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Rule 6:

* * * Any member who may find that he holds, for account of his correspondents, contracts, both of sale and purchase, in the same month which offset each other, shall be authorized to offset and settle such accounts and to substitute therefor his own name, and he shall be responsible to his principals for the strict fulfillment of such contracts, and shall be liable to them for all damages or loss they may sustain by reason of such substitution.

Rule 7 provides—

* * * That any party holding a contract against another, corresponding in all respects except as to price, with one held by the other party against him, may close both by giving notice in writing to the opposite party, at any time before notice of delivery; or where a "ring" may be formed, all parties thereto shall be compelled to settle upon the terms hereinafter prescribed. * * * It shall be the duty of each party to a transferable notice or to direct settlements or to "rings" that have been accepted and upon which payments are due, to send to the clearing house in a sealed envelope addressed to the party from whom such payments are due * * * a comparison slip of the net balances due on such settlements,

with further provisions providing the details of clearance settlements. In Chicago Board of Trade v. Chrystie, etc. (198 U. S., 236), the Supreme Court of the United States had under consideration the question of the legality of the transactions upon the board of trade and the specific methods herein complained oi. The direct question was stated by the court as follows:

It is said that the plaintiff itself keeps the greatest of bucket shops, in the sense of an Illinois statute of June 6, 1887; that is, places wherein is permitted the pretended buying and selling of grain, etc., without any intention of receiving and paying for the property so bought, or of delivering the property so sold.

Mr. Justice Holmes said:

It appears that in no less than three-quarters of the transactions in the grain pit there is no physical handing over of any grain, but that there is a settlement, either by the direct method, so called, or by what is known as "ringing up." The direct' method consists simply in setting off contracts to buy wheat of a certain amount at a certain time against contracts to sell a like amount at the same time, and paying the difference of price in cash at the end of the business day. The ring settlement is reached by a comparison of books among the clerks of the members buying and selling in the pit, and picking out a series of transactions which begins and ends with dealings which can be set against each other by eliminating those between, as, if A has sold to B 5,000 bushels of May wheat, and B has sold the same amount to C, and C to D, and D to A. Substituting D for B by novation, A's sale can be set against his on simply paying the difference in price;

and the legality of direct settlements, ring settlements, and hedging was asserted.

The sales in the pits are not pretended, but, as we have said, are meant and supposed to be binding. A set-off is in legal effect a delivery. We speak only of the contracts made in the pits, because in them the members are principals. * * * The proportion of the dealings in the pit which are settled in this way throws no light on the question of the proportion of serious dealings for legitimate business purposes to those which may be classed as wagers, or pretended contracts. No more does the fact that the contracts thus disposed of call for many times the total receipts of grain in Chicago. The fact that they can be and are set off sufficiently explains the possibility, which is no more wonderful than the enormous disproportion between the currency of the country and contracts for the payment of money, many of which in like manner are set off in clearing houses without anyone dreaming that they are not paid, and for the rest of which the same money suffices in succession, the less being needed the more rapid the circulation.

The court also said:

This court has upheld sales of stock of future delivery and the substitution of parties, provided for by the rules of the Chicago Stock Exchange. (Clews v. Jamieeon, 182 U. S., 461.)

36387—A A B—vol 2—10 44

Bearing in mind, then, that the dealings between the plaintiffs and the defendant had reference to and were to be consummated upon the exchange with reference to and controlled by the by-laws, rules, and regulations thereof, which governed the plaintiffs as members thereof, and that those rules and regulations contemplated and required actual performance of the contracts for future delivery and, as Detween members, provided for clearances by prescribed methods which could be compelled by any member, and that these methods have been approved by the Supreme Court of the United States holding that a settlement by way of set-off is equivalent to delivery and that the defendant does not complain that his directions were not carried out and that he did not receive prompt notice of the sale or purchase, as ordered by him, at the prices reported at the time made, and that he made no question of the accounts received until this suit was brought, what is it that he complains of? That because the contracts which were purchased or sold for his account were settled by way of substitution and set-off between the plaintiffs and other members of the exchange before the time when he gave his order to close the transaction, therefore no moneys had been laid out or expended for his benefit. But for every contract that was set-off against another contract there was a payment pro tanto, because set-off is payment, and where the prices named in the contract differed an actual payment in money took place. So that the effect, so far as the plaintiffs were concerned, was precisely as if when he did order the transaction closed they had paid out the actual sum which represented the difference between the purchase and the selling price. No harm came to him by reason of this transaction. The only persons that he ever knew were the plaintiffs; it was upon their faith and credit that he rested when he gave his orders. They never reported to him the names of the persons with whom they had entered into the contract which he had authorized them to make, either the opposite broker or the principals of that broker. He dealt with the plaintiffs, and the rules required that whenever the substitution and set-off occurred they should be responsible for the strict fulfillment of the contract and be liable to the defendant. It also appeared that at all the times the plaintiffs, when said offsetting and settling occurred, had on their books and in their possession contracts sufficient to supply the defendant and all other customers who had open contracts upon their books.

So that, it seems to us, he not having sustained the burden of showing that his transactions with the plaintiffs were wagers, and it having been shown that they promptly executed his orders as

fiven, and that his transactions eventuated in a loss which was paid y them in the manner indicated, that, irrespective of the question of an account stated, the plaintiffs sustained their several causes of action and were entitled to the judgment rendered in their favor.

We think that the amount of the judgment should be reduced by the sum of $75. On November 8 the plaintiffs, upon the defendant's direction, undertook to close out his December contracts by buying 5,000 bales. They bought 3,500 bales, but were unable to complete without bidding the price up on the customer.

So, in order to save his money and for his benefit, we bought January's at the same time. We made a sale and a purchase of 1,500 December's at 9.90, which filled in hie order and the firm was then long of the January's and short of December's, and as soon after as there was any December's offering they bought in the December's and sold out their January's. That would be a hedge of January's. That was all done in one day. He got his December's at 9.90, whereas, if we had bid in the market for them, he might have had to pay as high as 9.95. I believe there was a profit of about $75.

At the close of the case plaintiffs' counsel asked the referee to allow the $75 to the defendant in the case. For some reason this was not done. We think that should have been allowed. However good the intention and favorable the result to the plaintiffs, the fact remains that the defendant is entitled to the credit, and the amount of the judgment should be accordingly reduced.

It follows, therefore, that the judgment should be modified by reducing the amount thereof by $75, and as so modified affirmed, with costs to the respondents.

All concur.

Three letters submitted by Mr. Violett and referred to on page 810:

New York, July 24, 1907. Mr. Atwood Violett,

New York City, N. Y.

Deah Sir: Your favor 23d instant, with inclosures, has reached us. We return you herewith the paper signed.

We believe that which you are striving to accomplish a most laudable undertaking, and as you have taken more interest than anyone we know of in an endeavor to put the New York Cotton Exchange on a high plane as regards its contracts and one that will give confidence in every section of this country and all over the world, you are certainly entitled to great praise.

We never could understand why the business of the great New York Cotton Exchange should be kept at a disadvantage with other exchanges because of inequalities that might be speedily remedied.

We are in favor of anything that is fair, and trust your exertions will prove successful and benefits will be derived from them by every member of the exchange.

Yours, very truly,

Latham, Alexander & Co.

Leroy Springs & Co.,
Bankers And Cotton Merchants,

Lancaster, S. C, February 12, 1907. Mr. Atwood Violett,

New York City. Dear Sir: I am in receipt of your circular letter of the 9th, and would say that I thoroughly approve of your position, and, furthermore, I do not believe we have any right to receive any cotton below the grade of low middling white and above the grade of strict good middling white on contract. This will cover, almost any year, 90 per cent of the cotton produced, and it looks as if this should be sufficient to make a contract. I think the members of the exchange are standing in their own light and advertising the exchange to its detriment in not making a legitimate contract, such as would attract legitimate business and put the New York Exchange quotations on a basis of spot quotations in the South. It is a mistaken idea that it would not facilitate business. I do not believe that the exchange can be maintained unless it has legitimate business to govern its contracts.

Yours, very truly, Leroy Springs.

W. W. Gordon & Co.,
Cotton Factors And Commission Merchants,

Savannah, Ga., February 16, 1907. Mr. Walter C Hubbard,

President Cotton Exchange, New York City. Dear Sir: I am in receipt of a letter from you, as president, to the members of the exchange, reporting conclusions of the board of managers concerning certain grades.

In my letter to you, dated January 18, I stated my opinion of an amendment which would base differences in value of grades upon recent differences in prices for spots in markets in the cotton States, where almost the entire crop is originally sold.

Previously, in conversation with members of the New York Cotton Exchange, I have expressed this opinion to my friends and the reply was, "You don't understand the situation. New York would not get cotton unless there was some special attraction to bring it."

The impression in the South is that for a number of years the attraction has consisted in making the differences in value of grades of such a character that cotton could be delivered on contracts at figures entirely foreign to the actual value of said cotton at date of delivery, thereby deterring the spinner or exporter or dealer from ever accepting delivery on a contract unless for the purpose of himself using it for manipulating succeeding months.

Hostile legislation in the Southern States has been partly due to the universal belief that the methods of the New York Cotton Exchange to attract cotton were deliberately and intentionally framed to benefit members of the exchange at the expense of producers of cotton, and that the result of such methods was, in the majority of cases, prejudicial to the maintenance of prices based upon supply and demand.

As a member of the New York Cotton Exchange, I am interested in the value of its shares of stock, but as a cotton merchant I am greatly more interested in having the New York Exchange so conducted as to enable a dealer to hedge his sales to spinners, and spinners hedge their sales of their goods. I venture the opinion that this is the proper function of an exchange, and if it avowedly ceases to do this it simply becomes an arena for speculation, and, as such, will cease to be of importance or influence in the cotton trade.

I write you my views frankly, because I think very many of your resident members do not realize the seriousness of the situation.

Yours, truly, Vvm. W. Gordon.

INDEX.

[Chronologically arranged.

1910.
Feb. 9—Morning.—Testimony of Mr. Thomas J. Brooks, of Atwood, Tenn., repre-
sentative of the Farmers' Educational and Cooperative
Union of America, p. 4, et seq.
Afternoon.—Testimony of Mr. Lewis W. Parker, of Greenville, S. C, cotton
manufacturer, p. 23, et seq.
Testimony of Mr. Charles S. Webb, of Greenville, N. C, cotton
broker, p. 64, et seq.
Feb. 10—Morning.—Testimony of Mr. Thomas J. Brooks, of Atwood, Tenn. (con-
tinued), p. 72, et seq.
Testimony of Mr. D. J. Neill, of Fort Worth, Tex., representing
the Farmers' Union of Texas, p. 82, et seq.
Afternoon.—Testimony of Mr. Solomon N. Cone, of Greensboro, N. C,
cotton dealer, p. 89, et seq.
Feb. 11—Morning.—Testimony of Mr. J. E. Latham, of Greensboro, N. C, cotton
merchant, cotton manufacturer, and cotton farmer, p. 123,
et seq.
Afternoon.—Testimony of Mr. Arthur R. Marsh, vice-president of the New
York Cotton Exchange, p. 156, et seq.
Feb. 14—Afternoon.—Testimony of Mr. Arthur R. Marsh (continued), p. 190, et seq.
Feb. 15—Morning.—Testimony of Mr. Arthur R. Marsh (continued), p. 238, et seq.

Afternoon.—Testimony of Mr. Arthur R. Marsh (continued), p. 253, et seq.

Feb. 16—Morning.—Testimony of Mr. George W. Neville, of New York, cotton

broker and member of the New York Cotton Exchange,

p. 281, et seq.

Afternoon.—Testimony of Mr. George W. Neville (continued), p. 310, et seq.

Testimony of Mr. Wingate P. Barbot, expert cotton classifier,

p. 316.
Testimony of Mr. George W. Neville (continued), p. 316, et seq.
Feb. 17—Morning.—Testimony of Mr. Samuel T. Hubbard, of New York, cotton
merchant and member of the New York Cotton Exchange,
p. 343, et seq.
Testimony of Mr. Luitpold Mandelbaum, of New York, member
of board of managers of New York Cotton Exchange,
p. 349, et seq.
Afternoon.—Testimony of Hon. A. S. Burleson, a Representative from the
State of Texas, p. 373, et seq.
Feb. 18—Morning.—Testimony of Hon. A. S. Burleson (continued), p. 419, et seq.
Testimony of Mr. Walter Fitch, of Chicago, 111., grain mer-
chant and ex-president of the Chicago Board of Trade,
p. 435, et seq.
Afternoon.—Testimony of Mr. Walter Fitch (continued), p. 447, et seq.

Testimony of J. L. Messmore, of the St. Louis Grain Exchange,
p. 470, et seq.
Feb. 19—Morning.—Testimony of Mr. A. E. Reynolds, of Crawfordsville, Ind., chair-
man of the legislative committee of the Grain Dealers'
National Association, p. 479, et seq.
Testimony of Mr. H. D. Irwin, of Philadelphia, grain exporter,

p. 484, et seq.
Testimony of Mr. Edward P. Peck, of Omaha, Nebr., represent-
ing the Omaha Grain Exchange, p. 489.
Testimony of Mr. Edward J. Furlong, of Milwaukee, first vice-

president of Milwaukee Chamber of Commerce, p. 490.
Testimony of Mr. F. A. Hallet, of Minneapolis, Minn., director

of Minneapolis Chamber of Commerce, p. 491, et seq.
Testimony of Mr. George H. Davis, of Kansas City, Mo., vice-
president Kansas City (Mo.) Board of Trade, p. 498, et seq.
Testimony of Mr. Ward Ames, sr., of the Duluth (Minn.) Board
of Trade, p. 513, et seq.

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