The present nominal range of grades is not too wide if the classification of cotton tendered should be intelligently and honestly made.

A merchant of Houston, Tex., said that a contract for the future delivery of cotton should be broad enough to include all spinnable grades of cotton; that the evils complained of were not the result of a broad contract, but of a wrong classification and a wrong system of determining differences.

Section 5. General arguments in favor of the exclusion of low grades from privilege of contract delivery.

While demands of spinners that individual deliveries of cotton be restricted to specific grades are generally pronounced impractical, many interests in the cotton trade, including cotton merchants as well as spinners, are in favor of some limitation of the contract range itself, particularly by the exclusion of some of the lowest grades now tenderable.

CHANGE IN QUALITY OF COTTON USED BY MOST SPINNERS.-One of the principal arguments upon which the exclusion of low grades from contract delivery is favored is that the standard of cotton used by a majority of spinners has been materially raised in the past twenty years. This improvement, while somewhat spasmodic according to the dictates of fashion, has nevertheless been more or less permanent. It has been due in part to the increased prosperity in business, which has stimulated the demand for high-grade cotton goods. This tendency is suggested in the following statement by an advocate of a narrower contract:

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The trend of dry-goods development is continuously toward a demand for better class of goods, owing to the increased earning power of our population and their increased tendency toward luxury. ** That is true throughout all conditions of society. The disposition of women is to wear constantly finer cotton goods for clothes. In the old days the average woman was contented with a pretty calico made out of cheap print cloths. Today she wants her muslins and lawns. In the old days a colored tablecloth was used in the great majority of households in America. They were more economical, did not have to be washed so often, etc. To-day the average housekeeper wants a damask. * The depreciation in low-grade cotton has been more marked this year (1907) than any year within my recollection. Why? Because the good crops of the preceding four or five years have permitted of the manufacture of fine goods and have habituated the public demand to the manufacture of those goods, with the result that when your manufacturer comes to put goods on the market made out of low-grade cotton he finds that they are barely salable.

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Labor conditions have also tended to raise the standard of the average quality of cotton ordinarily used by spinners. Operatives working on a piece basis know that they can not earn as much in spinning and weaving poor cotton as they can in handling good cotton, and they therefore demand that they be given better material or else a higher rate of pay. In this connection it may be noted that one great reason why dusty cotton is not acceptable to many mills is that the operatives object to it.

A member of the New York Cotton Exchange, in discussing the influence of labor conditions, said:

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In the last few years there has been a tendency for the mills of the world to want a better class of cotton than formerly, and that is due largely to labor conditions. A certain proportion of the laborers are paid so much a cut for the cloth that they turn out, and when they are using good cotton the yarns break less and the production is greater than when they are using a lower grade of cotton. You take any town where there are two mills making the same class of stock. If it became known among the help that one mill was buying a better class of cotton than the other, it would be easier for the mill buying good cotton to keep a supply of labor than the other.

This tendency of spinners to use the better grades of cotton is subject to modification. Thus, if a prolonged period of commercial depression were to occur it would result in a material change in the character of the demand and stimulate the consumption of low-grade cotton rather than of the higher grades. Again, even without material change in financial conditions, the demand for various grades may be influenced by fashion. It is one of the proverbs of the cotton trade that practically no cotton is grown which does not find a market. Grades which are undesirable to-day may be eagerly sought for six months or a year hence. In fact, cotton merchants very generally assert that it is an important part of their business to purchase grades which for the moment are in poor demand and hold them until they are in better demand.

Because of this constant though somewhat limited demand for the lower grades of cotton, and because of the possibility of a much more active demand occasionally for such grades, it is argued by others that there should be no exclusion of these grades from delivery on cotton-exchange contracts.

DIFFICULTY IN CLASSING OF AND ESTABLISHING DIFFERENCES FOR LOWGRADE COTTON.-Another argument advanced in favor of a more restricted contract, and particularly for the exclusion of some of the lower grades, is that the principal difficulty in classification of cotton occurs in the case of the lower grades. The difficulties in classification have already been sufficiently illustrated. The argument that these difficulties would be limited by the adoption of a more re

stricted contract is presented in the following excerpt from a statement by a leading cotton merchant in New Orleans:

The better grades are much easier classed than the lower grades. There is where the principal difficulty comes in. People disagree on the lower grades because there are so few of them that few people know how to class them. In other words, they do not handle enough low-grade cotton to know what to call it. But when it comes to strict low middling and grades above, they are generally plentiful, and every classer understands what they are, and they rarely differ. But when it comes to good ordinary and strict good ordinary, hardly two classers will agree, and that is one other reason why I should say that such low grades should be eliminated.

The restriction of the range of contract grades is also of vital importance in the establishment of grade differences. As shown in Part I of this report, the establishment of such differences has been the subject of acute controversy and has been productive of abuses, and this even in the New Orleans market, where the commercialdifference system, which in principle is the fundamentally correct system, is employed. In the case of the New York market, where the "fixed-difference" system is used, it was shown that errors in establishing grade differences have repeatedly resulted in sending the contract price to an abnormal discount as compared with the spot price of middling cotton, and that this has caused enormous losses to holders of contracts.

The principal difficulty in establishing differences under the commercial-difference system occurs in the case of extremely low grades and of irregular cotton. It is argued that if such grades were eliminated from the privilege of contract tender the danger of errors in differences would be greatly lessened and that as a result the normal parity between the spot and contract prices would be much better maintained. The natural result of this would be to give greater stability, not only to speculative operations, but particularly to hedging transactions, which, as explained in Part I, are intended as a sort of insurance for cotton merchants and spinners.

In connection with this influence of a more limited contract upon the stability of hedging transactions, the following letter, taken from the minutes of the New York Cotton Exchange, is of interest. It may be noted that this letter was written just after the New York revision of November, 1906, and that since then several of the grades referred to have been excluded from the privilege of contract delivery at New York.

Mr. L. L. FLEMING,

NEW YORK, November 27, 1906.

Secretary New York Cotton Exchange, New York City. DEAR SIR: The New York Cotton Exchange has been subjected to much undeserved criticism by other exchanges, and the revi

sion committee has been so severely found fault with that I for one no longer wish to serve upon the committee.

We were brought into an unfortunate position for reason of our contract allowing grades of an undesirable character to come here, which could not be tendered on the New Orleans exchange, and this has thrown us out of parity with the southern markets and we have only been able to make a nominal quotation for spot cotton, for where under normal conditions we quote twenty-five (25) points on the spot month we are now quoting seventy-five (75) points on. The price we make here is taken as a basis for contracts in the dry goods market, and our quotation at the present time does not represent the true value of merchantable spinning cotton.

We have no high grades in our stock, yet we quote good middling under the present revision at fifty-seven (57) points on middling, when it can't be bought in the southern markets for less than seventy-five (75) to ninety (90) points on.

From talking with a number of members of the exchange, as well as some of our largest spinners, it would seem advisable to modify our contract and bring it into a more merchantable form by eliminating our quarter grades, especially the high grades like barely middling fair, which the greatest experts have difficulty in classing, and sending our three (3) lowest stained grades to the waste mills, where they belong. These quarter grades are not taken into consideration in either buying or selling cotton and are so much more work for our classification bureau. I fully think that this would be to the best interest of the New York Cotton Exchange and would bring in a class of members who are not simply speculators, but spinners who were hedging their sales of goods in the future market. We should also have more latitude as to the time of our revision of differences and be governed more by the condition of the crop, for it is seldom we can make any revision in September, and this only leaves us the month of November.

The character of our trading here in this market is very different from what it used to be, and we need more protection against our contracts in hedges of spot cotton.

Yours, truly,

CHARLES STILLMAN.

ARGUMENT THAT EXCLUSION OF LOW GRADES WOULD RESULT IN IMPROVED METHODS OF PICKING.-A planter of Hempstead, Tex., contended that the exclusion of some of the low grades from delivery on contract would have a very beneficial effect by inducing the farmer to take more pains in gathering his crop. This planter, in fact, advocated a contract excluding anything below middling in white cotton and below middling stained in colored cotton. He admitted that such a provision would exclude a considerable percentage of the crop from contract delivery, and that the natural result would be to depress the price of this excluded portion; but he contended that the immediate effect of this would be to compel the farmer to give

This was the difference for barely good middling.

more attention to picking his cotton, and that within a very few years, perhaps within a single year, the proportion of low-grade cotton would be greatly reduced by improvements in methods of picking. He contended that such a restricted contract would in the end add millions of dollars to the value of the cotton crop in Texas alone each year. The low grades of cotton, he asserted, were generally the result of careless picking and handling; if the farmer knew that he would get a premium for cotton carefully gathered, he would, it was argued, exercise much greater care in gathering it.

Section 6. Comparison of range of grades in cotton contracts with that in future contracts for other commodities.

Those who argue for a more restricted form of contract point to contracts in other commodities in which organized future trading is extensively conducted. In particular, the rules of the Chicago Board of Trade covering contract wheat are cited in support of arguments for a restricted cotton contract. It is a fact that the rules of the Chicago Board of Trade restrict the seller of contract wheat to the delivery of a comparatively small number of grades. This is indicated by the following excerpt from the rules:

All contracts made for wheat hereafter, unless otherwise specified, shall be understood as for "contract wheat, and on such contracts a tender of No. 1 red winter wheat, No. 2 red winter wheat, No. 1 northern spring wheat, No. 1 hard winter wheat, or No. 2 hard winter wheat, in such proportions as may be convenient to the seller, subject, however, to the provisions of section 5 of Rule XXI, shall be deemed a valid tender: Provided, however, That on all No. 1 hard winter wheat and No. 2 hard winter wheat delivered on such contracts before July 1, 1904, 5 cents per bushel shall be deducted, and delivered on and after July 1, 1904, 2 cents per bushel shall be deducted."

Section 5 of Rule XXI, referred to above, provides that-

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All warehouse receipts for property tendered or delivered on contracts shall be for quantities or parcels, in the aggregate, as sold: Provided, That on all time contracts of five thousand (5,000) bushels of grain or flaxseed, or any multiple thereof, deliveries shall be made in lots of five thousand (5,000) bushels.

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It will thus be seen that deliveries of contract wheat at Chicago, which must be in lots of 5,000 bushels, may include only five different grades. Moreover, very little winter wheat is put in the No. 1 grades, so that the range in actual deliveries is narrower than the rules might suggest.

The rules of the Chicago Board of Trade for contract corn, up to July, 1905, limited the delivery to six grades, namely, No. 1 corn, No.

a An amended rule effective October 1, 1908, omits this proviso.