Mr. MCFADDEN. I have, Mr. Wyllie, but they are not accurate for the reason that I have not as yet our complete figures from our Havre and Bremen offices. Mr. WYLLIE. Will you be able to furnish those for the record later on? Mr. MCFADDEN. I can give you what I have now. Mr. WYLLIE. If your figures are approximately correct, they will be satisfactory. Mr. MCFADDEN. In the season 1928-29, we sold 40,172 bales; in 1929-30, 44,208 bales; in 1930-31, 14,184 bales; in 1931-32, 5,667 bales; in 1932-33, 13,120 bales; in 1933-34, 16,965 bales; and in 1934-35, 25,926 bales. Mr. WYLLIE. Will you now give us the figure of your total purchases and sales on the New York Cotton Exchange for each of the years which you have mentioned? Mr. MCFADDEN. In the season 1928-29 we sold from January 1, 1929, to July 31, 1929, 2,456,000 bales, which was equivalent to 5 percent of the total sales of futures in the New York market for that period. In the season 1929-30 we sold 3,433,000 bales, or 5 percent of the total volume of trading on the exchange for that period. In the season 1930-31 we sold 2,960,000 bales, representing 51⁄2 percent of the total sales on the exchange for that period. In the season 1931-32 we sold 2,459,000 bales, or 5 percent of the total sales for that period. In the season 1932-33 we sold 2,828,000 bales, or 42 percent of the total sales for that period. In the season 1933-34 we sold 2,555,000 bales, or 434 percent of the total sales for that period. In the season 1934-35 we sold 1,647,000 bales, or 41⁄2 percent of the total sales for that period. Of course, Mr. Wyllie, you understand why I mention sales, because we get those from the Internal Revenue Department. Mr. WYLLIE. Have you the figures with respect to your purchases? Mr. MCFADDEN. No; I have not, but they are approximately the same. Mr. WYLLIE. Does that include any business done by your firm for customers' accounts or do they relate only to the business which you did for your own account? Mr. MCFADDEN. That also includes customers. Mr. WYLLIE. Have you the figures with respect to the volume done purely for your own account? Mr. MCFADDEN. No; I have not, Mr. Wyllie. Mr. WYLLIE. Have you the figures showing the total amount of futures done on all markets, both domestic and foreign futures exchanges, for that same period? Mr. MCFADDEN. No, I have not. I can give you the figures from Chicago and New Orleans but not from Liverpool and Havre. Mr. WYLLIE. I will ask you to give the figures with respect to the New Orleans Exchange and the Chicago Board of Trade. Mr. MCFADDEN. New Orleans: January 1, 1929, to July 31, 1929, 234.400 bales; in the season 1929-30, 471,800 bales; 1930-31, 311,700 bales; 1931-32, 244,450 bales; in 1932-33, 237.250 bales; in 1933-34, 201,150 bales; in 1934-35, 147,700 bales. As far as Chicago is concerned, it is negligible. From January 1, 1929, to July 31, 1929, 100 bales; nothing the following season; in the season 1931-32, 500 bales; in the season 1932-33, 600 bales; in the season 1933-34, 400 bales; nothing in the season 1934-35. Mr. WYLLIE. I wish you would name the exchanges of which your firm are members; that is, those which they have membership privileges on. Mr. MCFADDEN. The New York Cotton Exchange, the New Orleans Cotton Exchange, the New York Coffee and Sugar Exchange, Liverpool Cotton Association, Chicago Board of Trade, Commodity Exchange, New York Produce Exchange, Winnipeg Grain Exchange, New York Cocoa Exchange, Canadian Commodity Exchange. Mr. WYLLIE. Will you also give a statement of the clearing houses or clearing associations of which your firm are members? Mr. MCFADDEN. The New York Cotton Exchange Clearing Association, New York Coffee and Sugar Clearing Association, New York Produce Clearing Association, New York Cocoa Clearing Association, the Commodity Exchange Rubber Clearing Association, Commodity Exchange Silk Clearing Association, Commodity Exchange Hide Clearing Association, and Commodity Exchange Metal Clearing Association. Mr. WYLLIE. Mr. McFadden, I notice that for several years your firm handled spot purchases in excess of a million bales. "Have you any record to show when your firm first exceeded or first sold as much as a million bales of cotton during any one season? Mr. MCFADDEN. No; I have not, Mr. Wyllie. Mr. WYLLIE. Have you any approximate idea as to when your firm first crossed that mark in the total of your spot sales? Mr. MCFADDEN. Mr. Wyllie, I prefer not to guess about it. It is something I can look up very readily and give you that information later on. Mr. WYLLIE. Any approximate date would be satisfactory. Mr. MCFADDEN. I am afraid I could not even give an approximate date. Mr. WYLLIE. This investigation began, Mr. McFadden, with an inquiry into the causes for the rapid decline in the price of cotton on the New York Cotton Exchange and other exchanges on March 11, 1935. We would like to have your ideas and views as to what precipitated this decline and the rapidity with which it carried on. Mr. MCFADDEN. Mr. Wyllie, I have a very short prepared statement on that. May I read it? Mr. WYLLIE. Does it relate only to that subject? Mr. MCFADDEN. Only to that particular subject. Mr. MCFADDEN. The primary purpose of this investigation, as I understand it, is to discover the cause of the decline in the cotton market on March 11, 1935. It has been suggested that this decline was caused deliberately by parties desiring to make a profit on the short side of the market. I cannot conceive of any single interest or group of interests powerful enough to deliberately cause a break in the market such as that was. The decline of March 11 has, I believe, a perfectly simple explanation : From January 24, 1935, until March 9, 1935, there was a maximum market movement of approximately 62 points. On January 24, May contracts sold at 12.57 cents. On February 18 they sold as high as 12.73 cents and by March 9 they had declined to 12.11 cents. All during this period the Government was lending 12 cents a pound on all cotton of low Middling value and above, 7-inch staple, and hundreds of thousands of bales had been going into Government hands instead of trade channels. In view of this, the statistical position looked exceedingly strong. This, coupled with the fact that for a long period of time the market had been practically stationary, only moving a few points one way or the other, lulled the world into the feeling of security that the market could not decline materially from existing levels, whereas anything which might develop of a constructive nature might easily bring about a material advance. With this as their hypothesis, a very considerable long interest was built up, not only by speculators but by the trade as well. In many cases, the speculators put in stop-loss orders against their long position thereby theoretically limiting any loss which might be brought about by unforeseen circumstances. In the meantime, mills who had cotton to buy or old purchases to fix, refrained from putting in limited orders to buy substantially under the market for the obvious reason that in their judgment there was no possibility of getting the order executed. This is of outstanding importance in analyzing the cause of the decline of March 11, namely, that there was not the normal buying power progressively downward which is usually to be found. Toward the end of February or the beginning of March, rumors started to be heard that there might not be a 12-cent loan in 193536. This produced an uneasiness which made the longs begin to wonder whether they were really as safe as they thought they were and whether, after all, it might not be possible for the market to decline below the 12-cent level. I cannot say how or exactly when these rumors started, but on February 26, 1935, Russell's News Ticker printed the following item: Reports that the Government is ready to quit its cotton loan policy, says the Journal of Commerce, were unconfirmed by Senator Smith, but scorned by A. A. A. officials. The Government stands to lose $30,000,000 for every cent loss below 12 cents, in addition to jeopardizing chances of collecting loans from farmers with pool holdings. Another statement on the same day read as follows: Senator Smith, who is said to be persona non grata at the White House, is declared to be in favor of a plan to impound the 6,000,000 bales on which the Government has a lien and give it to the farmer in place of cash if the farmer cooperates with the A. A. A. Local men, when they read of this idea, declared that the farmer wouldn't like that. They have been getting cash and naturally they want more. Another unsettling feature of the market at this time was Representative Doxie's bill designed to exempt the small farmer from the requirements of the Bankhead bill and, if passed, was estimated as releasing two to three million bales of cotton from the Bankhead tax requirement. Started apparently by these vague rumors, on the 9th of March the market had declined to a new low for several months past; and this weakness, plus the fact that people became tired of waiting for bull news to develop, was instrumental in causing a number of people to decide to sell out on March 11. In the early part of the session there were enough limited trade buying orders just under the market to hold it fairly well, but as the selling increased and these orders were filled, stop-loss orders were touched off one by one, which finally ended in a decline of approximately 185 points, marking one of the wildest markets that the New York Cotton Exchange had seen in many years. The outstanding feature of this decline, and in fact one of the chief causes, was its total unexpectedness. There were hundreds of people in this country and abroad who would have been glad to have taken the opportunity of buying cotton on any such break as was experienced that day, but it happened so quickly and with absolutely no warning that buying power never had an opportunity to assert itself. Mr. WYLLIE. Do you attribute the rumors with respect to the continuation of the Government policies concerning the 12-cent loan as the sole cause of the break on that date? Mr. MCFADDEN. I would say, Mr. Wyllie, that, expressed in percentages, they were 90-percent responsible. Mr. WYLLIE. What other factors entered into the picture? Mr. MCFADDEN. I think the other 10 percent was the fact that these longs who had been waiting for a profit that did not materialize just got disgusted and sold out. Mr. WYLLIE. Have you a record of the purchases and sales made by your firm on that day? Mr. MCFADDEN. I have. Mr. WYLLIE. I am speaking now of your purchases and sales made on the New York Cotton Exchange. Mr. MCFADDEN. Our purchases were 13,700 bales and our sales were 12,400 bales. Mr. WYLLIE. So your purchases on that date exceeded your sales? Mr. MCFADDEN. Yes, sir. Mr. WYLLIE. At that time did you have any straddle position between Liverpool and New York? Mr. MCFADDEN. I am speaking from memory, Mr. Wyllie, but I think we did. Mr. WYLLIE. You recall whether on that date you applied any of your purchases on the New York Exchange against your subsequent sales on the Liverpool Exchange? Mr. MCFADDEN. I do not recall. Mr. WYLLIE. In other words, did you take that opportunity to undo any of your straddles? Mr. MCFADDEN. I could not tell you whether we did or not, but my impression is that we did not. Mr. WYLLIE. Do your records show whether your purchases were made first on that date or whether your sales, that is, whether you began selling first or whether you began purchasing first? Mr. MCFADDEN. We began our first transaction was at 10:03 o'clock. At 10:03 o'clock we bought two contracts. The next transaction was at 10:08 o'clock when we bought one contract. The next transaction was at 10:10 o'clock when we bought one contract; the next transaction was at 10:11 o'clock when we bought two contracts; and our first sale was made at 10:12 o'clock when we sold four contracts. 55627-36-pt. 1- -32 Mr. WYLLIE. Could you tell me from your records what would be the difference in money value between the prices at which you purchased and the closing prices on that date and the prices at which you sold and the closing prices on that date? Mr. MCFADDEN. No; I could not, Mr. Wyllie. Mr. WYLLIE. Do your records show the respective prices at which each one of your contracts were executed on that date? Mr. MCFADDEN. No; it simply gives the time. Mr. WYLLIE. You are familiar of course, Mr. McFadden, with the fact that the New York Cotton Exchange has what is known as a credit rule, are you not? Mr. MCFADDEN. I am familiar with that. Mr. WYLLIE. And that rule provides that no firm can extend to any customer a credit or marginal courtesy in excess of $10,000 or $5 per bale; is that not correct? Mr. MCFADDEN. That is correct. Mr. WYLLIE. Do you know whether that credit rule was violated on or about that time by any of the firms who are members of your exchange? Mr. MCFADDEN. Mr. Wyllie, that rule, if I recall correctly, reads that a marginal requirement must be met within a reasonable length of time. That phrase is naturally to a certain extent elastic; I don't mean by that, to the best of my knowledge and belief, that anybody takes advantage of that elasticity, but it would be natural to assume that on a day like March 11 that a little more time might have been given to certain customers than would have been given ordinarily. I have no knowledge, no personal knowledge, of that rule having been violated in act or in spirit on that day. Mr. WYLLIE. Well, if it should appear from our investigation and is shown to be a fact that one of the firms permitted a customer to open an account the latter part of 1934 without making any deposits and continued to trade through a period of several months without making any deposits and then had all of his open commitments closed with a money debit of five or six thousand dollars and that money debit remained unpaid for a period of a week or 10 days and the account resumed operations without any deposit and continued to operate on up to and through March 11 without any deposits and was finally closed without ever having made a deposit, would that be a violation of your credit rule? Mr. MCFADDEN. It would sound so to me, but I would have to know the surrounding circumstances, Mr. Wyllie, before I would like to answer that definitely, the way you put it. Mr. WYLLIE. What facilities would your exchange have to ascertain whether the credit rule had or had not been violated? Mr. MCFADDEN. If you mean by that, have we got a police committee Mr. WYLLIE (interposing). Any facility? Mr. MCFADDEN (continuing). That goes around checking up on that particular matter, my answer is no, that we have not. However, I cannot conceive of anybody wanting deliberately to violate that rule. Mr. WYLLIE. My question is, If it were violated, has the exchange any facilities for ascertaining that fact and taking the necessary and proper action? |