than a very few grades, on any one contract. They condemn the delivery of a wide range of grades even though all the cotton may be entirely merchantable. The second class of complaints is directed especially against the privilege which the seller has under the present contract of delivering low grades of cotton-grades which are not desired by the ordinary spinner.

WIDE RANGE OF GRADES AT PRESENT DELIVERABLE.

That the ordinary delivery of cotton on contract does comprise a very wide variety of grades is indisputable. Including the quarter grades formerly deliverable at New York, it has not been unusual for deliveries in that market to embrace twenty grades or more. The delivery, moreover, frequently includes with white cotton of fairly high grade tinged and stained cotton of low grade. A further serious objection is that such mixture of grades is often found in an individual lot covered by a single grade certificate, which means that the desired grades can be separated only at considerable expense.

COMPARISON OF DELIVERIES AT NEW YORK AND NEW ORLEANS.

Deliveries in the New Orleans market are, as a rule, much less mixed than at New York, but still are often so wide as to be quite unsatisfactory to the receiver and particularly to spinners. Direct comparison of deliveries in the two markets can not be made for the reason that under the New Orleans system no record is kept of the grades delivered, but simply of the grade differences on and off middling which are allowed by arbitrators on various lots of cotton distinguished by private "marks" of the receiver. An average delivery of cotton in New Orleans embraces rather less than five marks, but since a mark might cover more than one grade or half grade the number of such marks is not comparable with the number of grades embraced in deliveries at New York. It is certain, however, as just stated, that deliveries in New Orleans are less mixed than in New York.

The fact has been frequently overlooked that the larger number of grades formerly deliverable at New York as compared with New Orleans did not mean a correspondingly greater range of grades. Prior to January 1, 1908, the New York Cotton Exchange recognized nine intermediate grades known as quarter grades. Such quarter grades were not recognized in New Orleans, but cotton of such quality was deliverable in that market, allowance for its intermediate character being made through the grade differences applied by arbitrators. Again, during the present year the New York Cotton Exchange has eliminated from its list of deliverable grades several of the lowest formerly tenderable, including strict good ordinary tinged, strict low middling stained, and low middling stained. The deliverable range

at New York is now nominally somewhat narrower with respect to tinged and stained cottons than that at New Orleans; practically, owing to a more rigid classification at New Orleans, the actual difference in range is not great.

ALLEGED MIXING OF GRADES FOR MANIPULATIVE PURPOSES.

It has been charged that deliveries, particularly in New York, have been deliberately composed of an unnecessarily large number of grades for the express purpose of forcing the holder of the contract to sell it out rather than take up the cotton, and that in such cases the seller of the contract has been able to buy it back at a decline. While such "clubbing the market " may occur at times, the deliberate mixing of grades for manipulative purposes does not appear to have been a general practice. It is undoubtedly true that buyers of contracts in the New York market frequently "run from notices"—that is, sell out their contracts rather than accept delivery-but this is true to some extent of all future markets and is partly due to the fact that vast numbers of contracts are purchased by speculative operators who may not have the capital necessary to actually take up the cotton. There is little doubt that at times sellers of contracts at New York have abused their option of delivering a wide range of grades, either from motives of personal animosity or for purposes of profit, and that, to say the least, there is rarely any consideration for the buyer's interests. To a large extent, however, the mixed character of New York deliveries appears to be due to natural causes and particularly to the fact that the New York stock is composed largely of surplus and broken grades, which, as pointed out in Part I, comprise a considerable portion of the shipments to New York from the South. The fact that deliveries are often badly mixed is more important than the motive for such mixture.

SPECIFIC NATURE OF SPINNERS' REQUIREMENTS.

The demand for a restriction of the range of grades deliverable on future contracts comes chiefly from spinners. It is contended that the present contract either at New York or New Orleans is not adapted to the requirements of the ordinary spinner, and that the contract should be modified so as not only to exclude from delivery very low grades of cotton but also to prevent the delivery of more than a single grade or at most a very small number of grades on a single contract. Spinners urge that it is impracticable for them to receive a mixed delivery.

This is undoubtedly true. Spinners are ordinarily very specific in their demands. Orders placed by spinners with cotton merchants are for a very distinct style of cotton, usually ranging less than a

half grade either way from the grade specifically called for. The spinner, therefore, who takes up cotton on an exchange contract, and who usually receives a mixed assortment of grades, can not ordinarily ship the cotton to his mill, but must either redeliver it on contract or resell it to some other spinner, thereby virtually becoming a cotton merchant. As a result spinners have largely ceased to receive cotton on exchange contracts.

As a matter of fact, however, even though the contracts dealt in on exchanges should provide for the delivery of only a single specified grade on a single contract, they would still fail to meet the needs of most spinners. As already emphasized, the grading of cotton for contract purposes is confined to more or less superficial characteristics, such as color and the presence of dirt and other impurities. Spinners are exacting, not merely as to such characteristics, but also as to length, strength, and general character of staple, and as to still other minor characteristics. Some of these special characteristics can not be taken account of in the grading of cotton by exchanges, so that no modification in the form of the future contract would make it possible for spinners generally to supply their needs by taking up cotton on such contracts. Instead spinners must continue to secure their actual supply of cotton chiefly through large spot merchants. Cotton exchanges, in fact, do not profess that their contracts were primarily intended to enable spinners to receive cotton upon them. They were framed principally to facilitate the business of cotton merchants. It is contended also that even if a system should be devised under which spinners could secure the particular grades of cotton which they desire on future contracts adapted to general trading purposes the price of such contracts would be so increased that spinners would be no better off than under the present system of obtaining the desired grades through specific contracts with spot merchants.

Complaints against the delivery of a greatly mixed assortment of grades upon a single contract are not, however, confined to spinners. Many cotton merchants complain that the mixed deliveries ordinarily made on future contracts, particularly at New York, impose unreasonable burdens upon merchants, and especially upon those who transact only a limited volume of business. Such merchants are forced, if they take up cotton on contract, to reassort it into even-running lots if it is to be sold to spinners, and this involves very considerable

expense.

ARGUMENTS IN FAVOR OF EXCLUDING LOW GRADES FROM CONTRACT

DELIVERY.

As distinct from a restriction upon each individual delivery of cotton within the present deliverable range, many interests in the cotton trade, including both spinners and cotton merchants, assert

that the range itself should be reduced by the exclusion of some of the lower grades now tenderable.

In support of this argument it is urged that during recent years an increased demand for high-grade cotton goods has raised the standard of cotton used in most mills until comparatively few spinners are now willing to use low grades if high grades are obtainable. Against this argument it is urged that although most spinners are unwilling to use low grades these grades are by no means unmerchantable, but, instead, find a ready market in normal years for other purposes, such as the manufacture of carpets, bagging, or rope.

Those who argue that the range of contract grades should be thus narrowed point to the fact that future contracts in other commodities, such, for instance, as grain, are ordinarily much narrower than those in cotton. Defenders of the present broad contract answer this argument by stating that the range of grades of cotton actually produced is much greater than the range of grades in the case of most other staple crops. Since a wide range of grades is thus actually produced, they contend that the contract should be "broad enough to take care of the crop."

In this connection it is argued that a broad contract is a distinct advantage to the cotton producer. The argument is that the cotton merchant, because he has an outlet for a wide range of grades in the contract market, is more disposed to take surplus grades or extremely low grades from the farmer than he would be if he were wholly dependent upon the spot market, and that he is thus able to pay the farmer a higher price for his crop.

As a counter argument it is asserted that the farmer pays very dearly for this alleged benefit, because the inclusion of low grades which are objectionable to the ordinary spinner has a tendency to depress the contract price and thus to depress the price of the entire crop in the spot market. This tendency, it is urged, is the more powerful because of the "fixed-difference" system employed by the New York Cotton Exchange. It was shown conclusively in Part I that the usual effect of errors in differences is to depress the contract price relatively to the spot price of middling. It is contended by many that this depression of the contract price at the same time has a tendency to drag down the spot price of cotton, and particularly of the prevailing contract grades, and that in view of this possible indirect effect upon the great bulk of the crop the producer is exceedingly shortsighted in endeavoring to force upon the contract market the limited portion of the crop which is of very low grade. The merits of this argument will be discussed more extensively in a later part of this report. In this connection a point entitled to very serious consideration is that the difficulties in the classification of cotton and in the establishment of grade differences are chiefly encountered in the

case of the low grades. It is urged that the exclusion of some of the lowest grades from contract delivery would obviate a vast amount of controversy over classification. The still more important argument is advanced that, by tending to avoid errors in the establishment of grade differences, a restriction of the range of deliverable grades would result in maintaining a much more nearly constant parity between the spot and contract prices, and thus give a much greater degree of stability to operations in the future market, and particularly to "hedging " transactions.

Still another argument in favor of excluding some of the lower grades from the privilege of contract delivery is that the proportion of such grades in a normal crop is unnecessarily large, owing to careless methods of picking. It is contended that the exclusion of such grades would be an incentive to greater care in the gathering of the crop, and that this, in turn, would add very materially to its value.

SUGGESTED SPECIFIC CHANGES IN RANGE OF CONTRACT GRADES.

Although the general arguments for and against a restriction of the range of grades deliverable on any individual contract, as well as for a restriction of the extreme range provided by the contract itself, have been outlined, several specific suggestions along these lines may be briefly considered.

SPECIFIC CONTRACT.

The first suggestion is for specific contracts; that is, that each contract shall name on its face either a single grade or certain specific grades. This would mean, of course, that there would be no single. form of contract for future transactions, but an indefinite number. The buyer would know at the time he made his contract what grade or grades of cotton he would receive at its maturity. Such a contract, if it were practicable and could be secured, would go far toward eliminating some of the most serious evils which have accompanied future trading in cotton, and particularly, of course, those due to improper establishment of grade differences. As a matter of fact, although a specific contract is advocated by a few interests in the cotton trade, it is generally pronounced utterly impracticable for purposes of organized future trading, on the ground that few sellers would enter into such contracts. The reason for this is that in the ordinary course of business contracts must be made months in advance of actual delivery, and oftentimes in advance of the gathering of the crop. Since the general character of a crop may be suddenly changed by abnormal weather conditions, this means that sellers of future contracts in the spring or summer can not possibly know what the