bought so many bales of cotton are bought, without regard to the value of the cotton, the grade of the cotton, or the condition of the cotton. Middling grade is the basis in classifying cotton. When a buyer that really wants cotton buys, he may have to accept a grade that he can not use. That makes it an undesirable place to call for deliveries, so he seldom makes the demand. In the New York exchange another obstacle has been raised that operates against the buyer; by setting, for ten months ahead or thereabouts, a certain difference in price between different grades. The relative values of these different grades may be quite different from the commercial values of these different grades at certain seasons of the year, owing to weather conditions during the gathering season which determine, to a great extent, the amount of each grade that there is to market for the season. All of these things make it difficult for the purchaser to get the kind of cotton he desires on a future contract, deliverable through an exchange, so most of the cotton that is bought for future delivery is bought from cotton dealers outside of the exchange. I refer to those who go on the exchange and hedge to cover actual cotton which they contemplate buying, but which they have sold to be delivered at a specific price. These are either spinners or cotton merchants.

Mr. Chairman, it does not make any difference whether we take the spinner or the cotton merchant as an illustration, so we will take a cotton merchant who is an exporter. He goes to a mill, we will say, on the 9th day of February, and he makes a contract to deliver to that mill next October 1,000 bales of cotton at, say, 14 cents. He does not positively know that cotton will be 14 cents or above 14 cents or below 14 cents, so that he takes chances on having to pay more for that cotton than he has promised to deliver it for, unless he is allowed to hedge, as it is called; so that he turns around and buys the same number of bales on the exchange to be delivered at the same time that he is to deliver to the spinner. This is done with an understanding in his own mind that the relative prices of futures and spots will remain the same, or approximately so, at least; so that if cotton goes up and this exporter has to pay more for it than he has promised to deliver it for, he wins as much on his hedge as he loses on the real cotton that he handles. Mr. Chairman, that cotton that he actually buys from the American producer through his agents and actually delivers to the mill is not carried through the exchange; it is a separate, independent transaction. The delivery of that actual cotton from the producer to the spinner is a contract that is carried out solely upon its own merits, and this outside issue of this exporter hedging to cover those sales is an independent transaction. They are not linked together, except to the extent that the same man is concerned in both transactions. The books of the exchange carry no record of the actual cotton that is bought and actually delivered. The exchange only has upon its books the record of the hedging that was done by the exporter.

Now, he puts up a margin, and the man against whom his cotton is placed in the exchange by the broker has to put up a margin. The margins vary from $1 a bale up to as high as $10, I have been told, that are required. Those margins are merely required because the fluctuation in price may be such that it will demand more than $1 a bale to pay the difference in prices that the cotton sells for on the date

of delivery and the date that the contract was made. The man against whose account, or margin, or hedge, or the stake that he puts up through a broker on the exchange-the man whose account this exporter is placed against-is nearly always a speculator. He is not apt to be another mill man or another exporter; he is simply a speculator who is willing to take changes on the rise and fall of the market, so that he is not in the market as a hedger. Half of the project is a speculative project, and the other is hedging pure and simple, in nearly all of those cases where hedging is carried on. So that if investing in futures simply as a speculation is gambling, as it is called, then half of almost every proposition of this kind is gambling, and so far as the morals of it are concerned we see no differenec whatever in a hedging transaction and in a purely speculative or gambling transaction in the rise and fall of prices. Mr. Chairman, this exporter will perhaps think that he ought to be allowed this privilege, as it will enable him to make contracts many months ahead to deliver cotton at certain prices, when otherwise he would not be willing to risk the rise in the price of cotton; so that hedges are made with the view that spot cotton may go up, and the hedge is made against the possible loss that would occur in that case; and we would ask, from the standpoint of statesmanship, is it the duty of any class of citizens anywhere, or scattered over the country, to furnish the loss that this business man happens to sustain incidentally in the transactions that he is carrying out? Is anybody under obligation to sustain that loss for him any more than some one is under obligation to sustain the loss of the farmer when he has to take chances with the elements in producing a crop and then take chances with the fluctuation of prices in getting the price for what he has produced?

We see no cause why a system should be tolerated on the basis that it furnishes protection for a certain class of citizens when that protection must necessarily be at the expense and absolute loss, dollar for dollar, upon the part of some other citizen who is just as important as he is; so we see no justification of hedging, if it is based upon that one claim alone. Besides, there are so many other things that are of as general use almost, the volume of business in which is enormous, even greater than in cotton, that are handled year by year, upon which there is no speculation in futures. There are no futures on wool, I understand, and that enters into almost every use that cotton does. If there is no exchange or future dealing on wool, why should you not carry on the business of handling cotton without future dealings? There is none on hay, there is none on iron, there is none on coal, and there is none on an enormous amount of as important products that require as much ingenuity, as much business sagacity, to conduct business as it does to handle cotton, and we do not see why this special article should be subject to it, nor do we think that it should be subject to it any more than these others. There are no futures on farm machinery, that helps the farmer to produce everything he raises, and farm machinery is made years before it is sold, often. A manufacturer may produce a machine five years before it is sold. Those manufacturers do not hedge in order to be able to know how many machines to make.

Mr. Chairman, it is sometimes argued that hedging is a species of insurance, and that it is just as legitimate as taking out fire insurance or life insurance. I will call your attention to the summary of the

report of the Commissioner of Corporations on cotton exchanges, by Mr. Herbert Knox Smith, on page 6, at the top of the page, in which he uses the following language:

Contrary to long-established theory, it has thus lately been urged that hedging is a form of insurance, a "division" of risks. Though often, for convenience, hedging is referred to as "insurance," it is not insurance, nor is it a "division" of loss. Insurance is indemnity for actual destruction of property. There is no destruction of property in changes of cotton values. Loss on one side is balanced by gain on the other side. Hedging is an entire transfer or elimination of a speculative risk; that risk is never 'distributed," as in insurance. If the hedging function fails, an entire class of hedgers on one side of the market must suffer to the full amount.

Without elaborating that thought further, I think that statement is clear and covers that point.

If the hedging business was confined to the actual number of bales of cotton raised and sold, I doubt if it would have attracted such widespread attention. As only a certain part of each cotton crop is actually covered by hedges by those who handle the spot cotton, it follows that only that per cent of each year's crop can be legitimately hedged, and this would limit each year's options to something like four or five million bales, or perhaps six million bales, and at the furthest extent it could not exceed the number of bales that were produced in a year, and it seems that the most reliable figures that we can obtain show that 100,000,000 bales are bought and sold on the exchanges of this country every year; so that they can scarcely be called actual cotton exchanges, but are more option exchanges than cotton exchanges.

It has occurred to me in the discussions and talks with gentlemen who are interested in this subject on the opposite side, that almost invariably they leave out any consideration whatever of the welfare of those who lose by investing in futures, and we wish that point to be emphasized, that every time a spinner or exporter or cotton dealer of any kind is saved from loss by this method, somebody has sustained that loss, and it is an absolute loss on his part; he gets no equivalent, but loses the margin that he staked against the margin staked by the spinner or the exporter or the cotton dealer; and we would like to know in what school of ethics, philosophy, or morals is one class of citizens under obligation to sustain the losses in business of another class. We wish to look at this from the standpoint of the greatest good to the greatest number, I repeat. We are not simply claiming that it would put money in the pockets of any particular citizens, and for that reason we would want the law passed to carry out the purposes for which we are contending, and we hope that that is the viewpoint of the committee. We will leave it with the committee and the minds of the people generally as to what class or category this purely speculative feature falls in, whether it is legitimate or illegitimate, whether it is gambling pure and simple, or whether it is a species of business which modern developments have necessitated. We have our own opinions, and we grant to every other his. The word "legitimate" has more than one meaning, perhaps. Anything is legitimate in a legal sense that is tolerated by law. In another sense, only those things are legitimate that are in keeping with ethics and principles of morals. We see no distinction in the methods pursued in the machinery that is operated between hedging and pure gambling on the exchange. The only difference is that the individuals who do the one are also actual traders in cotton, while the

others are not. The buyer is called a bull and the seller is called a bear. The bull is the man who buys to get in and sells to get out, while the bear is a man who sells to get in and buys to get out or forfeits his margin and gets out the best way he can. Mr. Chairman, it is not always the case that even a purchase of futures on the exchange is a protection to the cotton dealer. The relative position of the spot and future markets must remain approximately the same for it to be an adequate protection. If they converge or diverge, it changes the feature altogether. Sometimes the man who has hedged can actually lose both on his spot deals and on his future deals. If he contracts to deliver cotton at a certain time and at a certain price and the price of spot cotton goes up and he has to pay an advanced price and at the same time futures go down, then he loses on both. Those things do not occur very often, but such things have happened. It has been stated that it enables those who are dealing in wheat or cotton to pay the producer more than they could possibly pay or would be willing to risk if they could not hedge. Mr. Chairman, all we want is whatever follows the untrammeled operations of the law of supply and demand. All we would ask is to give the normal operation of the law of supply and demand full sway. Let that help who it will or be to the detriment of who it will, it is justice. That is honesty, that is equity, and we think to demand more is wrong, and we think to be satisfied with less is cowardice. We see no excuse for anyone, even though he be a farmer, wanting the hedging business to go on, if it puts money in his pocket at the expense of somebody else who gets no equivalent. We want nothing but equity, if we know ourselves, and we would not for one instant advocate the continuance of this system if we thought it put money in our pockets by robbing somebody else of that additional price that we might obtain. You can not make that too positive on our side. We are perfectly willing to take the results, the consequences, of abolishing these futures, and the vague solicitude that may be offered by our friends on the other side will not be appreciated, if they think that they are simply in the business for our benefit. Everybody is a consumer, and everybody ought to be a producer, if he is able. He is either one or the other, or a parasite, and to unload a loss upon victims is wrong, to unload a loss upon those who are victimized by having a temptation held up that here is a chance to make money, and then to get them into the game and freeze them out, we say is not based upon good political economy, and we do not want it to continue, though perhaps once and a while incidentally even a producer might get some of the swill.

In connection with this question of prices, it seems that the people of the United States are very much alarmed over the recent inflation of prices, and I would like to just call your attention to one little fact for the sake of impressing one point. Suppose cotton is selling at 10 cents a pound and then jumps to 15 cents a pound. The average dollar cotton shirt weighs 9 ounces, but we will just say, for the sake of making the illustration simple, that it weighs a pound, 16 ounces. Then, how much would that shirt be worth which is now worth a dollar at 10 cents when cotton goes to 15 cents? How much rise in the price of that shirt would it cause? It might be thought at first flash that it would make it worth $1.50, but the price of the raw material has only increased 5 cents a pound, and if there is a pound

in the shirt the shirt that sold for $1 when cotton was at 10 cents a pound would sell for $1.05 when cotton was 15 cents a pound. It only adds 5 cents to the value of the pound. It does not take one bit longer to spin it or one bit longer to sell it or one bit more labor to manufacture it into a shirt, and the difference in the price of the raw material will only affect the value of it to the very extent of the rise in the price of the raw material.

Mr. COLE. What is the practical effect of that? Will not the price of that shirt on the market be greatly increased above 5 cents? Mr. BROOKS. It will not necessarily so.

Mr. COLE. Not necessarily so, unless somebody wants to add more profit than he has been getting. Is it not a fact that they take advantage of that to about double the price of the shirt?

Mr. BROOKS. People take advantage of almost everything they can make money out of; but that does not at all change the facts as I have stated them.

Mr. RUCKER. I think there is no question about that being true, though; we have seen that done in certain tariff matters.

Mr. COLE. Yes; they lower the tariff and increase the price of the article.

Mr. BROOKS. Mr. Chairman, I make the point of order that we are not discussing the tariff.

The CHAIRMAN. I think the point is well taken.

Mr. BROOKS. The consumers of the world, taking the approximate figures, which of course is all that anybody can get the consumers of cotton goods throughout the world, pay as much every year for the finished products of cotton as there is of every kind of money in the United States to-day. Take all of our different kinds of money, and the amount of money paid for the finished products of cotton goods every year in the world equals that. So that a rise of price is not levying a tax merely upon the consumers of the United States, but on the entire inhabitable globe.

Mr. Chairman, let us come to some of what we consider to be evidences of the positive evils of the future-dealing business. In the first place, it gives instability of price. It is sometimes claimed that it acts as a balance wheel to prices, tends to hold them level, that it is the governor of prices; but we think that it has the opposite effect, that it tends to cause prices to fluctuate, that it tends to destroy stability of prices. In the first place, it could not be otherwise from the simple fact that it would not exist without fluctuation. Does anybody suppose that anyone would ever buy or sell a future if they absolutely, positively knew that the price would always remain exactly the same thing? Why, of course they would not. They deal in futures because they know that the price is going to fluctuate. Well, then, the exchange would not so much as exist if it was not for fluctuations. Do you suppose that an institution would allow fluctuations to cease when it meant the destruction of that institution itself if it was in the power of that institution to cause fluctuations? All of the ninety-odd per cent of the transactions through exchanges that do not carry with them the delivery of actual commodities and serve that function in the channels of trade are brought about by the certainty that there will be fluctuation in the market. For every winner there must be a loser, and the disposition of the human family to take risks in games of chance is so strong that it is a temptation