eries. Buyers who wish to be sure to escape accepting delivery sell out or liquidate their contracts before the delivery month arrives. By far the great majority of future contracts never reach the stage of delivery. This is true of merely speculative contracts, especially in the case of small speculative traders, but it is also true-though possibly to a less extent-in the case of hedges.

Most of the sales in the futures market on which the seller expects to make delivery, of course, originate with the terminal elevators. These large merchandisers of grain have both private and public elevator capacity, and if they find it advisable to dispose of some of their grain through sales of futures, will transfer it from their private elevators to the regular public warehouses. Under the laws of Illinois, public warehouses can not store their own grain in public bins and issue it on delivery, but there are simple methods in use for evading this requirement.1

DEFAULT BY THE BUYER ON DELIVERY.-In case of default on the part of the party to whom delivery of the warehouse receipt is due, the party making delivery has the right to sell the grain in the open market (upon the observance of certain requirements designed to safeguard the interests of all parties, including adequate notice to the buyer), in which case the defaulter is liable for certain fees. The remedy for defeated delivery due to the absence of the buyer from the delivery session is of the same nature. Default on delivery by a seller is disposed of by a different method, as appears in the following section.

3

METHODS OF EXCHANGES OTHER THAN CHICAGO.-Minneapolis has a system of deliveries by notice similar to that of Chicago. Elsewhere there appears to be no such volume of deliveries on future trades as to occasion the devising of special methods. Under the complete clearing-house system where there is a clearing corporation, as at Minneapolis and Kansas City, it is contemplated that deliveries will largely be made to and by the clearing house.

1 For a description of this situation, see Vol. III.

*

2 "All expense and risk of carrying property defaulted on, including a commission of one-quarter of 1 cent per bushel on grain, * ** shall be payable to the party required to make resale, by the party to whom he had the property sold, he to be reimbursed by the one to whom he delivered the notice of delivery, and so on until it is finally paid by the party in default. And in case of such default and resale of property all differences shall be adjusted, as hereinbefore provided, on the basis of the price at which the property shall have been resold.” (Rule XXI, sec. 2.)

"Any property which can not be delivered owing to the absence of the buyer from the exchange hall, or such other place as the directors may have designated for the purpose of delivery, may be sold out by the party having same sold to such absentee, as herein before provided in cases of default; * * * provided, however, such property shall not be sold until the absentee has had notice in writing, either delivered to him in person, to his business representative, at his place of business, or left at the secretary's office in case he has no regular place of business, that the property was ready for delivery under this rule on his contract." (Rule XXI, sec. 2.)

Section 7.-Safeguards against corners.

THE EMERGENCY RULE FOR REGULAR STORAGE AT CHICAGO.—Under an emergency clause, the board of directors of the Chicago Board of Trade has power to expand or substitute facilities for delivery beyond or in place of the warehouses designated by the Board for the issuance of regular receipts. The emergency rule relates to " any storehouses, vessels, or places suitable for the storage of grain or flaxseed within the Chicago switching district wherein the cost of delivery to vessels or railroad cars shall not be greater than such as is made by the regular elevators for the same service." Regular storage capacity for the past few years has stood at about 12,500,000 bushels. This is not as large as the amount of regular storage that was formerly available. In addition to this, the Chicago district has something over 42,000,000 bushels of private grain-storage warehouse capacity.

1

Use was made of this emergency provision by vote of the directors of the Chicago Board on May 25, 1916, or at least permission to make use of emergency capacity for future deliveries was granted. Only on one other occasion in the past generation does it appear that the directors granted such permission. In neither case was the permission used. The large accumulation of grain in public warehouses has been the occasion of such emergency action and the threat of more storage capacity appears to have been sufficient to cause long traders to accept lower prices from shorts covering their contracts in the pit. The tendency to a higher price for the contracts than for the actua! grain toward the termination of their period, said to be observable “a great many years ago," it is claimed, has been done away with by this and other measures and policies of the board of directors of the Chicago Board of Trade.

DELIVERY IN CARS.-Furthermore, delivery in cars direct from the country, has been made possible. This provision reads as follows:

On and after January 1, 1915, grain in cars, including that graded subject to approval," shall be deemed a valid tender on contracts during the last three business days of any month, under the provisions of the rules pertaining to the delivery of warehouse receipts, the railroad receipt issued against same evidencing ownership serving to convey the title to the grain, same as warehouse receipts issued against grain in warehouses.

* * *

1 The emergency clause (Rule XXI, sec. 1) reads as follows:

"The board of directors shall have power, when in their judgment an emergency exists requiring more storage room than can be supplied by the regular elevator warehouses, or because of an inability to obtain insurance on grain stored therein, to declare any storehouses, vessels, or places suitable for the storage of grain or flaxseed within the Chicago switching district, wherein the cost of delivery to vessels or railroad cars shall not be greater than such as is made by the regular elevators for the same service, to be regular places for the storage of grain deliverable under the rules of the Board of Trade."

This provision is not new. It appears as section 1 of Rule XXV in 1881. But the underlined clauses first appear in 1913. Before that the locality was described as "within the city limits."

Rule XXI, sec. 1.

The cars must be within the Chicago switching district. The making of delivery under this rule is safeguarded by very specific administrative requirements, referring to inspection, grading, weighing, use of railroad receipts, unloading, or diversion, etc., which are designed to protect the interests of the buyer who must accept delivery under special circumstances. This rule was adopted in 1914 and went into effect in 1915-that is, rather recently. Of its operation the secretary of the Chicago Board says, under date of March 14, 1916:

This rule was enacted about two years ago and has served a most useful purpose on two or three occasions since that time. It was enacted because of a lack of unloading facilities, which have steadily decreased. Whereas some 25 years ago we had some 50,000,000-bushels capacity of public elevator storage, we have now room for but 14,000,000. * ** * Of late years toward the end of the delivery month, at times tracks have become congested by grain arriving for delivery on contracts, and because of the decline in elevator capacity the unloading of these cars in time for delivery has been impossible. To remedy this defect and make it difficult to corner the market, and to remove doubt on the part of the country dealers about the unloading of their grain in time to be delivered, this rule was prepared. * Last September much grain

*

**

was delivered in cars. Also last May a considerable quantity was delivered in cars. It may now be considered a fully seasoned rule, having been tested out and securing the benefits it was designed to secure.

It appears that the Chicago membership voted down such a rule

in 1913.

ORIGIN OF THIS RULE AT KANSAS CITY.-In adopting the above rule Chicago followed the example set by Kansas City. By vote of the membership of the Kansas City Board on August 27, 1912, an amendment to the rules was adopted which reads as follows:

When in the opinion of the directors an emergency exists, they shall have the power to authorize and permit delivery on regular contracts of contract grades of grain in cars on track in the switching limits of Kansas City, and shall prescribe the manner in which such delivery shall be made. Directors shall also determine the length of time during which such emergency rule shall be effective.

Use was made of this rule by resolution of the board of directors on September 17, 1912, permitting track deliveries from September 19 to September 30, inclusive, and specifying necessary conditions. In answer to objections of Mr. Marcy, president of the Armour Grain Co., the directors affirmed their opinion that the regulations were fair, and should stand. In fact, the adoption of the rule resulted from an attempted Armour corner. Under it heavy deliveries in cars were made. By amendment adopted on March 25, 1913, the rule was made to read as follows:

During the last six business days of any delivery month regular deliveries of contract grades of grain on contracts for future delivery may be made in cars on track within the switching limits of Kansas City.

The present Kansas City rule operates without any prior action of the board of directors being necessary, being thus automatic, and it is otherwise more liberal than the Chicago rule above quoted.

CAR DELIVERY AT CHICAGO MAY NOW BE MADE REGULAR AT ANY TIME.In 1918 a further step designed to forestall the technical exploitation of delivery conditions was taken by the Chicago Board by adding to section 1 of Rule XXI, paragraph E, which reads in part as follows:

At any time when, in the judgment of the board of directors, an emergency exists, grain in cars shall be deemed a valid tender on contracts, on any business day of any month, etc.

The need of such a rule was called to the attention of the board by conditions affecting corn deliveries in September, 1918, when there was little available storage capacity, owing to heavy stocks of wheat, and when the elevators were not exerting themselves to provide room because of the right of appeal on the grading of corn, of which technical advantage was taken by dealers, to the new Federal inspection. Further reference to this situation will be made in considering corners and decreed settlements. This rule makes delivery on future contracts almost independent of the existence of public warehouses. The railroad bill of lading takes the place of a warehouse receipt. But it is important to note that the rule does not work automatically, but only upon decision by the board of directors that an emergency exists.

DEFAULT OF THE SELLER AND AN ARBITRATED SETTLEMENT PRICE.All the above-mentioned emergency provisions are directed against corners. There is a further possible recourse in case of a corner afforded by a provision of Rule XX, which is applicable upon default in delivery on any future contract. In case of failure to deliver, provision is made for a money settlement, including a penalty. The rule is as follows:

In case any property contracted for future delivery is not delivered at maturity of contract, the president shall appoint a committee of three from the membership at large, to be approved by the board of directors, which committee shall determine as nearly as possible the true commercial value of the commodity in question on the day of maturity of the contract, and the price so established shall be the basis upon which settlement is made.

As liquidated damage the seller shall pay to the purchaser not less than 5 per cent, nor more than 10 per cent, of the value of the commodity as established by the committee; the percentage, within said limits, to be such as, in the judgment of the committee, may be just and equitable. (Rule XXIII, sec. 1.)

This provision is not applicable to a party having the option both bought and sold. The general effect is to penalize short sellers who

169514°-20--12

are unable to deliver. Formerly, that is, from at least 1892 to 1911, this rule did not definitely impose a penalty.1

2

Redress in case of failure to accept delivery and pay for the warehouse receipt is simpler, being effected through the sale of the property and the collection of the difference between the price so obtained and the contract price. The arbitrated settlement price resulting from default on delivery is doubtless applied generally, once such a price has been fixed for a particular delivery, although the rule contemplates the appointment of a separate committee for each case on default. Minneapolis and Kansas City rules provide for the general use of an arbitrated settlement price.

3

The rules themselves do not define "true commercial value" with specific applicability to this situation. Nor can it be assumed that such value is, by implication, defined in another connection which has reference to margin calls. The provision in question is as follows:

In determining the value of property under this rule its value in other markets or for manufacturing or consumptive purposes in this market, together with such other facts as may justly enter in the determination of its value, shall be considered, irrespective of any fictitious price it may at the time be selling for in this market. Such value, for the purposes of this rule, in case of disagreement shall be determined by the board of directors and communicated to the parties in interest through the president or secretary.*

The practice of other exchanges suggests the applicability of this definition to cases of default on delivery. But it is not so applicable at Chicago. The powers of a committee appointed under Rule XXIII, section 1, to fix a price that has reference primarily to conditions in the pit at the maturity of the option has been sustained by the courts in the case of Lanyon v. Bennett.

EARLIER CORNER RULES AT CHICAGO.-As early as 1869 the rules of the Chicago Board of Trade recognized the possible necessity of mitigating under special conditions the requirement of a literal performance of the obligation to deliver under a future contract, and also expressly recognized the existence of corners as morally a de

1 In 1910 sec. 1 was as follows:

"In case any property contracted for future delivery is not delivered at maturity of contract, the purchaser may, if he shall so elect, consider the contract forfeited; or he may purchase the property on the market for account of the seller, by 1.15 o'clock of the next business day, notifying him at once of such purchase; or he may require a settlement with the seller at the average market price on the day of maturity of contract, and any damages or loss due to the purchaser, by reason of such purchase or declared settlements, shall be due and payable by the seller immediately.”

The new rule was adopted July 1, 1911.

2 Rule XXIII, sec. 2.

The rules of the Chicago Open Board of Trade specifically make an arbitrated and adjudicated settlement price applicable to all contracts for the same commodity and delivery. (Sec. 116.)

4 Rule XX, sec. 7.

U. S. District Court, Northern District of Illinois, Eastern division, 1918.