It is the same way with cotton. You sell a contract, and that contract is put on the market. When I get rid of it, I offer to sell that contract, and somebody else may buy it; so that you can not say that the number of original sales is represented by the number of bales that this, that, and the other man offers, because each man may be simply offering a check, in other words, that has been issued against particular cotton.

That is the way in the whole cotton crop. You see, a bale of cotton or 100 bales of cotton passes through three or four hands before it gets from the farmer to the spinner. Each man that has that cotton, usually, in the modern system of handling the spot business, has it protected by a future hedge, and when he gets through with it, he gets rid of it. Somebody else takes it. There has been only 100 bales of cotton sold; but the number of future contracts that represent that hundred bales in its different steps of ownership adds a good many more. It is just like an insurance on a building. I own a building and I have it insured. I sell it to you. I cancel my insurance and you take out more insurance, or else I transfer my insurance to you. Of course, after a time, if there have been a good many transfers of that property, if you add up the gross amount of the insurance policies against the property, you may say that that has been tremendously over-insured, when as a matter of fact it has never had more than the original amount of the insurance against the property.

Mr. BEALL. I understand you can not give any estimate of the volume of business on your exchange?

Mr. THOMPSON. No, sir; I can not. It depends, of course, on the

season.

Mr. BEALL. Can you take any particular time and form an estimate as to what, in your judgment, would be the largest volume of business that you have ever seen transacted on the New Orleans Cotton Exchange in one day?

Mr. THOMPSON. You will have to ask some of these gentlemen who are in the "future" business. I am not in the "future" business. Mr. BEALL. You are a member of that exchange?

Mr. THOMPSON. I am a member of that exchange, but I am in the spot business. I have no means of estimating the amount of transactions in a day.

Mr. BEALL. I understood you to say a while ago that since the 1st of September there had been but 40,000 bales of cotton in the warehouses to be deliverable upon contract at New Orleans?

Mr. THOMPSON. Actually.

Mr. BEALL. Actual cotton?

Mr. THOMPSON. Yes.

Mr. BEALL. And for more than six months the 400 members of the New Orleans Cotton Exchange have brought and sold back and forth upon a total amount of actual cotton reaching only 40,000 bales?

Mr. THOMPSON. No, sir; I said there were only 40,000 bales that had been actually delivered on specific contracts; but I explained, in order that it might be understood, that when cotton is covered by a contract the contract performs its function. It is covered by s contract; but if I have sold you, and you have bought, a future contract, and my cotton comes down to the market, I then will say. "Here, I have got this cotton here; we will not let it pass through

the exchange; I will deliver that cotton to you and you pay me on the basis that we figure ourselves;" and we will not go to that expense, but we will just close out the contract, you see. So that in that way a great deal of cotton, as a matter of fact, all the cotton in this whole crop at one time or another, is covered by a future contract; and if it was carried to its logical conclusion all of it would be delivered on contract. But in order to save the expenses and to simplify the transaction, when there is no necessity of arbitration we agree as to the cotton. There is a great deal of it which is properly the subject of delivery, but by mutual agreement we do not deliver it, that is, do not pass it through the exchange and incur that expense, but we actually deliver it to each other.

Mr. BEALL. Outside of the exchange?

Mr. THOMPSON. Yes, sir.

Mr. BEALL. Take cotton that goes to New Orleans to be delivered upon an exchange contract; does it go into warehouses there?

Mr. THOMPSON. I do not quite get your question, sir.

Mr. BEALL. Cotton that goes to New Orleans to be delivered upon one of these contracts, does it go into the warehouses; is it warehoused?

Mr. THOMPSON. Yes. You mean, for instance, if a man in the country sold 100 bales of cotton on the New Orleans Cotton Exchange against 100 bales of cotton that he had in the interior, and he shipped his cotton down to satisfy that contract?

Mr. BEALL. Yes.

Mr. THOMPSON. Yes; that cotton goes into the warehouse.
Mr. BEALL. And receipts would be given for it?

Mr. PINCKARD. Not necessarily. Because it would save the expense of sending that cotton to the warehouse, our rules provide that that cotton can be delivered from the railroad depot when it arrives there, in order to save the parties the expense of paying warehouse charges. We allow that cotton to be delivered from the railroad depot, in order to save the expenses to the interior seller, and the buyer pays the drayage.

Mr. HAUGEN. Then those expenses are not incurred?

Mr. PINCKARD. No, sir.

Mr. HAUGEN. There is no disadvantage, then?

Mr. PINCKARD. No, sir; they deliver it from the depot.

Mr. THOMPSON. When it comes to be delivered it can not be delivered on the exchange until it has been examined by the inspection department to see that it is merchantable, and then the cotton is classed by the paid classers of the cotton exchange, and their decision is made and the certificate' is issued and that is guaranteed by the exchange.

Mr. HAUGEN. But no additional expense is incurred, except that for inspection and the delivery, over the cash and spot transaction? Mr. THOMPSON. Nothing but the expense of the inspection, but that would have to be done anyway.

Mr. PINCKARD. Is it not a matter of agreement between the parties whether that cotton shall be certificated or not?

Mr. THOMPSON. If they do not want to do it, it is a matter of agreement between the buyer and the seller whether it shall be done or

not.

Mr. BEALL. Can you tell us how much cotton has actually gone into warehouses in New Orleans during the past six months to be deliverable on these exchange contracts?

Mr. THOMPSON. No, sir; I can not tell you that, because we do not know about the cotton that comes into the warehouse at the time it comes in. It may have a future contract against it, but the owner of that contract may sell it on the outside and close out his contract. Of course, after he sells his cotton he does not want a contract against it.

Mr. BEALL. You can not tell how much actual cotton has been in New Orleans that was subject to delivery upon these contracts? Mr. THOMPSON. No, sir; I can not tell, except generally; but I know that almost all the cotton that comes to New Orleans comes either for sale by factors, such as I am, who sell on consignmentand we do not hedge, because we sell directly for the producer-or, and this is the larger part, much the greater part, of the cotton that comes to New Orleans, it does not come on those terms, but it is brought from the interior and is sold either in transit or at New Orleans. Now, that cotton, as we know by the invariable practice of those merchants, is hedged cotton. The merchants hedge that cotton because they could not afford to take the chances; buying the cotton in the interior as they do they could not afford to take the chances. They will buy 100 bales of cotton in the interior, and the samples are shipped and the cotton is shipped, but it takes the cotton longer to get there than it does the samples. Immediately they buy that cotton they sell a future contract against it. They expose the samples, and the buyers come around and look, and if they can make a trade on that basis, as soon as they make the trade which covers that specific cotton the seller takes out his contract, and when it comes then he delivers it to the man who buys it on that sample.

Mr. BEALL. The man who buys, buys it on the samples, and not under an exchange contract?

Mr. THOMPSON. No; when he does that, the future contract in that case becomes simply and solely a protection to the manMr. BEALL. As a hedge?

Mr. THOMPSON. As a hedge.

Mr. BEALL. Mr. Thompson, there is a certain element of risk in handling cotton?

Mr. THOMPSON. Yes.

Mr. BEALL. The cotton merchant, when he sells to the spinner, wants to shift that risk, or all risks as far as possible, off of himself; so he goes in and buys futures; is that right?

Mr. THOMPSON. Yes.

Mr. BEALL. That is for the purpose of eliminating the risk so far as he is concerned. Then the spinner who wants cotton, who sells his cloth, wants to eliminate the risk so far as he is concerned?

Mr. THOMPSON. Yes.

Mr. BEALL. So that he goes upon the exchange, and he buys a future contract?

Mr. THOMPSON. Yes.

Mr. BEALL. The cotton merchant has shifted the risk and the spinner has shifted the risk?

Mr. THOMPSON. Yes.

Mr. BEALL. Who is it that bears that risk?

Mr. THOMPSON. It is the man who believes that cotton is going up or is going down. It is the speculator who comes in and backs his judgment by his purchases or his sales.

Mr. BEALL. Well, let me ask you this: Would you agree with the statement of a gentleman who says that on a declining market the producer of cotton bears that risk, and that on an advancing market the consumer of cotton goods, the ultimate consumer, bears that risk?

Mr. THOMPSON. I do not exactly catch your question.

Mr. BEALL. Would you agree with a statement made before the committee here by a gentleman, that upon a declining market the producer of cotton has to bear the risk of which we have been speaking, and that on an advancing market that risk is distributed, through the world, upon those who consume the products of cotton?

Mr. THOMPSON. I do not know that I would.

Mr. PINCKARD. I do not see, sir, where there is any risk, provided the producer has already sold against his cotton. He is running no risk on a declining market. If the spinner has bought the contract, he knows there is no risk because the market is going in his favor. There is no risk either way there.

Mr. BEALL. Somebody, somewhere, somehow, has to bear the risk on cotton from the time it is put into the ground until it is made into cotton cloth. The producer bears that risk through the time that the cotton is cultivated, ginned, baled, and sold?

Mr. THOMPSON. Yes, sir.

Mr. BEALL. Now, the risk does not end there. It continues. Who bears that risk?

Mr. THOMPSON. It depends, of course. If the producer simply holds his cotton, he takes the chance; if he holds his cotton without any protection, he takes the chance; he bears the risk of the market going up. If the market goes up, he stands a chance of making money. It is a speculative chance. It is the same way with the spinner, on the other hand. If the spinner does provide himself beforehand, either with contracts for specific grades or with a future hedge, if the market goes up he loses, and if the market goes down he makes, he having made a contract for the cloth against it. But where there is a contract market, and where one person for this reason and another person for that reason is offering contracts, and offering to buy contracts, either the spinner or the farmer can go in-or the farmer's representative can go in-and protect himself just like he can buy a policy of insurance on his house.

Mr. BEALL. Then I understand you to say that the producer can go in and speculate upon the exchange?

Mr. THOMPSON. He does not speculate.

Mr. BEALL. But the producer does not ordinarily do that?

Mr. THOMPSON. I know he does not. It would not be well, in my opinion, for him to do it; but he sells his cotton to somebody who does protect himself, and therefore is enabled to give the producer a better price for his cotton than if he had taken speculative chances in the market. That is my opinion.

Mr. BEALL. At the very time that the producer sells his cotton, is not that risk which has to be taken in connection with that cot

ton taken into consideration in fixing the price that is to be paid to the producer?

Mr. THOMPSON. I do not know that I quite grasp your meaning. Mr. PINCKARD. If the producer comes into the market, sir

Mr. BEALL. The producer does not go into the exchange.

Mr. PINCKARD. I say if the producer does not go into the exchange, but he sees on the board of the exchange that middling cotton for December is selling, say, at 13.50 now, he is perfectly willing

Mr. BEALL. Just there; that is futures you are talking about?
Mr. PINCKARD. That is futures.

Mr. BEALL. That is, the price of futures?

Mr. PINCKARD. The future price of cotton, to be delivered in December. Now, this planter has counted what it cost him to raise his cotton, and he says, "I am perfectly satisfied to take 13.50 for my cotton, or such crop as I may ship in December." The spinner is able to make the contract to the buyer of goods, based upon December contract at 13.50; so the planter simply sells his cotton at 13.50 to the spinner, who makes it up and sells it to the buyer of goods. There is no risk either way there. The planter is satisfied with the price, and the spinner on that basis can make his contract. producer is at no risk. He sells the cotton, as he pleases, for 13.50 or 14 cents, as suits him. The risk has nothing to do with the price. The spinner would make that bid because he can make good on that price. He says, "I will give 14 cents," and the planter says, "I can deliver at 14 cents. Then he turns to Mr. Thompson and he tells him to sell 100 bales.

The

Mr. HAUGEN. To what extent does the planter sell his cotton for future delivery?

Mr. PINCKARD. That I can not say. As a matter of course I can not answer that question. The planter is like everybody else. Mr. HAUGEN. You were referring to the planter.

Mr. PINCKARD. I referred to the planter. This gentleman wanted to know where the risk came, and whether on an advancing market it was not borne by the consumer and whether on a declining market it was not borne by the producer. I say there can be no risk to the producer; when the price suits the spinner and the producer, they run no risk.

Speaking of speculators, some of the biggest speculators we have are planters. They do not sell against their crops, and where they do not sell against their crops they become as big speculators as any broker on the floor of the cotton exchange.

Mr. LEVER. Mr. Thompson, I gathered from your statement a while ago that in fixing the difference between grades of cotton deliverable on contracts, the difference is fixed from day to day, based upon the price of the spots for various grades?

Mr. THOMPSON. Yes, sir.

Mr. LEVER. That is true?

Mr. THOMPSON. Yes, sir.

Mr. LEVER. What would you say of a system which fixed the differences in grades, through the arbitrary judgment of a committee, once a year? What would you say as to the justice and equity and commercial fairness of a contract of that kind, which fixed those differences in September and November, twice a year?