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PREVENTION OF DEALING IN FUTURES.
BRIEF SUBMITTED BY THE NEW YORK COTTON EXCHANGE IN OPPOSITION TO H. R. 7521 (SCOTT BILL), H. R. 3041 (BURLESON BILL), AND SIMILAR PROPOSED LEGISLATION NOW UNDER CONSIDERATION BY THE COMMITTEE ON AGRICULTURE OF THE HOUSE OF REPRESENTATIVES.
The economic conditions as related to the New York Cotton Exchange have been fully set forth in the argument made by Mr. Arthur JR.. Marsh before your committee, but may be summarized briefly as follows:
(a) The New York Cotton Exchange is an association of cotton merchants who have agreed among themselves upon certain by-laws and rules which shall govern contracts which they make, one with another, relating to the purchase and sale of cotton on the spot in New York, of cotton to arrive in the port of New York, and of cotton for future delivery in the port of New York.
(b) The contracts which these merchants make with each other (or for the account of persons who are not members of the New York Cotton Exchange), subject to the by-laws and rules which they have adopted, are contracts wholly confined to the State of New York, and are in no sense of the word of the character of interstate commerce.
(c) The membership of the New York Cotton Exchange embraces cotton merchants, not only in the city of New York, but also in large numbers established throughout the cotton-producing States and m the cotton-consuming countries all over the world.
(d) These merchants in the pursuit of their business, and to a large extent relying upon the facilities afforded them by their membership in the New York Cotton Exchange, handle every year in excess of 80 per cent of the entire cotton crop of the United States.
Contracts for the future delivery of cotton, constituting the larger part of the business done by members of the New York Cotton Exchange in New York, are the outcome of a long historical development of the cotton trade in all parts of the world, and represent the best judgment and experience of cotton merchants, as to the necessary means for handling the heavy burden which is placed upon
them in the annual distribution of the cotton crop. These contracts, which are used by merchants for what is called "hedging" purposes, afford not only these merchants themselves, but through them, all producers and consumers of cotton, and all distributors of cotton goods, the only available means for distributing throughout the world the great risks involved in handling a commodity whose annual production is of so uncertain a character that great fluctuations in price are inevitable. Through the facilities afforded by the exchange, and through the use of these contracts, there has become possible an ever ready market both for the sale and for the purchase oi cotton, and the producer of cotton is thus enabled at any time in the year when the price suits him to sell his entire crop, and the manufacturer of cotton goods is enabled to enter upon contracts for the production of any kind of goods for delivery in the distant future. For more detailed statements upon these points, we refer to the arguments made by Messrs. Marsh, Neville, and Hubbard.
We desire particularly to call attention to the disastrous effects upon the manufacturers of cotton in the United States if these facilities, which are now available to American spinners either directly or through cotton merchants, are done away with, thus throwing the business of contracting in advance for goods into the hands of foreign spinners who will be able to avail themselves of the opportunity to hedge either in Liverpool or in Havre. It goes without saying that the greatest of all sufferers under these conditions will be the American labor now employed in the cotton manufacturing industry. (See the closing argument of Mr. Mandelbaum.)
A further consideration which should have great weight in the minds of all legislators who have at heart not only the best interests of the cotton producers of the United States, but also the economic welfare of the country as a whole, is, that it is only through exchanges located in the United States, and consisting primarily of American cotton merchants, that the interests of this country as a producer, seller, and exporter of cotton can be thoroughly safeguarded. Foreign exchanges are in the nature of the case dominated by the interest of buyers and consumers of cotton, and their rules and regulations inevitably reflect that interest.
The New York Cotton Exchange has an economic interest both in the prosperity of the cotton producing section of the United States and also in the prosperity of the country as a whole. As the members of the exchange realize that their own business success is bound up with the economic success of the whole country, they are in a position and have a motive for protecting the just rights of the American cotton producer which can not be true of the members of foreign exchanges nor of the interests which they represent.
The destruction of the business of the American cotton exchanges would certainly have a most serious effect upon the financial position of the United States in international trade. Not only would the steady marketing of the cotton crop, which depends upon a ready market for bills of exchange drawn against cotton, be greatly disturbed and at times rendered practically impossible by the withdrawal of opportunities for hedging, but in a larger sense the entire balance of trade of the United States would almost certainly be profoundly affected. It is a fact beyond dispute that during the past year the existence of cotton exchanges in the United States in which were carried hedges, not only against cotton in the United States but also against the undistributed cotton of the entire world, has led to remittances from foreign countries to protect these hedges of not less than $150,000,000.
Although the criticisms of the New York Cotton Exchange embodied in the report on Cotton Exchanges by the Commissioner of Corporations, Mr. Herbert Knox Smith, deal almost exclusively with the manner in which the members of the New York Cotton Exchange have exercised their judgment with regard to the internal economy of the Exchange, and although we not oidy strongly dissent from the justice of these criticisms, but also understand that your committee regards these matters as not properly pertinent to the subject of the bills now under consideration, we must point out here that the Exchange from its inception has never failed to work for the improvement of the economic conditions under which the cotton crop of the United States is marketed; always giving due consideration to the producer of the crop and affording him an opportunity to market the qualities of the crop he is able to produce at just values for those qualities, the production of which he can in no manner control. In order to arrive at a scientifically accurate valuation of the various qualities above and below middling, this Exchange has gone to a large expense. It is still conducting these tests, and we refer to the preliminary results demonstrated by Mr. Neville before your committee.
The question of the legality of the contract traded in upon the New York Cotton Exchange making compulsory, by by-laws and rules, the delivery of cotton, if sold, and the receipt of cotton, if bought, can not be questioned. It has stood the scrutiny of the Supreme Court of the United States, as shown in the decision by Justice Holmes in the case of the Chicago Board of Trade v. Christie, a decision which has had to be followed in all the federal courts, even in the South, notwithstanding their state laws to the contrary. It has recently been reaffirmed by the appellate division of the supreme court of the State of New York, which by a unanimous court upheld the referee in the case of Springs & Co., respondent, v. D. W. Janies, appellant, a copy of which is herewith annexed and marked "Exhibit A."
As the contracts made upon the New York Cotton Exchange are made entirely within the State of New York, Congress can neither claim nor has the right of direct interference or prohibition. The proponents of the bills under consideration by your committee therefore endeavor to set forth a moral issue and, under the cloak of this, arbitrarily to exercise the power of Congress over mail and telegraph to interfere with the business carried oiwunder jurisdiction of a State. Congress, in our opinion, has not the right to prohibit the use of the mail or telegraph unless it is clearly shown that the business conducted by their aid is of an absolutely and grossly immoral character. The fact that the instrumentalities oi this business might be employed occasionally by some unscrupulous person for illegitimate purposes does not detract from the legality of the business itself, and unless it can be shown that the business is of an inherently immoral character it would be, in our opinion, not within the power of Congress to lay upon it such prohibitions. The case of Champion v. Ames (188 U. S.) has been cited by one of the supporters of the proposed legislation, who endeavored to point out the right of Congress in this matter to be parallel to the case above cited. In this case, in order to get jurisdiction, the Supreme Court of the United States declared that lottery tickets are an article of commerce and that the sending of them from one State to another constitutes interstate commerce. To make that case parallel to the one at issue Congress would have first to prohibit the sending of cotton from one State to another. We do not think that anything like this is contemplated by the proponents of the different bills.
Apart from the question of the possible constitutionality of the proposed legislation, we desire to draw attention to the dangers attending any attempt to restrict or prohibit that which people engaged in a given business regard as an inherent necessity of that business. To strive to force men to give over that which has become to their minds absolutely essential in the conduct of their affairs is simply to encourage them to seek for methods of doing that which they feel they must do, even though those methods come perilously close to evasion of the law. It must be a serious question in the mind of every citizen familiar with the existing business of distributing the cotton crop whether the proposed bills, if enacted into law, would not inevitably give rise to the commission of perjury, evasion, and circumvention of the law. And even more must this be the case when these citizens believe that Congress has itself, by roundabout and unwarranted means, strained its legislative powers to obtain jurisdiction in matters over which, as shown by the tenor of the different bills under consideration, it has no direct concern and over which it has no proper jurisdiction.
All of which is respectfully submitted.
Geo. W. Neville.
S. T. Hubbard.
Arthur R. Marsh.
Eli B. Sprino8.
[On title page: New York Supreme Court, Appellate Division— First Department. Richard A. Springs, William D. Martin, and Eli B. Springs, plaintiffs-respondents, v. David W. James, defendantappellant. Opinion. Edward D. Brown, attorney; John R. Abney, counsel for plaintiffs-respondents. Ivins, Mason, Wolff & Hoguet; Smith, Hammond & Smith, Atlanta, Ga., attorneys for defendantappellant. Herbert D. Mason, Victor Lamar Smith, Robert L. Hoguet, and William L. Ransom, counsel.]
Supreme Court—Appellate Division. First Department, FebRuary, 1910.
George L. Ingraham, P. J., Frank C. Laughlin, John Proctor Clarke, Francis M. Scott, Nathan L. Miller, JJ.
Richard A. Springs, William D. Martin, and Eli B. Springs, respondents, againM David W. James, appellant. ho. 4421.
Appeal from a judgment entered upon the report of a referee to hear and determine.
Herbert D. Mason, of counsel; Robert Louis Hoguet, Victor Lamar Smith, William L. Ransom, with him on the brief (Ivans, Mason, Wolff & Hoguet, attorneys), for appellant.
John R. Abney (Edward D. Brown with him on the brief) for respondents.
The plaintiffs are members of the New York Cotton Exchange. The defendant resides in Blakely, Ga., and owns 9,000 acres of land in Georgia and 240 in Alabama, upon which he raises cotton, 1,000 to 1,500 bales a year; owns a cotton warehouse which handles from 6,000 to 8,000 bales a year; is engaged in the mercantile business; in the oil fertilizing business; is the president of three banks and a director of two others.
He has been engaged for twenty to twenty-five years in the cotton business and, upon his own testimony, has bought and sold cotton upon the New York Cotton Exchange through members thereof for fifteen or twenty years; and for some two years prior to the beginning of this suit had transacted such business through and with the plaintiffs and their immediate predecessors in business.
The complaint sets up five causes of action: Three for money laid out and expended for defendant's use and at his request in purchases and sales of cotton for future delivery, upon the New York Cotton Exchange and subject to its rules and regulations, made upon the orders of the defendant, statements having been rendered of such transactions, partial payments made by defendant and promises to pay the balance; the fourth for interest paid on various sums used in said trades; and the fifth upon an account stated for the balance shown upon the final statement rendered of $48,672.13, and a promise to pay.
Summarily stated, the defense is that the New York Cotton Exchange is a bucket shop and that the matters set forth were gambling transactions upon which there can be no recovery. Subsidiary