fense for default in delivery. The provision in the rules of 1869 looks to the fixing of a settlement price in the case of a corner.1

No such need is definitely recognized in the rules for 1877. The 1881 rule is in effect the same as the 1910 rule above cited, in which no reference is made to the allegation or fact of a corner.

A statement from the Chicago Tribune's review of grain-market conditions at the close of 1882 shows the somewhat conflicting and confusing grounds and results of the so-called "corner" rule. This statement in part is as follows:

2

The first attempt at preventing the recurrence of disastrous corners was made in 1873. The rule then adopted provided substantially that the committee called in cases of default should fix the price by reference to the value in other markets. This was found to be unfair to the buyer of property, tending to an undue lowering of prices, and July 24, 1879-three and a half years ago-the Board adopted the well-known “rule 27," after having voted it down in April, 1878. That rule increased the power of the committee by authorizing them to take into consideration (also) the value of the property for other purposes, meaning its value as determined by a demand to fill contracts. The rule was equitable enough in spirit and was interpreted fairly enough till within the last 12 months. Recently it has been construed to favor repudiation by the short seller who chose to claim that the market was higher, in his judgment, ` than it ought to have been. It was claimed, when the rule was offered for adoption, that the object was chiefly to prevent a party on the long side from rushing up the market 10 and 20 per cent on the last day of the month so as to force a very high settling price on the obstinate ones among the shorts. This view of the case was generally held for nearly three years, after which it was falsely claimed that the intent of the rule was to prevent a party from collecting damages above the basis on which the property could be shipped to other points without loss.

*

*

The second sense of the board seems to be opposed to the blotting out of corner rules. It is desirable that there should be some means of protection accorded for men who are not to blame for omitting to deliver. But there should be no inducement to default deliberately.3

The review quoted contains reference to bucket shopping and trading in differences, implying that if the short seller were allowed to settle on the basis of mere shipping value, future trading would degenerate into mere trading in differences.

1 The rule in question (Rule XIII, sec. 1) reads as follows:

Whenever any member of this Board shall claim that the fulfillment of his contract is interfered with by the existence of a 'corner,' the president of the Board shall, upon the application of any party to such contract, appoint a committee of three disinterested members of the Board, who shall decide as to the existence of a corner and if they find that a corner' existed at the time of maturity of the contract, such contract shall be settled on the basis of actual value as compared with other property of the same kind, but of a different grade in this market, and with property of the same grade in other markets, such value to be ascertained as near as may be, and a price to be fixed by a majority of such committee."

Taylor's History, p. 650.

The date given is not that of the earliest attempt of the Chicago Board of Trade to prevent corners.

In the annual report of Chicago Board of Trade for 1882, President Dunham, in his report to the board of directors, dated January 15, 1883, comments on the same situation as follows:

The crops of 1881 in the West were a partial failure, the result of which appears in diminished receipts from those crops at this point. Speculative operations on orders to our members seemed to be forwarded regardless of this important fact, and on repeated occasions it was found that the mass of these dealers had contracted to deliver property which they were utterly unable to procure. The result was unsatisfactory in respect to the settlement of their obligations, and our rules touching such contingencies were overthrown as being in their application unsuited to such occasions. It is to be hoped some new or improved system may be devised by a committee now having that subject under consideration which shall operate more satisfactorily than those which have been discarded. Your directors are clear in the conviction that no rule of the association which in any degree seems to invite the defaulting on contracts for the delivery of property ought to be tolerated by the association. *

*

* 1

ADMINISTRATION OF THE PRESENT RULE.-A short seller, or an elevator, caught in a corner, may default and allege that the market price at the close of the delivery month was the result of manipulation and not representative of true value. The spirit in which this rule is administered, however, is not such as to encourage defaulting, even under abnormal conditions. Buyers are able to enter the pit at the close of the market and bid up the price in a way to make an abnormal record. The committees appointed as provided for above, it appears, nevertheless, make such a price the basis of settlement. There are squeezes still. Thus the short seller may have to settle at more than 10 per cent above shipping value. Or the hedging elevator may be thus punished, even though it has the grain at some other market. This is not due entirely to the tendency of the committee to be technical, since there is a strong sentiment that a contract should be lived up to specifically. The majority of the committee is in sympathy with the speculative trade. But there is no disposition to make things easy for the short seller who does not cover or deliver. The power in question is referred to by one of the Board's committees as "the power of the Board to penalize short sellers by requiring them to settle at the average price in the pits on the last day of the month.” 2 While the rule providing for settlement in case of default on delivery is a safeguard against corners, in its present form it is in effect directed rather at short sellers and at manipulation from that side of the market. The secretary of the Chicago Board, under date of February 1, 1915, describes the effect of the rule as follows:

The present rules of this Board in reference to manipulation have been found more effective than were previous attempts at controlling this evil. Notwithstanding the drastic penalty rules for extortion and for manipulation, etc.,

tried out in the lapse of years, nonmembers acting through several houses here concurrently, thereby limiting the amount in any office to a relatively inconsequential quantity, could and did corner the market or manipulate it.

Some four years ago, section 1 of Rule XXIII of our rules, was repealed and the present section substituted therefor. Its application is to members and to nonmembers alike. The theory of the rule is, that no one can afford to manipulate or corner a market for 5 per cent, the minimum assessed penalty for failure to deliver, and no one would willfully default in performing a contract when there were no manipulated conditions, and thereby incur a penalty of 5 per cent, or possibly 10 per cent, as provided in the rules.

The rule has been used several times, and because it, in common with all of the rules, is a condition of every contract entered into on the exchange by all members, there is no stigma attached to closing a contract as provided therein. The 5 per cent or more as in the judgment of the committee to be appointed as provided in the rule, is designed to be a sufficient compensation to the buyer for being obliged to repurchase the property as well as to cover the risk involved in the premises.

The question at issue in the matter of settlement on default depends upon whether it is wise to recognize the use of grain or the demand for it in the pit merely to meeet contracts for future delivery as a legitimate factor in commercial value, and a factor that may properly raise the price above what it would otherwise be on the basis of shipping and consumptive uses.

THE DECLINE IN PUBLIC-ELEVATOR CAPACITY AT CHICAGO AND OTHER CONDITIONS.-One reason for the comparatively recent dates of adoption of the rules providing for track delivery designed to meet emergency conditions has doubtless been the decline in regular elevator capacity in the Chicago district. Such capacity reached its maximum of 34,000,000 bushels in 1894. It had declined to 21,950,000 bushels in 1904 and to 11,700,000 bushels in 1918. There has been no similar decrease in the total capacity of Chicago grain elevators (including private houses), though the total in 1904 was greater than at present.

Another factor in the adoption of rules designed to defeat corners has doubtless been the development of a feeling that artificial corners are functionally wrong and that the Board should not be satisfied merely with conformity to the rules of the game. In the nature of the case, however, it would doubtless be. difficult to formulate a definite and practicable rule against corners as such under existing methods of dealing, since the question is one of intent in the mind of the long operator as well as of circumstances at the close of the option. In general, the larger the amount of grain that is deliverable, or the larger the proportion of the crop that meets the requirements of "contract grade," the less the chance of a corner. In other words, the more grades and varieties deliverable, the less possibility of a The tendency to a more liberal or inclusive policy in defining requirements for delivery under future contracts may be attributed largely to the desire to prevent corners. There was a time

corner.

when a single grade of a single variety was deliverable, while now it requires half a page to list the varieties of wheat deliberable at Chicago. The section below dealing with the subject of contract grades shows the tendency in question.

That the extent of available regular elevator capacity is an important factor in lessening the likelihood of corners and that in this respect the situation at Chicago is not improving has already been noted. The fact that under the Illinois law a warehouseman can not store his own grain in a public warehouse owned by him possibly tends to restrict the available capacity there. Other markets are not so hampered. At Chicago, however, an elevator wishing to deliver grain can put it in another public house or directly evade the law. Of course the elevator capacity of a terminal market depends primarily upon the extent of its cash-grain trade. A futures market must therefore also be an important cash market.

CORNER RULES ON EXCHANGES OTHER THAN CHICAGO.-Rules of the Minneapolis and Kansas City exchanges regarding default on delivery by sellers imply that other alternatives to a committee decision are more usual and do not specifically provide for penalizing the short seller caught in the delivery month. Only the St. Louis exchange, besides Chicago, appears to have the latter provision.

Section 8.--Deliveries to customers.

THE CUSTOMER NOT NECESSARILY INVOLVED IN DELIVERY.-The foregoing consideration of deliveries refers to transactions between commission houses or members of the clearing house. While some of these buy on their own account, is is especially pit scalpers who do this, and they do not expect to take or make delivery. There is the same sort of a distinction to be made between the house and its customers as regards deliveries as there is in other matters affecting open trades, to which attention has been called in considering margins. The broker in these matters is not an agent of his principal in any sense that permits the shifting of responsibility but is completely substituted for him as regards obligations to other members under future contracts. Why this is so will appear later in connection with the consideration of settlements.

If customers' open trades cancel each other and the house is able to settle all trades, the question of delivery is merely a matter between the customers of the house. As a matter of fact, however, an ordinary customer would never think of obtaining possession of a warehouse receipt and turning it in to his broker in satisfaction of a future contract. As indicated above, practically all sales upon which delivery is made originate with the elevators.

CHOICE OF A CUSTOMER TO WHOM TO CHARGE A STOPPED DELIVERY.— If a commission house stops a delivery, then the question arises as to what customer's account it shall be charged to. If there is a preference for deliveries among certain of the customers having long trades open, of course that will be a sufficient guide. If the customers with long trades open have no preference, except possibly that all prefer not to take delivery, or if all want the actual grain delivered, then the rule is said to be that the warehouse receipt goes to the oldest trade open. Some who want delivery may prefer to get the warehouse receipts as late in the month as possible, for example, those who need the grain to make shipments on contracts for the ensuing month. Such preferences are regarded so far as possible, and otherwise the priority rule is applied first as between those who want delivery and then as between those who do not. But statements of different commission merchants upon this subject are not altogether consistent with each other, from which situation it may be inferred that practices differ. It appears that in some cases the warehouse receipt delivered will be placed where it fits the open trade best as to quantity, or if that does not decide the question, it is said that it will be placed to the account of the largest customer.1

SPECULATORS DO NOT WANT DELIVERY.-The casual speculative trader is, of course, ignorant of what to do with a warehouse receipt when he gets one, but the commission house usually has the facilities for carrying the grain and selling it for him, so that his acceptance of a delivery usually means merely a continuance of his speculative interest in the market, but with further expense charged to his speculative account to pay carrying charges in the form of interest, storage, and insurance. If the broker himself has not the facilities for selling the grain to advantage in the cash market-perhaps by shipment for export-he will get some commission house with shipping connections to attend to the matter. Of course, the buyer of a future who has stayed into the delivery month and to whom delivery is made can dispose of the grain by a future sale for delivery in the current month and immediately deliver out the receipt. Sometimes warehouse receipts obtained on delivery are similarly disposed of after the close of the standard option month by selling an oddmonth future for current delivery, for example, selling January corn in January to get rid of receipts taken in on delivery in December.

HEDGERS DO NOT WANT DELIVERY.-As has already been noted, hedgers, also, do not in general make or take delivery. An elevator not

1 At Minneapolis (Rule IX) and Kansas City (Art. VI, sec. 11) the clearing houses are by their rules definitely required to close the oldest trade on the books first in making deliveries.