ness will not support a private-wire system. This is generally admitted. Some primarily cash houses use private wires, however. One such house describes the situation as follows:

Our private wire runs from our office in Chicago to our branch office at

a distance of about 60 miles. We have no drops, and the wire is merely used in connection with our cash business. We use the telephones from through territory wherein our customers or grain shippers

are located. This wire has been under lease by us since 1910.

Some cash-grain concerns have met wire-house competition by themselves leasing wires, and a few small systems have been built up on such a foundation. Whenever a cash house leases a private wire, however, with the possible exception described just above, its futures business promptly becomes important. If the wire mileage is small, however, perhaps extending only a comparatively few miles out into Illinois, the firm may still remain primarily a cash-grain house. But a receiver who develops a private-wire system may fairly be said to be obliged to go into the speculative business. Two of the large elevator merchandizers have developed private-wire systems. Each is also a "commission merchant," however, and hast a large volume of futures business, though, presumably (in one case clearly) originating mostly from men in the grain trade. In some of these cases the wire systems might be considered as largely "industrial"; that is, as having reference to the internal needs of the business rather than to profits from speculative brokerage. In one case the system serves mainly to keep the head office in close touch with representatives in distributing or exporting and shipping centers and with terminal and country elevators operated by the corporation and its affiliated companies.

The large wire houses that have receiving departments use their private-wire system in connection with their cash-grain business, and doubtless find it to great advantage to do so. It has been called the up-to-date method of handling cash grain. It helps to build up their futures business. Private-wire systems were organized in the first instance with reference to futures and other speculative business exclusively. Many of them preferred not to bother with the cash business. In the past few years, however, most of them have organized cash departments. The old-line receivers, as already noted, are inclined to feel that this policy is a sop to public opinion. In some cases the cash departments of the wire houses are of almost nominal importance, but in several cases large and important receiving interests have been developed by wire houses in the last 10 years.

The fundamental reason for the existence of private wires in the grain business may be inferred from the use to which such wires in

general are put. According to the recent Interstate Commerce Commission investigations:

At the time of the hearing approximately 80 per cent of all Morse-service leases were taken by bankers and brokers, who operated 80 per cent of the leased mileage and paid 80 per cent of the leased-wire rentals. Over 86 per cent of all private-wire stations were on bankers' and brokers' wires. If to the bankers and brokers are added the meat packing and the iron and steel industries the aggregate rises to 89 per cent of all leases and 96 per cent of all mileage and stations. These lessees numbered 144. Throughout the whole United States, as served by these respondents, the Morse-service lessees, other than bankers, brokers, packers, and iron and steel industries, numbered only 39, and operated only about 4 per cent of all the leased mileage here under consideration. Practically all of the industrial lessees of Morse service are among the larger and more powerful houses in their respective lines.1

The two classes additional to the two mentioned (bankers and brokers, and industrial concerns) which account for the remainder of the 100 per cent are common-carrier railroads and the public press. Therefore, aside from considerations derived from observation of the grain trade, it appears correct to regard the grain private wires as primarily a future trading facility. Once established, they are, of course, put to any collateral use consistent with their main service which will bring in additional revenue. They do not exist merely for the sake of future trading.

It is evidence of the connection between private-wire service and future trading that such wires, reaching out from a terminal market not merely to other terminal markets but to tributary small towns, are of importance among grain markets only at Chicago, the great future-trading center. Minneapolis has a single small wire system and Kansas City none, while Chicago has a score.

GRAIN FUTURES OFTEN HANDLED AS A BY-PRODUCT OF STOCK-EXCHANGE BROKERAGE.-Some of the private-wire systems were developed with reference to the grain-futures business primarily, and others are primarily stock-exchange houses whose wire systems are also available for grain-futures business. Doubtless, if a separation of the two uses could be made, the stock-exchange wires would be found to be much more extensive than the grain wires. It is not possible to separate banking, especially investment banking, from brokerage service. As regards the various speculative markets, moreover, practically no private wire is devoted exclusively to grain business (unless on an industrial basis), though there may be some devoted exclusively to stock business. The general situation is that private wires are used for speculative orders not only in stocks but also in grain, or perhaps in grain principally and stocks secondarily, also in cotton and coffee, and anything else for which there happens to be a

150 I. C. C. 738.

speculative market, where it is important that buying and selling orders, regardless of distance, reach, as promptly as possible, the hands of those who execute them. This fact, that even the grainfutures business may be, in effect, a by-product service, and perhaps cash-grain receiving be taken on as a further by-product, does not improve the situation from the viewpoint of the cash-grain man as regards his attitude toward private-wire competition. With one possible exception, there is no clear evidence that the receiving business of the wire houses is profitable except on a by-product basis and as a means of utilizing an expensive organization when the futures business happens to be slack.

Section 10. Do the private wires encourage speculation?

THE BUSINESS-GETTING TENDENCY.-The complaint is often heard that the wire houses encourage speculation. It is probably not true that a large proportion of the firms engaged in this business definitely seek to draw into the trade outsiders who have no interest in the grain business. But some wire houses do seek commission revenue from this class of business, through solicitation and advice of partners and employees, if not by advertising. It is said that, even where the heads of the concern are not desirous of taking orders from miscellaneous outsiders, they are not in control of the situation, because their managers of branch offices or their correspondents are rated or prosper according to the amount of business they get, hence are disposed to obtain as much as possible from all sources. There is a regulation governing the compensation of branch-office managers, who, together with the country agents of cash-grain houses, are termed solicitors, as follows: 1

Solicitors may receive from their employers compensation in the form of a fixed salary; such salary not to be changed until it has been in force at least six months.

This applies only to branch offices, since a correspondent is a member and takes his compensation in the form of half the full-rate commission. The provision is designed to prevent varying the compensation of a solicitor according to the business he obtains, but in the nature of the case it has little effect. The quotation is from regulations adopted by the Chicago board of directors, but Minneapolis and other exchanges have similar provisions. A correspondent, in a small town in particular, may find it necessary to get outside speculative business in order to maintain his office. Moreover, the long private wire between two terminal markets at the rate of $20 or

1.1918 annual report of the Chicago Board of Trade, p. 130 of second part.

2 Some discussion of measures of the Chicago Board of Trade designed to control of correspondents is found in section 8 of Chap. II.

more per mile per year costs a great deal, and it is natural to seek to meet the expense in part by providing drops and taking on correspondents at some of the small towns along the way. In general, too, the very efficiency of the private-wire system, combined with the fact that there is a very heavy fixed charge for the lease of the line, means that, all the ordinary or necessary business being disposed of very quickly and the wire thus left to be used largely for unimportant gossip, there is a special inducement to take on some other business to better the load on the wire. To illustrate, if the hedging business and the business of large operators interested in the grain trade will about pay for the lease, then even a comparatively small volume of outside speculative business will make all the difference between large profits and no profits at all. The private wires are under a strong temptation to encourage miscellaneous speculation.

ALLEGED EASIER PROFITS FROM FUTURE COMMISSIONS.-Men who are interested in both the receiving business and the future commission business, say that the profitable part of the business is the futures. Such a situation, under conditions of fixed rates of commission, naturally results in competitive betterment of service in order to get the futures business. The wire house is the outcome. A local commission man with a business exclusively in futures says that in the nineties, by circularizing, he could get some outside commission business, but that a few years ago, when he spent considerable money upon such a project, he awakened a great deal of interest and received replies that evidenced such interest, but got no business from his expenditure. Doubtless some business was brought into being by it, but it went to the private-wire houses.

RELATION OF WIRES TO JOB-LOT TRADING.-The relation of the private-wire houses to job-lot trading is illustrative of their tendency. Members not friendly to the wire houses blame them for the existence and encouragement of this class of business. Its importance has, as a matter of fact, developed with the dominance in the futures commission business of the private wires. But the explanation of the situation is not merely that the private-wire men are unscrupulously trying to get the little fellow into the game for the sake of commission revenue, but the fact that they can transact 1,000-bushel-lot orders profitably, while the commission house without wires finds no profit in such business because the telegrams giving the order and reporting the trade are paid for by it. In many cases the cost of the telegrams would amount to as much as the commission. But it is not necessary for the private-wire house to charge any of the fixed cost of its wire system to this class of business or, if its cost acounting theories suppose such an allocation, the average rate per message is but a small fraction of the

public-telegram rate. In other words, the need of more fully utilizing wires impels to a broadening out of the speculative clientele in fields which the old-line commission merchant finds not worth entering. It is not to be inferred that the job-lot business in question is all purely speculative. Some of it results from hedging by farmers or from closer hedging by country elevators. It is said, and it is probably true, that:

The volume of hedging has increased during the last decade on account of the facilities the private wires have been able to extend to the country.

In the way indicated the existence of costly facilities with fixed charges to be earned operates as a stimulus to speculation, quite independently of the moral motivation of any class of exchange members, and fosters the evil of participation in speculation by the outside public.

BETTER FACILITIES AND OPPORTUNITIES STIMULATE SPECULATION.—In order to maintain the private wires, a much larger volume of business is necessary than for a commission merchant without such wires. The contribution to volume of business made by a particular lease is closely watched in the case of an efficiently managed firm. One wire-house partner says:

We figure whether a wire pays or not by the volume of business coming to us over that wire, comparing that with the rent of the wire and all operating expenses; and a wire must be a paying proposition within a reasonable time after its installation or else it is chopped off.

The private-wire house is certainly not a disinterested observer of the growth of future trading, and is doubtless more interested in speculation, because of its greater potentialities, than in hedging business.

The quotation and news service of the private wires has been described in another connection. Apart from any intention to promote speculation-though such an intention is evidently often operative-the continuous receipt of news, including statistical information and gossip, stimulates interest in the market. It is said that the wire houses seek to cause fluctuations by their gossip, thus keeping customers active in buying or selling and contributing to commission revenues. On the other side, a wire-house partner describes the situation favorably to the wire houses, in a way also to imply that they increase the amount of speculation, as follows:

Through the facilities offered by the private-wire houses a great many more persons are put in possession of the facts upon which they can intelligently trade. Although private-wire facilities are doubtless of use to the cashgrain trade, they serve chiefly the purposes of speculative trading in