cotton intended for contract delivery, establishes its grade, and issues a certificate of grade. Such certificate holds good for a year, or until the cotton is shipped from the port of New York, subject to a demand for reclassification by any holder not satisfied with the classification as originally established. The actual work of grading is performed by a classification committee consisting of five salaried employees of the exchange. This committee receives the samples drawn at the dock or warehouse by assistant inspectors and is supposed to grade these samples in accordance with the established standards of the exchange, of which duplicate sets known as "working types" are kept in the classification room. Two members of the committee act upon the set of samples for each lot and in case of disagreement a third member is called in. The owner may appeal, in which case the cotton must be reexamined by at least four of the five members of the committee, whose decision is final. When the grade has been established, the inspector in chief issues a grade certificate showing the number of bales of each different grade in the lot thus classed. The certificate does not, however, indicate the grade of individual bales, so as to identify each bale.

Purchasers of cotton on contract in New York must take the cotton at the grade thus established by the classification committee and pay the seller on that basis. As just stated, however, the purchaser has the right to demand a new classification. If this shows the cotton to be of a grade inferior to that originally given it or below the contract limit, the holder of the certificate has a claim for reimbursement from the inspection fund of the exchange. Such reclassification, while in the nature of an appeal, is conducted by the classification committee in the same manner as the original classification. Since at least two members of the committee were the original classers, this means that on reclassifications, and also on appeals, the grade may be determined in part at least by the classers who made the original award. Some objections urged against this method are discussed below.

COMPLAINTS REGARDING THE CHARACTER OF THE NEW YORK STOCK.

Those who complain that a large part of the stock of cotton at New York is of an unmerchantable character usually charge that this stock has been used for the purpose of depressing the price of future contracts, and indirectly the price of spot cotton, throughout the country. It is alleged that the fear of buyers of contracts at New York that they will have to accept inferior cotton on contract delivery induces them to lower the price which they bid for contracts. As a remedy it is contended that some of the lowest grades should be excluded from contract delivery altogether. This matter is referred to later.

The investigation has shown that many extreme charges regarding the stock of cotton at New York can not be fully sustained. A prevailing impression that many thousands of bales of cotton in the New York market have been carried for many years, until the stock is little more than an accumulation of rubbish, is disproved by the fact that the entire stock at New York has on several occasions in recent years been reduced to a very small quantity. Thus, in October, 1900, the total certificated stock was only a trifle over 5,000 bales, and as recently as September, 1904, it was only 15,600 bales. At the latter date a considerable part of the stock was apparently of fairly high grade. Consequently it is certain that the amount of very low grade cotton carried over in New York for any considerable period of years can not be extremely large. On the other hand, there is some cotton which has thus been carried over from year to year. The president of the New York Cotton Exchange, in November, 1907, stated to the revision committee that some cotton had been in the New York stock for four years, and that the reason it had not been purchased for consumption was that it was of such poor quality as to be undesirable at the grade differences then existing. Moreover, a considerable amount of the cotton certificated in the season of 1906-7 was of very poor quality. The 1906-7 crop, it may be noted, was seriously damaged by unfavorable weather.

Since the tendency of the New York market is to attract surplus grades of cotton, it follows that in years when the crop is of high grade the receipts at New York should be mainly of high-grade cotton, and not invariably of low grades. This has been the case. Simple average figures compiled from the records of the exchangeaccepting for the moment the classification of the inspection bureau as correct-indicate that for the crop years from 1890-91 to 1906-7, inclusive, 40.3 per cent of the cotton certificated was above middling in value, 8.2 per cent middling or the equivalent of middling in value, and 51.5 per cent below middling in value. These figures are not conclusive because the classification of the New York Cotton Exchange, as shown below, can not thus be accepted at its face value. Moreover, the figures include reclassifications as well as original classifications, and as a result tend to exaggerate the prevailing character of the stock in any given year. At the same time they are prima facie evidence that the New York stock has not been composed exclusively of extremely low grades.

These figures, it should be noted, represent the grade at the time of classification. As the season advances the more desirable grades for the time being are removed for consumption, thus leaving the stock composed mainly of the less desirable or surplus grades. Until recently the New York Cotton Exchange kept no records showing the character of the certificated stock on hand at any given date. In Jan

uary, 1907, however, the exchange commenced the publication of statistics giving the certificated stock by grades. The first statement indicated that, out of a total stock of over 115,000 bales, not over 10 per cent would fall under the designation of extremely low grade cotton, say below strict good ordinary, assuming the classification to have been correct. A similar statement for March 31, 1908, however, showed that, out of a total certificated stock of 78,069 bales, only 2,200 bales were of the value of middling and above. At this time there were 11,512 bales of good ordinary and about 10,500 bales of low middling tinged and middling stained cotton. These low grades, therefore, constituted about 30 per cent of the total stock. At the end of April, 1908, the total certificated stock had been reduced to about 72,000 bales, of which the grades of good ordinary, low middling tinged, and middling stained comprised about 20,700 bales. There were 32,866 bales of strict good ordinary, this grade representing over 45 per cent of the total. There were practically 9,500 bales of low middling. Only 3,300 bales of the 72,000 were in grades above low middling. The character of the stock at this time was, therefore, distinctly low. The season was, of course, well advanced, and the stock of better grades had been heavily drawn upon in nearly all markets. It should be repeated, as stated in Part I, that since the 1st of January, 1908, the New York Cotton Exchange has eliminated several of the lowest grades of cotton formerly recognized by its contract, and that, therefore, the stock at present, although low, is nevertheless better than it would have been if the former contract limits had remained in effect.

EVIDENCE OF OVERCLASSIFICATION AT NEW YORK.

While extreme charges against the grading of cotton at New York have undoubtedly exaggerated actual conditions, nevertheless it is certain that serious overclassification has frequently occurred in that market. Members of the New York Cotton Exchange have repeatedly asserted that the certificated stock includes no unmerchantable cotton, and have contended that this is proved by the fact that the great bulk of cotton passed by the inspection bureau sooner or later is shipped out of New York for actual consumption. This argument does not meet the issue. Practically no cotton is raised which is not merchantable for some purpose or other. This, however, does not warrant including cotton in the certificated stock by calling it of a higher grade than it actually is. The inclusion of low-grade cotton, if properly graded and if properly valued by means of a correct system of price" differences," can be defended on some grounds, although the inclusion of such grades may not be best for the interests of the trade as a whole. Overgrading of cotton, however, is a different matter and clearly indefensible.

While charges of overgrading at New York have been made repeatedly, there is a practical difficulty in determining how far they are justified, particularly in the case of cotton certificated more than a year ago. It is almost impossible to determine just what cotton has been carried over in the New York stock from one year to another. Consequently, complaints of overclassification in earlier years can not be absolutely proved or disproved by physical inspection. Again, after cotton is shipped out for consumption, the samples are returned by the inspection bureau to the owner, and there is no means of establishing whether or not the cotton has been overgraded. The preponderance of testimony, however, leaves no doubt that cotton has been frequently and seriously overgraded by the inspection bureau of the New York Cotton Exchange. The inspection bureau was reorganized in June, 1907, immediately after the election of a new board of managers, this election having been influenced in large measure by the acute dissatisfaction in the cotton trade over the revision of November, 1906 (fully discussed in Part I), and other abuses. The present inspector in chief admitted that at times prior to his appointment samples submitted to the classification committee had not been drawn in accordance with the rules and might not have fairly represented the bales from which they were taken. Several members of the exchange, moreover, stated that the work of the inspection bureau had been at times uneven and faulty. Pronounced and specific complaints of overclassification were made by cotton merchants in the South.

Conclusive evidence of overclassification of cotton at New York prior to the reorganization of the inspection bureau in 1907 is furnished by the record of payments from the inspection fund. This inspection fund is derived from fees charged for classification. It is responsible to owners of cotton to indemnify them in case on reinspection the grade is lowered, or in case cotton which had previously been admitted to the certificated stock is pronounced unfit to remain in that stock and is consequently rejected. If cotton on reclassification were pronounced below the lowest grade tenderable on contract, the owner would be paid for it in cash on the basis of the current contract price, allowing, of course, for grade differences, plus a penalty, and the inspection bureau would take this cotton and sell it for what it would bring in the spot market.

The record of payments from the inspection fund on account of claims for grade—that is, claims due to the fact that cotton on reclassification was placed in a lower grade, and consequently given a lower value than that accorded it on the original classification-for the period from 1890 to 1906 shows only three years in which the payments exceeded $500, and that the average yearly pay

ments for this period were under that figure. In the fiscal year 1891-92 (May, 1891, to April, 1892) such payments amounted to about $2,300, and in the succeeding year to $2,500, but these payments were unusually large. In the fiscal year ended April 30, 1907, however, they increased sharply, while for the fiscal year ended April 30, 1908, they amounted to almost $12,000. The total payments on account of absolute rejections (as distinct from mere reductions in grade) from 1890 to 1906 were less than $12,000, or an average of less than $750 per year. For the fiscal year ended April 30, 1908, alone they amounted to almost $15,000. These are the net payments; that is, the actual loss to the inspection fund after crediting against the gross payment to the owner of the rejected cotton the amount realized by the inspection bureau from the sale of such cotton. The exceedingly large payments from the inspection fund since May 1, 1906, and particularly during the year from May 1, 1907, to April 30, 1908, therefore show conclusively that large amounts of cotton must have been seriously overgraded on the original classification, and also that considerable cotton had been admitted to the certificated stock which should have been excluded. That the payinents from the inspection fund during the earlier years were small, on the other hand, does not indicate that the classification at that time was proper. Instead, it probably means that on reclassification, as well as on the original classification, the tendency was to overgrade the cotton. The large payments of the fiscal year 1906-7 were doubtless partly due to the peculiarly low character of the cotton that year, which rendered classification difficult. But they are also in some measure attributable to the pressure brought upon members of the classification committee as a result of growing dissatisfaction on the part of members of the exchange with the management. The still larger payments of 1907-8 followed the reorganization of the inspection bureau, which was a result of the dissatisfaction noted, and were mainly due to the reclassification of cotton which was first classed prior to the reorganization.

In connection with these heavy payments from the inspection fund it should be stated that most of the cotton rejected during the period mentioned realized on forced sale from 8 to 9 cents or more, the average for several hundred bales being 8.93 cents. This goes to show that although the cotton unquestionably had been overgraded, it nevertheless had a commercial value.

INFERIOR COTTON DELIBERATELY FORCED INTO NEW YORK CERTIFICATED STOCK BY COTTON-EXCHANGE AUTHORITIES.

Not only has cotton really below the standard prescribed for contract delivery been certificated at New York, but such cotton was for