Mr. THOMPSON. My present opinion is that that contract is on the wrong foundation. Mr. LEVER. Do you happen to know whether your judgment is shared in by the majority of the members of the New Orleans Cotton Exchange? Mr. THOMPSON. I am sure it is, because we have adopted, without any qualification, and absolutely without any serious debate, the commercial-difference system. The CHAIRMAN. Have you had that system since the organization of your exchange? Mr. THOMPSON. Yes. The commercial-difference system has existed, I am sure, since the organization of the exchange. I have never known of any other. We have this, if you will permit me. We on the first of each exchange year appoint a committee of thirty, taken from the members of the cotton exchange who are best acquainted with the actual spot market. We take into consideration whether a man is a seller, a factor like myself, a buyer, an exporter, or a spot broker. We endeavor to divide this panel up as evenly as we can so as to cover the entire spot cotton trade. Each month from this panel of thirty, which is announced at the beginning of the time, we select five men, having regard in the monthly committee to the same distribution. We have two factors, two buyers and a spot broker on the committee. This committee meets every afternoon at 2 o'clock, and they quote the spot market. From their experience of the market, it is their duty to go into the market and find out what cotton has been sold, and on the basis of the market as they find it they quote the spot market, and those are the quotations for that day. Whenever, in the judgment of a member of this committee, there should be a change made in the differences not in the market, whether it is up or down, but in the relative quotations-a meeting of what we call the revision committee is called. The revision committee consists of the spot quotation committee of five and the appeal committee of seven, which is the highest committee on classification in the exchange, and who are men of expert, known experience in the matter. Now, we can have no changes in our differences made except by the revision committee, which is composed, as I have stated, of five and seven, or in all twelve men, and sometimes there are two men of the spot quotation committee that belong on the other committee, which makes it ten. However, we get the judgment, whenever we make a change, of the best talent in the exchange. But the system is made entirely flexible, because any member of that committee, by giving notice to the secretary of the exchange before 12 o'clock of any day, can call a meeting of that committee, and if the necessity should arise, which it never does, the differences could be made every day by that machinery. But as I say, that necessity does not arise. The CHAIRMAN. How often are changes of the differences made, as a matter of fact? Mr. THOMPSON. Now, it depends on the crop. This year the crop was high grade, and we have had only one revision on it. The CHAIRMAN. Has the revision committee, or any member of it, ever been charged with using influence to fix a differential that would be to his or their advantage? Mr. THOMPSON. No, sir; no, sir. The CHAIRMAN. Just one further question, I would like to ask. In your formal statement you remarked that one good way, you thought, to eliminate the evils of future trading might be by requiring a greater margin. I believe you stated that you are not engaged in future trading? Mr. THOMPSON. Yes, sir; I am not. The CHAIRMAN. Then are you able to answer whether those who do engage in it on the New Orleans Cotton Exchange require any fixed margin, or is it altogether a matter of credit and of individual arrangement? Mr. THOMPSON. No. I think it depends, of course, on the market. If the market is fluctuating and is very high or low, and is subject to violent fluctuations, then they call for larger margins than they do when the market is more even. The CHAIRMAN. I believe you said that one member of your committee does operate, and I will defer any further questions along that line until he makes his statement. Mr. SIMS. As I understand the practical effect of your contract in New Orleans, it is that you sell, say, $50,000 worth of cotton, in effect, rather than a number of bales or pounds, that contract to be discharged by the delivery of the cotton within the grades, on the market value, when it is executed? Mr. THOMPSON. No; we sell contracts for a specific number of bales. Mr. SIMS. No, but it comes, so many bales at such a price, to $50,000? Mr. THOMPSON. Yes. Mr. SIMS. Now, when you come to make delivery, you make the party delivering deliver $50,000 worth of cotton. Mr. THOMPSON. That is the idea. Mr. SIMS. At the existing market value for the character of cotton delivered? Mr. THOMPSON. That is it. Mr. SIMS. And not an arbitrary value fixed months before, which may or may not apply commercially to the date of delivery? Mr. THOMPSON. That is it. Mr. SIMS. That is the effect of that contract? Mr. THOMPSON. Yes. Mr. SIMS. Then a person who buys a hedge in your market is certain that he will get the number of dollars' worth it provides, that he has bought? Mr. THOMPSON. Yes. Mr. SIMS. To that extent it is an inflexible hedge? Mr. THOMPSON. Yes. Mr. SIMS. Now, I want you to explain this. I understood you to compare the transfer of the future contract to the transfer of a check for money? Mr. THOMPSON. Yes. Mr. SIMS. And you said your check might be indorsed and transferred around by delivery or otherwise 100 times, but it would be really all only one transaction? Mr. THOMPSON. Yes. Mr. SIMS. That is not literally the case on the exchange, is it? Is it not the fact that if I go there and buy 100 bales of cotton on the exchange, somebody of course sells it? Mr. THOMPSON. Yes. Mr. SIMS. Then if I go to you within twenty minutes afterwards and sell it out, then another party buys that 100 bales that I have offered, and the man I sold it to has still got it? Mr. THOMPSON. Yes. Mr. SIMS. And it is a separate and distinct transaction contracted between another and one party to the original transaction? Mr. THOMPSON. Yes. Mr. SIMS. Then that is an actual transaction, potentially, in 100 bales of cotton? Mr. THOMPSON. Yes. Mr. SIMS. And you would get an actual separate commission on that? Mr. THOMPSON. Yes. Mr. SIMS. Now, I think you have answered as truthfully and logically as a man can, that the hedge can only obtain through the means of the speculative dealer? Mr. THOMPSON. Yes. Mr. SIMS. Therefore the speculative interest in this business is always just exactly equal to the investment business? Is not that true? Mr. THOMPSON. Yes. Mr. SIMS. Now, then, an investor is interested only in the actual investment. If a man buys cotton to make cloth, he wants cloth made? Mr. THOMPSON. Yes. Mr. SIMS. But the investor in future contracts has speculatively the same interest, by reason of creating sentiment through the market, to put up or down the holdings by reason of the value to the investor? Mr. THOMPSON. Yes. Mr. SIMS. Now I will ask you if you can not, through your New York or New Orleans cotton exchanges, or any other that I know of, by using money in limited or unlimited quantities, either put up or down the value of a future contract prior to the day of ultimate settlement? Mr. THOMPSON. No, sir. Mr. SIMS. You can not do that? Mr. THOMPSON. I will tell you; in a market where the contract is equitable and fair they can not maintain any abnormal or artificial advance or decline, because there are merchants there who will take advantage of it. If you have a market in which a contract is equitable, and it gives no advantage to either the buyer or the seller and is such a contract as you cited in the beginning, and there is a break in the future market brought about by such means as you say, you will find right there in the market people who are in the cotton business who are willing to take advantage of that and buy the contract and demand the cotton. If they are afraid that when they get the cotton they will lose money on account of some miscalculation, then they might be afraid to do it; but if they know that if they buy that cotton and it is delivered to them, they will pay for it on the basis of the market value of the cotton, on the differences in market value of the cotton; that sort of behavior in the future market, in my opinion, will be largely regulated. Of course we can not help, in any specu lative commodity, having fluctuations, depending upon the happening of things that affect the minds of people who happen to be in the market; but to a very large extent, in my opinion, that behavior of the market will be regulated in such an exchange on such a con tract. Mr. SIMS. Now is it not a fact generally that the speculator pure and simple has more ready money, a larger bank account, on which to make transactions or with which to affect the market by the simple use of money than the producer or the manufacturer of cotton would have? Mr. THOMPSON. I could not answer that. I know that we have at New Orleans cotton merchants who are not speculators who have a good deal of money or resources. Of course they may not have so much money of themselves. Mr. SIMS. I mean speculators in futures, who never expect to take delivery, only incidentally, who ignore it except when it is advantageous to do so? Have you not stated in reference to some other cotton exchange that exactly what I was describing was being done by men of unlimited money, right in the face of natural economic conditions, that would forbid any such condition growing out of natural laws of supply and demand? Mr. THOMPSON. I issued a statement, Mr. Sims, not that such a thing was being done in any exchange; I issued a statement saying that a concerted effort, originating in a coterie, in my opinion had precipitated this decline, which in my opinion was not warranted, and I urged those who held spot cottons to hold them until such time as normal conditions were restored. Cottons subsequently went up. Mr. SIMS. Would it be possible for such a condition or transaction or act as you have there described to have been executed and brought about without a cotton exchange somewhere on which you could make and sell these contracts, without any reference whatever to the natural law of supply and demand? Mr. THOMPSON. No, I do not believe it could; if you had not had any cotton exchange that could not have happened. But if you had not had any cotton exchange, in my opinion the price that the farmer got for his cotton this year he never would have gotten. Mr. SIMS. I agree with you exactly, that this year the speculator began so early that the farmer got a great harvest; and I do not mean that sometimes the farmer is not on the winning side. I know the farmer frequently tries to get on it, and makes a mistake; he ought to keep out of it. We are talking about the possibilities of a system of exchange, or a system of operating upon exchanges. by which men of large ready means, by the mere manufacture of contracts, throwing them on the market in unlimited volume, can break down the prestige and temporarily change the price, at a time when the farmer is compelled to deliver a large part of his crop. and when many of them could not take your advice and hold back; and I ask you if such a system of commercial business ought to be permitted or tolerated in any civilized country, if we can prevent it lawfully and properly? Mr. THOMPSON. Yes, Mr. Sims; as I have always said in these matters, anything that could prevent those untoward happenings in my opinion, would be very advantageous. Mr. SIMS. That is our only object and purpose, and we do not know how to do it, and we thought maybe you could tell us how to do it and yet leave all the beneficial functions of a cotton exchange in existence. I do not want to embarrass either the producer or the consumer or the merchant. Mr. BURLESON. Mr. Thompson, you say it is a custom in the South for cotton buyers to receive instructions from their principals advising them in their purchase of cotton to pay so many points off or on the price of futures? Mr. THOMPSON. Yes; that is the way the purchases are made. Mr. THOMPSON. Yes; in the interior. Mr. BURLESON. You have expressed the opinion to this committee that if by law Congress abolished the sale of future contracts for the delivery of cotton, it would bring demoralization to the cotton trade and result in loss. I want to ask you if operations upon the cotton exchanges can not bring demoralization, and do not frequently bring demoralization to the cotton trade, and loss? Mr. THOMPSON. I do not think, Mr. Burleson, that the operations of the cotton exchange bring any more demoralization and loss than occurred before the cotton exchanges were even in existence, because we know that the fluctuations have been as violent or more violent before we had the exchange, and as great losses have been made by the cotton producer or by the cotton merchant who has undertaken to hold cotton himself, believing that the market would advance, when conditions did not warrant it, and he has lost the money. Mr. BURLESON. Yes, Mr. Thompson; but you will admit that facilities for gathering information and the distribution of information with reference to the cotton crop, which makes for steadiness of price, now are very much greater than they were before the organization of exchanges? Mr. THOMPSON. Certainly; yes, sir. Mr. BURLESON. And it is this information furnished the trade relating to crop conditions that tends to prevent fluctuations in price, is it not? Mr. THOMPSON. To discount future conditions, yes; the present price Mr. BURLESON. Now, go back to my question. You admit that transactions and operations can take place on these exchanges that result in demoralization to the trade and loss? Mr. THOMPSON. I think these transactions that happen on the exchanges generally, as a rule, are not the causes of those things, but it is the conditions themselves that are reflected in the cotton exchange. Mr. BURLESON. Have you not made emphatic statements that operations have taken place on the exchanges resulting in great loss and demoralization when the conditions did not justify it at all? Mr. THOMPSON. Yes; I did. Mr. BURLESON. There was a great slump in the price of cotton along about last January, was there not? Mr. THOMPSON. Yes. Mr. BURLESON. You made a public statement at that time about the causes of this slump, did you not? Mr. THOMPSON. Yes, sir. 36387-A A B-VOL 2—10— -40 |