York Cotton Exchange appointed a committee, of which I had the honor to be chairman, to make an exhaustive investigation of these conditions which were reported upon so unfavorably by the Commissioner of Corporations. It was decided from the start to invite the Commissioner of Corporations to have a representative present at every meeting of the committee. It was decided at the start to submit to the Commissioner of Corporations the record of every meeting of the committee, and every scrap of evidence that the committee might obtain from any source.

The committee held nearly 60 extensive hearings. It had before it approximately 100 different persons interested in the cotton trade. It had before it members of the New York Cotton Exchange, members of the Liverpool Cotton Exchange, members of the New Orleans Cotton Exchange, spinners in considerable number, representatives of the cotton producers (among them Mr. Harvie Jordan, and Mr. Sumners, who has already appeared before this committee); it received letters and reports from Europe, and from spinning centers in this country, and it studied the situation as carefully as it could.

All this mass of material, Mr. Chairman, without exception, was submitted to the Commissioner of Corporations; and at a very large number of meetings a representative of the Bureau of Corporations was actually and physically present. Furthermore, after the committee had heard a large number of witnesses, the Commissioner of Corporations himself was invited to a conference, and did, in New York, confer with the committee of the New York Cotton Exchange; and there he was given an opportunity to understand the real difficulties which we found in our path. The Commissioner of Corporations has here in Washington at the present moment, I suppose, the complete record of all these proceedings.

These numerous and prolonged meetings were devoted to ascertaining, as far as we could, the real underlying principles of our business, the accuracy of the criticisms which had been passed upon us, the validity of the suggestions that were made to us, and the real scope and bearing not on the immediate present, but upon the whole range of our business, now and for years to come-of what we were urged to do. And I do not hesitate to say that all of us, including myself, who had given an unusual amount of study to the subject, found that at the start we were practically only groping into it. The complexities of the subject were so great, the possibilities of unsuspected damage if we did this or that were so great, that it was only by slow degrees that our minds took any determinate set.

That committee continued its hearings until early in 1909; and then it found it desirable to obtain certain information which I shall describe in a moment, which it found great difficulty in obtaining, and which it has been slowly obtaining since. Toward the end of 1909 the Commissioner of Corporations issued the final part of his report; and that final part of his report (this bulky volume) is, as is evident to anyone who knows what I have been describing to the committee, mainly taken up with the discussion of matters that were brought out in the hearings of the committee of the New York Cotton Exchange. This report, as it lies there, would not exist in any such form as it has were it not for the hearings of the New York Cotton Exchange committee, the records of which were submitted to the Commissioner of Corporations.

As the committee of the New York Cotton Exchange looked into this matter it found, as everyone will find, that the critical point in the whole business is the matter of valuing the different grades of cotton for delivery upon contracts for future delivery. The Commissioner of Corporations in his first report laid down the principle that the only just and equitable method of valuing these different grades is what he calls the "commercial-difference" system-the system which prevails in Liverpool and New Orleans, and which did prevail in New York until 1897. He roundly declares, over and over