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Mr. Cocks. And yet you tell me that a lot of cotton planters sell their crop ahead.


Mr. Cocks. In that case do they not distribute the risk over the rest of the world?


Mr. Cocks. Í would like to ask Mr. Sims or Mr. Burleson if he thinks that is a proper thing for the planter to do, to sell his crop before it is planted ?

Mr. BURLESON. No; and it is done to an insignificant degree.

Mr. Cocks. In that way could not the planter protect himself by hedges?

Mr. BURLESON. No, sir; every one that has ever tried it has been burnt.

Mr. Cocks. He is gambling like any other gambler, is he not?

Mr. NEVILLE. Mr. Chairman, if those gentlemen want to get on the stand so that we can cross-examine them, let them get on. They are making statements as to gambling and speculating that I think are capable of two or three constructions, and on that point

Mr. Sims. I think a farmer can gamble as well as anybody else, if he wants to.

Mr. NEVILLE. It is not a question of that; it is a question of whether a farmer when he sells his crop ahead, instead of selling 300 bales sells 1,000 bales at a price that is satisfactory to him, is gambling. I think that is a distinction that is pretty fine.

Mr. LEVER. I want to ask just one other question, and then I am through.

Mr. NEVILLE. Mr. Lever, you remind me of the man that only wants to talk a minute.

Mr. LEVER. I will make it very short. A moment ago in testifying on the question of hedging you said that the man who bought 100 bales of actual cotton and sold on the exchange a hedge, would not thereby necessarily become a bear on the market for futures.

Mr. NEVILLE. I said so.

Mr. LEVER. Now, as to the mill man, I take it from the testimony given in the hearings that the condition would be a little bit different. He buys 1,000 bales of spot cotton and sells a contract for 1,000 bales as a hedge against that?

Mr. LEVER. What would his position be?

Mr. NEVILLE. I think his position is just as I am. If the market for cotton goes down, the contracts go down. He is protected in a possible decline in his case owing to the decline of the contracts.

Mr. LEVER. As a matter of fact

Mr. NEVILLE. One minute; let me get through. If the cotton market goes up, that money he loses on his hedge is made up on the advanced price he gets for his goods.

Mr. LEVER. So that as a matter of fact—and this is the point I want to bring out—the mill man who sells a hedge becomes really a bull upon the future market in order to get the advance in his commodity ?

Mr. NEVILLE. No; I would not say that, and I do not think my answer could possibly be construed that way.

Mr. LEVER. Then he would not become a bull ?

Mr. NEVILLE. I think his position on the market is absolutely neutral. Mr. LEVER. He does not care whether it goes up or down? Mr. NEVILLE. He is in just the same position as the merchant is in. We do not care whether we pay 15 cents or 20 cents or 8 cents or 9 cents a pound for cotton. It is immaterial to us. Mr. LEveR. So that you do not agree with Mr. Parker, who testified that the spinner who sold a hedge naturally had a depressing effect upon futures for the reason that he was afraid to accept delivery of the cotton you have in your stock? Mr. NEville. No, I do not agree to that. Mr. LEVER. You do not agree to that? Mr. NEVILLE. Absolutely, no. Mr. ELLERBE. I understood Mr. Neville, I think, to say that the farmer selling his cotton was practically the same thing as if he sold so many bales of futures. I want to ask him if this is not a fact that in a great many localities—it is so in mine—the farmer comes to his local merchant or to his local cotton buyer and sells 100, 200, sometimes 1,000 bales of cotton. The contract is drawn. If those men are responsible, it matters not how much fluctuation there may be in cotton, when the fall of the year comes and that cotton is delivered the rice is paid as agreed upon; but suppose that poor farmer sells 1,000 |. of cotton as futures, and in the spring of the year, when every dollar he has is tied up, there comes some rumor, false, probably, which perhaps lasts but a day, and cotton shoots up 2 or 3 cents a pound and then drops back, is not that man out of the market and all of his money gone? I just ask that question to get that difference clearly before the committee. Mr. NEville. That condition might follow; but then the farmer is to blame for contracting to sell more cotton ahead than he is financially able to take care of. Mr. BURLESON. That is your answer to that question? Mr. NEville. Yes. Mr. BURLESON. I could not understand your §: Mr. Neville, to a question put by Mr. Beall as to whether any members of the revision committee of 1907 made money. Mr. NEville. I said that I had no means of knowing. Mr. BURLESON. You had no means of knowing? Mr. NEville. No, sir. Mr. BURLEsoN. You did not either affirm or deny that they had 7 Mr. NEVILLE. Isaid that I had no means of knowing, Mr. Burleson. Mr. BURLEsoN. Do I understand that from your viewpoint it is right for a man who is on this revision committee to be interested largely in future contracts? .NEyille. Mr. Burleson, I stated, and I think my reply, if the stenographer could find it, was this: That in a matter of that kind that necessitated a man knowing something about what he was called on to do—for instance, a member of the exchange who was actively engaged in the cotton business and very rarely came on the floor of the exchange and did not keep posted on the cotton part of it—could not serve on that committee. The CHAIRMAN. Let me interrupt the examination to say that it is about time to adjourn. Mr. BURLESON. I can finish in three minutes, Mr. Chairman.

The CHAIRMAN. We will give you five minutes more.

Mr. BURLESON. To get right down to it, I understood you to say that you did not believe any of these members were interested in future contracts ?

Mr. NEVILLE. I said that I did not believe any man who was on that committee would allow his interests that he might have in the market to influence his decision in fixing those differences. That is what I said, and I think I was perfectly clear on it.

Mr. BURLESON. I wanted to read you this from the report of the Commissioner of Corporations:

One member of the committee who admitted that he was short of the New York market and long of Liverpool, and who made a great deal of money, said:

"I do not think the differences should be fixed once a year or twice a year, or any other number of times a year. We have here a contract which calls for the delivery of cotton between one man and another. I am very emphatic in believing that there ought to be no committee or parcel of men who have the power to alter the terms of this contract. You get together an aggregation of 17 men here. There is no telling what an ordinary jury is going to do in judging facts. But here you get together a parcel of 17 intelligent men. Every one of them must be interested more or less in the fixing of differences. If they were not interested, they would not be in the cotton trade. Now, you are asking them to do something they can not do-eliminate selfinterest in acting upon a question where they are vitally interested. * * * Here you have got 17 men to do something with no basis on which to do it; they do not know what they are expected to do it on, except that they are to fix differences binding between buyer and seller for ten months, and that, too, when the contracts have already been entered into and anything they do must take so much money out of one man's pocket and put it into another man's pocket. * * * If a man was not interested in the cotton business, he would not be a fit person to sit on that committee and make differences, and at the same time if he is interested in the cotton business he is not a fit person to sit there and fix differences affecting a contract between himself and somebody else. * * * It simply amounts to the same thing as a judge sitting on the bench and passing on his own case.”

That came from one of the members who made up the differences.
Mr. NEVILLE. That is all right. I can understand that.
Mr. BURLESON. In 1906.

Mr. NEVILLE. His idea and mine are in thorough accord, and I. think I answered that in response to a question of Mr. Beall. That is exactly what some of us are trying to do now, to take it out of the hands of anybody by fixing the difference on the spinning value, and not fixed on so-called commercial values.

Mr. BURLESON. Now, I want to ask you if it is not a fact that the safety of a hedge depends upon a parity being maintained between the future price and the spot price?

Mr. NEVILLE. I do not think so.
Mr. BURLESON. You do not think so ?

Mr. NEVILLE. Not altogether. It is a very desirable thing, but there are so many things that could disturb the parity.

Mr. BURLESON. If the margin becomes very wide and there is a violent fluctuation, does it not cease to be a hedge altogether, or a protection altogether?

Mr. NEVILLE. Not altogether. It depends on the basis the man has used the hedge for. If you will tell me exactly what you are driving at, I will give you an answer on it.

Mr. BURLESON. What I am driving at is this, whether or not the statement of facts by the Commissioner of Corporations is true, and if it is true whether you are in accord with the conclusions he bases on them?

Mr. NEVILLE. What is the statement of facts?
Mr. BURLEsoN. This is on page 156:

From September, 1891, to September, 1897, the margin between the two prices showed a fair degree of constancy. Thus, the extreme discount in the contract price during this period was 56 points, and instances where the discount exceeded 40 points were rare. At the same time the margin seldom was less than 15 points. This com

arative steadiness of the margin is well brought out by chart 5. This greater uni

ormity in the margin was due in part, no doubt, to the low prices for cotton which prevailed during this period and for some time thereafter. Thus, from 1892 to 1897 the actual price of middling did not at any time exceed 10 cents, while it frequently was below 6 cents. While the normal margin of 15 to 25 points should be more or less unaffected by changes in prices of spot cotton, disturbances in this margin, due to improper establishment of differences, would naturally be less when prices of cotton were low and the commercial differences consequently small in absolute amount than when they were high, since errors in arbitrary differences under these conditions would naturally be smaller than when prices of cotton were high and commercial differences between grades fairly wide.

During this period, from 1891 to 1897, the revision committee of the New York Cotton Exchange continued to meet nine times a year; as shown later, the committee frequently made no change in differences at its meetings. In the crop year 1897 the New York Cotton Exchange abandoned monthly meetings of the revision committee, and provided that the committee should meet only twice a year, namely, in September and November, and this system has been in force ever since. This change has been followed by a very marked change in the relationship between the spot and the contract price. In the seasons of 1897–98 and 1898–99, it is true, the margin between the two prices was comparatively moderate on the whole, although in the latter season the margin in July widened out to 65 points. In these years, however, as shown later, the disparity between the New York differences and the commercial differences was not great. This again was partly due to the low prices of cotton which still prevailed at this time.

From September, 1899, down to the present time, however, the margin has on the whole been very much greater than in earlier years, and, what is far more important, it has fluctuated with much greater violence.

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Irregularity in the margin is especially important. It is the constancy rather than the amount of the margin with which operators in the future market, and particularly those using the future market for hedging purposes, are mainly concerned. The consideration can not be too strongly emphasized. That is to say, it is largely immaterial to an operator whether the contract price is 25 points below the price of spot middling or 100 points below so long as a uniform parity is maintained. The table, however, shows very clearly that for the period from 1897 to date, and more particularly from 1899 to date, there has really been nothing like a sustained parity between the two prices for any considerable period of time. This means that merchants using the market for hedging purposes have been more or less constantly subjected to a very serious risk; whereas, as so frequently emphasized, the purpose of hedging is to reduce or eliminate risk. It means, too, that the calculations of speculators as to the movements of the contract price itself have been rendered more difficult and risks consequently increased.

Now, first, is it true that the prices have fluctuated; that this margin has fluctuated with more violence from 1899 down to the present time than it has at any time in the past? Mr. NEville. What do you mean by “margin?” Mr. BURLEsoN. Well, the margin, the difference between the future price and the spot price. That is what I mean by “margin.” Mr. NEville. I could only answer that, Mr. Burleson, in this way. Of course, what Mr. Herbert Knox Smith has got there, he has gone to the exchanges and copied the statistics Mr. BURLEsoN. Then do you accept Mr. NEVILLE. Let me get ho before you ask me any more uestions. What he says may be true. ... I do not think that is a air criterion, for the reason that a merchant who tries to keep up with the causes that affect margins, as you call them—we call them so control his hedging to meet the occasion. I mean y that, this: If a merchant wanted to buy cotton hedged, and he thought conditions that he could foresee would cause that particular kind of cotton the spinner wanted Mr. BURLEsoN. Evidently you do not understand what I have got in mind. Mr. NEVILLE. Evidently I do not. I must confess that. I am answering the best I can. I am doing the best I can. Mr. BURLEsoN. All right. I will put three simple questions that can be answered ves or no. From 1899 to the present time has the margin between cotton constantly fluctuated with more violence than it did theretofore? Mr. NEville. I could not say. Mr. BURLEsoN. You do not know. If that is true, upon the assumption that that is true— Mr. NEville. There you go with an “if.” Mr. BURLEsoN. Well, if that is true; you are here as an expert defending the exchange. Mr. NEVILLE. I am not defending that part of it. Mr. BURLEsoN. If that is true, does it not destroy the exchange for hedging purposes? Mr. NEville. Absolutely no. Mr. BURLEson. Now, then, why not? Mr. NEVILLE. I endeavored to tell you just now, and you said I was not answering the question. Mr. BURLEsoN. Now, I will give you an opportunity to tell why. Mr. NEville. I consider that is an answer that I have given there to that question, and I think the chairman will agree with me. The CHAIRMAN. The committee will adjourn until 2 o'clock.

(At 12.30 o'clock p.m. the committee took a recess until 2 o'clock p.m.)


The committee met pursuant to taking of recess, Hon. Charles F. Scott in the chair.

The CHAIRMAN. Mr. Neville desires to open his statement this afternoon by calling the attention of the committee to some samples of the grades that have been fixed by the department in order to illustrate what he may have to say about the grades that are in effect in the New York market.

Mr. NEville. So-called quarter grades.

The CHAIRMAN. And the committee will therefore make itself as comfortable as possible wherever it can see the samples.


Mr. NEville. There have been statements by the proponents of the measure that you are considering, and by the people who have used a number of grades deliverable on contract in the New York market which I, as a member of the New York Cotton Exchange and as a merchant handling large quantities of spot cotton, take very

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