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reports of the committee of the New York exchange on licensed warehouses in the South.
Take the quotations this morning. You will find that spot cotton is worth in Galveston as much as, if not more than, it is in New York. It takes about 80 points to get it up there, does it not?
Mr. MANDELBAUM. Not from Galveston.
Mr. SUMNERS. In order for that cotton to be delivered, it has to be certificated. They have got to grade it, certify it, and warehouse it. Do you permit delivery anywhere except in the warehouse?
Mr. MANDELBAUM. Not in the contracts.
Mr. SUMNERS. That is what I am talking about. Those things make it impossible.
Now, so much for that. These gentlemen want to ask me some questions, and I will develop that further when they do.
With reference to the proposition of hedging, in my candid judgment the custom is one of the most injurious, so far as the stability of the market is concerned, of any of the systems and customs that have grown up in the whole cotton business.
There are connected with the cotton industry three classes of people, primarily. There is the consumer at one end, and the National Congress must consider him. You have no right to consider the producer as against the interests of the consumer. There is the manufacturer, the transportation man, and the merchant,who constitute a class; but the people who are directly and vitally interested in this matter and who have a right to appeal to the power of Congress to protect them, are the men who produce and the men who consume cotton. Between the producer and the consumer people intervene who prepare the commodity for use; but no man who is a merchant has a right to demand that he be permitted to render a service. There is a difference between the relative rights of those people before the Congress of the United States, and the rights of the man who produces and the man who consumes. The merchant has a right to tender his services, and he has a right to demand pay for the economic value of the service he renders, but he has no right to demand that the people accept his services. Nor does he have the right to disturb the free passage from the producer to the consumer. The producer is entitled to the fair value of his product. The consumer is entitled to receive that product with only such charges attached to it as are necessary to convey it from the producer to him, prepared for his use. The system of hedging produces an economic loss, borne by the producer, or the consumer, or both. The cost of hedging is anywhere between $15,000,000 and $7,500,000 annually. Cotton is bought four or five times, and every time it is hedged, they say.
The man who manufactures cotton goods is entitled to receive his cotton as nearly at a uniform price as economical conditions give it to him. The man who uses cotton is entitled to receive it as near its economic value as it can be given to him. The man who produces cotton is entitled to as near its economic value as it can be given to him. Whenever a merchant or anybody else establishes a system by which the price of the fruits of another man's toil or the commodity which another is bound to use is disturbed materially in its travel along the path that is provided for it by the law of supply and demand,
and that path is between the States, or the States and a foreign country, it becomes the duty of Congress to interfere.
Gentlemen contend that this system of hedging has a tendency to make prices stable. I want to show to the committee as briefly as I can how it is impossible for that to be true.
We will suppose that the total output of the United States is 2,000 bales, just to illustrate. Half of that cotton is sold. Suppose you bought it. Suppose I owned it all. I represent the farmer. You represent the merchant. I have 2,000 bales. You come to me and say, “Sumners, I will buy a thousand of those bales.” You give me 10 cents for it. I have the rest of it. Do you think you would be willing to sell any of that thousand bales for less than 10 cents unless you were hanging on the very verge of bankruptcy? You would not do it. You would say, "I paid 10 cents for this cotton and I can not take less. It is not probable that Sumners will take less for the last half of his cotton than I gave him for the other, and I am not going to suffer a loss as long as I can hold on to it." I would not fear your underselling me.
But suppose you go into an exchange and hedge, you cut yourself off from all possibility of improving your financial condition by any raise in the price. You have insured yourself against any loss by reason of a decline in the price, and you have absolutely no interest whatever in protecting the price of the commodity. Your half is adrift on the high seas of commerce, blown hither and thither by every wind of speculation.
There is in the record here the testimony of a merchant who says that after this break in January, when the market was trembling and needed all the support it could get, he went into the market and sold the farmers' cotton at a price lower than the farmers would sell it themselves.
Mr. Cone testified:
In the break that occurred in New York recently, I sold cotton for much less than . I could buy it. I told my salesmen: “Boys, call up all the mills, sell all the cotton you can.” I said, “Fill the order books." They called up and we sold; in fact, we did not have to call them up. The mills called us up, and we have orders on our books running clear into August, and that cotton we sold is still owned by those gentlemen over there (indicating the farmers). But why did we sell it? Because we knew that somebody is selling something in New York for less than it was worth. As each sale was made I telegraphed my brokers in New York to buy me July or to buy May cotton.
That is possible under this magnificent system of hedging that they talk so much about. When the market is breaking, when every man ought to stand under it and get it to a stable basis, these men, by reason of this system of hedging, undersell the farmers, sell the cotton they do not own, at a cheaper price than the farmers would sell. That is the testimony in this case.
I grant you, gentlemen, if you pass this bill, there will be some disturbance.
The CHAIRMAN. What do you think would happen in the case just referred to by the gentleman from New Orleans who, as an exporter, has sold 50,000 or 60,000 bales? It may take him six months to gather it. In the absence of the hedging system would it be impossible, in your judgment, for such a transaction to be made ?
Mr. SUMNERS. No, sir; I. will tell you what I think would come about. These exchanges would become exchanges in truth and in fact. They are not exchanges now. There is not a large cotton exchange in the United States to-day. There is not a place where the man who wants to buy goes to meet the man who wants to sell. There would have been more than 40,000 bales of cotton delivered on the New Orleans contract since last September had it been a real exchange. There would be much more cotton delivered than has been delivered on the New York contracts were it a real exchange. These gentlemen who are merchants are finely equipped. They buy cotton all over the country. Exchanges would develop, Mr. Chairman.
There was a day when these institutions were exchanges, but the gambler went to those exchanges and offered just as much commission for the privilege of gambling as the man who has spot cotton to sell offered for selling it. There is where the trouble came in. The vice crept into these exchanges. Instead of strangling that vice when it came it was permitted to grow, and just as vice always does when it is given a free opportunity, it strangled out the legitimate transactions on the exchanges.
There would develop great spot exchanges, and I will tell you what this merchant would do. To illustrate, I would say to him, “I want you to deliver me cotton in six months." He would say, “All right; I will deliver that cotton at 50 points on the spot quotation on a given spot exchange at the date of delivery.” We would get down to business then.
Mr. GLENNY. May I ask whether that would be permissible under the bill?
Mr. SUMNERS. Absolutely.
Mr. GLENNY. He would be selling something he did not have and which he could not get.
The CHAIRMAN. But he has the bona fide intention of buying. Mr. SUMNERS. He has not hedged. He has not sold anything. He has made an independent contract with me. That is the character of what I believe would be done.
The CHAIRMAN. Would that meet the need of the spinner? The argument, with which I have no doubt you are familiar, is that the spinner must know to-day what the cotton he expects to spin six months from now is going to cost him. Under your suggestion he would not know that.
Mr. SUMNERS. I am glad to answer that. Of course it is merely a matter of opinion as to just what would be done. In the case that was suggested here yesterday the spinner, we will say, must sell his goods a year and a half in advance. Now, he makes a price based on the price of cotton or cotton futures at the time he makes the contract. He hedges against that sale. Therefore the only profit he expects to receive is the profit based on the price of cotton at the time of the contract and the price he has agreed to sell his cloth for. He has figured in, of course, all his expenses—that is, the price of cotton, labor, fuel, and those other expenses that must occur, and he has figured, say, half a cent per yard profit. The reason he sells this cloth a year and a half in advance is that he may be certain of a market for the output of his mills at a fair profit.
He has already determined in advance what his profit is going to be. Why could not that spinner make this sort of a contract with the cotton merchant, if he wanted to make a contract to protect himself? We will say cotton is worth 10 cents a pound and he is manufacturing gingham, for instance, which he is willing to sell at 5 cents a yard. Why could he not make that sale on the basis of 10 and 5, providing that the price at which he is to make the delivery be determined by the fluctuation of cotton above or below 10 centshis selling price based on cotton at 10 cents and his cloth at 5 cents ?
Mr. MANDELBAUM. How about his ginghams? He would not get any more for his ginghams?
Mr. SUMNERS. Why not? You did not listen to me. That is the reason you did not hear what I said. I am not undertaking to say, Mr. Chairman, what sort of a system these men are to adopt. I think it will work itself out.
The CHAIRMAN. The suggestion I understood you to make just now was that the spinner would make a contingent contract with the customer for his cloth.
Mr. SUMNERS. A basic contract; yes, sir; based on ten and five, with the fluctuations. I am not a practical spinner. I do not know how that ought to be measured, but with such fluctuations as will give him when he makes his final sale the profit he would have made if the cotton had remained 10 cents per pound. There is nothing arbitrary about that.
Mr. MANDELBAUM. May I interject one question? You would not consider that a gambling contract, would you?
Mr. SUMNERS. Not at all.
Mr. MANDELBAUM. Neither the seller of the cotton nor the buyer of the ginghams would know what he was doing. In my opinion that would be a gamble, pure and simple.
Mr. SUMNERS. This is a country, you know, where everybody has a right to an opinion. That is not mine. I think that is a contract that is absolutely devoid of all gambling, for the reason that this man has figured that he would make half a cent a yard on his gingham. That is all he will make at any time. Now, if at the time he has to buy the cotton the very cotton that goes into the gingham has gone up, ought not the man who buys the gingham to pay more? On the contrary, if at the very time he buys the cotton that goes into the gingham cotton has gone down, why ought not the purchaser of the cloth to get it at less? If there is any gamble in that, I am sure I can not discover it.
As I say, I do not think I am going to get any patent on this.
Mr. BEALL. Mr. Sumners, I notice that the members of the New York Cotton Exchange exhibit evidences of amusement over that proposition. Do you not think they would have been just as much amused if the proposition had been submitted to them thirty years ago that New York would cease to be a spot-cotton market ?
Mr. SUMNERS. Yes, sir. I do not think they ever dreamed of it.
Mr. BEALL. Does the manufacturer of cotton goods have any trouble in disposing of his product to the retail merchant ?
Mr. SUMNERS. I am not familiar with that, Mr. Beall, but I understand not,
Now, just one additional thing, Mr. Chairman. They talk about this hedging system adding to the demand. With all due respect to the gentlemen who make that suggestion, it does not occur to me as being a serious proposition. The fellow who adds to the demand for cotton is the consumer. I do not care whether it is a man who buys a shirt like I have or just wears one garment in Africa. He is the fellow who fixes the demand for cotton—the man who uses the cotton.
These gentlemen have the New York Exchange so big in their eyes that they feel that if you should abolish it the stars would fall. Well, I will not say that; that would not sound right, but they believe that if you abolish the New York Exchange this whole thing will go all to pieces.
It is the biggest thing they know about; it is so close up to them. They are honest about it. We believed in the South that if the institution of slavery were abolished—I have referred to that already, and I will come back to it—we would be absolutely ruined, and yet every man who is informed down there knows that if it had not been abolished, in two or three generations more civilization in the South as we know it would have perished. These exchanges afford the temptation and the machinery to send the market up or send it down. Operations on them constantly disturb it. The New York exchange could not live if it had a stable market. Its very existence depends upon the going up or down of prices. People will not go in there and buy on a stable market, and they know it. They thrive upon a disturbed market.
There is nothing personal in that statement, but I believe every man of fair information must recognize that these exchanges are disturbing elements, interfering in the passage of commodities from the producer to the final consumer. The people of this country are too resourceful to have to depend on an institution of that kind, that confessedly has gambling mixed up in it, in order for the men who produce the cotton to be able to carry it in to the men who consume it.
So far as I am concerned and so far as the other men who have appeared here as producers, or for them, are concerned, we are willing to take the chance. I understand that legislators can not foresee what will happen. Nobody can I do not know how many other manufacturers have appeared here in opposition to the bill, but I believe no manufacturers have appeared who are not connected with the exchanges. Manufacturers generally are willing to take the chance. I believe the consumers of this country are willing to take the chance. The only people I find who are seriously objecting to this measure are the members of the exchanges, and their rights as compared with the rights of the producer and consumer do not stand in the same class. If the producer and the consumer do not want their services, or find their activities to be injurious, it seems to me that is the end of it.
Mr. LEVER. Mr. Sumners, before you close I would like you to give the committee your idea, very briefly or as much at length as you please, just how dealing in future contracts works to the injury of the producer and the ultimate consumer of cotton.
Mr. SUMNERS. Mr. Chairman, we have a peculiar condition in the South with reference to the production of cotton. I have just gone through a rate hearing in my State in which it was disclosed that by