practices usually preceded the making of rules, but also much of the apparent restriction of trading to definite types results from absence of sufficient occasion to afford facilities for variant forms of trading rather than from limitations upon freedom of contract. In order to provide an adequate market, the trading must not be too much split up and subdivided among contracts not comparable with each other and therefore not subject to like competitive conditions. Much of the uniformity of trading reflects merely the fact that the Board will not furnish quotations unless or until trading is sufficient to warrant it. With regard to the obligations imposed by the contracts, of course there are very definite rules.

After the United States entered the war a rule was adopted conferring upon the board of directors "during the continuance of any war to which the United States shall be a party" extraordinary powers over future and other contracts and over rules, amounting to a delegation of the legislative powers of the membership to the directors, and indeed conferring upon them powers over future contracts which it is possible to question the right of the Board itself to exercise. These powers were conferred (it is alleged) partly at the instance of the Federal Government and have been exercised to a large extent in cooperation with the United States Food Adminis

tration.

Under these powers, not only has future trading been discontinued in certain grains-such a regulation does not necessarily involve changing the terms of contracts already entered into-but limits have been placed upon the rise of the future price applicable to existing contracts, and settlements at decreed prices have been made from time to time. Such procedure has not commended itself to certain. of the more conservative element in the board membership.2

1 "The board of directors, during the continuance of any war to which the United States shall be a party, shall have power from time to time to thereafter prohibit, until further action of the Board and notice thereof, trading for present or future delivery in any or all of the commodities traded in on its exchange, or such trading for delivery in any particular month, including trading in settlement of any then existing future contracts. Whenever such trading for future delivery shall have been so prohibited, the board of directors shall appoint a committee of three from the membership at large, which committee shall fix, as of the day immediately preceding the first day on which said future trading shall have been prohibited, a fair and reasonable price at which existing contracts shall be settled, and the price so established shall, without the payment of any penalty, be the basis on which such settlements of such contracts for future delivery shall be made. The board of directors, whenever the public welfare, or the best interests of the association in its judgment seem so to require, shall have power to suspend, during the continuance of any war to which the United States shall be a party, the operation of any rule of the exchange, and also to fix a maximum price for any commodity dealt in on its exchange, above which price no member shall thereafter and during the maintenance of said maximum price, be permitted to make a trade in such commodity." Rule XXIII, sec. 3. This rule was adopted July 19, 1917, by the Chicago Board and went into effect the next day; and such action was copied by the Kansas City Board on July 28. The Minneapolis Chamber of Commerce, it appears, did not take similar action until Apr. 11, 1918.

* Recognition of the uncertain legal foundation for some of the restrictions adoptedabolition of future trading is, of course, a different matter-is to be noted in the resolu

The rules of the Chicago Board of Trade that constitute, in effect, the substance of the future contract on the most important futures market are numerous, and will be dealt with in detail in the course of this discussion. The "future" as such is nowhere defined in the rules. This situation is the natural result of the gradual evolution of this form of trading out of purchases of grain to arrive" and by grade, and is not due to conscious contrivance. The departure from sales on the spot and in sight once begun, there is no natural stopping place short of the fully developed "future." For this reason-and not merely because the dubious reputation of futures with most of the general public makes it expedient to emphasize the connection-there is doubtless a closer connection in the minds of men in the grain trade between cash transactions and futures than is logically necessary or practically perceptible to the outsider, especially to such a one as uses the system of future trading merely because it offers facilities for "playing the market" or "taking a chance."

It is hardly necessary to state that future contracts are at present oral, evidenced of course by accounting and other memoranda and by exchange of written confirmations, but not written out in a formal legal document. The condition of trading, in particular the speed of transactions, makes this almost inevitable. On the other hand, the disciplinary power of the exchange over its members obviates some of the need of safeguards against dishonesty that are necessary in case of isolated transactions between individuals not within a circle of more or less mutual knowledge and guaranties. Much that is now understood was of course written into the earlier future contracts. The grade of grain to be delivered, for example, was not determined by exchange rules prior to the eighties. In other words, standardization and reliance on oral contracts naturally go together. There is, nevertheless, nothing to prevent a variant written contract if the parties wish to make one. There are some restrictive rules, but others are merely devised to fix terms and considerations when not otherwise specified.

PREREQUISITES AND LIMITATIONS OF FUTURES.-The future contract is a simple and stereotyped affair. This situation suggests economic preconditions that are usually regarded as part of the idea of future trading.

Commodities upon the basis of which future trades may be made must, as already stated, be nonperishable or susceptible, under proper

tion adopted by the Kansas City board of directors on Oct. 25, 1917, providing that members be required to stamp each memorandum of purchase of corn as follows:

"Limited contract: The above purchase is made subject to the resolution of the board of directors of the Board of Trade of Kansas City, Mo., of July 12, 1917, establishing a maximum price of $1.28 per bushel, and is subject to all the rules and regulations now in effect and all amendments that may be made thereto, both as to maximum and settlement prices."

conditions and care, of being kept for an indefinite time; they must also be homogenous as to the character and quality of their units. These two qualifications are essential to the interchangeability of units in space and also in time. It is obvious that not many commodities that are the subjects of commerce meet completely these requirements. In fact, wheat, which is perhaps the one of the grains that most nearly meets all the requirements-which is also the one that is dealt in by way of future contracts to the greatest extentdoes not perfectly satisfy the conditions. Millers prefer to buy their wheat on sample, even when they are using the futures market as a means of insuring a sufficient supply at a known price for meeting their future obligations under flour contracts. The subject of prerequisites of future trading is discussed in section 1 of Chapter I, immediately preceding, and some of the incidents of imperfect homogeneity and interchangeability in commodities subject to future trading in sections 8 to 10 of Chapter IV.

Because of the natural variations in the quality and condition of the most uniform products, future trading is dependent upon grading. Its development supposes the general recognition of distinct grades. In the grain trade grades were defined and given more or less official standing first by the exchanges, then by the State governments, and recently by Federal authority. For many years since the adoption of rules covering future trading by the Chicago Board of Trade, the only rule on the subject of grades provided merely that the tender of a higher grade than that called for must be accepted as fulfillment of the obligation of the seller under a future contract.

THE IMPORTANCE OF A CONTINUOUS MARKET.-It is sometimes alleged that a continuous market is something essential to the idea of future trading. Doubtless continuous trading greatly increases the services performed by the futures market, especially in connection with the relations of such trading to insurance and credit. A market that is perfectly satisfactory for hedging purposes must be available at any time, so that a very large quantity of grain may be hedged on a moment's notice without there being any doubt as to a purchaser being found at a price substantially that prevailing during the hours or minutes immediately prior to the trade, provided the estimate of the market as to the value of the grain has remained unchanged. With reference to the most advantageous use of grain warehouse receipts as collateral for securing credit at a bank, moreover, it is essential that the banker be able to realize on this collateral at a moment's notice with a minimum sacrifice in price. All broadening of the futures market, of course, tends to promote continuous trading. A broad and continuous market is, in fact, the natural result of the fundamental characteristics of future 169514°-20-4

trading as developed in the direction of getting rid of all other considerations affecting dealings except the fact of futurity within defined limits and the fixing of a price for such future time. Nevertheless, the continuous market is not essential to the idea of future trading, though so important a factor in its serviceability.

The fact that most future trades are closed in the pit before delivery and that their average life is comparatively short has already been mentioned. There could scarcely be a continuous market without such trading in and out and the large volume it makes. The need of simplification and economy in handling settlements under these circumstances leads to a system of substitution of principals and such an offsetting of trades and merging of obligations that the fact that there is another party to every future contract may be lost sight of. Some degree of detachment of the futures market from reference to the actual grain is a natural result.

"OPTIONS." The word "option" is often used as if synonymous with the term "future." It is better to restrict the meaning of "option" to the group of trades having reference to specified commodity and delivery month-as, for example, referring to "1917 May wheat." The term as used in this report will mean such a group of trades. In the Chicago Board of Trade rules, futures are referred to under the name of "time contracts" and "contracts for future delivery," not under the name futures.

The true option contract is described in the next section on the privilege contract and will be fully considered in a later volume of this report.

COMPARISON OF FUTURES AND TO-ARRIVE CONTRACTS.-The distinctive character of futures is well brought out by comparison with a closely related type of contract commonly used in the cash grain trade and doubtless the type of trading out of which futures were developed, namely, the to-arrive purchase or sale. This form of contract has been described and discussed in a previous volume of the report. Both contracts are based upon official grades in lieu of examination by the buyer. Delivery is postponed in the to-arrive contract as in the case of a future. But the time allowed in the former has reference to a merchandising condition, namely, the time required for the freight car containing the grain bought to reach the terminal market from the country, and in practice often, also, upon the time. needed by the shipper to obtain the grain from farmers. The Minneapolis Chamber of Commerce specifically provides that on to-arrive contracts the buyer is entitled to receive grain in cars from the country which was uninspected when the sale was made. On the

1

1 Resolution of Mar. 16, 1909, published as Circular No. 97, p. 66, Rules and By-laws of the Chamber of Commerce, 1917. At Chicago what may be expected is stated in the rules as follows: "The intent of this rule is that all sales of wheat, corn, oats, or rye made in accordance therewith shall be filled by the delivery of grain billed direct from the country point of origin to the seller at this market."-Rule IV, see. 32.

other hand, future contracts, if they mature, can normally be met only by the delivery of warehouse receipts representing duly inspected grain in store. The time allowed by the to-arrive contract may be defined with reference either to shipment or to delivery at the terminal market. Most such contracts run for about 15 days, but 30, 60, and even 90 day contracts are entered into. Relation to the future is of the essence of the future contract, while it is normally an incident of the to-arrive contract. In the case of the latter there is no concentration of dealings upon standard delivery or any specified calendar months. To-arrive contracts are not interchangeable nor in fact substituted for one another, as futures are. In sum, the to-arrive contract is a merchandising arrangement, while the future contract is a thing apart and distinct from merchandising, though of course used in connection with merchandising and evolved out of merchandising agreements.

From the legal viewpoint the distinction between the future contract and the to-arrive contract can be more sharply made. The one is an agreement to sell and the other is a sale. Title to the grain passes to the purchaser upon making the contract or at least upon loading into cars in the case of the to-arrive contract. In future trading title does not pass until delivery. The special nature of the future contract in this respect has been discussed above.

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FUTURE TRADING NOT STRICTLY TRADING IN CONTRACTS."-The distinction between a transaction in futures and transaction in cash grain is sometimes described as the difference between a contract to ⚫ sell and a sale; 1 and dealing in futures is accordingly described as dealing in contracts. Though this description is not adequate, it is substantially and practically true as appears in the abandonment in any attempt to preserve the identity of any future contracts, and in the closing of most such contracts by the payment of differencesmatters dealt with in a later chapter in describing settlements. Section 2.-The privilege contract.

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DEFINITION AND DESCRIPTION OF THE PRIVILEGE CONTRACT.-The privilege" is a form of contract dependent upon the futures market, but in its nature different from the "future." In effect, it is an agreement to offer or accept, as the case may be, on demand within some specified period (a day, a week, or a month) a "future" sale or purchase to or from the customer to whom the privilege is sold, the price at which the future is to be transferred being a part of the

1 An Illinois law enacted in 1874 and designed to limit future trading was phrased as follows:

"Whoever contracts to have or give to himself or another the option to sell or buy at a future time any grain * * shall be fined."

This was interpreted by the courts to prohibit dealing in privileges, and left future trading unscathed. Privilege trading, rather than future trading, might, in fact, be strictly described as dealing in contracts.