again, that this "commercial-difference" system, as he calls it (I do not think anyone ever did call it so before the Commissioner of Corporations so named it), is the only just and equitable system; and that the system which he calls the "fixed-difference" system, which has been in operation in New York, is unjust and inequitable. And his last report is mainly given to combating the arguments and the suggestions against his contention which were brought out in the hearings of the New York Cotton Exchange committee.

It would take me, not one morning, but several days to go into all the details of this intricate matter of the valuation of the different grades of cotton. I will say here that the Commissioner of Corporations has not begun to exhaust the subject in his report. But certain salient points do stand out, and I will state to the committee some of the difficulties which the New York Cotton Exchange finds in the way of accepting in toto the principle laid down by the Commissioner of Corporations.

The cotton merchants of the New York Cotton Exchange know (and their knowledge has been amply confirmed) that the real reason why there is any difference in the value of the different grades of cotton is that those different grades have different values to the spinner of cotton. There is no other reason why low middling cotton should be worth less than middling cotton than that the spinner gets a less quantity of yarn and a less quantity of goods out of his low middling cotton than he gets out of his middling cotton. Members of the New York Cotton Exchange already know approximately what those differences of value to the spinner of the different grades of cotton are. They know that the differences between the grades which have existed in the New York market for many years approximately represent the difference in the value of the different grades to the spinner. It was a kind of vague apprehension of this which had such weight with members of the New York Cotton Exchange when the calamity of 1906 took place. We know that low middling cotton is worth to the spinner between 4 and 5 per cent less than middling cotton is worth to the spinner. I mean by that that the spinner gets out of 100 bales of low middling cotton between 4 and 5 per cent less yarn than he gets out of 100 bales of middling cotton; and we have substantially similar information with regard to the value of the other grades of cotton.

Mr. LEVER. If it does not interrupt you, Mr. Marsh, I should like to ask you just there, for information, what you consider in making up your grades? Is it the staple, the color, and the trash in the cotton?

Mr. MARSH. The staple has nothing to do with it; and in the matter of making up the grades of white cotton the color has not anything to do with it. In making up the grades of white cotton it is the amount of leaf and trash, and so on, appearing in the cotton which determines the grade.

Mr. LEVER. Does the strength of the fiber of the cotton have anything to do with it?

Mr. MARSH. It has nothing to do with it beyond this: That cotton which is what we call "perished" cotton-cotton which has been exposed to the weather for a long period of time and the tensile strength of whose fiber is practically destroyed-is not regarded as a merchantable cotton, is not deliverable upon contracts in the New

York Cotton Exchange, and is to be regarded as being in a class by itself.

Mr. LEVER. I did not want to interrupt you, but I wanted that information myself.

Mr. MARSH. Now, Mr. Chairman, the proposition of the Commissioner of Corporations is that this economic difference in the value of the grades of cotton should be entirely thrown away; that the only thing to be regarded in determining the differences between the grades is the relative supply of those grades, and the relative demand for those grades from day to day. That is the principle which the Commissioner of Corporations tells us is the only just and equitable principle the principle which the New York Cotton Exchange ought to adopt if it is to have any reason to exist. That, Mr. Chairman, is a pretty extensive proposition. But it is a proposition which has been very generally taken up. These gentlemen here from the South propound it. They declare that that is the only sound principle. And the reason given by the Commissioner of Corporations and, as I understand it, by these southern gentlemen-is that the all-important matter is that the price of middling cotton and the price of future contracts should remain substantially the same, in order that (as they put it) the price of middling cotton and the price of future contracts may remain at a fairly fixed and narrow parity. The principle that what determines the valuation of a grade of cotton is its value to the spinner is to be thrown to the four winds of heaven.

Mr. Chairman, it is a pretty hard proposition that you have to go out of existence because you can not see that that is a sound principle. It is a pretty hard proposition, and it is harder when you begin to see the consequences that follow from that proposition.

Let us take that extraordinary crop of 1906-7-the crop when the storm came in the end of September. Over night, as I have said, through an act of God, the cotton producers of the South had left. on their hands a cotton crop with an unusual proportion of low grades and an extraordinary scarcity of the higher grades. One would say that in a situation like that the true question was, What shall be done with these low grades? How can we get the full value out of these low grades? The only cotton that thousands and tens of thousands of farmers in the South had to sell was low-grade cotton. It did not make any difference to them what the price of middling cotton was, or what the price of good middling cotton was. They did not have any. They had on their hands at least 2,000,000 bales of low middling cotton. They had on their hands 2,000,000 bales of strict good ordinary and good ordinary cotton. They had on their hands 2,000,000 bales of stained and tinged cotton. And from the point of view of the genuine welfare of the cotton producer the all-important question was, How shall we handle this extraordinary superfluity, for the time being, of these low grades, that Almighty God has given us to our harm?

The Commissioner of Corporations and these gentlemen from the South, as I understand it, say to us: "The thing to do is to keep the price of future contracts up to the price of middling cotton, and to do it by cutting down the valuation of these low grades of cotton to so low a price that they will be dirt cheap, and will find a consumer ready to take them off the hands of those who have produced them."

That, Mr. Chairman, is the consequence of this principle. That was the method adopted or followed by the New Orleans Cotton Exchange. Mind you, I do not criticise the New Orleans Cotton Exchange for following that method. It was the traditional method. It was the method that cotton exchanges had generally followed in the past, and it was the method which the Commissioner of Corporations says is the only sound and just method. That the New Orleans Cotton Exchange should not have broken away from tradition and should not have seen a new light is, I say, no reason for criticising the New Orleans Cotton Exchange. But mark you, Mr. Chairman, what the practical consequences of that method followed by the New Orleans Cotton Exchange were: We know that in that year the value of low middling cotton to the spinner was approximately 50 points less than middling; and yet New Orleans Cotton Exchange cut that difference down to 125 points. They marked off $3 a bale on 2,000,000 bales of cotton. We know, sir, that the value of strict good ordinary cotton to the spinner and the value of good ordinary cotton to the spinner was approximately a cent a pound off. They cut that value down to 3 cents a pound off. They valued that cotton, sir, at over 2 cents a pound ($12.50 a bale) less than it was worth to the spinner. They cut, sir, $25,000,000 off the valuation of that cotton, and they cut another $25,000,000 off the valuation of the stained and the tinged cotton that that storm had produced.

Mr. SIMS. Right there, Mr. Marsh, let me ask you this question: The practical effect of that would be that the owner of this low-grade cotton would not deliver it on contract in New Orleans, but would sell it to the consumer, would it not? Would not that be the practical effect?

Mr. MARSH. Mr. Sims, he could not sell it to the consumer when the consumer was not buying it at the moment-when the consumer was looking around to see whether he was going to get the high-grade cotton that he had contracted for.

Mr. SIMS. But he would not tender it on contracts in New Orleans at this undervalued difference?

Mr. MARSH. He certainly would not; and he did not, sir.

Mr. MENDELBAUM. Right in line with that question

The CHAIRMAN. I think it would be better not to interrupt.

Mr. MENDELBAUM. I desire to bring out that he would not deliver it on contract. Was not the spot price the same?

Mr. MARSH. The spot price was the same.

Mr. MENDELBAUM. If he bought it on the spot, he would have got it at the same price?

The CHAIRMAN. I think it would be better for you to wait until Mr. Marsh has concluded.

Mr. MARSH. Mr. Chairman, that is the outcome of the application of the principle which Mr. Herbert Knox Smith says is the only just and equitable principle for an exchange to adopt in determining the valuation of different grades of cotton. And that is not the only effect: If that system had been adopted by all the exchanges, there would have been a period of four or five months when you could not have sold any of that low-grade cotton at any price. And the reason for that, sir, is this: Take the case of a man who bought a thousand bales of strict good ordinary cotton, and sold a hedge in New Orleans against it. The next morning, when he woke up, he found that the

New Orleans Cotton Exchange had written $1,000 off the value of his cotton. Three days later they had written $2,000 more off the value of his cotton, and before they got through writing off they had written over $10 a bale off the value of his cotton. Now, Mr. Chairman, no merchant will go ahead buying cotton from the producer and every day seeing the valuation of that which he has bought written down and down and down. No man will do that. And for months in the middle of that critical season of 1906-7, the only cotton which the cotton producers of large parts of the South had to sell at all could not have been sold at any price.

I simply call attention to these things, Mr. Chairman, to show that there is at least another side to this question from that which has been presented by these gentlemen from the South and by the Commissioner of Corporations. They do not know, sir, the practical consequences of their contentions.

The merchants who constitute the New York Cotton Exchange are sensible of their obligations to those who produce the cotton crop of the United States. They are sensible of their obligations to maintain, as far as they can, really just and really economic principles in the conduct of that business. That is what the charter of the New York Cotton Exchange calls for the establishment of really just and really equitable principles in the conduct of the business. And I say, sir, that from my point of view any principle which has such practical results as the principle announced by Mr. Herbert Knox Smith is not a just and equitable principle.

What the New York Cotton Exchange has been trying to do for the past year and a half is to find out, if it can, what is the fair, economic valuation of these different grades of cotton. We realize that no matter what may happen during one season or a part of a season, in the long run every one of these grades of cotton will come back to its economic value. Strict good ordinary cotton, valued at 33 cents a pound off middling, and worth a cent a pound off middling, will come back to its economic valuation if you give a little time for the operation of the natural laws of trade. And the search for a basis of that kind for the valuation of grades in the New York Cotton Exchange is what has occupied us for the past year.

We find, Mr. Chairman, that the Commissioner of Corporations derides us in that effort. He scoffs at us in that effort. He tells us that it is not economic to value grades of cotton at what they are worth to the spinner. And he even throws out, sir, this grain of comfort to the cotton producer of the South, upon whom God has sent a heavy calamity in the shape of a storm like that of 1906.

I find that on page 202 of the fourth part of his report the Commissioner of Corporations says:

It is certainly remarkable that a member of a trading organization should seriously advance the argument that a spinner should be compelled to pay for cotton all that it is worth to him, at a time when natural conditions enable him to purchase it for less.

Mr. Chairman, when the next great storm comes over the South, and when the cotton producers of the South are face to face with the necessity of turning into money a vast quantity of low-grade cotton, it will be a very great comfort to them to be told that through the efforts of these gentlemen from the South, through the efforts of Congressmen, backed up by the opinion of the Commissioner of Corporations, but at a cost of $50,000,000, the price of future con

tracts has been kept up to a parity with the price of spot cotton or middling cotton.

Mr. Chairman, we may be right, or we may be wrong. I have given you as well as I could, in my poor way, the considerations which affect our minds as merchants, in view of our obligations as merchants and in view of our obligations to those who produce that which we have as the basis of our business. I say we may be right, or we may be wrong; but I want to call your attention to the fact that whether we are right or whether we are wrong, we are in competition with the New Orleans Cotton Exchange, which is pursuing exactly the course laid down by the Commissioner of Corporations. And, sir, if we are wrong, and they are right, they will get the business and we shall lose it. I ask you, Mr. Chairman, whether there is any conceivable reason why the Government of the United States should interfere between these free competitors-one of whom, in the exercise of its proper discretion and best judgment, is following one course, and the other, in the exercise of its equally free discretion and free judgment, is following another course and should say to the one of those competitors that its conclusions and its principles are unjust and inequitable, and that it has not any right to exist? That is a new thing in the government of this country, Mr. Chairman. We never have had that before. Now, only a few more words about this report of the Commissioner of Corporations:

The Commissioner of Corporations does not even stand to his own guns. He does not even know his own mind. In the second volume of his report his conclusion with regard to the range of grades deliverable on contract is that the delivery of grades below low middling is inadvisable, and gives rise to difficulties and controversies, and that the cotton exchanges ought to change their contract for the future delivery of cotton so that that contract shall no longer represent cotton as it is produced, but shall represent only cotton from low middling up. That, I say, is his fundamental contention in the second volume of his report. The whole of that volume is devoted to bringing out the substantiality of that contention. And now, sir, comes this third volume of his report, in which he states that the New Orleans Cotton Exchange, after consultation with him, has made changes in its contract greatly improving it, and by inference making it satisfactory; and the New Orleans Cotton Exchange has not adopted a contract with a low middling clause in it. The whole contention of that volume of the report of the Commissioner of Corporations has been absolutely neglected by the New Orleans Cotton Exchange. And yet, in the last volume of the report, the commissioner says that the New Orleans Cotton Exchange, after consultation with him, has done its duty; whereas the New York Cotton Exchange, though it appointed a committee, has as yet arrived at no result.

Mr. Chairman, it may be that this method of conducting the cotton business, which cotton merchants have evolved, is to be done away with; or it may be that some form of governmental supervision is to be imposed upon the hitherto free merchants of this country. But I ask you, Mr. Chairman, and I ask other members of the committee, whether, so long as we are free, our judgment ought to be controlled by the opinions and the conclusions of a man who does not know his own mind, of a man whom we can plainly see not to be largely and accurately familiar with the facts, and of a man who is willing to