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of the adroit efforts of the keepers thereof, for self-protection, to muddy the waters and confuse identities, many persons erroneously and unjustly call by the name of "bucket shop" any place where future trading is conducted, and give the rankest bucket shop the name of "exchange."
The remedy for the bucket-shop evil is simple. The bucket shop is not a part of any system or business; it is a distinct and characteristic institution. It is easily defined and located. A direct law would reach it and pluck it up and cast it out of the State or Nation without injuring, involving, or touching any legitimate interest whatsoever.
Excessive speculation in cotton is the second evil attributed to future trading. It is true that future trading makes possible the injurious speculation complained of, but the relationship between the two is no closer than the relationship between any beneficial privilege and the abuse thereof. It is well enough, and praiseworthy and wise to remove, in so far as we may, temptations to the frailties of mankind; but if we undertake to prevent injurious speculation by destroying all opportunities to speculate, we shall have to begin by closing practically every avenue of human activity and end by anihilating the human race. The test of a reform is in the net result. A legal and beneficial system of business should not be overthrown for the sake of preventing certain persons from practicing an abuse injurious to both the system and themselves. A true reform, which is a discerning reform, acts on this rule. The use of a bad principle is a wrong; the misuse of a good principle is an injustice. The wrong should be punished by destruction, the injustice by correction.
It is not to be denied that even in the legitimate exchanges a great many contracts for the future delivery of cotton are bought and sold for a purely speculative purpose, but in the frenzy oi speculation that has but recently swept the country, this is equally true of all other commodities and things. Speculation rampant is no respecter of commodities or issues. It is well, therefore, to consider whether this particular evil complained of may not be due more to the tendency of the time than to the nature oi the business. Again, before we condemn speculation in entirety, it would be well for us to consider the question as to whether or not there is a distinction between the kinds of speculation, between illegitimate and legitimate speculation, between speculation that is wholly bad and speculation that may be and is beneficial. We believe that there is such a distinction and our conclusion is this: When a man in no wise incapacitated by reason of ignorance, weakness, or lack of means, or disqualified by reason of a position or relation of trust, buys or sells a commodity or thing or its representative, which is an enforceable contract therefor, because he thinks it is cheap or dear, and because he thinks that he can subsequently dispose of his holding at a profit, the speculation is legitimate, not necessarily harmful to the individual and almost necessarily beneficial to the market for the commodity in which he trades. But when a man not so qualified and capacitated as specified, undertakes to speculate, or when any man merely wagers that a certain event or tendency may or may not occur, or if having bought or sold a commodity or thing or a contract therefor, he enters into a conspiracy with others, or uses some accidental power of his own, to depress or advance the price of the commodity or thing beyond its legitimate value, to the hurt of the bona fide holders oi or traders in such commodity, the speculation is illegitimate, hurtful to the individual and to the market in which he trades. Legitimate speculation as here defined is a benefit to the cotton market, in that it supplies a demand for the commodity at a time when the demand for consumption is absent or in abeyance, and thereby aids in carrying the temporary surplus of supply over demand. It is further beneficial in that it brings to the future market a larger supply of both buying and selling contracts, which to that extent facilitates both merchant and manufacturer in making quick and advantageous hedges of his specific contract and of his specific purchases and sales. Illegitimate speculation as here defined is wholly demoralizing and bad. It helps no one and injures everyone and should be destroyed.
The evil of excessive and hurtful speculation is somewhat more difficult to reach than the bucket-shop evil, but it can be reached, and if not destroyed it can be materially lessened. A popular arraignment of speculation in cotton contracts is based upon the charges that men in moderate circumstances have been reduced to poverty and goaded into crime by their losses in speculation; that employees by reason of their losses have been driven to embezzlement and theft; that men in positions of trust have been by reason of losses in cotton speculation or of a desire for gain, tempted into the appropriation of funds belonging to others. We believe that by far the greater number of these disasters proceed from bucket-shop gambling, and that with the complete elimination of the bucket shop, the number of these unhappv incidents would be comparatively small. But, assuming, for the sake of this argument, that this class of speculators do operate in the legitimate exchanges where a hundred-bale contract is the minimum trade permitted, we still declare that thev can be practically eliminated and the problem thereby nearly solved. The result can be largely accomplished by restrictions preventing the broker from executing any order unless the same is accompanied by a cash deposit large enough to be prohibitive to the smaller speculator and restrictive to the larger, and by prohibiting a broker from accepting an order from any employee of any person, firm, corporation, or trust company, unless said order is accompanied by the written consent of such employer.
The third evil to be considered is found in the terms of the future contract itself and in the rules of delivery and settlement thereunder, resulting in an injurious effect upon the market and upon the price of cotton by the delivery of cotton, or tender of deliverv, on such contract and under such rules. A contract giving an undue advantage to either seller or buyer is not only a contaminating element per se, but it also invites and facilitates the formation and the operations of those combinations of speculators which demoralize a market and injure legitimate traders W the sheer force of speculate e activity. Logically this evil should be considered under the head of illegitimate or wrongful speculation, as heretofore defined, but in view of the importance of the principle involved, we give it separate consideration. Such a contract not only fails to perform the legitimate functions of a future contract, but it puts a premium upon illegitimate usage. It not only fails to afford protection to the legitimate trader, but it throws the freebooter of speculation upon his back. It facilitates manipulation and nullifies foresight. A contract that is not fair is a reproach and can not survive. A contract that offers inducements to the speculative seller by giving liim an unfair advantage, or to the speculative buyer by giving an unfair advantage, is contrary to public policy and should be made unlawful, if it is not already unlawful. The unfair contract affords a striking instance of the unjust application of a just principle. But the remedy for this wrong application lies not in depriving the individual of his right to contract, but in protecting him from the injurious operation of an inequitable contract.
The remedy for the evil of the unfair contract is very plain and of easy accomplishment. A law establishing a national standard of classification of the marketable grades of cotton, upon which standard all arbitrations on contract deliveries must be made, prohibiting any contract on which can be delivered unmarketable cotton or useless stuff, or cotton of a value uncertain and not readily ascertainable, and providing that all cotton delivered on contract shall be paid for on the basis of actual differences in the spot value of the grades delivered on the market and at the time of delivery, would effectually and immediately eradicate this evil influence.
Thus it seems plain that the legitimate future contract is in itself entirely legal and honest, and has in the evolution of the cotton trade become a necessary, if not an indispensable, factor in the proper and advantageous marketing and distribution of the cotton crop and the manufactured product. It also seems plain that the future contract, by reason of its protective and auxiliary functions, has become so assimilated by the cotton trade that it can not be eliminated except at the cost of demoralizing a great industry and crippling a great people. It further seems plain that the evils complained oi are not inherent in the system of legitimate contract trading, but merely incident thereto, and can be eliminated therefrom with no hurt to the system itself, but with benefit thereto. The conclusion, therefore, follows that it is the duty of not only our legislators, but of our exchanges and of everyone who has at heart the welfare of the South and of the nation, to vigorously attack and destroy the evil, but no less steadfastly to sustain and encourage the good.
The New Orleans Cotton Exchange defends no evil. Our laws and rules in force at this time represent the best thought of our members aided by the sound suggestions of Mr. Herbert Knox Smith, Commissioner of Corporations, and reinforced by his approval. We have taken counsel not only with the commissioner, but also with leading cotton producers and manufacturers, and our conclusions have been reached under stress of a full appreciation of our duty and obligation, not to any particular interest or faction, but to the cotton trade at large. We, however, are not yet satisfied. We will welcome further investigation and scrutiny, and will pay earnest heed to all reasonable suggestions looking toward the improvement of the cotton contract and the cotton trade; but we are convinced that such improvement will not come through destructive legislation; it will come through constructive endeavor.
It is a momentous issue here discussed. It is not a matter for casual legislation. We are tampering with a great trade system and with the welfare of millions of people. We should be careful in dealing with questions of this great consequence. We should consider deeply the fundamentals of the problem and not be led into essential error by a vindictive assault upon superficial issues. The futixre holds great promise for the American cotton producer and for the American cotton manufacturing trade. We can not afford to take the chance of nullifying this promise by a heedless conflict with immutable economic laws which no Congress can alter or repeal.
Now, Mr. Chairman, I have finished with the formal part oi my talk, and I take pleasure in introducing to the committee the other members of my committee, Mr. Edmund J. Glenny, who is vice-president of the New Orleans Cotton Exchange, and who is very familiar with the new rules and with the warehouse and delivery end of our future contract proposition; Mr. William F. Pinckard, who is the president of the Future Brokers' Association, of New Orleans; and Mr. John F. Clark, who is the chairman of our committee on revision. It is a spot committee entirely. Now, the gentlemen I have named and myself are at your service, and any questions that the committee desire to ask we will be pleased to answer to the best of our ability.
The Chairman. Do any members of the committee wish to ask any questions of Mr. Thompson?
Mr. Lever. I would like to ask him some practical questions, unless some of these gentlemen wish to address the committee on this matter.
The Chairman. I think it would be more satisfactory to interrogate Mr. Thompson now, and let them say anything they may have to say afterwards.
Mr. Lever. Mr. Thompson, what is the membership of the New Orleans Cotton Exchange?
Mr. Thompson. I think it is now something over 400.
Mr. Lever. How many of those men are members of the New York Cotton Exchange?
Mr. Thompson. I could not tell you, Mr. Lever. I really do not know. I have not looked that matter up at all. I do not think that there are a great many. I know we have a good many members, however, who are members of the New York Cotton Exchange.
Mr. Lever. How many members of the Liverpool exchange are members of your exchange also?
Mr. Thompson. I could not tell you that accurately.
Mr. Glenny. I will answer that for you. There are none. The Liverpool exchange does not permit an English-born subject to become a member of this exchange. They have a system of associate membership, which gives simply the privilege of doing business on a smaller commission, but without the benefit of any voice in any legislation or anything tending to the conduct of the exchange.
Mr. Lever. Under that have you the right of conducting business \
Mr. Glenny. Those associate members have no rights except to do business there on a reduced commission. They have no right to enter protests as to the construction of their rules or anything of that kind.
Mr. Lever. Do you happen to know how many members of your exchange are associate members of the Liverpool exchange?
Mr. Glenny. A small percentage, a very small percentage. I could not tell you the exact figures, but only those who do a Liverpool business. The only object in being a mem ber is to do that Liverpool business at a reduced commission.
Mr. Lever. Do you happen to know how many members of your exchange are members of the New York Cotton Exchange?
Mr. Glenny. Not positively. That information could be very easily obtained. I think the New York Cotton Exchange men could probably answer that better than we could.
Mr. Lever. Mr. Neville, can you give us that information for the record?
Mr. Mandelbaum. We have put in evidence the membership of the New York Cotton Exchange, which contains the name of every member of the New Orleans exchange who is a member of the New York exchange.
Mr. Lever. If it is already in the record, that is all right.
Mr. Thompson, you have made the statement that the abolition of future trading would reduce the price of cotton paid to the producer of cotton. Will you elaborate that a little more fully and tell us just how that would happen?
Mr. Thompson. In the first place, as I suggested in my statement, it would narrow the market. One of the most influential factors in creating a good and active demand for cotton is the forward demand that is created—the obligations that spinners and merchants have entered into to use a certain amount of cotton. Now, they are able to do that by reason of the future contract. They are able, as I tried to explain, in this way to do that. The spinner.for instance, will take orders way ahead for goods. That creates a demand on his part for cotton. It makes no difference what the fluctuations in the cotton are, he wants to get that cotton and manufacture it and sell it as the time comes around. When that is done it creates a demand that is waiting for the cotton when it comes; it makes no difference what the price may be at that time, there is a demand for that cotton; and we all know that the extent of the demand regulates the price of the cotton.
Mr. Lever. In other words, the demand for the future contract, as it were, puts the price upon the spot cotton at the time?
Mr. Thompson. Oh, no; I mean this. I mean that the demand for the actual cotton is made possible because the spinner or the merchant can protect himself by executing a future contract.
Mr. Lever. As a matter of fact, is there any appreciable relationship between the price of a future contract and the price of spot cotton in an interior point?
Mr. Thompson. Yes, sir; there ought to be.
Mr. Lever. It is a fact that interior merchants buying spot cotton base their prices to the producer upon quotations of future contracts?
Mr. Thompson. I believe they do.
Mr. Lever. You believe they do?