a time virtually forced into the New York stock in pursuance of a ruling of the board of appeals of the New York Cotton Exchange, one of the highest committees of the exchange, and against the judgment of members of the classification committee. This remarkable ruling, which was in effect during part of the season of 1906-7, apparently came about in the following manner: The assistant inspectors make a preliminary classification of the cotton at the dock or warehouse; but their classification, under the rules of the New York Cotton Exchange, is not binding upon the classification committee, which may reject cotton passed by the assistant inspectors. It had happened, however, that during the interval between the original inspection at the dock and the final classification by the classification committee, contracts had been sold against such cotton, and warehouse receipts specifying the weight but not the grade had been used acollateral in obtaining loans from banks; so that the subsequent rejection of certain bales in such lots by the classification committee caused considerable inconvenience. This was the ostensible excuse for the ruling in question. Nevertheless, the by-laws of the New York Cotton Exchange distinctly provide that no delivery of cotton shall be considered complete until a duly executed certificate signed by the inspector in chief has been delivered to the receiver, such certificate, of course, to be based upon the decision of the classification committee. In the face of the by-laws, the board of appeals of the New York Cotton Exchange ruled in the latter part of 1906 that where cotton which had been passed by the assistant inspectors at the dock was later pronounced by the classification committee to be below any deliverable grade, it nevertheless should be permitted to go into the certificated stock, taking the lowest grade recognized by the exchange. This arbitrary ruling of the board of appeals clearly was subversive of the entire scheme of classification, in that it virtually made the assistant inspector at the dock, instead of the classification committee, the final authority for the admission of the cotton into the certificated stock.

Members of the classification committee, it should be said, while obeying this ruling of the board of appeals, did so under protest. On the grade slips for lots of cotton including bales which in their opinion were below deliverable grade members of the committee noted that fact. These notations or protests were usually in one of the following forms:

One bale [or bales] under grade; should have been rejected. Valued at lowest grade called for on contract in accordance with decision rendered by board of appeals.

Certificate issued under instructions from warehouse and delivery committee at meeting held March 14, 1907.

These protests were termed by members of the classification committee their "declaration of independence." One member said:

The reason I signed those slips with that notation was to defend myself thereafter for calling cotton grades that I knew it

was not.

This certification of cotton actually below tenderable grade is especially important because it was not due to the carelessness of the classification committee, or to the dishonesty of any individual employee, but was the expression of a deliberate policy of one of the highest committees of the exchange, which should have taken every precaution to protect the integrity of the contract. It has been argued that although the holder of a contract could be forced to accept such cotton he could in turn retender it at the false valuation. Obviously, this was no justification. On this ground the board of appeals might have ordered the classification committee to certificate sawdust. Again, it has been argued that the receiver, if dissatisfied, could make claim upon the inspection fund. But there was no ground, under this ruling, on which the committee could reverse its decision. In any event the argument clearly is improper. The inspection fund was intended to provide for genuine errors in classification and not to place a premium on the deliberate certification of cotton clearly unfit for contract delivery.

Members of the New York Cotton Exchange have also attempted to excuse this extraordinary ruling of the board of appeals on the ground that only a few hundred bales of rejectable cotton were thus deliberately allowed to go into the certificated stock. They have further attempted to defend the classification of the exchange generally on the ground that the amount of certificated cotton which was really below tenderable grade, or even the amount which, although tenderable, is of exceptionally low grade, is but a small percentage of the total certificated stock. They argue that the buyer of a future contract would therefore be indifferent to the possibility of receiving some of this cotton. This argument is so absurd as hardly to call for discussion. It would be about as logical for a man to say that he would be willing to stand up before a squad of soldiers to be shot at simply because only a portion of the guns were loaded. Such cotton would unquestionably exert an influence upon the buyer out of all proportion to its actual amount relative to the total stock, because he must take whatever the seller chooses to tender him. When the new management of the New York Cotton Exchange came into office, in June, 1907, this practice of accepting cotton under the ruling of the board of appeals was promptly stopped.

This ruling of the board of appeals has been emphasized because it illustrates a more or less general tendency of the officials of the

New York Cotton Exchange to depart from commercial and equitable principles in the very fundamentals of their system. It may easily be that larger quantities of cotton have been improperly graded at New Orleans. Absolute integrity on the part of all individuals can not be hoped for. But there is no excuse for lack of integrity in the system itself. A large part of the complaint regarding overclassification of cotton at New York, however, is not necessarily complaint against the system, but rather against its practical application by the classification committee; and the evils can largely be remedied by greater care and conscientiousness, without change in the system itself. Some proposals for certain changes in the system of classification are, however, discussed later.

An especial reason why the New York Cotton Exchange should endeavor to maintain the integrity of its classification is that under the most favorable circumstances the stock at New York is composed largely of the least desirable grades of the crop. The buyer of a contract in New York is at all times under serious disadvantage in this respect, and no effort should be spared to prevent incorrect or inproper classification.

Owing to the recent elimination of several of the lowest grades of cotton from the deliverable range at New York it seems reasonable to hope that many of the abuses formerly charged against classification in that market will not be repeated. Efforts have already been made to secure more accurate grading of cotton, and, as the increased payments from the inspection fund above noted indicate, such efforts have met with at least some degree of success.

OBJECTIONS ADVANCED AGAINST CERTIFICATE SYSTEM IN PRINCIPLE.

Aside from complaints of overclassification of cotton at New York, the certificate system itself, as employed in that market, is condemned by some as fundamentally incorrect in principle. It is argued that the original owner of cotton who submits it to the inspection bureau for classification will naturally use every influence to secure an overclassification, and that the buyer is not represented at the time of the original classification, as he is at New Orleans. The opportunity of the buyer subsequently to demand a reclassification is considered an inadequate protection to him; moreover, if the decision is against him he has to bear the expense. Another complaint is that the certificate system permits large operators to select the most desirable certificates for sale to spinners, while leaving the most undesirable grades in the New York stock.

It is further urged that the delivery of cotton by certificate is too easy and that it tends to favor bearish manipulation because the seller can deliver 5,000 or 10,000 or 100,000 bales in a moment, thus possibly

forcing buyers of limited resources to sell out at a sacrifice, whereas under the New Orleans system he can not deliver more cotton in a day than he can physically move from a warehouse.

There does not appear to be much weight to complaints against the certificate system in principle. There seems to be little objection to the system if it is only properly applied. Indeed, that system has some manifest advantages, particularly in that it tends to avoid the expense and labor of frequent rehandling and resampling of cotton. The principle of leaving classification to a body of salaried experts, if properly safeguarded, also seems altogether unobjectionable.

COMPLAINTS AGAINST NEW ORLEANS CLASSIFICATION.

Complaints against the New Orleans classification are in substance that cotton which was merchantable and properly tenderable has been rejected or has been undergraded. Such complaints were made not only by members of the New York Cotton Exchange, but by merchants in the South, some of whom had shipped cotton to the New Orleans market. While such complaints were numerous, most of them were vague and indefinite; few were supported by tangible evidence. One of the most frequently cited of such instances occurred in the summer of 1906, when a firm of cotton merchants, members of the New York Cotton Exchange, shipped approximately a thousand bales of cotton to New Orleans for delivery on contract. At this time there was a rather severe corner in the New Orleans market. Out of the thousand bales shipped, only a little over five hundred were accepted; several hundred were withdrawn by the deliverers. after having been tentatively tendered. The action of the New Orleans arbitrators in this case was sharply denounced by members of the New York Cotton Exchange as showing bias in favor of the New Orleans receivers.

Careful investigation of this particular case showed that the New York shippers had sent unbroken certificated lots, many of which included cotton which the shippers themselves knew was of such low grade that its acceptance in New Orleans was doubtful. Furthermore, the shippers admitted that approximately 150 bales of this cotton which failed to pass the New Orleans arbitrators could not be sold over factors' tables in New Orleans; in other words, that it could not be sold in one of the largest spot markets in the world.

Since there was a sharp corner in New Orleans at that time, it would obviously have been to the interest of the receivers to prevent the delivery of this cotton, because they could thus punish short sellers the more severely. It is possible therefore that arbitrations in New Orleans at this time were too severe. In view of the admissions of

the shippers themselves, however, it is entirely fair to state that complaints against these arbitrations were not conclusively sustained, and this was true of the other specific instances brought to the attention of the Bureau.

It is not contended, however, that arbitrations in New Orleans have invariably been fair. In fact, in view of local jealousies, and particularly in view of the fact that in times of squeezes and corners there is great temptation for receivers to attempt to influence arbitrators improperly, and that arbitrators themselves might be unconsciously influenced by local sentiment, it would not be surprising if abuses of this sort had occurred. Furthermore, as already stated, southern merchants themselves very generally assert that New Orleans arbitrations are unduly severe. The fact, however, that the arbitration of cotton in New Orleans is left to men drawn by lot. and that both buyers and sellers have the right of appeal to other arbitrators similarly chosen, is reasonable protection against any general abuse of power. It should be borne in mind that the tendency of a shipper naturally is to force cotton through which is hardly up to the mark, and that complaints of shippers may thus naturally be overdrawn.

DIFFERENCE BETWEEN NEW YORK AND NEW ORLEANS CONTRACTS.

Moreover, it seems probable that dissatisfaction over the classification of cotton in either New York or New Orleans is partly chargeable to the inherent impossibility of securing absolute accuracy in grading, even with the best of intentions on the part of those performing the work. Furthermore, it is probable that many complaints by New York interests regarding New Orleans classifications have been due to a failure to appreciate the material difference between the rules of the two exchanges. In particular, the provision of the New Orleans contract that no cotton below the value of good ordinary, fair color, shall be deliverable is exceedingly important, since it tends to exclude a great deal of cotton which under the rules of the New York Cotton Exchange is deliverable, or at least has been deliverable until very recently. Moreover, since the value of good ordinary cotton of fair color may change from season to season, and even during a given season, this provision results in a variable limit for the classification of irregular cotton, such as the tinged and stained grades. As a result of this provision, cotton which may properly be tenderable at one time in New Orleans may as properly be excluded a few months later. This fact has probably been overlooked in many disputes over classification in the New Orleans market. In the same way some complaints against the New York classification may have been due to a misunderstanding of the rules of that exchange.