contract and the physical marketing of grain without which futures trading ceases to be a useful adjunct to the marketing of grain.

KANSAS CITY BOARD OF TRADE ACTIONS

On February 18, 1946, immediately after War Food Order No. 144 was issued, the Board of Directors of the Kansas City Board of Trade prohibited trading in May 1946 wheat except for liquidation, and on March 28, all May wheat contracts still outstanding were prematurely closed out at the then prevailing ceiling of $1.73-5/8 per bushel. A total of 2,850,000 bushels of May 1946 contracts was so closed out, with those in long positions getting the protection of the March 4 ceiling price increase of 3 cents per bushel. This amounted to $85,500.

On May 11 there were 4,199,000 bushels of old wheat futures for July and later months open on the Kansas City Board. On May 13 the management restricted tradin these futures to liquidation at the old ceiling of $1.78-5/8 per bushel. From May 13 to June 5, 930,000 bushels were traded out on this basis. On June 5, the Board of Directors made the new ceiling prices applicable and ordered all trading to be continued for liquidation. There were no trades until the price reached the new ceiling of $1.88-5/8 (effective May 13) and thereafter, from June 7 to 13, a total of 680,000 bushels was traded out, leaving 2,589,000 open on June 13. This last quantity was prematurely closed out by order of the management at $1.88-5/8 per bushel.

The financial gains and losses to shorts and longs covering all closeouts at ceiling prices by regulations of the Kansas City Board of Trade from March 28 to June 13, 1946, may be summarized as follows:

Shorts were protected to the extent of 19.5 percent of the total of $715,350 and longs were benefitted at the expense of shorts to the extent of 80.5 percent. Most of the profit to longs was realized on closeouts at the new ceiling price after June 5.

In addition, the closing out of all old futures on May 13 in anticipation of the expiration of price controls on June 30 protected shorts against possible further losses in case the price of wheat advanced sharply after July 1. The price of cash wheat did advance after July 1 and averaged for the month of July about 8 cents higher than the May 13 ceiling price. The average of September cash quotations also was higher than the May 13 ceiling by about 6 cents per bushel. It would seem that shorts whose July and September contracts represented the bulk of the Kansas City futures closed out on June 13 might count additional protection of the order of these amounts per bushel.

Since May wheat was closed out on March 28, there were no defaults in Kansas City on May 31. Also, in the closing out of other contracts on June 13, little difficulty

appears to have been experienced in bringing traders together for settlements, either by delivery of grain or by cash settlements through the Clearing Association. No lawsuits resulted in Kansas City from actions taken, whereas in Chicago, lawsuits resulted both from the May 12 and subsequent actions of the Board.

MINNEAPOLIS CHAMBER OF COMMERCE ACTIONS

The Board of Directors of the Chamber of Commerce of Minneapolis took the lead in restricting trading and closing out to contracts by ordering trading for liquidation only in its May and July 1946 wheat contracts beginning on February 18, the date on which War Food Order No. 144 became effective. This was followed on March 12 by a regulation closing out all open contracts in May 1946 wheat as of March 13, 1946. This action respecting May 1946 wheat antedated by about two weeks similar actions by the Chicago and Kansas City Boards closing out May 1946 wheat contracts. It also was the only such action taken by the Minneapolis Chamber of Commerce.

When the May 13 ceiling prices became effective, the Minneapolis Chamber made the new ceilings effective on all futures being traded on its floor. Futures then being traded were July wheat (for liquidation only), September and December wheat, and May, July and September oats. Open trading was continued in all contracts other than July wheat.

One basic reason given by the Minneapolis Chamber for not following the request and recommendation of the Office of Economic Stabilization, the Office of Price Administration and the Department of Agriculture that all old contracts outstanding on May 11 be liquidated at the old ceiling was that the action recommended would have undermined the validity of futures and destroyed their value as hedges. Another basic reason given was desire on the part of the Chamber's Board of Directors to avoid assuming the responsibility of determining the profits and losses of traders before maturity of contracts.

The next significant action of the Minneapolis Chamber was on June 13 when trading in all open wheat contracts was restricted to trading for liquidation only, and at the May 13 ceiling. Open trading on oats was continued as before. Again, the reason ascribed for not closing out wheat contracts altogether, as was done on the other exchanges, was desire to protect the validity of futures to the maximum degree. This was followed on June 30 by rescinding ceiling prices altogether. This action, effective July 1, left all futures prices free to move upward, but continued the restriction of trading in all wheat contracts outstanding to liquidation only. Open trading in July, September and December oats was continued.

EFFECTS OF MINNEAPOLIS CHAMBER ACTIONS

The outstanding effect of Minneapolis actions was maximum preservation of the validity of futures contracts by holding the predominantly short speculative interest in the market financially responsible for working out by negotiation with the long interests in the market (consisting predominantly of long hedgers) the most satisfactory arrangements possible under the circumstances to bring about liquidation of open positions as the various contracts matured. In this it was recognized that the supply situation respecting wheat was such that agreed-upon cash settlements rather than delivery of wheat probably would be necessary. To make this possible, the Chamber's Business Conduct Committee urged longs and shorts to negotiate settlements and Clearing Association rules were relaxed to the extent necessary to accept and clear on the basis of reasonable agreements negotiated between longs and shorts so that there would be no defaults at maturity requiring Chamber action.

Since wheat could not be controlled for more than one week, the method of liquidating contracts to the satisfaction of longs desiring wheat became as follows: A trader short, say of July wheat, might purchase either cash wheat or a to arrive contract. He would then find some miller or feed manufacturer with a long hedge in July wheat and negotiate an exchange of his cash wheat or to arrive contract for a like quantity of the July future, executing the futures trade on the floor of the exchange. Most open positions are stated to have been liquidated in this manner, mainly before the maturity date of futures contracts and the balance were liquidated by cash settlements between parties involving futures trades finally formally executed on the exchange floor. The greatest difficulty met is stated to have been to get speculators who were long to give up their positions for to arrive contracts.

Success of these efforts was undoubtedly ficilitated by a cooperative spirit among traders, by the fact that the total volume was not large, and by the fact that there was little speculative interest either long or short located at such distance from the market as to make negotiation of settlements difficult.

The general effect of the procedure was to protect the interests of longs while placing the burden upon both longs and shorts to work out the best arrangements possible under the circumstances.

EFFECT ON PRESTIGE OF THE MINNEAPOLIS CHAMBER

Officers and directors of the Minneapolis Chamber of Commerce state it to be their belief that actions taken to protect the validity of contracts, preserve the responsibilities of traders, and avoid assumption by the management of responsibility for determining profits and losses of traders were economically and legally sound in principle, and conducive to the welfare and public prestige of their association.

EFFECT ON FARM PRICES

One important effect to be noted, which became very evident in Minneapolis Exchange operations, was the effect of lack of a futures market, especially for wheat, in which new hedges could be placed by merchants and processors when the new crop really began to move. When prices went up sharply after July 1, the entire burden of risk in purchasing and storing wheat fell upon country buyers, terminal grain merchants and processors. The situation was accentuated by the transportation shortage which caused grain to pile up in country elevators even though its owners had orders on which it might have been shipped had cars been available. Country buyers and terminal grain merchants, alike, then protected themselves by bidding less for grain in the country. Country buyers bid low prices to the farmer to cover their risk or took his grain for storage subject to pricing later when sold. The latter course shifted the entire burden of risk to the farmer. The effect was lower prices in the country. It is a notable fact that the price of cash wheat sagged in the latter part of July.

Representations as to the need for a futures market in wheat were received by the Minneapolis Chamber of Commerce. Thereupon, on July 30, as soon as paragraph (m) of War Food Order No. 144 was suspended, the Chamber reopened trading in September and December wheat futures. Speculators, however, were unwilling to buy the shippers' short hedges with the future price trend uncertain. The price of cash wheat continued to be only a few cents above the May 13 ceiling price throughout August and showed little tendency to increase until September.

CONCLUSIONS

WHERE RESPONSIBILITY LIES

Events of the first six months of 1946 demonstrate from a new background of practical experience that failure of exchange managements to protect the validity of future contracts results in severe loss of public confidence. Loss of confidence was due primarily to pursuit by exchange managements of a vacillating policy which failed to insist that traders perform in accordance with the terms of contracts traded. In this, the Chicago Board, having least effectively steered a straight course in accordance with the fundamental principles of validity of contracts and responsibility of traders, bears the heaviest burden of public criticism.

In the regulation adopted May 12, 1946, effective on May 13, 1946, the Board of Directors of the Chicago Board of Trade stated that the Office of Economic Stabilization, the United States Department of Agriculture and the Office of Price Administration had "requested and recommended to governing boards of the Grain Exchanges that all futures contracts open at the close of business May 11, 1946, be settled at the then applicable ceiling prices." This recommended action was taken by the Chicago and Kansas City Boards of Trade but not by the Minneapolis Chamber of Commerce.

Conditions leading up to these actions had been developing for more than a year. In retrospect it may be questioned whether any exchange management took action at the proper time to forestall the difficulties met during the critical period. Exchange managements generally admit that such actions as were taken were tardy. This constitutes an admission either that they failed to recognize or, having recognized, failed to heed warnings of the storm that broke early in 1946. These warnings became very definite in 1945 when, with speculative interests predominantly in short position facing long interests who were predominantly hedgers who would not trade their open positions for anything but grain, the shorts were frozen in their positions and large defaults occurred. Nevertheless, exchanges closed out these defaults at ceilings. This meant little or no penalty to shorts. Continued speculation at ceilings in contracts for later months then open for trading was fostered with disastrous results later.

DUALITY OF INTEREST AND PARTIALITY OF ACTION

In accounting for acts either of omission or commission it is to be recognized that the individual members of exchange managements who govern the market place and determine both the terms of contracts and times when they may be traded are not wholly disinterested agents in the management of the market place.

This question of duality of interest on the part of management personnel is by no means a new one. About it controversies have centered in the Chicago Board of Trade for more than 50 years in which some important group of traders, such as warehousemen, or commission merchants, or one or both acting in cooperation with other membership groups, have been accused of dominating the Board's management and using its powers to their own advantage and to the disadvantage of other members as well as of both producers and consumers of grains and grain products. Latest among these controversies in Chicago is the charge of some members who were in long position as hedgers and were injured by actions taken on May 12 and June 13, 1946, that the very broad powers for emergency action under Rule 251 were consistently used only for the protection of short interests and commission houses. Also in Minneapolis, members of the Chamber's Board of Directors state that preservation of the machinery of trading to provide even a small opportunity

for commission broker operations was a factor influencing the continuance of open trading even after prices went to ceilings and other factors beyond the control of the Chamber were such as to make pertinent the question as to whether futures trading might better have been discontinued altogether.

Both State and Federal laws have been enacted to provide regulation in the public interest found to be necessary because boards of directors occupying positions of dual interest in the management of exchanges do not always act impartially in the management of exchanges. Yet the experiences of the first six months of 1946 would seem to indicate that present regulation might be materially strengthened and made more effective if it included power not now provided to advise respecting and regulate exchange policies and acts at the management level if and when exchange managements deviate from economically sound and equitable policies and practices. Such exercise of regulatory power would be preventive rather than punitive.

THE COMMODITY EXCHANGE ACT

The Commodity Exchange Act, in effect, sets up two administrative authorities and procedures to deal respectively with exchanges and traders thereon. Authority to designate "contract" markets rests with the Secretary of Agriculture. If the Secretary refuses to so designate any exchange applying for designation, the exchange may appeal to a commission consisting of the Secretary of Agriculture, the Secretary of Commerce and the Attorney General for review. In addition, this Commission also has sole power to suspend or revoke any contract market designation. All decisions of the commission are subject to court review on appeal to United States circuit courts of appeal by exchanges or boards of trade affected.

The administrative power in proceedings against traders, however, rests with the Secretary of Agriculture who may initiate a complaint against any person (other than a contract market) for violation of the Act, and, after hearing, and upon evidence taken, may require all contract markets to deny trading privileges to such person for such period as may be specified in the Secretary's order. If the person is a registered commission merchant or floor broker, the Secretary of Agriculture may suspend, for a period not exceeding 6 months, or may revoke altogether, the person's registration. Orders of the Secretary, likewise, are subject to review by United States circuit courts of appeal on motion of persons affected.

Also the Commodity Exchange Act provides that each contract market shall "promptly furnish the Secretary of Agriculture copies of all by-laws, rules, regulations and resolutions made or issued by it or by the governing board thereof or any committee, and of all changes and proposed changes therein": The Act, however, does not in terms define any powers or duties the Secretary of Agriculture may have to advise respecting, approve, disapprove, or order change in policies involved or acts authorized or directed by the documents filed.

The intent of the law obviously is to hold both exchange managements and traders responsible for violations of its provisions. It, however, can hardly be maintained that the law has provided a basis for attaining its obvious purpose.

One of the criticisms aimed at Commodity Exchange regulation has been that regulatory proceedings have been directed at acts done by particular traders or groups of traders rather than at holding commodity exchange managements responsible for policies and acts either of omission or commission respecting the conduct of trading on their floors. Apparently this tendency is inherent in the situation. With outside regulatory authority set up by law, exchange managements seem prone to leave the responsibility for regulatory action to that authority. On the other