LETTERS OF TRANSMITTAL. DEPARTMENT OF COMMERCE AND LABOR, OFFICE OF THE SECRETARY, Washington, May 29, 1908. SIR: I have the honor to transmit herewith Parts II and III of the Report of the Commissioner of Corporations on Cotton Exchanges, the said parts dealing with the matter of the classification of cotton and the range of grades. Very respectfully, OSCAR S. STRAUS, Secretary. The PRESIDENT. DEPARTMENT OF COMMERCE AND LABOR, SIR: I have the honor to transmit herewith Parts II and III of a Report on Cotton Exchanges, made to the President under your direction and in accordance with the law creating the Bureau of Corporations and the resolution of the House of Representatives of February 4, 1907. The said parts deal with the matter of the classification of cotton and the range of grades. I desire to mention as especially contributing, under my direction, to the preparation of certain portions of this report the names of certain of my assistants, to wit, Mr. Luther Conant, jr., and Mr. T. M. Robertson, who assisted Mr. Conant. LETTER OF SUBMITTAL. DEPARTMENT OF COMMERCE AND LABOR, Washington, May 29, 1908. SIR: I have the honor to submit herewith Part II and Part III of the report on the operations of cotton exchanges, made in accordance with House resolution 795, of February 4, 1907. These parts deal with cotton-exchange methods of classification of cotton and with the range of contract grades. Subsequent parts will take up the effects of exchange rules and other conditions upon the price. METHODS OF CLASSIFICATION. For the purposes of delivery on future contracts cotton is classed into a number of grades-18 in New York and about the same in New Orleans, these two being the only American markets doing a future business. The classification is based chiefly on color and amount of dirt and trash in the cotton. Many criticisms have been made upon the rules of classification in both these exchanges and upon the way in which these rules have been applied. Many difficulties are inherent; the classification of cotton will probably never be an exact science, but must always depend more or less upon the discretion of experts, and be open to honest differences of opinion. Moreover, there are no uniform standards of grades in the cotton trade. Grades of the same name in different exchanges differ considerably in quality. This in itself causes much of the difference of opinion. Radically different methods of classification are employed in the New York and New Orleans exchanges. The New Orleans system is largely a private affair between the parties, the exchange merely furnishing the arbitrators. Each lot of cotton when tendered for delivery is submitted to such arbitrators, and they, having before them the price differences "off" or "on" middling cotton officially quoted by the exchange, determine what differences shall be applied respectively to the various grades of cotton in the particular lot, though they necessarily determine also, as part of this process, what these grades are. The New York system is distinctly different. New York has what is called a certificated stock of cotton, and the New York exchange officially determines, through its classification committee, what cotton shall be admitted to that stock and its grade therein, while the inspection fund of the exchange is responsible to the owner of such cotton for mistakes made by the committee in such classification. All cotton intended for contract delivery in New York is submitted, upon arriving at that port, to the classification committee. If accepted, a certificate is issued setting forth its grades. This cotton thereafter is dealt in on the basis of that certificate, unless the same be changed by reclassification. The classification at New York is thus much more closely bound up with the exchange itself, and its effects are more a part of the operations of the exchange than in New Orleans. A number of criticisms have been made against the New York system as to principle. Thus, lots of cotton are certified as having so many bales of such and such grades, but without identifying the grades of the individual bales. The result is that when the buyer receives a lot of cotton he can not, from the certificate, sort it out into even-running grades, because he has no means of knowing which bales belong to the given grades. To sort it out he must examine the cotton itself, at considerable expense and delay. This increases the reluctance of buyers to accept the actual delivery of cotton on future contracts. Another criticism is that the New York rules do not provide for the exclusion of extremely weak or "perished" staple cotton, as the New Orleans system practically does. While the New York classification committee asserted that as a matter of principle they would not admit perished staple, nevertheless, so far as the rules are concerned, the grades are determined chiefly by color and amount of trash, and there is no definite standard by which weak or perished staple can be determined and excluded, and some such cotton has actually been certificated. It seems probable that the amount is not large, but the presence of any of it is extremely objectionable, owing to the seller's option of selecting grades to be delivered. The admission of even a small amount of such low grades has a very injurious effect in depressing disproportionately the price of future contracts. The charge, however, that the New York stock is the refuse accumulation of many years is disproved by the fact that in September, 1904, the entire certificated stock was reduced to 15,600 bales, of which a considerable part was of high grade. Criticisms have been made also as to the application of the New York system. There has been considerable overclassification or overgrading by the New York committee. This is conclusively proved by the payments from the inspection fund. This fund, it will be remembered, is used to indemnify the owners of certificated cotton for mistakes in grading by the classification committee. From 1890 to 1906, sixteen years, these payments, including the net payments for rejections, averaged less than $1,250 a year, a total of less than $20,000, while for the single year ended April 30, 1908, under a reform management, the net total was almost $27,000. This great increase in these payments shows that the previous classification must have been far too high. A specific instance of deliberate overgrading took place in the latter part of 1906, when the board of appeals of the New York exchange instructed the classification committee to admit to the certificated stock all cotton which passed the preliminary and informal examination of the assistant inspectors at the dock, although the same might later have been held rejectable by the classification committee on its final classification. This cotton, thus forced in, was to take the lowest grade of the certificated stock. This ruling was in direct conflict with the by-laws of the exchange. The classification committee entered a protest, and even noted upon certificate slips of such rejectable cotton, “should have been rejected." When the new management of the exchange came into office in June, 1907, this practice was stopped. A contrary criticism has been made of the New Orleans exchange, to the effect that there is an undergrading there, and while the proof of this is not conclusive it is probable that in certain cases it is true. It is quite likely that the effect of the general opinion of the exchange has been to cause the arbitrators to be, consciously or unconsciously, too severe in their classification at certain times. A number of southern merchants have made such assertions very vigorously. The Bureau does not consider the New York system of classifying and certificating cotton, as distinguished from its "fixed-difference" system, as wrong on general principle. Under the conditions surrounding the New York business it is a proper development, capable of proper application. The principal difficulties on both exchanges have been with the careless or improper manner of applying their rules. In regard to certain details, however, a number of changes, most of which have already been widely discussed, seem desirable. The New York rules, as well as New Orleans, should expressly provide some method by which extremely weak or perished staple should be definitely excluded from the certificated stock. The New York certificate of classification should identify each individual bale by grade. It is objected that increased expense of handling and of storage would result, but it seems probable that this increased expense would be no greater than the expense now thrown on the receiver of cotton in attempting to identify or reclassify a mixed lot of bales, and such identification would also greatly facilitate the |