handling of certificated cotton and its segregation into even-running lots for consumption.

There should certainly be a system of uniform grades throughout the cotton trade, if possible. It would greatly simplify the business and stop a number of abuses. The practical difficulties in the way of arriving at such a system are considerable, and probably the best that can be done at present is to make a persistent effort to approach gradually such an ideal, as near as may be.

RANGE OF CONTRACT GRADES.

Very numerous criticisms have also been directed at the large number of grades now deliverable on future contracts on both cotton exchanges. It must always be remembered that the buyer of a future. contract has no option as to grades. He must take whatever the seller chooses to deliver to him. There are now 18 grades deliverable on New York and New Orleans contracts, covering a very wide range. In practice it frequently happens that deliveries on a single contract embrace ten different grades and half grades, so that lots thus delivered are often greatly mixed. This is true both in New Orleans and in New York, though not to so great an extent in the former place.

So far as spinners are concerned, the practical certainty of receiving several different kinds of cotton on one contract makes it impossible for them to buy their cotton on the exchanges. The range of quality of cotton which can ordinarily be used by a given spinner is extremely limited, owing to the mechanical restrictions of his mill and the requirements of his particular custom. So limited, indeed, is this spinner's range that it is wholly out of the question to so restrict the range of grades on exchanges as to make this contract generally acceptable to spinners and still maintain a practical future market. The spinner will probably always buy directly through spot transactions, although he should be able to use the exchange for hedging purposes.

It is obvious that the more mixed a delivery is the less desirable it is. It has happened that sellers of contracts have deliberately tendered lots of very indiscriminate character for the purpose of forcing the buyer to sell out his contract rather than receive the cotton, making it possible for the seller to buy in the contract at a profit. The present wide range of deliverable grades makes this possible.

On the other hand, there must be a considerable range of grades, as, unlike certain other great staples, there is a very wide range of actual difference in the quality of a given crop of cotton; there is also a demand for most, if not all, of these grades. This is often expressed in the phrase that "the contract must be broad enough to take care of the crop."

The contract must also be broad enough to induce general trading thereon, and thus furnish the broad market necessary to fulfill the true functions of an exchange. There is no reasonable obligation, however, to take care of that part of the crop which is for most purposes unspinnable, and the admission of very low grades of such unmerchantable or unspinnable cotton into the exchange stocks creates several evils. The effect of such cotton is to depress the price of future contracts, and this tends to affect unfavorably the value of the entire crop, the great bulk of which is of much better quality. It is certainly wholly improper that a small fraction of very low grade cotton should be allowed on exchange contracts if it has such effect. The extent of this particular effect, however, will be considered fully in a later part. Secondly, this low-grade cotton is the cause of by far the greater part of the numerous difficulties and controversies as to classification and the establishing of price differences in both markets. In the third place, the producer is encouraged to grow and pick a low quality of cotton.

LOW-MIDDLING CLAUSE. The most practical suggestion for a limitation of the present range of grades is the so-called low-middling clause; that is, the exclusion of all white cotton below the grade of low middling, and possibly all tinged or stained cotton below that in value. The Bureau is strongly inclined to favor such a change; it would not only eliminate a number of the lowest grades now deliverable, which are objectionable both on account of the controversies to which they give rise and on account of their unfortunate effect in reducing the contract price, but it would also tend to exclude substantially all unspinnable cotton. It must be remembered that the amount of so-called unspinnable cotton, while comparatively small, has a disproportionate effect upon the price of all future contracts, so that the benefit to the rest of the crop by its elimination would be much greater than any hardship thereby created as to this small fraction of the crop.

As distinct from the limitation of the present range of tenderable grades, a number of suggestions have been made for restricting deliveries on single contracts within that range so as to make the contract a more certain and advantageous one.

These suggestions may be commented on briefly.

First. A "specific" contract: It is wholly out of the question to make the contract an absolutely specific one; that is, to provide that only one particular grade shall be delivered. In view of the fact that future contracts are largely made before the quality of the crop is known, very few sellers of future contracts would dare to agree to deliver any particular grade of cotton on an exchange contract, owing to constant danger of intentional manipulation resulting in

corners and squeezes. Such a restriction would practically destroy the future market by making it very narrow.

Second. That not more than three grades of cotton should be delivered on any single contract. The Bureau regards this not only as impracticable, but as having little advantage over the present system.

Third. To have two contracts, one for the delivery of middling cotton and above, and the other for the delivery of middling cotton and below. Such an arrangement would be wholly experimental and its results are not easy to calculate.

Fourth. That all deliveries should be substantially "even running;" that is, that on any single contract only a range of a half grade either way from the medium grade tendered should be deliverable, the seller having still the option, however, of selecting such medium grade. It is not believed that this is entirely practical, or even that it would accomplish the results desired, inasmuch as the buyer would still be left in great uncertainty as to what grades would ultimately be delivered. This system also would greatly add to the difficulties of classification and the controversies arising therefrom.

Fifth. Possibly a more practical suggestion is that of a premium for even-running deliveries, to be inserted in the contract itself.

A further and a practical suggestion is that the seller, on the day that he issues notice of delivery, which in New York is three days and in New Orleans five days before the delivery, shall specify the grade or grades of cotton which he intends to deliver. This would give to the buyer an opportunity to make provision for disposing of it in accordance with its quality.

It is believed that by the adoption of the low-middling clause many of the difficulties of classification would be removed; much of the evil effect of very low cotton on contract prices, as well as the controversies as to "differences," would be eliminated; no real hardship would be worked; and, if a proper system of differences were fairly applied thereto, with uniform and accurate classification, many of the present tenable objections to the business of the exchanges would be removed. In making these suggestions the various objections thereto, which have been fully heard, have been carefully considered, and while numerous other suggested reforms have been also considered, only those have been set forth here which seem to merit serious attention. The importance of the exchanges of New York and New Orleans in the cotton trade, and their unquestioned effect on all concerned in this great industry, make it desirable that careful consideration be given to those lines of improvement which seem practical.

Very respectfully,

HERBERT KNOX SMITH, Commissioner of Corporations.

The PRESIDENT.

REPORT OF THE COMMISSIONER OF CORPORATIONS

ON COTTON EXCHANGES.

Part II.-CLASSIFICATION OF COTTON.

Part III-RANGE OF GRADES DELIVERABLE ON CONTRACT.

SUMMARY.

COMPLAINTS REGARDING CLASSIFICATION OF COTTON.

The classification of cotton has been the source of a great deal of controversy. Dissatisfaction has been particularly pronounced in the case of deliveries on future contracts of the New York and New Orleans cotton exchanges, the only exchanges in this country where a future business is conducted. It is alleged that cotton intended for delivery on contract in New York has been systematically overgraded, and also that a considerable amount of cotton has been deliverable on contract there of such an inferior and nondescript character as really to have no commercial rating whatever. Complaints against the New Orleans Cotton Exchange are of the opposite character, namely, that the classification there has been too severe, and that cotton which was clearly adapted to ordinary spinning purposes has been rejected by arbitrators when tendered on future contracts.

Aside from complaints of improper classification under the rules of the respective exchanges, the absence of uniformity in the basis of classification, not only as between New York and New Orleans, but among southern spot markets generally, has been productive of numerous controversies.

DIFFICULTIES ATTENDING CLASSIFICATION.

In considering these complaints it should be constantly borne in mind that the classification of cotton is not, and can not be, an exact science. The grade of a bale of cotton is usually established from a sample of only a few ounces. Since a bale of 500 pounds represents the product of something like 2 acres of land, a classification based on so small a sample may easily give rise to serious controversy.

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Furthermore, considerations apparently trifling may materially affect the judgment of a classer, as, for instance, the shadow cast by a passing cloud. The grading depends almost entirely upon the personal judgment of the individual classers, among whom there are certain to be great differences in skill and experience.

In the case of complaints from spinners, the further consideration should be kept in mind that cotton as classed for contract delivery is mainly graded on its superficial appearance—that is, its color and the amount of trash and dirt mixed with the fiber-rather than by the length, strength, and general character of the staple. The latter considerations are exceedingly important in determining the spinning value of the cotton as distinct from grade. They are, however, so complex that they are to a large extent necessarily disregarded in classing cotton for delivery on exchange contracts.

Still another source of difficulty is the absence of a uniform standard of grades. Instead, there is a great variety of so-called standards in different markets, and, although the standards of several important markets correspond fairly closely, there is, on the other hand, great divergence between the standards of other markets.

The New York Cotton Exchange professes to have maintained standards since 1886 substantially identical from year to year. Apparently no other American exchange has done this. Many southern exchanges do not regularly establish standards at all, while others, including the New Orleans Cotton Exchange, vary their types from year to year to correspond with the character of individual crops.

METHODS OF CLASSIFICATION IN NEW ORLEANS AND IN NEW YORK.

In New Orleans the classification of contract cotton is left to arbitrators, who also adjust the price "differences " for the various grades in the manner explained in Part I. In fact, the classification of contract cotton in New Orleans is inseparably involved in the adjustment of differences. Although the arbitrators endeavor to establish in their minds the grade of the cotton which they arbitrate, they do not officially call it by any grade name, or make any record of its grade; they simply determine its value relative to middling.

In New Orleans the samples submitted for arbitration are drawn in the presence of both the deliverer and receiver or their representatives, the receiver having the right to object to or "protest " any bales which he considers below contract grade. Either party has the right of appeal to another set of arbitrators, also chosen by lot. The New Orleans Cotton Exchange assumes no responsibility for classification beyond the maintenance of types and the selection of arbitrators.

The classification of contract cotton in New York, on the other hand, is entirely under the official control of the New York Cotton Exchange. The exchange has an inspection bureau which samples