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Mr. Thompson. I believe they do. However they base it, tha resultant price is not always the same. The futures may be at i certain figure, and one day they will bid 50 points on for a certain grade and futures may be lower, and in order to get that grade thev may bid 60 points on. That is the base, but not an inflexible b&^

Mr. Lever. That is true; but the future contract price enters largely and almost entirely into the making of the spot price?

Mr. Thompson. No; if you will excuse me, I would not like to U quoted to a statement as broad as that. The supply and deman! really make the price of cotton. Now, the variations in the futun contract may temporarily disturb that; but in a properly regulate: future contract it will come back. Now, they use the future con tract—that is, the quotations in the future market—as the basis foi these bids, because they are able to figure on that basis so that the] can hedge themselves; don't you see?

Mr. Lever. And for the time being, in a given spot market, thi local spot merchant bases the price to the producer upon the futur, price?

Mr. Thompson. Do you mean the man who is buying from tin producer?

Mr. Lever. Yes.

Mr. Thompson. Yes.

Mr. Burleson. He has instructions to buy so many points o: or off?

Mr. Thompson. Yes.

Mr. Lever. We all understand that.

Mr. Thompson. Yes, sir.

Mr. Lever. You made the statement a moment ago that futur trading had a tendency to give stability to prices. Is that a fact?

Mr. Thompson. Properly conducted, it is, sir. I mean by tha that if it were not for future trading whereby the distribution of th crop could be made, we would have much more violent fluctuation up and down. For instance, we know that in the South most of th cotton is sold within a few months. The crop is not marketed as i ought to be; it is marketed precipitately. Now, if there were onl the actual user of cotton, the manufacturer of cotton, to whom th producer could sell, then it stands to reason that when this grea volume of cotton came on the market at this particular time am there was only one limited class of men who bought that cotton, al they would have to do would be to stand aside, and the price o cotton would descend and descend until such prices were reaches as they were willing to go in and buy at, and they would get th cotton at a bargain.

Mr. Lever. If we should ever reach such a condition as that ii the South, when the countrv was filled with warehouses in which th farmers might warehouse their cotton, and the farmer had reacbe such a condition of financial strength as to be able to market hi cotton throughout the entire twelve months of the year instead «i through three months of the year, would you not say that the abc lition of future trading would have the effect of depressing the pric to the producer?

Mr. Thompson. Not particularly, in that direction. If they wer able to cure this defect in the marketing, they, of course, would no need the future contract, so far as that particular defect is concerned but that would not eliminate the necessity for the future contract because the future contract is a part of the system. There are other beneficial features of the future contract that even the proper marketing of cotton would not enable us to do without.

Mr. Lever. As a matter of fact, do not the tremendous and violent fluctuations that we have seen from time to time on the various exchanges of the world, the Liverpool, New Orleans, and New York exchanges, in the future contract have a tendency to upset business and upset prices?

Mr. Thompson. Of course they have; but I think you will find if you consult the record, that those fluctuations were as violent before they had future trading as they have been since.

Mr. Lever. Is it a fact that in commodities in which there are no future tradings there are fluctuations as violent as in commodities in which we have future trading?

Mr. Thompson. I think not.

Mr. Lever. You think not?

Mr. Thompson. I think not; but the basis or level of value that you get for those commodities is lower than the level of values that you get for commodities in which there is future trading. In other words, in those commodities where there is no future trading, where the public can not come in and compete with those particular interests that use those commodities, you do not have fluctuation. The price of a trust-controlled commodity hardly ever fluctuates. It is very steady, but at a low level.

Mr. Lever. Take the case of hay. Are the fluctuations in the price of hay as violent as the fluctuations in the price of cotton?

Mr. Thompson. I could not say, but I think not. I know very little about hay, to tell the truth.

Mr. Lever. You know that hay is one of the great crops of this country? •

Mr. Thompson. Yes; I know it is one of our great crops.

Mr. Lever. In value it is greater than cotton, is it not?

Mr. Thompson. I really do not know. I am not up on the statistics. Do we export hay?

Mr. Lever. I presume so. I do not know in what proportion.

Mr. Thompson. You see, the great proportion of our cotton crop that we export is surplus. The surplus over domestic consumption is what gives cotton a character that other things, like wool, and other things that we do not export but consume ourselves, do not have. That is what gives cotton a different character, and it is governed by somewhat different rules from these other commodities.

Mr. Lever. You mentioned some time ago the evil of excessive speculation, and you spoke of your desire to eliminate that evil as far as possible.

Mr. Thompson. Yes.

Mr. Lever. If the bill we have under consideration looked only to the elimination of excessive or gambling transactions pure and simple, as we feel that they are—we will put it in that language, at least— you would have no objection to that bill, would you?

Mr. Thompson. I would have no objection to that bill provided it did that thing. In other words, I mean this, that if it prohibited what we call or generally understand as rank gambling, I would not have any objection to that; but I would not want to give my assent

but would prevent what tion.

-' to a bill that would not only prevent that, but we call, and what I think is, legitimate speculati

Mr. Lever. Have you read the Scott bill carefully?

Mr. Thompson. Yes; I have.

Mr. Lamb. May I ask you a question right there?

Mr. Thompson. Yes, sir.

Mr. Lamb. What, in your judgment, would be the effect of the enacting of the Scott bill into law upon this system of hedging that you have so ably—if you will permit me to say so—presented here to this committee?

Mr. Thompson. I am not prepared to say, sir. I do not know. I am not a lawyer and I am not familiar with those questions. I could not say. I am afraid, from the reading of the bill, that it would seriously disturb it.

Mr. Lamb. That is what I wanted to find out from you.

Mr. Thompson. Yes, sir.

Mr. Lever. You would not be opposed to any legislation which would prohibit a contract for future delivery in which the deliver}* was not intended to be made at any time?

Mr. Thompson. No. I would say this. I want to make this distinction. A great deal of cotton is bought and sold in a perfectly legitimate and business way and for legitimate and business purposes, where the parties do not intend delivery. They simply sell the contract as a protection. I have, for instance, 100 bales of cotton that there is no market for, and I see that some people are bidding for cotton a price that I am willing to take for my cotton for future delivery. Now, I will sell that contract. Before that contract matures 1 may find some spot man who comes around and offers me a good price for my cotton; it mav be better than the future price for my cotton. I do not want to be debarred from the privilege of selling that spot cotton and closing out my contract, because that is what Itfiave bought the contract for, to assure me that I will get that much for my cotton. I want a contract so that if I wanted to deliver that cotton I could enforce the delivery, and when I did enforce the delivery I would have a clear bill.

Mr. Lever. Then your New Orleans contract, as I understand you,

Jiermits you to enter into a trade in which delivery does not form any actor at all?

Mr. Thompson. No, sir; the rules of the exchange are that there must be an intention on the part of the parties to carry out this contract.

Mr. Lever. To make the delivery?

Mr. Thompson. To make the delivery. It is not, however, essential that the delivery be made.

Mr. Lever. And in practice it is very rarely made?

Mr. Thompson. No, I would not say that. We have in our exchange delivered a good deal of cotton. There has passed through our qualification delivery department this year, I think, 40,000 bales since the 1st of September. That has been actually, or a larger part of that, has been actually delivered on contracts. But practically all of that cotton that has passed through New Orleans this year has been delivered on contracts; not actually on the contract which has been made, you understand. It was covered by a contract; the cotton was in the interior. It was sold under future contract, ami all the way down to market that cotton was covered by that future contract, and it was entirely within the power of the man who had made that contract to deliver that cotton when it came to New Orleans. When that cotton is on the way to New Orleans, he has the samples, and when he finds the man who will take that cotton and ship it out without expense of delivery he lets him take that cotton off his hands at a price, and then he sells his contract, and while there has not been an actual physical delivery of that contract there has in spirit and in truth been a delivery of that contract.

Mr. Lever. As a matter of fact, as an operator on the exchange, if you receive an order from Mr. Smith to buy 100 bales of cotton, do you make any inquiry as to his intent to deliver, or do you assume that?

Mr. Thompson. Now, I will say this, that I am not a future broker.

Mr. Glenny. I am president of the Future Brokers' Association, and I want to say that there can be no contract entered into on the floor of the New Orleans Cotton Exchange that does not contemplate the delivery of cotton. It is specified in our rules that there can be no contract made on the floor of the New Orleans Cotton Exchange that does not contemplate the actual delivery of the cotton, nor can there be any collusion by which we contract and it is not to be delivered. If I buy a contract, I buy a contract which forces me to accept that cotton, and if I sell a contract I sell a contract that forces me to deliver the cotton. Now, with Mr. Smith, to whom I sold it, it cuts no figure. He sells that out to Mr. Jones. But eventually that contract has to be enforced on the floor of the cotton exchange. The actual delivery of every bale of cotton bought on the floor of the cotton exchange can be enforced, and you can make no other contract there than that. And no matter what the intention or the desire of the individuals, or what understanding they arrive at, the rules say specifically that no contract can be entered into on the floor of the New Orleans Cotton Exchange that does not contemplate the receipt or delivery of cotton.

Mr. Lever. Do the operators on the New Orleans Cotton Exchange regard themselves as merchants?

Mr. Thompson. Yes, sir.

Mi Lever. Cotton merchants?

Mr. Thompson. Yes, sir.

Mr. Lever. Is it not a fact that in the conduct of the world's business the merchant is a gentleman who buys at the lowest price and sells at the highest?

Mr. Thompson. What is that, sir?

Mr. Lever. I say, in the conduct of the world's business is not a merchant one who buys a commodity for the lowest price he can get it for and sells it for the highest price he can get for it?

Mr. Thompson. I think that is a rule that applies not only to merchants, but to everybody in every line of business.

Mr. Lever. Yes.

Mr. Thompson. Certainly.

Mr. Lever. How many grades are deliverable upon that contract in New Orleans?

Mr. Thompson. Middling cotton is the basis, and there are 4 grades up and 4 grades down; or rather, there are 4 half grades. We have middling cotton, and above is strict middling, and good middling, and strict good middling. Below the middling grade we have strict low middling, and low middling, and strict good ordinary, and good ordinary.

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Mr. Lever. You have 9 grades. You have 9 grades on your exchange as against 28 grades on the New York exchange?

Mr. Thompson. No; those are the full grades; or the half grades, as you may call them. Now, we deliver those; but if any cottony intermediate, we deliver intermediate grades, and we also deliver cotton that is of a deliverable grade but has some stain or discoloration that in no wise affects its character as deliverable cotton.

Mr. Lever. What I am trying to get at is the number of grades. stained or tinged, or the like of that, half grades or full grades, that you can deliver upon a contract, if I buy 100 bales of cotton on the market.

Mr. Thompson. If you buy 100 bales of cotton on a New Orlean> contract, we can deliver you between the grades of good ordinary and middling fair. There are the nine grades. If a bale of middling for instance, is stained, we can deliver that. If a bale of low middling is stained, we can not deliver that. A bale of low middling that Ltinged, just a little off from the color, we can deliver to you, but w can not deliver you anything lower than low middling unless it is fair colored cotton.

When you go above, if we have strict middling cotton and it is stained or tinged, we can deliver that to you. It is the same with the other grades. If you add them all up

Mr. Lever. That is it; now add them all up.

Mr. Thompson. If you add them all up, it makes quite a number of different kinds of cotton you can deliver on the contract. Wt have also a provision, as far as sand is concerned. A little sand it cotton detracts a little from its value, but not enough, if there is only a small amount of sand, to prevent the cotton from being readily usable. We have a rule that you can deliver sandy cotton on contract provided it does not contain more than 1 per cent of sand, which amount has been found by experience not to militate against the merchantable character of the cotton; and we have scales, and a very definite way by which that percentage can be determined. As I sav. if you take the nine basic grades and then add to those the stains to each one that you can under our contract, and the tinges to each one that you can, and then the sandy to each one that you can, it multiplies the number of apparent grades deliverable, but it does not in fact multiply to any considerable extent, or increase to any considerable extent, the cotton that is deliverable. For instance, if you take a middling bale of cotton and then a stained middling bale of cotton, there would be two grades, as you would figure it; but reallv the stained is middling cotton, which is not quite as good as another kind of middling.

The multiplicity of grades does not injure the contract at all. On the contrary, if you get at the actual, true value of each one of those grades, it helps the contract; because a man then knows, when he takes the cotton on the contract, just what he is going to get. Ii makes it more accurate; provided, of course, that if I deliver that cotton to you, for instance, when you pay me for it you pay me upon the basis of its relative value over and above the base of the contract

Mr. Lever. How is that relative value fixed?

Mr. TnoMPSON. In our exchange the relative value is fixed by the spot quotations.

Mr. Lever. From day to day?

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