of the transactions upon the New York Exchange were such that it was difficult for the lay mind to comprehend them? I realize that the complexities of these exchange transactions might confuse some people, but I did not think they were such that even Mr. Mandelbaum would fail to comprehend them. Mr. Chairman, the horse illustration is not the character of transaction that takes place on the New York Cotton Exchange; they do not there sell a hundred bales of cotton to A and A to B and so on; they sell a future contract for the delivery of cotton, a different proposition altogether, a contract and a basis contract at that for the delivery of cotton. Now, I will also use a horse illustration of the exchange type.

Suppose a man who had a horse to sell heard that there was a horse exchange in the town and should carry his horse to the exchange to dispose of him. Arriving there he finds that on this exchange they are not selling horses but future contracts for the delivery of horses, and that these transactions were going to control the price he was to receive for his horse. Suppose he should see a future contract for the delivery of a horse sold for a given price, then another future contract for a horse at a lower price, and then another at a higher price, and somebody standing by, a member of the exchange, should say to him as these contracts were being sold and bought: "Now, the price of your horse has gone down, now it has gone up." And if you asked why, should answer, "Because these sale contracts for the delivery of horses that are taking place, actual contracts, where there is an expectation that delivery will take place, indicate the market value of your horse, in fact will control the price you are to receive for him. When he saw these transactions going on and on and on would it be surprising if he finally asked, "Where are all these horses? I don't see any horses that are being traded in under these contracts; where are the horses? I have seen dozens of sales, I have seen hundreds of contracts for horses sold, but I have not seen a horse." Would you blame him if he reached the conclusion that they were phantom horses that were being dealt in? Why, of course, you would not. Neither would you blame him if he objected to having the market price of his horse influenced or controlled by these transactions.

My friend Mr. Mandelbaum has become so involved in the complexities of the situation that he loses sight of the real transactions which take place on the cotton exchange. Keep in mind the fact that it is future contracts for the delivery of cotton that are being bought and sold on this exchange and not real cotton that is there being bought and sold. Remember, also, that these future contracts for the delivery of cotton are controlled by the law of supply and demand, just exactly as cotton is controlled by the law of supply and demand. If there is an excess of offers of the future contracts for the delivery of cotton, the price of contracts or futures goes down; if there is a scarcity of offers of contracts, then the price of futures goes up. By an excess of offers to sell contracts a combination may force a decline in futures at its will.

I address myself now to the hedging proposition. Mr. Chairman, the chief defense made, or the principal justification for the continued existence of the New York Cotton Exchange, is that it affords a protection to the spinner or a protection to the cotton merchant who sells the spinner his raw material when goods are being sold in advance of their manufacture by the spinner.

Now, what is it that makes a safe hedge? It has been made plain to you that where violent fluctuation takes place in the price of futures and the parity between the price of futures and the price of spots is not maintained, that when the margin becomes too wide an attempt at hedging becomes an added risk rather than a protection. For a future contract to be a protection as a hedge there must be maintained a certain parity, a uniform parity between the price of futures and the price of spots. Now, is this parity being maintained, or has it been for years, so as to afford a safe hedge? Let me read from Commissioner Smith's report, page 155, Volume I:

From the table it will be seen that in the period from 1880 to 1888, during which the commercial difference principle was employed by the New York Cotton Exchange, fluctuations in the margin between the price of spot cotton and the price of futures were confined to moderate limits. It was reasonably safe, then, during that period, for the merchant or spinner to go to the New York Cotton Exchange for the purpose of buying a contract hedge to relieve himself of the risk.

Now, it was about this time that the through bill of lading came into use and the exchange changed its practice of fixing differences, and what happened? I read further from the report:

In 1888 the New York Cotton Exchange, as already stated, abandoned its policy of frequent revisions and provided that its revision committee should meet only nine times a year (or monthly from September to April and again in June).

That was once a month during the active cotton season. Now, note the immediate effect of that change upon the price of contracts. I read further from Commissioner Smith's report:

It is worth noting that this change was almost immediately accompanied by a marked disturbance of the parity between the spot and the contract price.

They were making revisions of differences during that time once a month, nine times during the season, and conditions were growing worse. Finally, New York ceased to be a spot cotton market, and in 1897 the exchange abandoned the practice of fixing these differences once a month during the active cotton season and entered upon the policy of fixing the differences once a year. When first organized and until 1888, differences in value between grades were, by the rules of the exchange, fixed daily-kept in line with commercial differencesand the parity between the price of futures and spots was closely maintained. In 1888 the exchange changed its rules and differences were fixed once a month, being at such times brought in line with the commercial differences. This change brought about a marked disturbance of the parity between spots and futures. This practice continued until 1897 when again the exchange changed its rules and entered upon the policy of fixing differences practically only once a year, and that, too, at a time when the character of the crop could not possibly be known. The result could not be other than it is-the parity between the prices of futures and spots has, for commercial purposes, been completely destroyed.

Speaking of this last change Commissioner Smith in his report had this to say:

In the same year, 1897, the New York Cotton Exchange abandoned monthly meetings and provided that it 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. Since that period what has been the common result, or the continuous result, if I may so express it, of this system of fixed differences? I will read you further from this report: From September, 1899, down to the present time, however, the margin

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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."

If this margin was maintained at a parity, even if it was slightly out of line with the commercial value of cotton-spot cotton in the South-merchants and spinners could take that into account, make allowance for it and protect themselves; but, gentlemen, when cotton fluctuates in this wise-I read from their own statistics for 1907:

Taking each month as I call them, from the time deliveries for that month were dealt in until the close of that month, the price fluctuated as follows: For September, from 11.18 cents per pound to 8.58. Remember, now, that this price is for the same grade of cotton. For October, from 11.30 cents to 8.69 cents per pound; November, from 11.70 to 8.85; December, 11.30 to 8.90; January, 11.31 to 8.99; February, 11.40 to 9.06; March, 11.48 to 9.02; and thus throughout the year, for July the highest being 13 cents and the lowest 9.35 cents per pound. Thus you see that these prices are either manipulated or the unrestrained speculation keeps the market price shifting round like a howling dervish.

Frequently since then, during certain months, futures have fluctuated violently, as much as 3 cents within a very short period. Recently the price of future contracts has fluctuated as much as 3 cents a pound in the month, and nearly always there is a fluctuation of from 2 to 3 cents in any future month for the delivery of cotton. When these violent fluctuations take place, pray tell me what becomes of this margin of safety which affords protection to merchant and spinner? Where is it found? As a matter of fact it is often so wide there is frequently such a wide variance between the price of future contracts and the price of spots, that no merchant and no spinner can, with safety, rely upon it as a hedge. It has ceased to be a protection either to the merchant or to the spinner, as was asserted here by Mr. Parker, and has, as a matter of fact, become an additional menace and danger. Now, let us see what Commissioner Smith says on that point. Page 157, speaking of this irregularity in the margin, he says: "This means that merchants using the market for hedging purposes have been more or less constantly subjected to a very serious risk.”

What is the purpose of hedging? The purpose of hedging is to avoid risk, to escape the dangers occasioned by fluctuation in the price of cotton. And, by the way, I will say here that, in my deliberate judgment, these dangers, these fluctuations in prices are directly attributable to the operations of these exchanges. They bring about the very condition which makes it necessary for the merchant and the spinner to fly to them in a vain effort to protect themselves by hedging. A careful reading of this report will drive conviction home to the mind of any candid man, that fluctuations in the price of futures are directly attributable to the "subsidiary element" operating on the New York Cotton Exchange; that it is these violent fluctuations of from 2 to 3 cents a pound in the price of futures in each and every month, that makes it necessary for the cotton spinner and the cotton merchant to seek protection for themselves against it. Eliminate this danger by prohibiting these gambling contracts-and that is the sole purpose of the Scott bill-and you make it impossible for these violent fluctuations to be brought about. I did not read all that Commissioner Smith said on this subject.

Whereas, as so frequently emphasized, the purpose of hedging is to reduce or eliminate risk. It means, too, that the calulcations of speculators as to the movements of the contract price itself have been rendered more difficult and risks consequently increased.

Thus it is made plain that instead of hedging facilities being afforded, the New York Cotton Exchange or any other exchange, where the margin between the price of future contracts and the price of spots is constantly disturbed, and becomes so wide as to destroy the parity between them, instead of affording relief to the spinner or affording a safeguard for the merchant by eliminating risk, really increases such risk. Now, right on that point I want to read this morning excerpts from letters by spinners to show the views held by them on the protection afforded by a hedge on these exchanges.

I first submit a statement by Mr. A. W. Emery, of the Evansville Cotton Manufacturing Company of Indiana:

I believe the bill which you have introduced is just and right, and so far as our observation has been we consider the matter of dealing in futures in cotton to be detrimental to the manufacturer in every respect, as it is a form of gambling which misrepresents facts, and is harmful to anyone who is in any way connected with such doubtful methods of business.

Evidently this spinner would not attempt a hedge. I next read from Mr. T. L. Wainright, president of the Stonewall Cotton Mills of Mississippi:

Now, touching on the future business, will say that I have frequently had occasion to buy so-called futures or future contract cotton to cover actual future sales of cotton goods, but I am very sorry to have to say that we have always come out, with very few minor exceptions, with either the hot end of the poker or short end of the string in our hands. The methods of the New York Cotton Exchange are an outrage on the public. They do not afford the protection that is expected and held out.

Again:

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It is argued that if our American exchanges are suppressed or closed up that we transfer the market quotations, or, I should say, prices to Liverpool. This I deny.

Now, down to the real practical facts, which will be attested by every sensible cotton-mill manager. The trouble is, we and many others have recently and heretofore many times sold large quantities of cotton goods at profitable prices and have bought the spot cotton or futures as a hedge, then the gamblers get into the deal and depress the cotton markets from 1 to 3 or 4 cents per pound; then down goes cotton goods, the purchasers cancel their orders and leave the cotton mills with the high price future or spot cotton on their hands and their orders for the goods all canceled. We are in this fix to-day, and with a loss from this very cause on our hands that will amount to many thousands of dollars. I have gone through this experience before. The dethroned cotton kings, and many others of their stripe and class, are absolutely to blame for these terrible conditions. So, I must repeat, from a common sense and practical experience of a third of a century I am unalterably opposed to the bucket shop, and secondly to the swindling and unjust methods followed by the New York cotton exchanges, and, thirdly, to the general practice of the so-called cotton exchanges as relates to future cotton transactions. If the whole future business were swept off the map of cotton business I believe everybody would be far better off.

He says further that the bill under consideration covers his views and ideas exactly.

Now, one from Mr. E. S. Hobbs, of the Aurora Cotton Mills, of Illinois:

In the twenty-four years' operation of these mills, during which time I have been connected with the active management, we have not made use of the future markets as a means of protection against unforeseen fluctuations. We are opposed to the cotton exchanges as now conducted, because they serve no legitimate purposes of commerce. The statement that they do seems plausible to the unthinking mind, but really has no foundation in fact. The producer and consumer of cotton want stability of prices, the speculators and gamblers want rapid and violent fluctuations, and use all sorts of means honorable and otherwise to produce them. The inevitable result is that the honest producer and consumer are defrauded.

I have many such letters, but will content myself with submitting only one more. It is from Thomas Henry & Sons, of Philadelphia, Pa. In no uncertain terms do they speak:

We think if the present cotton exchanges could be wiped out of existence the people or concerns engaged in legitimate business of cotton manufacturing would be far better off in every particular than they are at present.

Owing to the enormous rises and falls that have taken place in the cotton market quotations for the past few years it is almost impossible to do business on a legitimate basis; but if, as above stated, the exchanges were out of existence, and the old rule made to apply that is, to make the price of cotton according to the legitimate demand and supply-it would result to the mutual advantage of the producer and the consumer, meaning the cotton-mill man as well, and the ultimate extinction of the gambling element who use the cotton market as a dummy for their gain.

Again they say:

We sincerely trust you will be able to have laws passed through both Houses to overcome the gross evils of the present cotton market, which have existed for the past ten years, and thereby receive the everlasting gratitude of the law-abiding people who have millions of dollars invested in the manufacture of cotton fabrics.

In a letter from the same, of another date, they have this to say: We as manufacturers to-day can not use anything in grade lower than good middling in our class of manufacture, and we question seriously whether at this moment there are 700 bales of good cotton in New York market.

Our weekly consumption of cotton is on the average 100 bales of strict good middling. In our opinion, as we believe we stated in our last letter, we feel if there is any law existing permitting trading and selling future contracts (on paper), it should be wiped out for the benefit of the country at large.

You will note that this mill takes no grade of cotton lower than good middling, and that their weekly consumption calls on an average for 100 bales of strict good middling cotton.

I hold in my hand one of the warehouse certificates of exchange, which I submit:

NEW YORK COTTON EXCHANGE.

Grades of cotton in New York warehouses on September 30, 1907, inspected, classed, certificated, and grade guaranteed by the New York Cotton Exchange (with differences on or off Middling):