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forward to attack these bills, and when speeches were made two years ago attacking the exchanges the first document received by Members oi Congress in defense of the New York Cotton Exchange was issued by Latham, Alexander & Co. I read from this defense of the exchange by one of its members:
If there were other exchanges throughout the United States dealing in cotton for future delivery, they would have to look to the controlling market, which is New York, for quotations.
That shows, first, just what I have contended all the time, that the New Orleans Cotton Exchange is completely overshadowed by the colossal New York affair, that it merely trails along in the wake of the New York concern. Now, let us see what else he says:
The price of cotton contracts—
Not spot cotton—but the price of cotton contracts, futures—
in New York oftentimes controls the price of cotton in the whole world, because this city is presumed to know more about the supply than any other, and our operations and dealings are therefore generally followed.
There you have it—the price of futures oftentimes controls the price of spot cotton throughout the world.
The issue is fairly raised, and bearing on it Mr. Parker tells you that futures exercise a controlling influence on spot, that merchants in the South buy spots so many points on or off futures. Mr. Latham sap that that is frequently the practice. Commissioner Smith, in his report, says that futures exercise a psychological influence over—doe? not control absolutely but exercises great influence over—the price of spot cotton, and last we have Latham, Alexander & Co. in this defense of the New York Cotton Exchange, admitting that futures control the price of spots and not spots the price of futures.
Now, gentlemen, I am going to testify myself. Not once, not twice, but many times has this happened. I sell cotton in Waco, Tex., where I believe Mr. Neville has an agent. That is my market place. I do not sell it myself. The man who manages the plantation and is associated with me sells it. I have stood by his shoulder dozens of times and heard him ask the cotton buyer over the phone "What will you give for cotton this morning?" The answer would be, "I can not make you an offer because I have not heard from New York."
Mr. Cocks. Would not they make any price?
Mr. Burleson. Oh, yes; but he knew that we are not fools; that we wanted approximately what the cotton was worth.
Mr. Mandelbaum. You wanted what the cotton was worth?
Mr. Burleson. Yes, we wanted the highest price we could get.
Mr. Mandelbaum. You did not want to sell it for nothing?
Mr. Cocks. It seems to me that would apply to everything on earth.
Mr. Burleson. Then you admit, you concede the proposition, that futures control the price of spots?
Mr. Mandelbaum. So far as you are concerned, yes. You would not sell before you got that quotation.
Mr. Cocks. That is evidently true so far as vou are concerned.
Mr. Burleson. Not once, not twice, but hundreds of times has that happened, and my practice is not different from others. The cotton buyers would sav "We can not give you the price, because we have not heard from the market;" and then when this information would come, we would frequently be told "If you had called us up yesterday, we could have given you so many points more than we can this morning, because the market has declined to that extent."
Mr. Cocks. Would not that have been a stand off, then? What is the difference? If you had sold yesterday, somebody else would have been out.
Mr. Burleson. It sometimes was a stand off to the extent of $2 a bale to me—$2 less, because futures in New York had declined.
Mr. Cocks. But if you had sold yesterday, you would have made $2 a bale.
Mr. Howell. What is to hinder you from taking out contracts with the actual consumer—the mill?
Mr. Burleson. The trade conditions do not permit it.
Mr. Burleson. The bulk of the cotton crop is made by small producers. There are very, very few men who make 100 bales of cotton, and mill owners buy in 100 or 500 bale lots. My colleague, Mr. Beall, represents, as I said a moment ago, the largest cottonproducing county in the world. I should like Mr. Beall to state approximately what per cent of farmers in his county make 100 bales of cotton.
Mr. Beall. I should say not over 5 per cent; perhaps not more than 2 per cent.
Mr. Howell. You failed to state, when vou said that you wanted to hear the price of cotton in New York, at Waco, that it was the price of futures.
Mr. Burleson. Of course, that cotton buyer had instructions to buy within certain limits—so many points off or on the future price.
Mr. Mandelbaum. You wanted to sell, did you not, and you would not sell until you got that price?
Mr. Burleson. I wanted to sell and I wanted to get the best price I could. I must confess my profound astonishment when I heard even an attempt at denial of the proposition, not that futures absolutely controlled spots (because they do not), but that they exercise a controlling influence over the price of spots; and no candid, fair-minded man ought to deny it.
Mr. Beall. On what was that bid on your cotton based? Mr. Burleson. It was based upon the price of future contracts in New York. There is no doubt about it that large spot dealers in New York and elsewhere send out instructions. I am able to state it. I have seen such instructions time and time again—instructions to buy cotton at so many points on or off futures.
Mr. Cocks. Suppose we admit that; I understand that. That is simple and plain. What I can not understand is how you are hurt any. Suppose spots are the basis, how are you hurt?
Mr. Burleson. Under the operation of the rules of the New York Cotton Exchange one large operator on the exchange can depress the price of futures. I think I have shown it here. If I have not shown that, then I do not think that any proposition is susceptible of demonstration. I have shown it by Commissioner Smith's report, by spinners, by cotton merchants, and by the confessions of the members of the exchange.
Mr. Cocks. Probably you have, but my mental capacity has not been able to grasp it thoroughly. It seems to me you are only on 36387—A A B—vol 2—10 27
all fours with the man who has a carload of cattle and he calls up on the telephone and wants to know what the market is, and he ships to Kansas City and the market has dropped 2 or 3 cents while the cattle are on the way, and he loses that much. What is the difference?
Mr. Burleson. One is operating in the actual cattle, and the price is offered for actual cattle by the man who is going to buy these cattle from him. In the other case the man who is selling the cotton is compelled to take a price for his spot cotton, for his actual cotton that is influenced by the price of a future contract which has been fixed in New York, which has been manipulated, which may have been hammered down by the very man offering to buy the spot cotton.
Mr. Cocks. The shipper of the cattle believes that the price of his cattle is fixed by the beef trust.
Mr. Burleson. Oh, well. I think there is no analogy between the two cases.
Mr. Cocks. I wanted to know what you think would happen if you had not a cotton exchange?
Mr. Burleson. Then prices would be regulated by the law of supply and demand.
Mr. Cocks. Why does not the law of supply and demand regulate it now?
Mr. Burleson. Because of these unnatural conditions which are brought about under the rules of the cotton exchanges dealing in futures.
Mr. Cocks. Why does not the same thing happen in regard to cattle?
Mr. Burleson. Because they have no exchange on which cattle can be gambled in, as they gamble in cotton.
Mr. Cocks. But the trust affects that in the same way. Would it not be possible for the same thing to exist in the cotton market?
Mr. Burleson. There is a different economic principle involved there, entirely. With the permission of the chairman, I will now suspend until to-morrow morning.
(At 5.30 o'clock p. m. the committee adjourned until to-morrow. Friday, February 18, 1910, at 10.30 o'clock a. m.)
Committee On Agriculture,
Friday, February 18, 1910.
The committee met at 10.30 o'clock a. m., Hon. Charles F. Scoti (chairman) presiding.
The Chairman. It was the expectation of the committee to take up this morning that phase of the pending bills relating particularly to the grain exchanges, and it is still our expectation to do that before the morning expires. But Representative Burleson, of Texas, who was addressing the committee yesterday, was unable to finish within the time allowed and it was agreed, before adjournment on yesterday, that he should proceed this morning for thirty minutes, and in order that he may have all of that time in which to present the matters which he regards of importance, the Chair will ask that he be not interrupted until he has concluded his statement. I will ask Mr. Burleson to proceed. He is to be called down in thirty minutes. TESTIMONY OF HON. A. S. BURLESON—Continued.
Mr. Burleson. Mr. Chairman and gentlemen of the committee, it is my purpose to confine myself this morning, in the main, to a discussion of two phases of the question now before you. First, as to the necessity for the existence of these exchanges for hedging purposes; second, what will be the result upon the cotton trade if we eliminate the speculative feature from these exchanges. But before I enter upon a discussion of those two questions, just for a minute or two, I want to answer one or two questions that were asked me yesterday, which, by reason of interruptions and diversions, I did not answer. One question was asked by the gentleman from Iowa, Mr. Haugen, and it was with reference to whether cotton carried in the reserve stock at New York was spinable or usuable cotton, and, if so, when one purchased that cotton where was the serious hurt to him?
Now, gentlemen, just in a word that can be answered. It has been shown here that during the entire period of the crop season of 1906 and 1907, and at frequent intervals since that time, there has been a lack of parity between the price of future contracts and spot cotton amounting sometimes from 80 to 196 points. This means from $4 to $10 a bale less for futures on the New York Cotton Exchange than the market price for spot cotton in the South. Now, if it were practicable for spinners of the East to go to New York and secure the actual cotton on these contracts wouldn't they jump at the chance to save that $4 to $10 a bale and, in addition, the freight charge from the South, which they could do if by going there they could get the cotton they want? Why, you know they would. And yet they do not do it because it is unsafe and dangerous for them to attempt an acceptance of the cotton tenderable on contract. Take the case of Representative Lovering, who recently died, who, with his brother, spun 200,000 bales a year; think a moment what a saving it would have been to him if he could have gone to New York and bought his cotton through the New York Cotton Exchange; by saving $4 a bale his savings would reach $800,000 or more each year, an amount probably greater than his entire profits for the year. I think this answers the question of the gentleman from Iowa. Representative Cocks, of New York, also said that he could not understand why, if there was an overvaluation of the high grades deliverable on the future contract, and the prices of spots were being influenced by reason of that overvaluation of the high grades, it would not be beneficial to the people of the South or the producers of cotton rather than hurtful to them. It should be kept in mind that the grades overvalued are deliverable by the seller, and the buyer if he accepts delivery must take these grades on the basis of their overvaluation.
Now, gentlemen, I can illustrate the effect of this. I went by Woodward & Lothrop's this morning and bought some cotton goods. A spinner is controlled in the character of cotton he buys by the use he intends to put it to; by the character of cotton goods he intends to manufacture. I hold in my hand two samples of cotton goods made from the very lowest grades of cotton, one worth 4 cents a yard, the other, I think, worth about 10 or 12 cents a yard [exhibiting pieces of cloth]. These goods are made from the low grades of cotton; the spinners who make this character of stuff do not want the higher grades of cotton. It would be a useless expense to them to purchase the higher grades and use them. Now, suppose a spinner wanted low-grade cotton and the high grades of cotton had been overvalued by the revision committee of the New York Cotton Exchange, and he demanded delivery on a future contract (and, as Mr. Parker says, and as other spinners have said to you, the seller has the option and always gives you what you do not want), and they should give to this spinner who uses a low grade of cotton for the purpose of making this cheap cloth—they can manufacture a suit of clothes out of such cotton for a dollar and a half, an entire suit of clothes—and they tender to this spinner who manufactures this sort of material, the highest grade of cotton, which costs from $8 to $10 a bale more than the cotton which enters into the manufacture of this cheap cloth, he would promptly refuse to accept delivery and sell his contract at a loss. Can't you see how dangerous it would be for him to go to the exchange for the purpose of acquiring his stock of cotton, because if he acquired high-grade cotton to manufacture into this character of stuff he would suffer a great loss. If he accepts delivery, it might cost him $10 a bale more than he would pay if he bought the kind of cotton suitable for his purpose, and consequently he runs away from the notice of delivery; he promptly sells out his contract.
Keep in mind at all times this proposition, that one can not buy a future contract and expect to receive delivery of a particular grade of cotton. The contract sold is a basis contract, and the seller may deliver 15 or 20 or even 28 different grades of cotton on it, and one may expect an excess of the particular grades he can not use and does not want. A spinner who manufactures this cloth [exhibiting same]. a fine grade of cotton cloth, could not use the grade of cotton used to make this cheap cloth. An entire suit of clothes out of this cheap cloth can be bought for $1.50, whereas the cloth (8 yards) for a woman's suit from this material would cost $16.
Mr. Mandelbaum. Do you think you could make a suit out of that cloth for $1.50?
Mr. Burleson. I bought a coat and pair of trousers for $1.50, in order to use while fishing, and they were made of this cheap material. Now, suppose a spinner who manufactures this kind of goods, the finest cotton cloth [exhibiting piece of goods to committee], bought a future contract and there should happen to be a cotton crop that was low in grade for the year, and he should go to the New York Cotton Exchange and demand delivery under his contract and should be tendered and receive the kind of cotton that goes into the manufacture of this cheapest of cotton goods [exhibiting cloth to committee], can't you see that it would be as worthless to him as wheat and straw'. It would represent, especially if it were overvalued, as it always is when the crop is of low grade, as I showed you on yesterday, nearly a total loss to him. Thus you see that the tender of high grades may be ruinous to one spinner and the tender of low grades ruinous to another.
Yesterday Mr. Mandelbaum propounded a query to me. When I was discussing "spook" cotton, he asked, "If A sells a horse to B. and B sells the same horse to C, and C to D and D to E and E to F, would four of these horses be 'spook' horses? Do you recall that when Mr. Marsh was addressing the committee he said the intricacies