C5B6 ,y£-NRLF ^6 544 735 By JAMES E. BOYLE, Ph. D. PROFESSOR OF RURAL ECONOMY. College of Agriculture, Cornell University AUTHOR OF: Agricultural Economics The Financial History of Kansas Rural Problems in the United States Speculation and the Chicago Board of Trade V-". ■' The Chicago Board of Trade What It Is and What It Does By JAMES E. BOYLE, Ph.D. Professor of Rural Economy, College of Agriculture, Cornell University Copyright, 1921, by James E. Boyle. CHAPTER I. ECONOMIC FUNCTIONS OF A MARKET. GRAIN dealers and tax collectors are now and always have been two very unpopular members of our economic society. In spite of all efforts to abolish them, however, no successful substitutes have yet been found. Thus, Lysias, the Greek orator, made a speech- in Athens, 300 years before Christ, against the grain deal- ers there on trial. He spoke for the con- sumers of Athens, and every word of his great speech has been preserved and handed down to us. The burden of his complaint was that wheat was too dear for the city consumers, and for this unhappy situation the grain dealers should be put to death. From that day to this we have had two re- curring complaints against the grain deal- ers : First, by the consumers that prices ivil8G254 :2" '** ' tiiic\Gb 'board of trade were too high; second, by the producers that prices were too low. And since blame had to be placed on some one, the ^'middleman" has been the scapegoat. And now that in the last fifty years the grain market has come to be organized in great central grain exchanges this particular piece of market machinery — the Grain Exchange — is re- ceiving the centuries-old criticisms. Now these critics sometimes agree on one thing, and that is, in holding the marketing machinery, rather than general market con- ditions, responsible for changes in price levels. Thus the city consumers were dis- pleased by the tremendous rise in wheat prices beginning in 1916, and lasting up into 1920; consequently they blamed the grain exchanges; and prevailed upon Con- gress and the President to expend several hundreds of thousands of dollars of the public money in investigating the grain trade, through the Federal Trade Commis- sion and the Bureau of Markets. Then with the general drop in all prices late in 1920 following the World War, the produc- ers of wheat placed the blame for the fall in wheat prices on the grain marketing ma- chinery and called for another investigation by the Federal Trade Commission. How- ever, these various critics do not agree among themselves as to exactly what the market does do, or how it does it, or what it should do. Thus a prominent farmer, president of his local farm bureau, recently propounded these three questions to the Secretary of the Chicago Board of Trade: CHICAGO BOARD OF TRADE 3 1. "Why are wheat prices always forced down in the fall?" 2. "Why is a bushel of wheat not worth as much one day as another?" 3. "Why is there three times as much profit made on a bushel of wheat after it leaves a farmer's hands as the farmer made?" While these are all important indictments of our marketing machinery and deserve an answer (and will be fully answered in the following pages), yet they are not so important as this question : What should a market be and what should a market do? On the answer to this question all thought- ful critics agree. The economic function of a market is to register a price which correctly reflects sup- ply and demand influences. A free, open, competitive market price should and does reflect supply and demand. The cost of production governs supply. Utility governs demand. And utility plus scarcity determines value. Cost of produc- tion, therefore, does not determine value, but is one factor in determining value. Sup- ply and demand determine value. -Price is value expressed in terms of money. A fair price is the equilibrium price which bal- ances production and consumption, which balances supply and demand. The correct price is, therefore, the price which will move the whole crop into consumption, without a shortage and without a carryover. A low price (following a big crop) increases con- sumption and curtails production. A high price (following a short crop) stimulates production and curtails consumption. 4 CHICAGO BOARD OF TRADE Having now set up a standard or ideal by which to judge of the market let us apply this test to that particular market, known as the Chicago Board of Trade. And in ap- plying this test let us frankly face the fact that the forces of supply and demand are working through human agencies, powerful and alert human agencies, these on one side wanting and seeking lower prices; those on the other side wanting and seeking higher prices. ''Bargaining Power," in short, must be recognized as doing its utmost to thwart the "free, open and competitive" workings of the law of supply and demand. In the next chapter we will examine the physical facts which make Chicago a grain market; in the third chapter we will explain the market machinery of the Chicago market; in the fourth chapter we will apply the above economic tests of a market to the workings of this machinery and see whether or not the Chicago Board of Trade can fairly meet these tests. CHICAGO BOARD OF TRADE CHAPTER 2. CHICAGO AS A GRAIN MARKET. A GLANCE at the Census map of the United States furnishes one reason why Chicago is America's largest grain market. It will be seen from this map that the ^'center of production" of wheat, oats, corn and other grains has been traveling steadily westward for many dec- ades. Now the center of wheat production is in Iowa, some 300 miles from Chicago; oats, also in Iowa, 200 miles from Chicago ; corn, in Illinois, 200 miles from Chicago. Added to this fact of geographic location in the heart -of the world's greatest agricultural empire is the unparalleled system of trans- portation by lake and rail. About 400,- 000,000 bushels of grain are received at Chi- cago each year. This is a large volume of grain. But a still larger volume, in total aggregate, now flows to the rival markets in the same area. These competitors are, ranked in order of importance, Minneapolis, Duluth, St. Louis, Kansas City, Milwaukee, Omaha, Peoria, Toledo, Detroit. These rival ^markets take each year a total of some 800,000,000 bushels. The receipts of grain at Chicago are still double those of her nearest rival. There is only one force which will move this vast volume of grain to Chicago, name- ly, the Chicago price. COMPETING MARKETS. These cities named above, and many smaller ones known as "interior markets," O CHICAGO BOARD OF TRADE have established grain exchanges of their own. While there are now some forty grain exchanges in the United States, counting big and little, the following are those which come into most direct competition with Chi- cago: Minneapolis Chamber of Commerce; Duluth Board of Trade; St. Louis Mer- chants Exchange; Kansas City Board of Trade; Milwaukee Chamber of Commerce; Omaha Grain Exchange; Peoria Board of Trade; Toledo Produce Exchange; Detroit Board of Trade; Cleveland Grain and Hay Exchange; Cincinnati Grain and Hay Ex- change; Indianapolis Board of Trade; Lit- tle Rock Board of Trade; St. Joseph Grain Exchange; Atchison Board of Trade; Fort Worth Grain and Cotton Exchange ; Louis- ville Board of Trade; Memphis Merchants Exchange; Topeka Board of Trade; Wich- ita Board of Trade; Salina Board of Trade; Hutchinson Board of Trade; Oklahoma City Board of Trade; Enid Board of Trade ; Houston Grain and Hay Exchange ; Denver Grain Exchange; Sioux City Grain Exchange; Superior (Nebraska) Board of Trade; Des Moines Board of Trade; Cairo Board of Trade; Lincoln Grain Exchange. As illustrating the aggressive nature of the competition of these interior markets two cases may be cited, Lincoln and Des Moines. In the fall of 1920, in certain grain papers, full page advertisements of these, and other markets, appeared. The Lincoln Grain Exchange advertisement made the following claims: Federal inspection; Official weights; Railway facilities; Tribu- tary to producing area; Storage facilities; Flour milling facilities; Grain industries CHICAGO BOARD OF TRADE 7 (meal, hominy, feed, macaroni products, etc.) ; finally, the Grain and Milling mter- ests "have organized the Lincoln Grain Ex- change/' Similarly the Des Moines Board of Trade in the same paper, set forth the following advantages of this central Iowa market: Geographical center of grain area; Transportation system; Inspection and Weighing facihties; finally, "back of Des Moines' great natural advantages ... the Des Moines Board of Trade."' It is worthy of note in passing that these two grain exchanges lay special stress on the advantages to a shipper in dealing with an organized market. There is obviously a protection here to the country shipper which is conspicuously lacking on the unorganized market. It may here be stated positively, without fear of successful contradiction, that the grain trade as now conducted is one of the most competitive businesses in the United States. At this point we are ready to look at the Chicago Board of Trade as a piece of mar- ket machinery. iQuoted from the Cooperative Manager and Farmer, November, 1920, pp. 13, 27. CHICAGO BOARD OF TRADE CHICAGO BOARD OF TRADE CHAPTER 3. MARKET MACHINERY OF THE BOARD OF TRADE. LIKE all important grain exchanges, the Chicago Board of Trade is a corpora- tion. It holds its charter from the State of Illinois and is, of course, subject to the laws of that State. The Board itself does no trading. It has no interest in price changes. The Board of Trade merely fur- nishes (i) a place to trade; (2) rules of trading; (3) market information. The members as individuals trade with one an- other, either as principals or as agents for thousands of outsiders. EQUIPMENT. The Board furnishes a building for trad- ing purposes. The trading room, 144 by 161 feet, has large windows to furnish am- ple light for the 52 cash grain tables (some of them accommodating four traders each) ranged along the east side. There are four circular "pits" to accommodate those en- gaged in future trading. Elaborate means are employed to secure and disseminate market information rapidly and accurately, to all interested. There are about 100 tele- phones and 150 telegraph instruments on the trading floor. Large blackboards display the latest information about grain prices in all other important markets; Exports; Im- ports; Visible supply; Movements of grain (receipts and shipments) ; In and out in- spection at Terminal Elevators. A large weather map, furnished by the United lO CHICAGO BOARD OF TRADE States Department of Agriculture, shows each morning the country's weather — wind direction, precipitation, clear or cloudy, and barometer. In short, the market informa- tion discloses the factors affecting either supply of or demand for grain. All trad- ers on the floor are trading with their eyes wide open. Utmost publicity is given to the many supply and demand factors. OBJECTS. The objects of the Board of Trade are set forth in its rules, as follows: (i) To maintain a commercial exchange. (2) To promote uniformity in the cus- toms and usages of merchants. (3) To inculcate principles of justice and equity in trade. (4) To facilitate the speedy adjustment of business disputes. (5) To acquire and to disseminate valu- able commercial and economic information. (6) To secure to its members the bene- fits of cooperation in the furtherance of their legitimate pursuits. RULES. There is no secrecy about the rules of this organization. They are published in full in the large Annual Report of the Board of Trade and in that form distributed to all libraries and institutions interested. They are also published in booklet form and dis- tributed to grain dealers, shippers, farmers, and other parties making requests for them. The charter of the Board gives it certain general powers. But the rules, as grown up during the past sixty years and more, represent the actual regulations under which CHICAGO BOARD OF TRADE II the Board governs its affairs. The rules are adopted by the members, by a majority vote, and are constantly being changed from year to year to meet new conditions. The Initiative and Referendum — now so popu- lar as a democratic system of law making — has been in use on the Board for a much longer period than it has in any of our States. The administrative work of the corporation is left with its board of i8 di- rectors, and with the various committees. Among the most important committees may be named the following: Committee on Arbitration (to hear and settle business disputes, swiftly, cheaply, justly) ; Mem- bership Committee (to approve applications for membership and recommend them to the board of directors) ; Warehouse Commit- tee (to see that public storage facilities are meeting public needs) ; Market Report Committee (to see that no rumors or false news of any kind get into circulation and that attempts to manipulate the market by these means be frustrated and punished). MEMBERSHIP. The two conspicuous things about the membership here are ( i ) the large number of members — over 1600; and (2) the many and conflicting interests represented by the membership. The large number of mem- bers makes domination of the Board by any small clique or combine extremely difficult if not impossible. About 1200 bf these members live in Chicago, while the other 400 live in some 32 different States or coun- tries. This wide scatterment would make a "combine" all the more difficult. There is no limit to the number of members. Again, 12 CHICAGO BOARD OF TRADE these members represent the producers and consumers in about equal numbers. About lOO firms — and this list includes the oldest firms on the Board — are Receivers and Shippers, i.e., primarily Commission Mer- chants who receive consigned grain from the country and sell it on a commission basis. Their interests are bound up with the producers and the country shippers. They seek the highest possible price. Their trade comes from two classes of shippers — independent elevators and farmers' eleva- tors. Fifty-six per cent of the grain re- ceived at Chicago comes from farmers' ele- vators. Another group reaching out into the country is the line elevator company. This group also seeks to sell at high prices. The big millers, the exporters, the feed men, the maltsters, the oats products houses, the corn products people, all seek to buy at a low price. The most powerful single group is the terminal elevator group, hav- ing the advantages of large capital, great credit, and huge storage facilities. This group, however, is both a buyer and seller of grain and so cannot be counted on to line up with either the high-price sellers or low-price buyers. farmers' memberships. No farmers' company has ever been re- fused membership in the Board of Trade. Like any other company, it is required to have financial stability, good character, and must agree to obey the Rules of the Board. At present there are two farmers' compa- nies holding membership — one is in Illinois, and one is in Canada — a subsidiary of the CHICAGO BOARD OF TRADE 13 powerful United Grain Growers, the largest cooperative concern in North America. THE ANTI-REBATE RULE. One practical difficulty in the way of some farmers' cooperative concerns, as now organized, in obtaining membership on the Board of Trade is the board rule forbidding any commission firm to rebate any part of the regular commission back to the country shipper. This is to guarantee competition on an equal footing by all members when it comes to selling grain. This rule, of course, is in conflict with the "patronage dividend" in use by some country elevator companies. Farmers' companies, however, can find a way around this rule, if they desire to, by a proper distribution of their stock on the basis of the business done. Or there is one other way around this rule, and that is for enough farmers' companies to join the Board to form a strong block of votes ; then by securing adherents from other interests to have the anti-rebate rule altered or re- pealed. COST OF MEMBERSHIP. It IS customary for new members to buy memberships from retiring members or from the estates of deceased members. Memberships for sale are posted on the bulletin board and go to the highest bidder who can meet the membership requirements. The market price is around nine or ten thou- sand dollars a membership. There are loo or more transfers every year. SUMMARY. The Board of Trade as a corporation fur- nishes certain market machinery for the 14 CHICAGO BOARD OF TRADE dse of its members. This corporation is governed under democratic rules of self- government. In voting power, the "small business men" greatly outnumber the ''big business men." The way this market machinery operates will be discussed in the next chapter. CHICAGO BOARD OF TRADE I5 CHAPTER 4. HOW THE MARKET MACHINERY WORKS. AT first glance the test of registering supply and demand looks like a sim- ple one indeed. A prominent mem- ber of one of our agricultural colleges, for instance, recently published this statement in a bulletin: "The demand for wheat is fairly constant and the supply can easily be ascertained these days with telegraphs, ca- bles and wireless. Then why not a fairly steady price for wheat based on supply and demand?" But the subject is not so simple as that. A little effort at honest, clear, and sustained thinking will show the complex nature of the subject. The first question is, What is supply? Is it the crop? If so, no one knows exactly what that is, and even the Government crop estimates change from month to month. Does it include the carry- over from the old crop, and if so, how much is that? Does it include the crop in the rest of the world, particularly of our five biggest competitors — Canada, Argentina, Australia, India, and Russia ? But here the new crop is being harvested (in one or more countries) every day in the year, so that the "supply," meaning the "crop," is literally changing every day in the year. Traders do not face the actual supply, but the estimates of the supply, and these estimates change daily — even hourly — with new information. As a matter of fact "receipts" at the mar- ket constitute a more important "supply" factor than the "crop," and back of "re- i6 CHiCACO BOARt) OF TRADE o o O CHICAGO BOARD OF TRADE 1^ ccipts" is the so-called "visible supply"— ^ ,i;rain actually in terminal elevators. Back of this is the estimated holding in country elevators (some 20,000 of these houses) ; and back of these is the estimated holding on the farms (some two or three million of these). But the farm holdings are partly for seed and feed, and hence' are a very indefinite "supply'' factor. Indeed, the farmer himself may change his mind about the amount of wheat he will sell and the time he will sell. Obviously, then, the "sup- ply" of merchantable grain which may come to the market, which is important in price making, is not definitely known, and must be estimated from day to day by the trade according to available information. Neither is the demand "fairly constant," as the bulletin quoted claims. The biggest buyers are the millers, since most wheat goes into bread. Thus the consumption of wheat by American mills in July, August, September and October of 1920 was 50,- 000,000 bushels less than for the same pe- riod of 1919. Flour sales had fallen off, and wheat purchases fell off accordingly. Again the exporters are important buyers, since they take our surplus and it is the sur- plus which so largely determines the price of the whole crop. Thus the largest over- seas buyer of American wheat bought heav- ily the first half of 1920. This buying stopped absolutely on July 29, 1920, and during the next three or four months not another bushel of American wheat was taken by this buyer. At the end of this period this buyer was able to turn to Argentina and Australia and . secure l8 CHICAGO BOARD OF TRADE high-grade wheat below American prices. Demand is not constant — quite the con- trary. Sometimes demand can only be stimulated by price concessions; this is al- ways true in the face of a big surplus. De- mand is also affected by the use of substi- tutes and alternates. In human food, rye bread, or substitutes for bread, may be used more freely. For animal feeds, mixtures containing more cottonseed products, or corn or oats or linseed products and less flour mill by-products may be used. Stu- dents of markets and not of maxims appre- ciate the wide range of substitutes and al- ternates for wheat in human and animal nutrition, and the consequent fluctuations in the demand for wheat. When the world has a crop of 3,000,000,000 bushels — as it often does — there is "demand" enough to use it all. And when the world has a crop of 4,000,000,000 bushels — as it sometimes does — there is also "demand" enough to take it all. Demand is and must be flexible, and is in fact never constant. THE MARKET TEST. We have come far enough on our jour- ney to see that the "supply and demand" test is only superficially simple. Facing the realities of life, we must admit that to ap- ply this test to any market in such a way as actually to find out the truth is a job that cannot be done with statistical and mathematical accuracy. As a concrete back- ground to this market test, let these simple facts as to the supply side of the market be borne in mind. (i) In the year 1890 the United States wheat crop was 399,000,000 bushels. CHICAGO BOARD OF TRADE I9 (2) Ten years later, with 14,000,000 more mouths to feed in this country, the crop had increased by 122,000,000 bushels. (3) Five years later, with eight million more mouths to feed, the crop had increased by 170,000,000 bushels. (4) Five years later, with eight million more mouths to feed, the crop had fallen off 57,000,000 bushels. ( 5 ) Again, five years later, with five mil- lion more mouths to feed in the United States, the crop increased by 390,000,000 bushels. Truly, both ^'supply" and "demand" are and must be very flexible factors. For the output of farms, unlike the output of fac- tories, cannot be definitely controlled, re- gardless of wind and weather and insect pests, to meet the estimated "demands" of consumers. TESTING THE "SUPPLy" FACTOR. What constitutes the supply of wheat? As just stated in the preceding pages, the term "supply" is a complex and difficult one to measure. Supply is both psychological and physical. It is psychological, to the extent that it is merely the buyer's or seller's opin- ion or estimate of the amount of merchant- able wheat on the market or ready to flOw to the market. It is physical to the extent that it is a definite and stated number of bushels of merchantable wheat for sale. In reflecting the purely physical factors of sup- ply, the Board of Trade wheat price re- flects these three distinct aspects of supply, namely, (i) crop, (2) the visible supply, and (3) receipts at the market. Receipts have the most immediate effect on price; 20 CttiCAGO BOARD OF TRADE Chart I. Price of Cash Wheat for Ten Years, Chicago Board of Trade, and the three most important physical factors of supply which affect price. CHICAGO BOARD OF TRADE 21 visible supply ranks second ; the crop yield, as announced monthly by the United States Bureau of Crop Estimate is the underlying or third influence on price levels. To an- swer the question, therefore, whether or not the Chicago Board of Trade market price for wheat does correctly reflect the supply of wheat, it is necessary to show whether or not this price does rise and fall with corresponding changes in these three supply factors. This is best shown in the form of a graph. Ten normal years are taken as a test, 1904 to 19 13, inclusivCj years free from wars and subject to one minor panic. Judged by this fair test (see the accompanying graph) it is seen that the price of wheat on the Chicago Board of Trade does follow the law of supply and demand (Chart I). THE LIVERPOOL PRICE. THE Liverpool price of wheat is of prime importance, since it seriously affects the ebb and flow of export grain from the seaboard. This, in turn, at once affects the seaboard's bidding on the Chicago market. In this manner Liverpool buying is reflected back to the Chicago mar- ket as a demand influence, and, also, in turn, as an influence on the three physical factors of Chicago receipts and visible supply. STATISTICAL POSITION. The statistical position of the market, as it is called, means the market conditions, national and international, which are ex- pressed in definite statistics. In other words, it means the physical factors which are visible and are matters of public infor- 22 CHICAGO BOARD OF TRADE mation. It sometimes happens, however, that the statistical position may be "strong" and the actual market "weak." This hap- pened in the fall of 1920. The statistics in the early fall showed a hungry Europe fac- ing a very ordinary exportable surplus. This meant, obviously, a strong market. But certain invisible factors, not shown by the statistics, began to enter in and spoil the "strong" market. It developed, for instance, that the biggest buyer. Great Britain, had quit the market in July, for several months. This meant a big slump in the demand. This meant, by the same token, a supply in excess of the actual, manifested demand. In short, it meant a fall in price. No chart of statistics showing "Supply and Demand" can represent all the psychological elements on the actual market. But actual market fluctuations are due to all these supply and demand factors, both psychological and physical. To those who are ignorant of ac- tual market conditions and influences, these price fluctuations, although genuine supply- and-demand fluctuations, seem to be arbi- trary and the conscious and deliberate work of speculators and gamblers. Such a criti- cism of the market has never been made by a man who has spent several years on the market. Indeed, one of the interesting things about the Board of Trade is the group of men — none of them rich — who have been active members there for fifty years or over. These venerable traders are very firmly convinced, by the abundance of their experience, that price fluctuations — even great changes in price levels — are, in fact, due to natural supply and demand in-,... y CHICAGO BOARD OF TRADE ^3 fluences. In this market, as in every other kind of market, the powerful bargainer has a certain advantage over the weak bargainer, yet even the powerful bargainer can exer- cise but little and temporary artificial con- trol over supply or demand. The rules of the market are, in fact, made by the small dealers (who are in the majority) to protect themselves against just such a possible dom- ination by large interests. The same cannot be said of the tobacco or wool market, for instance, or any other unorganized market, for there small groups of men may and often do dominate the market. CASH PRICES NOT GOVERNED BY FUTURE PRICES. Following the re-opening of the Chicago wheat pit, July 15, 1920 (after being closed about three years), there came several weeks of a very narrow market — a market, that is, with few buyers and sellers in it. A narrow market always means wide fluctu- ations in price, as explained a few pages later on. Hence, following July 15, 1920, the country witnessed unprecedented price fluctuations in the wheat pit, aggravated by the further conditions that the whole world was recovering from four years of war, and that a general post-war price recession had set in. Instead of the usual daily range of two or three cents in future prices of wheat, some days saw a range of seven or eight or even ten cents. Before the World War we had what may be called a normal future market on the Chicago Board of Trade. During the months following the World War we had 24 CHICAGO BOARD OF TRADE what may be called an abnormal future market on the Board of Trade. A normal future market is one in which the future price ranges higher than the cash by about the amount of the "carrying charge'' on the grain (that is, storage, in- surance, interest). Such a normal market is illustrated by the graph below, Chart 2, showing one week's market in the year 191 1. H^^:-' :'":': --- - . -: --■- .'_..:;:_:.,.•.: , / : :.L ■..:..... .j Normal Futures. Cash and Futures, uary 9 to 14, 1911. Chart 2. One Week of Wheat Prices, Chicago Board of Trade, Jan- An abnormal future market, is illustrated by the graph, Chart 3, on following page, showing one week in October, 1920 — a pe- riod of drastic readjustment of prices and wages throughout the world. The error back of much reasoning about the Board of Trade is the belief that future price controls cash price. And since the future price is made in the pit, largely un- der speculative trading, the conclusion is reached that the cash price is a mere foot- ball of speculation. We have seen, in the preceding pages of this booklet, that cash CilicAGO BOARD OF TkAbE ^5 Chart 3. Abnormal Futures. Futures Below the Cash. One Week of Wheat Prices, Cash and Futures, Chicago Board of Trade, October 4 to 9, 1920. 26 CHICAGO BOARD OF TRADE prices reflect supply and demand conditions. It may be stated at this point, positively, that future price does not determine cash price. This may be illustrated by the price of corn during the crop year 1917. The crop in the fall of 19 17 was large in quantity, but very poor in quality, much of it being too wet to sell at all. The Food Adminis- tration was making superhuman efforts to move wheat to Europe, and, by the same token, was anxious to increase the con- sumption of wheat substitutes at home, in- cluding cgrn. Cash corn in January, 1917, ranged from $.93 to $1.03. From this date on, both cash and futures rose in price. By July, 1918, cash corn had climbed to $2.32, a figure so high as to worry the Food Ad- ministration. The Food Administration considered the speculative buying entirely too large on the rising market, and the Board of Trade was called upon to prevent a charge being placed on the public by the unrestrained eventuation of these contracts. The Directors of the Board of Trade, ex- ercising their own war powers over the activities of members, set a maximum price to corn futures, namely, $1.28. This action was taken on July 11, 1918. This action held the futures down to the $1.28 level. But did pegging the futures also peg the cash price? Not so. The cash price, buoyed up by heavy buying orders, contin- ued far above the futures, reaching $2.36 in August, $2.24 in September, and, work- ing downward as the new crop year ap- proached, reached $2,151^ in October, $2.29 in November, and $1.90 in December. CHICAGO BOARD OF TRADE 27 This illustration of cash corn moving wholly regardless of future prices may be supplemented by the examples of all future prices during the World War, when cash prices were continuously above futures, in- stead of below. In other words, upset con- ditions of transportation, markets, etc., placed a premium on cash grain. The conclusion is evidently warranted that neither future nor cash price has a dominating influence, permanently, over the other. Both are merely effects of supply and demand causes. TWO KINDS OF TRADING. Notwithstanding the fact that there are .several hundred million bushels of cash grain handled through the Board of Trade every year, public attention is centered al- most wholly on the future trading which is going on there at the same time. At this point it is necessary to define each kind of trading, and show the relation of the one to the other. Cash grain means the grain actually on hand ready for delivery. Fu- ture trading is dealing in grain contracts, the grain covered by the contract to be deliv- ered at some future date. The regular future delivery months for wheat are Sep- tember, December, May, and July. Some speculate in cash grain; some in futures. The bulk of speculation is in futures. INTERRELATIONSHIP OF CASH AND FUTURES. The future market is used by two dis- tinct classes of persons: by those who use it for speculation only; by those who use it to avoid speculation. This latter class in- cludes the cash grain interests, to a very large extent, particularly those who wish to 28 CHICAGO BOARD OF TRADE introduce certainty and stability into their business. To illustrate this truth it is necessary to explain ^'hedging/' HEDGING. Standing on the edge of the Chicago oats pit one day in the fall of 19 17, I noticed Mr. E. W. Bailey step into the pit and sell two cars of oats for December delivery. He explained the transaction as a hedge. He had just bought two cars of cash oats, after looking over the samples displayed by the various receivers and shippers of cash grain. These two cars were ordered sent to his mill in Vermont. Fearing a loss by a drop in price before these oats should reach destination, and not wishing to assume the speculative risk of either a profit or loss through price fluctuation, he sold two cars of oats to a speculator in the pit who did want to assume a risk. Since this pit trade made Bailey's books balance — being ''long" and "short" exactly the same amount, he had no further interest in price changes. For any loss on one side would be offset by a gain on the other side. Thus if the oats should rise in price 10 cents by the time the Vermont mill had passed them on to the consumer, Bailey would realize a lo-cent profit (in addition to his regular milling margin) on his cash oats. But as soon as his cash oats were sold, he would enter the pit and buy in his hedge, losing 10 cents on it. It may be emphasized here in passing that neither Bailey nor any other miller ordinarily takes any deliveries of grain on future contracts. They close out the con- tract before the delivery month by selling in the pit what they have bought in the pit, or CHICAGO BOARD OF TRADE 29 buying in the pit what they have sold in the pit. This universal practice helps shed some light on the large volume of futures as compared with cash sales. The big miller, quite obviously, meets his actual milling re- quirements — grades, varieties, blends, etc. — by buying cash grain from the samples on the trading floor. Hence he, has no need of taking deliveries on futures, since they have served his purpose already by insuring him his milling profits. This concrete case of Bailey is given in some detail because it is typical of a very large class of cash-and-future transactions on the Board of Trade. Bailey, without the hedge in the future market, could and would have hedged in another way (such as is done in barley), that is, paid less for the grain or sold it for more, or both. In other words, he would have worked on a larger margin. Wheat, oats, and corn, thanks to hedging in the future market, are now handled in the United States by the estab- lished dealers at the lowest margin of any farm product. As the miller uses the hedge, so do alsa the country elevator managers, the termi- nal elevators, and the exporters. Thus the country elevator manager, filling his house with cash grain, already paid for, sells it for future delivery. In September he is likely selling for December delivery. As his cash grain reaches the terminal and is bought and paid for by terminal elevator, miller, exporter, or industry, he buys in his hedge. The cash buyer, whoever he may be, if he IS a representative grain dealer, pro- ceeds to hedge in a similar manner. Thus, 30 CHICAGO BOARD OF TRADE o pq H CHICAGO BOARD OF TRADE 3I the cash grain interests are constantly in and out of the pit, trading with the specu- lators there, in order to avoid speculation themselves. This has two direct benefits for the cash grain interests. They work on a narrower margin (pay the producers more or charge the consumer less) ; they are financed at lower rates by the banks. On this first head, wheat and barley, before future trading in barley was estabhshed, are a case in point. To give a concrete illustra- tion from a South Dakota country elevator. Wheat subject to future trading, is handled on a definite and narrow margin ; barley was handled on a margin just three times as large. If the barley could have been hedged, the farmer would have received more for his barley. And on the second head, it may be stated that the large banks, in financing cash grain, feel that the loan has greater certainty and stability when the grain is hedged in the pit. It is true that some large banks loan against bills of lading, looking to the railroad company for the value of the wheat in case the shipment is lost or destroyed in transit ; or these banks may loan to terminal eleva- tors against warehouse receipts protected by grain insurance. However, in either of these cases there still remains a speculative hazard due to change in price of the grain and the bank must charge for this hazard in its interest rate. This speculative risk, however, many banks prefer to see shifted to the shoulders of the speculator. The testimony of one of the most experienced bankers in the grain belt is valuable as throwing light on this whole subject of financing the grain trade : 32 CHICAGO BOARD OF TRADfi David R. Forgan, President of the Na- tional City Bank of Chicago, stated the matter in these words: "Warehouse re- ceipts for grain or anything else that finally becomes human food are, in my opinion, the best possible collaterar for bank loans. . . . The warehouse receipts, therefore, above alluded to, constitute a collateral which is always available for the payment of debts. Furthermore, if the grain or pro- visions represented by the warehouse re- ceipts are already sold for future delivery, that fact adds a great element of strength to the loan because there is a third party obligated to take the grain at a certain time for a given price. ''When I lived in Minneapolis I had the only unpleasant experience I ever had in connection with the elevator business. A terminal elevator concern filled its elevators with wheat, and thinking that the market was likely to go up they did not hedge it by selling for future delivery. In other words, they speculated on their wheat. The mar- ket had a large and sudden drop with the result that the elevator concern failed, and the bank with which I was connected suf- fered a loss. The present method, there- fore, of carriers of grain or provisions sell- ing them for future delivery is a highly sat- isfactory one to the banks whose money is loaned to the carriers. The sale for future delivery is the final link in the chain that makes such loans the best in the world.'' This description of hedging, up to this point, has illustrated one form of hedging only, namely, that form in which the pure speculator always took one side of the trade. CHICAGO BOARt) OF TkAD£ 33 There is another form of hedging, also com- mon, namely, that form in which actual consumptive buyers instead of speculators take the buying side of the trade. To give a concrete illustration: Some cash grain interests went into the pit (in July) and sold 200,000 bushels of December corn. The buyer turned out to be a Texas cattle feeder, and not a speculator. He held his contract till December, called for his corn, and got it. And, by the way, this example of a trade (which actually happened) illus- trates another very simple aspect of the market, which at first glance looks "com- plicated" to the outsider. And that is this : The man who sold this 200,000 bushels of futures as a hedge, to Mr. Feeder, later bought in his hedge from Mr. Speculator, thus closing out his own futures. And Mr. Speculator, who was now short 200,000 bushels December corn was, under Board of Trade rules, bound by an unconditioned contract to deliver the corn in December. In such a case he would make one of two choices : ( i ) stand on the contract and de- liver the corn; (2) or pass on the contract to some other trader who was ready to take the short side of the market. The fact remains that as long as Mr. Feeder is "long" 200,000 bushels December corn, some trader is short that amount, and the terms of the contract will be strictly ful- filled. , And the further fact is to be borne in mind that these trades are contracts, not bets, and any trader who wishes to receive grain on his long contract will get it, prop- erly stored and insured in a regular ware- house sometime during the delivery month. 34 CiilCAGO BOARD OF TRADE Is this process "complicated" ? No more so than that of many contracts for large construction jobs. Thus Engineer A con- tracts to pave a street for $300,000. He is really selling labor and material short, for he contracts to deliver in the future what he does not now possess. It is a speculation on his part. He "sublets" the job to Con- tractor B, for $275,000, thus obtaining a profit of $25,000. Contractor B may pass on the contract to a group of smaller men — C, D, E, and F — at a total of $270,000, thus having a profit of $S,ooo on his contract. In the end the contract is fulfilled by the respective parties concerned and the city gets its pavement, but not directly from Engineer A. Or, to illustrate by an example from the clothing trade. The American Cloak Com- pany wants 1,000 women's coafs. Cohen sells the coats for $50,000, that is, he sells short, for he does not have any coats, but will dehver them at a future date. Cohen now divides his contract into ten jobs, and sells to ten of his friends a contract to de- liver 100 coats each, at $45. In turn these ten pass on their contracts to a number of smaller contractors and so on finally till the actual coat makers are reached. Some con- tractors may lose on their contract; some may gain. At any risk many "short sales" may be made before the actual goods are de- livered. Briefly, to sum up, the man who sells coats not in existence, who sells pave- ment not yet constructed, or grain he does not own, is a short seller, who, in dealing in contracts, thereby performs a service in our present commercial system. CHICAGO BOARD 0^ tRADfi 3^ Again, to return to the grain trade, there are several thousand farmers in Iowa and IlHnois who now use the Board of Trade for future contracts, to avoid speculative risks. Thus, in the late summer of 1920, their corn crop being assured and the price for December being satisfactory, they gave orders to grain commission firms to sell the December future. When December ar- rived, the price of corn had dropped 75 cents a bushel, but they, of course, delivered the corn on their December sale and ob- tained their original December contract price. The commission charged on these future trades is one- fourth of a cent a bushel. A similar thing happened with cer- tain wheat farmers who sold for December delivery, except their profit was nearly one dollar a bushel by avoiding the post-war price recession. The foregoing discussion may be sum- marized by saying that the speculator is a middle link in the chain of cash grain trans- actions and hedging transactions. He is the link that enables the other two interests to avoid speculation. He furnishes the insur- ance, LARGE VOLUME OF FUTURES. Future trading is dealing in grain con- tracts, not real grain, just as banking is dealing in credit, not real money. But it must be repeated and reiterated that credit is a promise to pay money — a grain contract is a promise to pay grain. And so the New York banks at the close of the year 1917, held net demand deposits of $3,500,000,000, and a total of all reserves of but $550,000,- 000 — or ratio of credit to real money of 36 CHtCAGE BOAkD OP tRADE •l ^feA^^ m m ^ ' ,.. 1 1 ^H lioy ,^ „, ^- — "^Mm .«. ^W Rii i 1 i^m CHICAGO BOARD OF TRADE 37 Over 6 to I, showing an efficient system of commercial banking. So also the grain contracts on the Chicago Board of Trade in an ordinary year greatly exceed in volume the amount of grain in the country. The crop of wheat, corn and oats in the United States averages 5,000,000,000 bushels an- nually. The volume of future trading in these grains at Chicago averages 20,000,- 000,000 a year, or four times the total crop. As long as all future contracts in grain are promptly met at maturity their total volume need have no fixed proportion to the cash grain handled. It is, in fact, very much the same as comparing the total volume of checks cashed with the size of the gold re- serve. This proportion, be it gold or be it wheat, is governed by the needs of the trade. How extremely rare is a case where a member of the Board of Trade fails to live up to his future contract. Practically non-existent ! SELLING CASH GRAIN. The above discussion illustrates the fact that future trading, as now carried on in the organized exchanges, is a part of cash grain trading — that part which furnishes certainty and stability through insurance. At this point a brief word must be said about an- other aspect of the cash grain trade, namely, how the farmer's grain is sold. About 95 per cent of the grain reaching the terminal market has already passed out of the original farmer's hands into the hands of a country elevator. About 4,000 of the country elevators in the Chicago ter- ritory are owned by farmers collectively, and the bulk of the cash grain reaching Chi- 38 CHICAGO BOARD OF TRADE cago comes from these farmers' elevators. Most of it is consigned to grain commis- sion merchants to be sold by them to the highest bidder they can find. The "toll'* is I per cent for this service. If the com- mission merchant is a skilled salesman (and the unskilled do not survive long on this market) he is at his table early in the morn- ing — a half hour before trading begins. He sees his samples delivered from the State Grain Inspection Laboratory, each in a strong paper bag with the proper notations as to grade, moisture content, dockage, test weight per bushel. He sees his own sam- ples arranged in order, whether he has ten cars or fifty or a hundred cars to sell. He moves about among the other fifty tables. He makes a swift and accurate mental in- ventory of every car of grain arrived, how much off-grade stuff, how much premium grade, and so on. Every seller of grain he knows intimately. They are his competi- tors. There are about 100 of them. The buyers of grain he knows equally well, and what their particular requirements are. And so when the gong sounds for trading to begin, he has his selling campaign well in mind — what to do with his white corn or his yellow corn, or his mixed corn, or his white or standard oats, or his hard wheat or his soft wheat. The actual bargaining is keen to an extreme degree. It is doubtful whether any better exhibitions of salesman- ship are anywhere to be found than here, or any more fierce competition. In one sense it is an auction — ^the sales going to the high- est bidder. Only there are many sellers and many buyers. CHICAGO BOARD OF TRADfe 39 SCALPING. Sometimes the claim is made by those not famiHar with facts that these grain dealers buy and sell from one another, the same car of grain thus passing back and forth several times, ''each one taking a commission on it." I once looked up the history of twelve hundred cars of cash grain sold on the Chicago Board of Trade, to see how many cars pass directly from the original shipper, through the one commis- sion merchant, to the consumptive buyer. All these cars but two followed this short route. In other words, ''scalping" of cash grain in this market is a very small fraction of I per cent. PERSONNEL. When it is remembered that here are as- sembled as buyers, representatives of the large milling interests (including the Min- neapolis mills), of all the large exporters, buyers for the various grain industries, in- cluding the Quaker Oats Company, the Corn Products Company, and similar indus- tries, the owners of big seed houses, and other grain interests, when all these are re- membered, to repeat, it is apparent that the cash grain market is strongly represented on the buying side and that these buyers are competitors. SPECULATION. The most familiar form of speculation in America today is land speculation — that is, the buying of a piece of land or a town lot, expecting to sell it later at a profit. The expected profit is to come from a change in price. The real essence of speculation is 40 CHICAGO 130ARD OF TRADE profit due to price fluctuations. Compare, for instance, a farmer, a retailer, and a professional speculator on the organized exchanges. Whence come the profits of each? The farmer aims to make his profit by using his land, labor and capital in pro- ducing crops for market. When once pro- duced, he may hold his crop for a rise in price, thus adding a little speculative profit (or loss) to his farming. In brief, his profits come primarily from good farming, and only incidentally from speculation. The retail merchant likewise is not a specula- tor, for his profits come from buying at wholesale and selling at retail. He may forecast a rise in price of sugar (for exam- ple) and lay in a big stock, thus making a speculative profit (ar loss) through price fluctuation. But his ' speculative profits are purely incidental. And now comes the speculator, whose profits come, primarily, from price fluctuations — buying cheap and selling dear; or what amounts to the same thing in the end, selling dear (for future delivery) and buying cheap (to fulfill his contract). Speculation, then, may be defined as fore- casting a change in value, and buying or selling to make a profit from such change. SPECULATION IN CASH AND FUTURE TRADING. Recently I was talking to a noted preach- er, famed for his stern opposition to "spec- ulation." He had just bought a $5,000 farm, paying down on it $500. Was he going to go "back to the land," I asked. He was not. He planned to sell to a prospec- tive customer for $6,000, thus taking a CHICAGO BOARD OF TRADE 4t profit of $i,ooo. In trade language, by putting up a margin of $500, he speculated and made a profit of $1,000. This illus- trates one outstanding truth, namely, that speculation is speculation, whether in fu- tures or cash commodities. A Kansas farmer by the name of Norman a few years ago considered cash corn too low at 18 cents a bushel delivered at the station. So he bought and stored 25,000 bushels. His fore- cast was correct. He sold the corn at 68 cents. He could just as easily (and more cheaply), have put up a margin, sent his buying order to a member of the Chicago Board of Trade, and bought the 25,000 bushels for future delivery. The essence of both trades is the same — profit through price change. THREE KINDS aF SPECULATORS. On the Board of Trade there are three distinct kinds of speculators, known in trade language as amateur speculators, pro- fessional speculators, and pit scalpers. The pit scalper is an important factor. There are about forty of these pit scalpers. A scalper is a trader who buys and sells on very small fluctuations in the price, usually with each one-eighth of a cent change, for in the pit price changes are on the one- eighth of a cent basis. The pit scalper is thus said to be in and out of the market, through the day, but is even at night. That is, he has sold as much as he has bought. He does not go long or short over night. His importance is in keeping a continuous market when the other class of traders are having a dull spell. The professional speculators are men of 4^ CHICAGO BOARD OF TRADE more means, and who buy and sell for longer swings in the market. There are probably not a dozen men on the Board of Trade who make their sole income as pro- fessional speculators, although there are perhaps a hundred men there who can qual- ify as professional speculators. They are members chiefly of large Chicago firms, or firms in other cities. Some of them may trade a little every day. Some may take a trade only occasionally. Most of them have other interests so that they can safely spec- ulate and lose without being wiped out. The professionals and scalpers together do about four-fifths of the total speculation. Almost without exception, every grain commission house in Chicago does two kinds of business for its customers: cash grain (at i per cent commission) and future trading (at one-fourth of a cent a bushel). And future trading is, of course, either hedging or speculation. The amateur spec- ulators comprise those lawyers, doctors, farmers, merchants, and other classes, scat- tered all over the United States who send in their orders for speculative trades to the commission houses. One big commission house will have about 3,000 of such cus- tomers. They all have their respective mar- ket opinions. And they are willing to in- vest their money on the strength of this opinion. Hence their order goes in; the trade is executed on the floor — and then stands as an open contract. FUTURES FURTHER EXPLAINED. Strictly speaking, future trading is not dealing in grain, but in contracts to deliver grain. Hence the volume of futures natu- CHICAGO BOARD OF TRADE 43 rally and properly greatly exceeds the vol- ume of cash grain. Grain contracts (fu- ture trades) are used very much the same as credits in our present commercial struc- ture, and are a sign of health and growth, not of corruption and decay. Credit is de- fined as a promise to pay money. But how greatly the volume of credit exceeds the volume of money! One form of credit alone — and a perfectly sound one — is our Liberty Bond issue, amounting to some twenty-five billions of dollars. This is a promise to pay in gold, and is, in fact, over eight times as large in volume as all the gold in the country. Or, the commercial banks give their customers the most liquid form of credit in business, namely, bank deposits subject to check, to the amount of over six times the total volume of money in the country. Grain contracts are liquid con- tracts in the grain trade and function as liquid credit does in the smoothly function- ing business world. Whether grain futures are ten times or twenty times ^ the volume of the grain delivered is not so important as the question whether or not these^ contracts are kept absolutely above question as to their integrity and safety. And the protec- tion thrown around these contracts by Board of Trade rules has made the various cash grain interests use these contracts as unhesitatingly as they would use gold coin. Credit is a promise to pay money. A grain contract (future trade) is a promise to pay grain. Most credit trans- actions (at least 95 ,per cent of them) are settled without the use of money. This is sound banking. Most grain contracts are 44 CHICAGO BOARD OF TRADE CHICAGO BOARD 01? TRADE 45 settled without the use of grain. This is sound and healthy business. It makes the business easier to transact, hence cheaper to transact. WIDE OR NARROW MARKET. A wide market is a market consisting of many buyers and sellers. It is subject to many and small fluctuations. A narrow market is a market consisting of few buy- ers and sellers. It is subject to few but violent fluctuations. To illustrate : (i) Wool market. The wool market in the United States is a very narrow market, there being no organized wool exchange for future trading and a comparatively small number of big manufacturers and big spec- ulators as buyers. The number of specu- lators and dealers who stand between pro- ducers and manufacturers is, it will be noted, small, not large, as in the wheat mar- ket. And the large speculators themselves own the bulk of the storage. Hence, when a few big manufacturers withdraw from the market as buyers, as occurred in the sum- mer of 1920, the price sags enormously. There are not enough speculators to come in and take up the slack. Hence wool prices (when sales could be made at any price at all) went as follows: Fine medium Mon- tana clothing wools (clean basis, Boston market) fell from $1.82 per pound in Jan- uary to 75 cents in November. On poorer grades of wool the drop was to 15 cents at country points. Had there been an or- ganized wool exchange, with futures and or- ganized speculation (including many small speculators without storage), the market would have been a wide one, free from stop- 46 CHICAGO BOARD OF TRADE pages and violent fluctuations. Any fall in price would have been cushioned by the speculative traders. (2) Beans. A perfect example of a nar- row market, run for the "consumptive buy- er" and without the ''speculator," is fur- nished by the California bean crop in 1918. The State Market Director of California, in his annual report for the year, tells the story in his own words as follows : "The conditions facing the growers were in the nature of an unprecedented combina- tion of unfavorable circumstances. "The small limit which the Federal Food Administration had placed on the profits to be allowed to the speculative buyer, had completely destroyed his speculative inter- est in the product. As a consequence, he was unwilling to buy except from hand to mouth. This left the producer with no buyers except for the merest handful of the product. Furthermore, the banks, with ab- normal demands made on them by the gov- ernment, with large advances made by them to barley and to other growers, with a weak and declining . bean market staring them in the face, were in no frame of mind to look with favor upon requests for finan- cial accommodations coming from bean growers." This is a clear indication of the produc- er's interest in a wide market, consisting of both speculators and consumptive buyers. (3) A third example of the meaning of a narrow market may be taken from the wheat pit itself, immediately following the period of government control. When the Chicago wheat pit reopened in 1920 but few CHICAGO BOARD OF TRADE 4/^ traders took part in the transactions there. It was indeed a dull market, with few trad- ers and few transactions. This meant what all narrow markets mean — wide swings in price, violent fluctuations. To make the matter more specific, take the reopening of the Winnipeg wheat pit on July 21, 19 rg. The news dispatch states : "Winnipeg. — After suspension for two years, wheat trading was resumed on the Grain Exchange here July 21. The first bid was $2.10 for October, with no offers (i.e., no sellers), and the first sale was made at $2.20, the price rising to $2.25 asked with no buyers. But 5,000 bushels were dealt in the first hour. The first bid for Decem- ber wheat was $2.23, with no sales. Dealers are inclined to be cautious. The millers are not in the market, but are watching the situation closely.'' Here is a market without speculators — and what a narrow market it is, how un- suited for hedging cash grain in. It is the universal and unanimous opinion among all handlers of cash grain with whom I have conferred on the subject, that the specula- tor is needed to make a wide market. The wide market is needed to keep down the costs of handling cash grain. And lowering the handling costs is desired by the public. WHY DO PRICES FLUCTUATE? We see all around us price changes. The city consumer, during the World War, blamed the "profiteer" and speculator for the tremendous rise in the price of farm products. Since the war, with a general re- cession in food prices and other •prices, 4^ CHICAGO BOARD OF TRADfi those suffering from the fall in prices quite generally blame the market machinery for this decline. And since the organized ex- changes are such concrete and highly cen- tralized pieces of market machinery, criti- cism has quite naturally focussed on them. Why prices fluctuate, and the true relation of organized speculation can best be an- swered in the form of brief questions and categorical answers. Q. Have we any article, bought and sold on the market, and not subject to specula- tive trading? A. Yes. United States Government bonds. The interest rate and the face value of the bond are both stamped on the bond in plain figures, and both will be paid in full in gold. Q. Are these bond prices then entirely free from fluctuation? A. No ; on the contrary, they show wide fluctuations in price. Just before the World War, the 4 per cent bonds were selling at 116. In April, 1920, 4% per cent bonds were selling at 84. This is a difference of $32 on a $100 bond. Q. Were these price fluctuations due to speculation ? A. No. The chief buyers were savings banks and insurance companies. Q. Did the bond prices fluctuate greatly during the year 1920? A Yes. Q. Did the supply of bonds increase during this year ? A. No. There were no , new issues. The supply of bonds was therefore con- stant. " CHICAGO BOARD OF TRADE 49 Q. What did make the prices fluctuate then? A. The demand. Buyers preferred other securities^ and would buy these bonds only at price reductions. This short catechism is given to teach one truth, namely, that severe price fluctuations occur in one non-speculative article, due wholly to supply and demand influences. And just as Government bonds fluctuate in price, according to the fundamental eco- nomic law of supply and demand, so also do wheat and other commodities. "stabilized'' wheat price. Fortunately, we can test this rule of wheat price fluctuations by taking the 34 months of Government control of wheat price with future trading abolished, and comparing them with the 34 months of nor- mal times prior to the war with future trading in force. The government stabilized price for No. 2 Northern wheat did not succeed in holding this wheat down, but on the contrary, the demand put the price up to $2.32 in July, 1918, and to $3.50 in De- cember, 1919, Taking the whole range of price for the 68 months, (i) October, 191 1- August, 1914, and (2) September, 1917 (when the stabiHzed price began) to June, 1920, inclusive (when the Government con- trol ended), and considering No. 2 North- ern cash wheat, the actual figures on the Chicago Board of Trade show the follow- ing: In the first period (with only future trad- ing to stabilize prices), price ranges were as follows: October, 191 1, from 108 to 117, or 9 cents; November, 5-cent range; 50 CHICAGO BOARD OF TRADE 1 ttb ^MNUm j 1 tfcxl'tirt.-itrrt-Hirfetti: ±I44) ^^ S s f P WW i W^^mi ^ P w it si ^m I 1 ^^§ ^ ^ m it? R 1 1 1 ^ ^ li wii ^.1|^4J r;^ ffl *i i ii 1 B#«^ yd 1 f^'j/ii*^'P}ii ,__ , ^ 1 irrr?^ tti^^-I-j^jttJ-t^'^^ \ 3 1 jg^^^^^^ttiHS Ifc^^ ^^^^^^J\r^-^-i^ ^A *m 0m Lji[4iij sc ^^^^ 1 iW HIM74 .68% Average for 20-year period, $0.65. Or, put in other words, the fluctuations were more than twice as large in the days when there was no future trading. The complete statistics put in the form of a graph are as follows (Chart s) : (2) Typical Year Without Future Trading.— The year 1855 may be taken as a year free from panics, and a typical year on the Chicago market when there was no future trading. It represents the typical narrow market with few speculators and big fluctuations. Taking the "top price" of spring wheat on this market for the months from March to November, inclusive, , we find fluctuations as follows : CHICAGO WHEAT MARKET IN 1855. (No future trading.) Low. High. Range. March $1.20 $1.35 $0.15 April l-tX \il 25 Ma V 1-50 1.75 .f'J June ". : 1-55 1.73 .18 Jufy .:. 1-00 1.55 .55 Aug-ust 1-00 1-^^ 'll September 1-05 1.30 .25 October 1.28 1.50 .22 November 1.4o 1.53 .m Total range for nine months Wa'o"^^'11 Average range per month ^4.8 cents 72 CHICAGO BOAHD OF TRADE /9S /Bo. llllllll II II II 1 1 j[[|||||; Ib€^. llllllll lllllllll ||||||||||||||||[[[|[|||||||||i /So. [lllllllllllllllll III ||||||||||}[[[|||||||||||||||! /3S. iimni iiliiil IIIIIM /Ze. I^B ■Bb /OS^ 90. llHIHIIIIIIIIm ljfi|Mf|M frmfflm t' T3- ujjiyiyiJM Ij Ji|A| Ljfla IjbJ IJW L|t«| XI /9S. ^M illliliiiii /90. /6S. ■ [1 1 ISO. /zo. ^H /t>S» 30. II JJHtllllllllBftllJlllt^lilllll ^ :*/•■ i llllllll /9€, m IMP'IIPf^H ^00 Hljyiiifflittffi ttttttlttfr fttililtiiHiTlffl-li^ /65^ /So. /35 IXt. /£>£ ■ ^0 m ^ ' -'- 1 fXO. JOS-. 30. iiiift^'' ■ 'r^WMi. /OS 90. TS. % '\v % m ^:-o,.:,,.. ,, ,: -x^ '-2 ;.. : Chart 5. One Hundred Years of Wheat Prices, arranged in 20-year periods. Compare price fluctuations. I., II., III. 60 years with no organized exchanges. IV. and V. 40 years with organized exchanges. CHICAGO BOARD OF TRADE J^ Avr.RAGr. :mo>:ttilv range, 1855. In other words, the average monthly range was 24.8 cents, which may be com- pared with the average monthly range for a period of 34 months preceding our entrance into the World War of 6.2 cents. The statistics for, the nine months' period expressed in the form of a graph are as fol- lows (Chart 6) on next page: 'The development of the system of grading and of elevator receipts is the most important step in the history of the grain trade," says H. C. Emery, the world's great- est authority on this subject. The Chicago Board of Trade, in pursuing a policy ol en- lightened self-interest, contributed more than any other one factor to the growth of a standard weighing, inspection and grading system for grain. Even modern countries in Europe, such as Germany, handling vast quantities of cash ^rain, have not worked put a grading system that approaches in efficiency our system. Indeed, sack handhng and selling by sample is still comm^on in many large European cities, in place of the better and cheaper method of bulk handling and selling on grades. In the course of time the State of IlHnois, in common with other States, took over the function of grading grain. Finally, the federal govern- ment, itself estabhshed uniform grades, for the sake of the better handling of interstate and foreign shipments. But the State of Illinois left intact the weighing department of the Chicago Board of Trade, the official weights of which are now accepted as stand- ard by all railroads and by all grain dealers. The State of Illinois, in taking over the 74 CHICAGO BOARD OF TRADE M |W^:|; B ^1 ^. I MM fffiiPiSffl " ■ ■ 1 I •jfce 1 i WSh i iMi!: W a. ItEf 1 ^ TO 1 ii' fll it 1 ■y-;:;: :J '^pF' : ■-fttff 1 ;^pL T^i 1 Wi ^i ^gi^DHiif i:| Eir_.,.:|^ 1 Wfim ^ Jsli 11 1 fpfrf ^ Ml 1 i|/«r 1 lljljt!! 1 i'il g 1 ire. Chart 6. V/V»eat Prices, Chicago Board of Trade. Year '*b{f^ 'before Future Trading was in use.) CHICAGO BOARD OF TRADE 75 grading of the grain, did in fact substan- tially preserve the Board of Trade grades. With very little change they are now re- flected in the federal grades. This chapter in the Board of Trade history is one of great importance to the welfare of our grain growers and grain dealers but it is not one which receives much notice from public speakers. Germany's experience with future TRADING. What would happen if our governrnent should pass a law prohibiting "speculation" on the grain exchanges? The same thing, no doubt, which happened in Germany when the Reichstag passed a law in 1896 abol- ishing future trading in grain. The farmers were strongly organized and had enough political power to put the law on the statute books. It was administered with great effi- ciency. The farmers' party was, however, finally convinced of their mistake in passing the law. It had the following results : (i) It increased price fluctuations in- stead of lessening them. (2) One class of business men — com- mission men — were wholly driven off the Berlin market. The so-called small dealer was in nearly every case also driven off the market, leaving the business in the hands of fewer and richer men. (3) Dealings in futures were found to be not only necessary but indispensable to dealers, importers, exporters and millers for the avoidance of speculation in grain. (4) With the abolition of futures it be- came impossible to establish fixed standard prices, while prices which were made by y(> CHICAGO BOARD OF TRADE secret transactions were not of best service to the farmers. (S) Finally, the law was of great benefit to one class — the interior dealers, who paid the farmers less and charged the consumers more. To summarize: The grain was handled on wider margins; the farmers' price was lowered; the consumer was not benefited; and price fluctuations were increased. So the law was repealed after four years of' vigorous enforcement. It took the farm- ers' party four years to learn its lesson. The Germans went back to the system of future trading used on the leading American grain exchanges. THE KANSAS WHEAT PRICE AND THE CON- SUMER'S DOLLAR. The federal government made a report on "Price of Wheat to Producers in Kansas" in 1914 (63d Congress, 3d Session, House Document 1271), and traced the wheat from the farm to the Liverpool buyer. Re- ducing the figures to the basis of 100 per cent, it was found that the farmer received 75 cents of the Liverpool importer's dollar. Expressed in the form of a table, the fig- ures are as follows : When Liverpool price was $1 a bushel — - Cts.per bu Price received by farmer in Kansas ... 75 Margin taken by country elevators 2.5 Freight to seaboard 12.6 Freight, ocean passage 5.0 Expense of elevating, loading, etc 1.9 Interest and insurance 0.8 Shipper's profits 1.1 Exporter's profits ' 1.1 100 CHICAGO BOARD OF TRADE "JJ The government says, in summarizing this report: **The cost of transportation is by far the largest element in the cost of marketing wheat. Of the total difference between the farm price and the Kansas City price, freight accounts for approximately 65 per cent. Of the spread between the farm price and the Liverpool price, railroad and ocean freights account for approximately 70 per cent. "The weakest link in the chain of market- ing Kansas wheat is the country elevator. Compared with the value and difficulty of service rendered, the margin taken by the country elevator is perhaps larger than that taken by any other middleman in the mar- keting of wheat. One special weakness is in the failure to use the future market to hedge holdings. Elevators frequently be- come congested with unhedged grain." (Note. — Country elevators of the Northwest very commonly hedge their purchases. Country elevators in Kansas quite generally do not hedge. However, it must be borne in mind in this con- nection that over half the Kansas wheat is milled within the State at a nearby mill, and these Kan- sas flour mills, particularly the large ones, do hedge this wheat. It will be noted from the above official report that no other farm crop caq show such low costs of handling. This is what organ- ized speculation means.) THE FUTURE PROBLEM. How shall speculation be lessened ? How shall prices be stabilized ? This problem in- volves three separate but related problems, namely : ( 1 ) How finance the grain movement ? (2) How provide adequate storage and where ? 78 CHICAGO BOARD OF TRADE ^ (3) How secure adequate transportation with no car shortages? (4) How provide more orderly market- ing throughout the 52 weeks? Organized exchanges should prove the greatest help in solving these problems — as they have proved in the past. CHICAGO BOARD OF TRADE 7$ APPENDIX. MINNESOTA STATE LEGISLATURE, 1919. Senate File No. 20 and Senate File No. 381, introduced by Hon. F. H. Peterson. RESOLUTION, Adopted by the Farmers Grain Dealers' Association of Minnesota, in convention assembled at Minneapolis, February 18-19-20, 1919. WHEREAS, There is under consideration by the Minnesota State Legislature at present Senate File No. 20 and also Senate File No. 381 (the latter being a correction of Senate File No. 20) ; and WHEREAS, These bills proposed to completely destroy all speculative trading in grain for future delivery in the State of Minnesota, at the same time pretending to permit purchases and sales of grain for future delivery as hedges; and WHEREAS, This bill would destroy future trading in the State of Minnesota and would de- prive the farmers' elevator companies, country millers, etc., in Minnesota and the Dakotas of the opportunity of hedging their purchases of grain in Minneapolis or Duluth, forcing them to assume the speculative risk which they now avoid through hedging sales for future delivery in these mar- kets, or it would force them to hedge their pur- chases of grain in Chicago, Milwaukee, Kansas City, St. Louis and other markets, in which they would not be able to make delivery, these hedging operations being, of course, very much more dan- gerous, and being in fact unsafe hedges on ac- count of the inability to deliver the grain hedged in the markets where the hedges are placed; and WHEREAS, By destroying future trading m the State of Minnesota the effect would be to greatly injure the market places at Duluth and Minneapolis, in which the spring wheat producer of the Northwest must market his grain, with the result that since the flour mills and linseed oil mills of Minnesota would be at such a great dis- advantage compared with the flour mills and oil manufacturers of other states, the result must necessarily be to lower the price of grain at 8o CHICAGO BOARD OF TRADE Minneapolis and Duluth, as compared with other markets, on account of the increased risks which must be assumed by farmers' elevator companies, line elevator companies, terminal elevators, millers, linseed oil manufacturers, etc.; and WHEREAS, The legislature of the State of Minnesota should not strike down or injure tb'j market places in its own State and the result of the passage of such a law would be to drive busi- ness to other markets in other States, such as Chicago, St. Louis, Kansas City, Milwaukee, ~ etc.; and NOW, THEREFORE, BE IT RESOLVED BY THE FARMERS' GRAIN DEALERS' ASSOCIATION, in convention assembled, that Senate Files No. 20 and No. 381 are against the best interests of the farmers and farmers' ele- vator companies of the State of Minnesota. AND BE IT FURTHER RESOLVED, That the officers of the Farmers' Grain Dealers' Asso- ciation forward a copy of this resolution to each member of the Minnesota Senate and House of Representatives, requesting them to oppose with all their influence the passage of Senate Files No. 20 and No. 381. or to the NORTHERN REGIONAL LIBRARY FACILITY BIdg. 400, Richmond Field Station University of California Richmond, CA 94804-4698 ALL BOOKS MAY BE RECALLED AFTER 7 DAYS • 2-month loans may be renewed by calling (510)642-6753 • 1 -year loans may be recharged by bringing books to NRLF • Renewals and recharges may be made 4 days prior to due date. DUE AS STAMPED BELOW Ft'B 05 199P 12,000(11/95) DCKIS.CLCT, \^M V-**/