ill Eon. Dept. Econ. IA. M^ T SPECULATION AND THE CHICAGO BOARD OF TRADE THE MACMILLAN COMPANY NEW YORK BOSTON CHICAGO DALLAS ATLANTA SAN FRANCISCO MACMILLAN & CO., LIMITED LONDON BOMBAY CALCUTTA MELBOURNE THE MACMILLAN CO. OF CANADA, LTD. TORONTO SPECULATION AND THE CHICAGO BOARD OF TRADE BY JAMES E. BOYLE, PH. D. EXTENSION PROFESSOR OF RURAL ECONOMY, COLLEGE OP AGRICULTURE, CORNELL UNIVERSITY flnrk THE MACMILLAN COMPANY 1920 AH rights reserved - * COPYRIGHT, 1920 BY THE MACMILLAN COMPANY Set up and electrotyped. Published July, 1920 iicoii. De.pi Aiain Librar, INTRODUCTORY Speculation in grain and future trading on the organized exchanges are fundamental market problems which interest every citizen. Unfortunately these questions are usually treated in a controversial manner, the discussions generally producing more heat than light. And so it happens that while the literature in this field is abundant, yet most of it is very one-sided and partisan. There are very few disinter- ested reports explaining the important terminal market problems of the grain trade. This book is really a " report" on the Chicago Board of Trade, and particularly on the two big problems involved there, namely, future trading and speculation. I have en- deavored to relate these two practices to the larger problem of marketing the grain crop, in order to show the true setting and the actual significance of future trading and speculation. In this way only can the economic functions of these two practices be rightly understood. It is hardly necessary to add that I have tried to make this report fair and candid. I have written this book for those open-minded readers who are looking for a disinter- ested treatment of the subject. The reader who already "knows it all " or whose mind is finally made up on all these controverted points, is asked to close the book at this point and read no further. In deference to the tacit demands of my readers to know what my credentials are for writing this report, I will add a brief word of explanation. The first twenty years of my 4342-97 VI INTKODUCTORY life I spent on a Kansas farm, and to this farm I have made a yearly visit during the past twenty years. Hence I claim to know something of the viewpoint of the farmer who is growing the grain. For several years I taught the subject of grain marketing in one of our State Universities, and so be- came familiar with the " theory " and with the literature of marketing. I made a first-hand study of the country eleva- tor business and of the various terminal market problems, thus getting in touch with the ''practical " side of marketing. Over two years' time was devoted to this study. Therefore, whatever the limitations of this book may be, whatever its merits or defects, it is the product of several years of study of the theory and practice of all parts of the grain trade. JAMES ERNEST BOYLE. Ithaca, N. Y. November 12, 1919. TABLE OF CONTENTS CHAPTER I PAGE FUNDAMENTAL ECONOMIC FUNCTIONS OF A MARKET 1 What an ideal market should be and do Contrast between ideal market and practical market Lack of coordination Example from Australia Fundamental function of a market The price function Problem of ''fair price " The grain market of Chicago Registering supply and demand Fluctuations in supply and demand The place of bargaining. CHAPTER II CHICAGO AS A GRAIN MARKET 10 Geographical location of Chicago Competing grain markets The flow of grain to Chicago and to interior markets Increase in competition among markets Grain area tributary to Chicago, cash and futures. CHAPTER III THE CHICAGO BOARD OF TRADE VIEWED AS A PIECE OF MAR- KETING MACHINERY STRUCTURE AND ORGANIZATION 14 A corporation Objects of the Board of Trade No trading by the Board itself Membership, number and classification Farmers' companies have memberships Qualifications of Members Government of the Board of Trade 'Use of Ini- tiative and Referendum -Rules Administrative work Twelve important committees Physical equipment Market information instrument alii ie. vii Vlll TABLE OF CONTENTS CHAPTER IV PAGE THE CHICAGO BOARD OF TRADE VIEWED AS A PIECE OF MARKET MACHINERY; OPERATION AND FUNCTIONS: SIXTY YEAR 3 OP ACTIVITY 22 A continuous market A picture of one day's trading Cash grain, to arrive grain, and grain for future delivery Selling from official samples: commission merchants Hedging and *-" f speculation Professional speculators, pit scalpers, and am- ateurs Bears, short selling Bulls, long Overbought, over- sold, liquidated Margins One day's trades, by 2595 persons, in 28 states Over half the future trading by members for themselves Cost of future trading to the country Selling cash grain Additional services of the commission merchant Grain handled on low margin of cost Hedging defined and illustrated Cost of hedging and influence on grain handling Evolution of the Board of Trade: (1) Membership: at first, "members and strangers"; (2) Weighing, Inspecting, Grad- ing; (3) Cash grain: price fixing at country elevators, origin and growth of Farmers' Elevators; (4) To arrive grain: the Call Rule; (5) Future Trading: before the Civil War: after the Civil War, credit, banking, and future trading, influence of future " prices on cash prices, carrying charge, delivery months; (6) Corners: days of many corners, reforms, record of various corners, Hutchinson corner, Leiter corner, Patten corner: Steps taken to prevent corners, shipping grain out of store, delivery at "fair price," grades deliverable on contract, de- livery on tract, declaring additional warehouses regular; (7) Clearing House of the Board of Trade, organization: operation, ringing out, settling by offsets, arguments for and against present clearing system; (8) Option trading: puts and calls; (9) The Bucket Shop fight, control of quotations, definition of bucket shop, interest of the Board in bucket shops, Western Union Telegraph Company, first bucket shop in the year 1876, the quotations issue, the Cleveland Telegraph Company, the Christie case, market news service of the Board at present; (10) Terminal Elevators, early relations with railroads, com- petition throttled, clash between conflicting interests on the TABLE OF CONTENTS IX PAGE Board, Illinois law of 1867, regulation resisted, Illinois Consti- tution of 1870, Railroad and Warehouse Act of 1871, inspec- tion, storage, warehouse receipts, elevators as custodians or merchants of grain, Judge Tuley's warehouse decision, inves- tigation by Interstate Commerce Commission, Hiram Sager, harmony president of the Board, working agreement between Board and Elevators, forcing grain into store, mixing grain, significance of struggle with Terminal Elevators; (11) Arbitra- tion of business disputes, adjusted out of court; Summary of Chapter. CHAPTER V THE CHICAGO BOARD OF TRADE AND THE PROBLEM OF SPECULA- TION 115 Chicago as the world's speculative grain market Comparison of volume of futures and volume of cash grain Definition of Speculation; Contrasted with gambling Speculation in cash grain and futures; Organized and unorganized speculation compared Speculation and price fluctuation; Compare price fluctuations in government bonds; speculation lessens fluctua- tions; Illustrations Influence of speculation in raising prices; in lowering prices The "phantom wheat" question Exam- ination of price fluctuations, comment by daily press market reporters, comment by Charles D. Michaels, Argentina, a comparison Corners, artificial and natural, an ancient prac-^ tice, examples from history, tobacco, a comparison, relation of organized exchange to corners Manipulation, definition and use, relation of organized exchange to manipulation Increas- ing use of future trading, forward contracts used before ex- changes started, use of futures in marketing apples, walnuts, prunes, apricots, etc., use of futures in various industries, fur- niture sales, bakers and flour millers, futures give certainty and stability Hedging, Insurance and Speculation, importance of modern insurance, fifty common forms of insurance, use of insurance in the grain trade, by the American Society of Equity, by the Saskatchewan Cooperative Elevator Co., speculation TABLE OF CONTENTS PAUK and the hay crop, a comparison, Hartford, South Dakota, farmers' elevator, hedging reduces margin of cost Wide mar- ket needed for hedging, illustration of narrow market, relation of hedging to speculation; limiting speculation to grain dealers; Hedging in North and South, a comparison Summary of benefits of organized speculation; stabilizes price; registers prices; wide continuous market: shifting of risk; enemy of monopoly: stability of values Prohibiting speculation Germany's experience; law of 1896: futures in grain prohibited; effects on the German farmer; future trading in grain re- established four years later Speculation a social question; speculation in grain one aspect of larger question, the problem of "unwise investments," " Educated gullibility," Mark Twain, Walter Scott, Wm. E. Gladstone, U. S. Grant, land speculation, George Washington, a successful speculator, business ventures as "adventures" Evils of Speculation, use and abuse of speculation, two. kinds of speculation, specula- tors, fit and unfit, relation of Board of Trade to unfit specula- tors Constructive Reforms: general reforms; program of reform; education; government supervision and inspection; reforms by the Directors of the Board of Trade; power of the Board of Trade to reform abuses from within Summary on speculation; abuse of speculation is local, temporary, incidental; use of speculation wisely is general practice of exchanges. LIST OF APPENDICES 1. World's Wheat Harvest 209 2. Wheat production and Farm Value for 50 years 211 3. Wheat prices on Chicago Board of Trade, 10 normal years . . . 212 4. List of flour mills 215 5. Relation between future price and cash price 215 6. List of Private Wire houses 217 7. Wheat price fluctuations for 100 years (60 years before estab- lishment of Board of Trade, and 40 years under Board of Trade influences) 219 8. Grain Storage in Chicago 220 9. Price fluctuations and the "horse disease " of 1872 222 10. Closing prices of cash corn, Chicago, 1919 223 11. Market News Restrictions, Chicago Board of Trade 225 12. Regulations of Crop Reporting Methods, Chicago Board of Trade 226 13. Regulation of Future Trading, Chicago Board of Trade 227 14. Restrictions on Future Trading, Chicago Board of Trade 228 15. Executing Trades in the open market 230 16. Settlement of contracts (story of credit money) 231 17. Prices of Wheat to Producers in Kansas 232 18. The Mixing Problem in Grain and in Butter 235 19. Threatened Corner in Malaga Grapes 237 20. Life of a car of grain shipped by country dealer to Chicago Grain Commission Merchant, showing trade documents used 238 21. An Argentina Need 264 22. Reference Library for a Board of Trade 265 Index. . .271 SPECULATION AND THE CHICAGO BOARD OF TRADE SPECULATION AND THE CHICAGO BOARD OF TRADE I FUNDAMENTAL ECONOMIC FUNCTIONS OF A MARKET The marketing of grain has been considered, in all coun- tries and in all times, as a matter of grave public concern. And in our modern times, the great central grain markets have reached an importance in the distribution of food sup- plies never attained before. Before passing an intelligent judgment on the virtues and shortcomings of that particular grain market known as the Chicago Board of Trade, it is first necessary to form a stand- ard of judgment as to what a market should be and should do. An ideal wheat market, for instance, would exist if exactly one fifty-second part of the world's wheat crop were har- vested each week and if exactly one fifty-second part were marketed each week and consumed each week, and if the quality and quantity were always the same, the quantity merely increasing slowly and gradually to keep pace with increasing population, and if the price remained the same, and if every buyer of wheat and flour and bread paid cash. There would then be no credit problem, no storage problem, no grading problem, and, most significant of all, no price problem. But contrast this ideally simple wheat-market problem with actual conditions. l 2 SPECULATION AND 'TttE CHICAGO BOARD OF TRADE The first Impressive "fact* to come to our notice is the lack of coordination between production and consumption as to the amount of wheat produced. Those peoples of the earth who eat the wheaten loaf and supposedly pray for their "daily bread" actually need about three and a half billion bushels of wheat per year. And, oddly enough, this was the crop actually produced in 1914. The year before and the year after, however, the crop was half a billion bushels in excess of that amount. And in the year 1916 the crop fell a billion bushels short of the 1915 crop. These years are typical of the wide range in crop yields. Insect enemies, such as the green bug, may work unexpected dam- age to a promising crop. So also may early frosts, drouth, hail, wet weather before harvest time, or wet weather during or after harvest, or red rust or black rust. Truly, the amount of good wheat harvested and marketed any year is very uncertain, depending as it does on many factors beyond the control of man. Again, there is lack of coordination of production and consumption as to the time of production, of harvesting and marketing. While the world's wheat harvest is going on every week in the year as a glance at the Table in Appen- dix 1 so interestingly shows yet the bulk of the crop is actually harvested during the four months of July, August, September and October. And in the United States, which is one of the six great wheat exporting countries, over half the wheat crop is marketed within four months following the harvest. The world's supply of wheat, in brief, is not produced when needed, where needed, and in the quantity needed. This makes the " Supply" side of the market very uncertain and very fluctuating. And the " Demand " side is subject to FUNDAMENTAL ECONOMIC FUNCTIONS OF A MARKET 3 unforeseen and unpredictable influences. A large crop of rye of good quality, for instance, in Germany or Russia where rye bread is common may increase the consumption of rye and decrease, proportionately, the demand for wheat. A failure of the corn crop may shift the demand to wheat products for feeding purposes, or conversely, a plentiful crop of corn, oats, alfalfa and of cotton seed may lessen the de- mand for bran and flour mill offal for stockfeeding purposes. A government attack on the high cost of living, or a state- ment from some prominent man that bread is too dear, may cause a big slump in the demand for wheat.* The stubborn, underlying condition of the market of agri- cultural products is shown by the above facts to be the lack of coordination of production and consumption. The fundamental problem of the market is, therefore, to move the whole crop into consumption without a loss, with- out a shortage, and without a carryover. And price is the instrument through which the market does this, or should do * For a curious example of how unforeseen events may affect the market, see Appendix 9. The following facts concerning the Australian wheat crops of 1917-18 and 1918-19 are significant: Grain Area, acres Yield, bushels 1917-18 1918-19 1917-18 1918-19 9,774,658 8,003,361 114,733,584 76,125,879 "Thus the area harvested for grain appears to have been 16 per cent less than in 1917-18, and the decrease in yield equal to no less than 33 per cent. The small yield to the acre is principally caused by the ad- verse character of the season. The reasons for the decrease in area are: Shortage and unreliability of labor; high cost of production, slow financial settlements by the pools, and the fact that stock raising is often thought to be more profitable than wheat growing." (Vice Consul W. J. McCafferty, Melbourne, July 17, 1919. Com- merce Reports, 1919, No. 214.) 4 SPECULATION AND THE CHICAGO BOARD OF TRADE this. If the market is a free, open, and competitive market, it makes the automatic adjustment of production to con- sumption. The high price (following a short crop) curtails consumption and stimulates production. The low price (following a large crop) increases consumption and curtails production. Thus the cure for high prices is high prices. The cure for low prices is low prices. Thus, in the open competitive market, a constant adjustment is made, coordi- nating consumption to production, on the basis of facts and not theories.* Price Function. It follows from what has been said above that the function of the market is to fix that price which will cobijdinate production and consumption. Such a price is sometimes called an equilibrium price or a fair price. * No matter how careful a market expert may be in compiling statis- tics from all known sources in order to form a correct theory of market p'riee, yet some omitted factors may emerge to bring those prices out of line with his theory and in line with the facts. An excellent example of this is seen in the case of the United States Food Administration during the years 1917 and 1918. Mr. Herbert Hoover, in charge of this gigantic task, was usually able to rely upon statistical information, secured by his experts, as to supply and demand matters. In one con- spicuous case, however, he found himself in error, despite the wide range of his information. The price of hogs in 1917 had been set at $17.50. Farmers had been induced to increase their hog crop very greatly. The conclusion was reached, about the end of the year, to remove this government price. We have the testimony of Mr. Mark Sullivan (Collier's Weekly, August 16, 1919) that at this juncture Mr. Hoover was greatly perturbed over breaking faith with the farmer, fearing that the removal of the government price would be followed by a slump in price. Exactly the opposite thing happened. The price rose to new records and for many months remained high. The "bumper" corn crop of 1917, claimed by the Government Crop Report, proved in fact to be so poor and so largely wet and unmerchantable that there was, in reality, a very short corn crop. FUNDAMENTAL ECONOMIC FUNCTIONS OF A MARKET 5 It takes into consideration not merely supply, with its under- lying cost of production, but also demand, which cannot be ignored in price matters. That cost of production alone is not a proper basis for fair price is evidenced by the fact that no two farmers have the same cost of production, and no one farmer has the same cost of production from year to year, and that the inefficient, high-cost farmer, like the inefficient, high-cost manufacturer fails and quits because he cannot force the consumer to pay the high price represented by his high cost of production. The equilibrium price pays the cost of production of that supply which the consumer stands ready to take at this price. If more than this is produced, the consumer can be induced to take it only by lowering the price, so that doubtless some portion of the supply is sold below the cost of production. That is, the so-called " mar- ginal farmer " loses money on his crop this year, and puts his land in something else next year, unless he be following a fixed rotation scheme. Thus, in fact we do have an annual fluctuation in wheat acreage, corn acreage, and other crop acreage. Conversely, it is true also that if less than the supply is produced, which the consumer wants at the equilib- rium price, the strengthened demand shows itself in higher price. Then the marginal farmer, the one on the ragged edge, finds his crop selling at a profit and he will feel like trying the same crop another year unless he has a rotation program. This discussion of price theory is given to remind the farmer that as a producer he is entitled to "cost of produc- tion plus a profit " only so far as the consumer is able anc willing to use the goods at that price. In the end the con- sumer is, and ought to be, the power that directs ultimate production. For surely the purpose of production is con- O SPECULATION AND THE CHICAGO BOARD OF TRADE sumption. That the producers are beginning to understand the psychology of this situation is illustrated by the action of the organized livestock producers, and other producers, in running paid advertisements for the purpose of " educat- ing the consumer" and " stimulating demand" for their various food products. The only "fair price" then, is the equilibrium price which coordinates production and con- sumption. This is the price which moves the whole crop into consumption, without a shortage, and without a carry- over.* * The statement has gained much currency that the farmer is the only person who has no voice in fixing the price of his product. The manufacturer, according to this view, puts the price on his product. This is true with certain very important limitations. Most manu- facturers face competition. All manufacturers face the consumer. The manufacturer sets his price, let us say, at the outset. Then what happens? If he has competition, he must set his price not too far above his competitor. Suppose the consumers fail to buy his whole output at this set price? He has various alternatives: (1) lower his cost of pro- duction and lower his price; (2) stimulate consumption by advertising and selling campaigns; (3) improve his product; (4) quit business. A very large per cent of all manufacturers do, sooner or later, fail and quit business, because the consumer refuses to buy any volume of the output at the price " fixed" by the manufacturer. Every village of any size can boast of one or more of such failed factories. If the manufac- turer have no competition, he is likewise forced to conform in the end to the consumer's demand. In reality, then, it is only superficially true that manufacturers "fix their own price" and hold the consumers to those prices. Similarly, we may say the merchants in the retail stores fix their own prices with certain very important limitations. Goods accumulate on their shelves, dead goods, not movable at the "fixed price." Annual and semi-annual clearance sales, at cut prices, may move these into consumption. A very large per cent of the merchants fail, because their "fixed " prices failed to move a big enough volume of goods into consumption. Fixing a price, by ignoring the consumer, is merely naming a price that won't stay fixed. The colossal and over- FUNDAMENTAL ECONOMIC FUNCTIONS OF A MARKET 7 By the test of the economic function of a market we must judge the grain market in general, and in particular that part of the grain market known as the Chicago Board of Trade. A careful study of the figures published by the United States Department of Agriculture giving the annual wheat production and the average farm price of wheat for the past fifty years shows clearly that the average price does actually fluctuate with the total supply of wheat. These figures are proof of the fundamental market truth that supply and de- mand govern prices in a broad and general way. Such figures, however, deal only with averages and for the whole United States, and must be construed with these limita- tions. They have value only for the big annual market movements. A more specific test must be applied to the Chicago mar- ket, taking into consideration not merely the supply (which does not fluctuate sharply from day to day) but also the demand (which does fluctuate sharply every hour of every day). Select for this purpose ten normal years free from war and what are the results? The important factors on the supply side which affect the market day by day are these : arrivals on the markets; United States Visible Supply; United States Crop, as estimated by the United States Department of Agriculture, and by private crop reporting agencies, such as Snow, Inglis, Goodman, the railroads and the industrial corporations; the world wheat crop as reported by Broomnall of Liverpool, by the International Institute of Agriculture at Rome, and by other agencies, official and pri- vate. The demand side of the market consists of buying whelming growth of advertising in recent years shows the determina- tion in the mind of sellers to control the consumer by "educating " him. 8 SPECULATION AND THE CHICAGO BOARD OF TRADE orders, and is therefore influenced by such factors as strikes, riots, panics, food boycotts, popular campaigns against the high cost of living, important pronouncements by high public officials, important lawsuits (particularly against farmers' organizations), embargoes by railroads, car short- ages, shortage of ships, drouth, failures of certain crops, etc. The demand side is the sensitive side of the market, showing the consumer's ultimate force in directing what shall be pro- duced by deciding what shall be consumed. Applying this test of supply and demand to the Board of Trade wheat prices for the ten normal years, 1905-1914, we find that the daily prices do fluctuate in accordance with supply and de- mand factors. The figures on which this conclusion is based are given in Appendix 2 and 3. It is fair to conclude, therefore, that the fundamental economic functions of a market are performed by the Board of Trade of the City of Chicago. In speaking of supply and demand, some writers seem to take the stand that supply is an impersonal factor while de- mand is the personal, human factor. But the word " sup- ply," in grain market language, must refer to the buyer's and seller's estimate or opinion of supply, and hence is, like demand, a personal, human factor. For surely no one ever knows exactly what the merchantable supply of grain is. Each dealer must keep revising his own opinions from day to day. This brings us to a very important limitation of the law of supply and demand. Within broad limits " supply and demand" do fix market price. But, the actual price at which the trade is made may be called the "bargain price." To use a figure of speech from the prize fighters' ring, supply and demand work out a circle: within this circle the buyer and seller contend for advantage and by their bargaining arrive at a price. The strength or weakness of the buyer or FUNDAMENTAL ECONOMIC FUNCTIONS OF A MARKET 9 of the seller thus enters into all price making. This fact has caused some very respectable thinkers to reject the whole law of supply and demand as inoperative. It is always operative, but it operates through human agents, some of whom are weak and some of whom are powerful. But should price fixing be attempted by government commission, the law of supply and demand would necessarily be followed as closely as possible, unless the -consumers should be rationed. And to ration consumers in peace times would be a tacit recognition of the law of supply and demand. A price that is too low does not maintain production; a price too high does not maintain consumption. What the cost of this Chicago market is to the public, as compared with the service it renders, what its mechanism is for functioning as a world market, and how its various problems of future trading, hedging, and speculation are actually being met, must be deferred for discussion to the subsequent chapters in this report. II CHICAGO AS A GRAIN MARKET The geographical location of Chicago made of the city a great grain market. Here is the greatest railroad center in the world. Here is the head of the Great Lakes. And tributary to this city is an empire of the world's best agri- cultural lands. About 400,000,000 bushels of grain are re- ceived at Chicago each year. It was due to natural economic evolution that here, the great grain warehouses were built, and that here should grow up the world's greatest cash grain market. However, with the settling up of the agricultural empire adjacent to Chicago there grew up a number of powerful, competing markets, the chief of which are in the order of their importance, Minneapolis, Duluth, St. Louis, Kansas City, Milwaukee, Omaha, Peoria, Toledo and Detroit. The primacy in wheat, barley and rye passed to Minneapolis. However, the primacy in corn and oats remained with Chi- cago and the receipts of grain at Chicago are still double those of her nearest rival. Along with these large central, competing markets there grew up a large number of so- called interior markets, as is witnessed by the number of grain exchanges formed in recent years in these points. A partial list of these exchanges includes the following: Indian- apolis Board of Trade, Little Rock Board of Trade, St. Joseph Grain Exchange, Atchison Board of Trade, Fort Worth Grain and Cotton Exchange, Louisville Board of 10 CHICAGO AS A GRAIN MARKET 11 ^Jrade, Memphis Merchants' Exchange, Topeka Board of Trade, Wichita 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, Su- perior (Nebraska) Board of Trade, Des Moines Board of Trade, Cairo Board of Trade. The growth of interior flour mills in this same territory, has tended to check the flow of cash grain to the terminals. For instance, using the figures of the United States Census for 1909, we find that in the Chicago territory, there were then 2828 flour mills of an annual capacity of over 1000 barrels each, and actually grinding 315,000,000 bushels of wheat a year.* The State of Kansas alone, at that time, was grinding about 50,000,000 bushels of wheat a year, and since that date many new flour mills have been constructed in that State. Developments like this affect the trade in both cash grain and future grain on the Chicago market, as will be presently explained. The increase in the feeding of livestock for the packing industry and the development of the manufacture of various kinds of cereal breakfast foods, of corn products, of livestock feeds, etc., have also tended to check the flow of grain to the larger terminals, and to promote the business of the small interior markets To illustrate in a concrete manner how this competition among markets works, consider the following typical causes: (1) A farmers' elevator in northern Iowa has a prosperous year's business, shipping out the almost unprecedented vol- ume of one million bushels of grain. In the spring, it devel- ops that too much corn has been shipped out, and some * See Appendix 4. 12 SPECULATION AND THE CHICAGO BOARD OF TRADE large livestock feeder must buy corn. This farmer goes to his local elevator. This elevator manager has a daily price card from Minneapolis, from Chicago and likely from Peoria and other points. He knows what these markets are bidding for corn, also at what price they offer corn. This manager may turn to his telephone, call up a car lot grain dealer in Sioux City and ask for his price on corn. The Sioux City dealer, being in touch with country elevators in four States, and with a branch office in Omaha, is able to buy the grain direct from a country elevator and turn it over to the Iowa manager at a profit of a half cent a bushel. And hence the corn is bought through the Sioux City dealer. And there are hundreds of dealers of this kind, in the interior markets, in direct, daily competition with Chicago and other terminal markets. To attract the grain to Chicago the price must be large enough, evidently, to make it to the interest of the country elevator to ship to that market. (2) A dealer in poultry feeds in Petaluma, California, wires his Denver grain dealer for a car of corn. This dealer wires a country elevator in Nebraska or Iowa for the corn, or, indeed, may wire an Omaha or Sioux City or Cedar Rapids dealer, who, in turn, gets in touch with the country house. In this way the corn is attracted to that market where the demand (the price) is the strongest. (3) In the same way New England and the South great consuming markets are bidding for grain, in part through the large terminal dealers, in part direct to the countiy elevators through grain brokers and grain dealers of various kinds. The grain trade, as now conducted, it may be men- tioned in passing, is carried on by many small, competing middlemen, with a small profit taken by each middleman, rather than by a few very powerful middlemen with a big CHICAGO AS A GRAIN MARKET 13 profit by each. This is the country shipper's guaranty of getting full market price. With the increase in the number of primary and secondary grain markets, and with the growth of local grain consuming industries at interior points, the tendency is to lessen the area from which Chicago draws cash grain and to increase the area for which Chicago is a market for future trading in grain, both for hedging and for speculative purposes. A discussion of this point must be deferred, however, till we reach the subject of future trading in Part IV of this report. Ill THE CHICAGO BOARD OF TRADE VIEWED AS A PIECE OF MARKET MACHINERY: STRUCTURE AND ORGANIZATION A Corporation. The Chicago Board of Trade, like all the other important grain exchanges, is a corporation. It was incorporated under a special act of the Illinois Legis- lature passed February 18, 1859. This act incorporated the then existing Board of Trade, which had had its early beginning in 1848 as a voluntary association. It was not till 1856, however, that the trade in grain was important enough to make the Board of Trade a real Grain Exchange. Objects. The objects of the Board of Trade are set forth in its Rules as follows: (1) To maintain a commercial exchange. (2) To promote uniformity in the customs 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 valuable commercial and economic information. (6) To secure to its members the benefits of cooperation in the furtherance of their legitimate pursuits. The Board of Trade, as a corporation, does no trading. It owns a building. In short, it merely furnishes (1) a place to 14 THE CHICAGO BOARD OF TRADE 15 It-ado; (2) rules of trading; (3) market information. The members acting as individuals, trade among themselves and as agents for many thousands of outsiders. Membership. The membership of the Board of Trade now (1919) numbers 1617. There is no limit to the number of members who may join. The membership may be classified (1) as to place of resi- dence, and (2) as to the nature of their business. (1) There are 1198 members of the Board of Trade resi- dent in Chicago. The remaining 419 are distributed as follows : New York 131 Illinois 71 Missouri 50 Minnesota 44 Ohio 24 Canada 24 Nebraska 18 Indiana 16 Iowa 16 Wisconsin 14 Massachusetts ... 11 Pennsylvania. . . 11 Maryland 8 Michigan 8 California 7 Tennessee 6 Kentucky 6 Louisiana 5 South Dakota. . . 3 Arkansas 2 Texas 2 Washington. ... 2 Washington, D. C. Arizona Kansas Virginia Florida Colorado Utah Oklahoma Oregon England This distribution corresponds fairly accurately to the location of the larger terminal markets and to the important consuming centers. (2) In classifying members on the basis of their principal activity, it must be borne in mind that such members are quite generally active in two or more lines of the grain busi- ness, and hence an effort has been made to list a member according to his chief activity. About one-fourth of the membership are interested in re- ceiving and selling consigned grain or in shipping cash grain : about one-fourth are primarily concerned with future 16 SPECULATION AND THE CHICAGO BOARD OF TRADE trading in grain (both speculative and hedging) ; about one- fourth are brokers who act as agents for others (and some- times for themselves as principals) in doing the pit trading (future trading); the balance of the membership represents those interested directly and indirectly in grain or provisions. Banks, railroads, and steamship companies have 35 member- ships in order the better to give attention to the financing and transportation of the grain. The great flour mills, the great corn products companies, the cereal breakfast food manufacturers, have memberships and represent heavy buying interests. All important Terminal Elevator Com- panies belong, and these too represent strong buying power. Exporters represent another group of buyers. Both the buying and the selling side of the market are well represented so that the market factors are present which go to make up a real auction. One farmers' company which belongs to the Board of Trade is an export company of Canadian farmers, and does a very large wheat export business. A second farmers' com- pany operates six or seven country elevators in Illinois. CLASSIFICATION OF MEMBERS, CHICAGO BOARD OF TRADE, YEAR 1919 Cash grain trade 394 Seeds and miscellany 14 Future trading 393 Oats products 14 Brokers 385 Corn products 10 Terminal elevators 50 Railroads 10 Pit scalpers 48 Steamships 9 Packers 44 Salvage grain 8 Provisions 41 Line elevators 8 Feeds 35 Stockyards 1 Exports 27 Vinegar 1 Flour mills 24 Inactive 70 Banks 16 Malster.. 15 1617 THE CHICAGO BOARD OF TRADE 17 The Packers and Provision Dealers are represented, since there is one pit on the Exchange floor where there is future trading in Provisions (Pork, Lard, Short Ribs). In the above list are included two farmers' companies, namely, Grain Growers' Export Company, Winnipeg (Thomas Crerar), and the Plainfield (111.) Grain Com- pany (Joseph A. Henebry). The Pit Scalper, in the above list, is a person who trades for himself in the pit, and is in and out of the market on very small price fluctuations. The Future Trading list of members includes the various firms in Chicago and elsewhere whose main business is to handle future trading orders for customers. In almost every case a Chicago firm executing future orders for a commis- sion is also engaged in receiving consigned grain in carlots on commission. In fact, one distinguishing feature of the Chicago market is the large mingling together of the cash and the future business. Private Wire Houses. There are several large and in- fluential firms operating leased wires, and thes^ firms are generally called " private wire houses." Some of these firms have only one branch office; some have twenty or more branch offices; one of them has 40,000 miles of leased wires, stretching from Boston and New York to San Francisco, and from Winnipeg to the Gulf, and with "drops" in most of our large cities. Some of the private wire houses reach out into the small towns of the country. Some are engaged almost wholly in future trading: others feature the cash grain busi- ness. In the above list, the wire houses are listed under the heads of cash grain and future trading. A complete list of all wire houses connected with the Chicago Board of Trade is given in Appendix 6. 18 SPECULATION AND THE CHICAGO BOARD OF TRADE Membership Qualifications for. Any male person of good character and credit, of legal age, is qualified, under the Rules of Board, to become a member. Applicants for membership must first be indorsed and recommended by two members who stand sponsors for them, and must next be approved by the membership committee. The appli- cant's name is posted on the bulletin board for at least ten days. An unfavorable vote by three directors (out of 18), three "black balls," is then sufficient to shut out the appli- cant. Upon joining, the applicant signs an agreement to obey all the Rules of the Board of Trade, and he is held to be strictly bound by these rules, under penalty of suspension or expulsion and loss of his membership fee. Memberships are bought from retiring members or from the estates of de- ceased members, and cost, during the year 1919 from ten thousand to eleven thousand dollars. The price varies greatly from year to year. Government of the Board of Trade. The affairs of this corporation are managed by a Board of Directors of 18 mem- bers. The President is elected by the general membership for one year. The annual election is held in January. There are two vice presidents whose term of office is two years. There are fifteen other directors whose term of office is three years. Hence the President, one vice president, and five directors are elected annually. As a self-governing institution, the Board's method of law making is very democratic. The initiative and referendum came into vogue here long before it became popular with our State governments. All rules are adopted by the members. And it is worthy of comment, that when it comes to a vote, the "small business" men outvote the " big business " men. In practice, the usual vote cast at an election is about 400 or THE CHICAGO BOARD OF TRADE 10 500 much less than half the membership. Since one-fourth the members are non-residents, it would seem just and wise to introduce a plan of voting by mail. A larger and more representative vote would then be secured. Rules. Under the charter of the Board it has power to adopt rules and to enforce them. Under this provision, there have gradually grown up, during the past fifty years an elaborate set of Rules, By-Laws, and Regulations, filling almost one hundred and fifty printed pages. The rules are easily changed to meet emergencies, such as war conditions. These rules give very great power to the Directors to disci- pline members. And the courts have repeatedly and con- sistently upheld this disciplinary control of members. Administrative Work. The active administrative work is largely in the hands of committees. A glance at the list of these committees shows the great number of important de- tails with which the Board must concern itself in order to keep the market machinery running smoothly. At the out- set we find two committees, provided for in the original State Charter, and the only committees which are elected by the membership at large. These are: (1) Committee on Arbitration (10 members) (2) Committee of Appeals (10 members) The other more important committees (chosen by the Pres- ident) are: (3) Membership (4) Warehouse (5) Grain (6) Clearing House (7) Market Report (8) Violation of Rules (9) Transportation 20 SPECULATION AND THE CHICAGO BOARD OP TRADE (10) Weighing and Custodian (11) Claims and Insolvencies (12) To arrive grain. Physical Equipment. The trading room of the Exchange is a high-ceilinged room, 144 by 161 feet. The adjoining smoking room (no smoking is permitted on the trading floor) is 64 by 72 feet. In the trading room along the large east windows, there are 52 tables for displaying samples of cash grain, each table capable of accommodating four firms. In the case of the larger firms, of course, one table is used by one firm only. To accommodate those engaged in future trading there are four circular "pits," with three or four steps leading down into the pit. These are the wheat pit, the corn pit, the oats pit and the provisions pit. To accommodate those buying grain "to arrive" there is a desk where all bids are recorded and from which they are at once posted on the large blackboard. The trading floor of the Exchange is provided with means of securing market information, rapidly and accurately, and of disseminating market information to all interested. There are 100 telephones and 150 telegraph instruments. Large blackboards display such information as the following: Exports of bread-stuft's at Atlantic and at Pacific ports: Cash Grain Market at other important terminals: Futures market at Minneapolis, Duluth, Winnipeg, Kansas City, St. Louis, New York: Visible supply of grain at Baltimore, Boston, Buffalo, and all other important markets, including also grain afloat at each terminal where vessels are loaded: Movement of grain at Chicago receipts by each railroad shipments by each railroad: Daily receipts in Chicago warehouses and daily shipments from same: Inspection THE CHICAGO BOAKI) OF TKADE 21 car lots, grades, etc., in Chicago. Several Tickers are on the floor, some giving price quotations, and some the so-called market gossip (i. e., domestic and foreign news items of com- mercial and financial significance). There is also a large weather map, furnished by the United States Department of Agriculture, showing for each morning the country's weather (wind direction, precipitation, clear or cloudy, and barometer). This is supplemented by large charts giving precipitation for many shipping points in each grain-produc- ing State. The factors affecting either supply of or demand for grain are quickly noted and made public here. A strike of the Boston police for instance, is reported on the gossip ticker, and a depression is cast over the demand for wheat. The important newspapers have representatives in the "press gallery" a section near the Provisions Pit. They report the doings of the market to their millions of readers in any manner they see fit so long as they don't spread market rumors, which is strictly forbidden by the rules. This very 'brief catalogue of facts is intended to disclose in general outline what market machinery is comprehended under the term, "Board of Trade," and that this market machinery is under democratic rules of self-government. With what degree of efficiency this machinery works must be discussed under Section IV of this Report, following. IV THE CHICAGO BOARD OF TRADE VIEWED AS A PIECE OF MAKKET MACHINERY: OPERATION AND FUNCTIONS: SIXTY YEARS OF ACTIVITY A Continuous Market. When the World War began in 1914, the commercial and financial shock was so terrific that all the world's stock exchanges closed their doors. The Directors of the Chicago Board of Trade paused for a mo- ment and considered closing the Board, but decided against it. So the Board has a record of being open continuously, with- out a break, on every business day since it was incorporated. In other words, in any hour of any business day, in war or in peace, in prosperity or in panic, grain could be sold on the Chicago Board of Trade at a market value which was open and known to all men. What is the value of a continuous market to the man who has something to sell? It is impos- sible to state it in definite terms. The man who has been called on suddenly to sell a team of horses or a house and lot or a farm things for which there are no organized exchanges can doubtless appreciate both the promptness and the definiteness of organized exchange prices. A Picture of One Day's Trading. A cross-section of the Board of Trade market at work would present a true picture of its various related activities. The writer made a study of this kind, selecting a day in August, when the movement of wheat and oats to market was extra heavy, but the move- 22 THE CHICAGO BOARD OF TRADE 23 ment of corn was extra light, thus getting a fair average day's business.* Before the details of this study are given, it is well to state in brief outline what actually takes place on the trading floor. Grain is sold in three ways, namely, (1) cash grain: (2) To arrive grain: (3) Future delivery, or grain " futures." The cash grain is in cars in the switching district of Chicago : it has been inspected by the State In- spection Department: official State samples are displayed in strong paper bags, each containing about a quart of grain and each bag with proper notation showing kind of grain, grade, dockage, and moisture content. These samples are placed on the sample tables of the commission merchants to whom the cars have been consigned. It is the chief busi- ness of the commission merchant to sell this grain to the highest bidder, and upon his success in performing this serv- ice depends the continued patronage of the country shipper. The term "to arrive/' as used on the Chicago market, means time of shipment, not time of arrival (as on the Minneapolis market). To arrive grain is bought to be shipped, for in- stance, in 3 days, or in 10 days, or 20 days, or even in 90 days or longer, depending on local conditions. The bids are wired out or mailed out overnight to the country, subject to acceptance by the time of the opening of the market in the morning. Or bids are sent out during the day, subject to immediate acceptance. Future trading is dealing in grain for future delivery, the regular delivery months usually being May, July, Sep- tember and December. Future trading is of two kinds, speculative and hedging. A part of future trading is known * The day selected for study was Monday, August 25, 1919. There was no future trading in wheat owing to the guarantee of wheat prices by the federal government. 24 SPECULATION AND THE CHICAGO BOARD OF TRADE as "hedging," and is a form of insurance, as explained later. A part of future trading is purely speculative. It is really dealing in grain contracts, rather than in grain. Some members of the Board of Trade devote their energies wholly to speculation, and are known as "professionals." Again, there is a sub-class of speculators who are called "scalpers," or "pit scalpers," since they buy, or sell, on each slight drop, or rise, in the market, trying to scalp a little profit off each fluctuation for themselves. They do not risk carrying any trades overnight but aim to be even at the close of each day. The "professional speculator," however, deals for the longer swings of the market, over a period of days or even weeks. A third class of speculators are the "amateurs" who send in orders for trades to be executed on a small commission. According to tradition, ninety per cent of the amateur speculators lose, and two years is the average market life of the amateur. Bears : Short Selling. The person who thinks the market price is too high and therefore is likely to drop, and who sells, expecting to buy later at a lower price, is called a short seller. He is "short" of the commodity he sells that is, does not have it, but expects to be able to buy later at a profit. Of course the short seller believes the market will fall and wants the market to fall. He is therefore called a bear, and his selling is said to "bear the market." The man who has sold is called a "short." Bulls: Longs. About half the speculators, ordinarily, believe the market is likely to rise, and hence they buy, ex- pecting to sell out later at a profit. Since they want the market to rise and believe it will rise, they are called "bulls," and their buying is said to "bull the market." The man who buys is called "long." It is obvious, that should there THE CHICAGO BOARD OF THADE 25 be 100 traders in the pit, 75 offering to sell and only 25 bid- ding in same amounts, it would temporarily be a bear mar- ket prices would decline. Conversely if 75 were buying and 25 selling in same amounts, it would be a bull market. In such a case the shorts (the bears) might take fright at the rise in price, foreseeing their profits wiped out and possible loss accumulating and begin to " cover," that is, buy to cover the amount of their sales. When such a situation develops, it gives opportunity to the " bulls" to sell out their purchases at a profit which, in effect, puts them temporarily on the bear side of the market. Thus each fluctuation of the market is a signal of activity to both bulls and bears. Overbought: Oversold: Liquidated: "Technical posi- tion". The market, in trade language, is called over- bought when the speculators have bought all they can or care to, with the short interests temporarily eliminated. It is oversold when the traders have sold all they can or care to, with longs well out of the market, for the time being. When the longs have sold out as much as possible the market is said to be liquidated. The "technical position" of the mar- ket is said to be weak when "after a sharp upturn due to buying by discouraged shorts, new purchasers show a dis- position not to buy except at considerable concession in price, and when the remaining short interests in the market is a hedging interest that is not likely to be disturbed by market actions in either direction; or the technical position may be said to be weak when buyers, who have followed an advance, have found their buying insufficient to absorb the offerings and have witnessed a decline to a point near which they wish to stop their loss, new buyers not appearing in sufficient volume to prevent further decline. In such a case they would expect to find stop-loss orders in the market 2t> .SPECULATION AND THE CHICAGO BOARD OF TRADE which if encountered because of further decline, would be likely to bring about a sharp break until the holdings so liquidated are thoroughly digested at a lower level." Margins. Trading in futures is sometimes called margin trading, because at the time of the purchase (or sale) of the commodity only a small installment of the price is advanced. Under the rules of the Board of Trade a ten per cent margin may be called. That is, a person buying 5000 bushels of wheat at $1.00 a bushel, for future delivery, could be called for $500. And the same amount could be called from the short seller of 5000 bushels at $1.00 a bushel to protect the trade. The reader will bear in mind, at this point, that mar- gin trading is the system now in vogue in real estate, and the system which has been in vogue in real estate for several hundred years at least. The margin system of buying, al- though called by various other names, is common in buying a large per cent of the articles advertised in our monthly magazines. In protecting contractors' bids on city, State, and Federal contracts, governmental authorities uniformly require the bid to be accompanied with a " margin." Mar- gin trading is not peculiar to grain exchanges, but enters into the business life of the nation at many points.- Like the credit system as a whole (of which it forms a part) it seems to be increasing in use as a modern convenience in conducting business. One Day's Market. On the day selected for study of the day's trading (August 25, 1919), there were 2595 persons, living in over half the States in the union, who executed trades on the Chicago Board of Trade. These were persons acting as principals, trading either directly or through agents on the floor of the Exchange. Of this number of persons, 1083 were buyers or sellers of cash grain; 36 were buyers THE CHICAGO BOARD OF TRADE 27 or sellers of to arrive grain; 1476 were buying or selling future contracts. The cash grain was mostly wheat; the futures were corn and oats, with an insignificant amount of rye. The cash grain sold was 1220 cars (approximately 1,830,000 bushels); the to arrive was 72 cars (approximately 108,000 (bushels); the futures amounted to 36,686,000 bushels. Analyzed in greater detail, the following facts are sig- nificant: Shippers of the cash grain to the Chicago market num- bered 752, living in ten States, ranked in the order of their importance as follows: Illinois, Iowa, Indiana, Missouri, South Dakota, Minnesota, Wisconsin, Michigan, Nebraska, Wyoming. There were 331 buyers of this grain representing nine States as follows: Illinois, Ohio, Michigan, New York, Massachusetts, Pennsylvania, Indiana, New Jersey and District of Columbia. The buyers are classified -as follows: Terminal Elevators in Chicago 69 per cent Shippers chiefly East and New England 12 " " Millers, Feed Manufacturers, Industries 16 " " Exporters 7 " " "Scalping" of cash grain has no place on this market, the cash grain passing directly on to a consumptive buyer in practically every case. It is impossible to classify future trades as between "hedges " and " speculative trades." Futures for the day are therefore classified on the following basis: Volume sold (and bought) for September delivery 3,958,000 bu. "December " 27,534,000" " May " 5,194,000 " Total Futures 36,686,000 bu. 28 SPECULATION AND THE CHICAGO BOARD OF TRADE Number of sellers, 1414 Located in following 28 States, ranked in order of impor- tance : 1. Illinois 8. Oklahoma 15. Michigan 22. Louisiana 2. New York 9. Iowa 16. Montana 23. Kansas 3. Missouri 10. Nebraska 17. Colorado 24. Maryland 4. Minnesota 11. Indiana 18. Oregon 25. Pennsylvania 5. Canada 12. Kentucky 19. Wisconsin 26. Washington 6. Ohio 13. Tennessee 20. Alabama 27. Arizona 7. California 14. Massachusetts 21. Mississippi 28. Virginia Number of buyers (including above sellers) 1476. Located in following 28 States, ranked as above: 1. Illinois 8. California 15. Colorado 22. Alabama. 2. New York 9. Michigan 16. Tennessee 23. Louisiana 3. Missouri 10. Nebraska 17. Virginia 24. Massachusetts 4. Iowa 11. Canada 18. Mississippi 25. Kansas 5. Minnesota 12. Kentucky 19. Washington 26. Maryland 6. Indiana 13. Wisconsin 20. Oregon. 27. New Hampshire 7. Ohio 14. Oklahoma 21. Montana 28. Pennsylvania A glance at these figures shows that the producing centers and the consuming centers make up the volume of the trad- ing in futures. The " amateurs" furnished about twenty per cent of the volume of futures, the balance coming from pro- fessionals and scalpers. On this day sixty per cent of the amateurs were bulls took the buying side. The amateur's vision sees when the price is too low and it is profitable to buy. It is commonly said, however, that his vision does not also see when prices are too high, and it is time to sell, and that is the reason he is an amateur. The figures showing these facts are as follows: THE CHICAGO BOARD OF TRADE 29 Bought, bushels Sold, bushels Members trading for themselves 18,402,000 20,010,000 " " other members 9,664,000 10,802,000 " " " non-members 8,620,000 5,874,000 36,686,000 36,686,000 What "toll" docs this market collect for its services? The cash grain business is governed by fixed rates of com- mission, which are substantially the same in all markets, namely, one per cent commission, i. e., one cent on each dollar's worth of grain sold. Future commissions are also fixed by the rules, and are at present one-fourth of a cent per bushel for the "round turn/' that is, for both buying and selling. In other words, for buying 5000 bushels and selling 5000 bushels, the commission is $12.50. The broker, who enters the pit and executes an order for a house dealing in futures is entitled to a brokerage of 75 cents for 5000 bushels. This is paid by the house, not by "the country." It will be noticed that 52 per cent of the trading in futures is done by members for themselves, on which there is no commission charged; 28 per cent is done by members for other members, at half rates. So the "toll" for the day's trading in futures can easily be calculated. Members trading for themselves $ 0.00 " other members 12,791 .25 " " non-members 18,242.50 Total $31,033.75 In other words, the commissions on one day's future trading, 36,686,000 bushels, is $31,033.75. On the same basis, the volume for one year would be 11,005,800,000 bushels and 30 SPECULATION AND THE CHICAGO BOARD OF TRADE coinmission of $9,310,125. These figures cover trading in corn, oats and rye. As mentioned before, during the period of the government guarantee of the wheat price there was no future trading in wheat.* The corn and oats crop of the country usually average somewhat over 4,000,000,000 bushels, and the Chicago market is used for hedging the crop as it passes from producers into final consumption. The "toll" on the whole crop imposed by future trading is 4 ~ of a cent per bushel, or slightly under J of a cent a bushel. The use of a future trading for hedging is described below, and the general theory of speculation and hedging in the last chapter. The commissions on the cash grain for the day, at one per cent, are calculated to be $30,500. Selling Cash Grain. The samples of cash grain are dis- tributed on the proper tables by employees of the Board, early in the morning. Trading begins at 9 : 30. The first hour is spent largely in feeling out the market. During that time the one or two hundred men representing the buying and the selling interests circulate cautiously among the tables, get- ting a mental inventory of the amount of grain arrived for the day and the general quality and condition of it. By 10 : 30 active selling begins. The chief sellers are, of course, the commission merchants about 100 in number who handle the consigned grain. Rules forbid them to be both principal and agent in the same transaction. Hence grain consigned to them must be sold by them in the open market. The buyers are chiefly the following interests: terminal elevators, shippers to eastern mills, particularly New Eng- land and New York, flour millers, manufacturers of corn products, rolled oats, breakfast foods, cereals, etc., malsters, * August 25, 1917, to Fall of 1920. THE CHICAGO BOARD OF TRADE 31 feed manufacturers, and exporters. The market is a highly competitive one in every sense of the term. The commission merchants use all the arts of the trade, taught them by years of experience, to secure the best prices for their patrons. They know what buyers prefer particular kinds of grain which one white corn, which yellow or mixed; which want standard oats; which mill oats; which white oats. They know where to go for a premium on the choice grain; where to find a buyer for low grade and "rejected" grains. The buyers in turn, feel back of them the vpressure of the con- sumers' demands. If the " seaboard" is taking shipments freely, they buy more freely. If New England overnight places strong bids, that tones up the market. If arrivals continue heavy a few days without a corresponding strength- ening in demand, prices work lower. If arrivals slacken for a time, and demand holds up, prices work upwards. Back of the arrivals there is the visible supply to affect the market, and back of the visible the grain afloat on the Lakes and in passage on the ocean, and back of that the more remote and fundamental factors of acreage, crop conditions, weather reports, etc. By " visible supply" is meant the grain stocks in public and private terminal elevators at all terminal mar- kets. The commission merchant, who is the agent of the country shipper on the market, performs certain definite services in addition to the major service of selling the grain. (1) He gives attention to the grade of the grain, and calls for re- inspection in case his own private inspection satisfies him that a reinspection would raise the grade. (2) He combats the evil of car shortage by doing all in his power to secure cars for his shippers. (3) He files and pushes all claims for shortage and damage of grain in transit. (4) He finances 32 SPECULATION AND THE CHICAGO BOARD OF TRADE the country shipper to a very liberal extent by making ad- vances against the bills of lading. When it is recalled that the bill of lading arrives by mail many days, and sometimes many weeks ahead of the grain, this service will be better appreciated. One Chicago commission house thus had out- standing at one time over $800,000 advanced against bills of lading, this money of course being borrowed by the commis- sion house from the banks; another Chicago house had out over $2,000,000. (5) General protection. In the evolution of the Chicago market as described in the following pages the country shipper was for many years under the heels of a monopoly, from which position he was finally extricated, in part by his own actions, in part by the help of the commis- sion merchants of the terminal market. The commission merchant, after selling a car of grain and getting the official weights and the money due on it, remits to the shipper the proceeds due him as shown by an ''account sales " which always accompanies the check. This document is supplemented by certain trade documents, such as seal record of the car, weighmaster's certificate, etc., so that the shipper is protected from fraud from his commission mer- chant, even should his commission merchant attempt such a thing. It is a significant fact that the various disclosures in recent years of peculations and swindles by commission merchants refer almost wholly to the commission merchants in the unorganized markets, particularly produce, such as potatoes, cabbage, poultry, eggs, butter, and so on. The organized grain exchanges have done big work in making strictly honorable the business of a commission merchant. Any complaint of fraud coming to the Board from a country shipper is promptly looked into, and settled strictly on its merits. THE CHICAGO BOARD OF TRADE 33 Tho words "trade documents" convey to the casual reader but a faint impression of the significance of these trade in- struments. No other market has developed these means of protection to the country shipper to the extent that the g-ain trade has. There is accordingly given in appendix 20 of this book (page 238), a very interesting set of these trade documents, showing the actual "life history" of a car of grain as it travels from an Iowa country station, to the Chicago Commission merchant, and on to the final buyer. The important functions of weighing, inspecting and grading are protected by every reasonable safeguard. Over twenty separate documents are exhibited, showing how full and complete is the information given on every step of the trans- action. These "exhibits" show the large extent of the purely mechanical detail involved in taking care of the country customer's interests, and yet for the expert selling service and for all this routine of detailed service, the com- mission merchant receives one per cent as his margin of cost. In case the commission merchant is employed to buy or sell the grain for future delivery, or both buy and sell, his charge is only one-fourth of a cent a bushel. Low Margin of Cost. Grain is handled by the "middle- men" on the organized Exchanges for the lowest margins of cost of any commodity. In most forms of merchandising a five per cent margin is looked upon as a very low charge. The largest automobile works in the country, famous for its efficiency in cheap distribution of cars, allows its agents 15 per cent for selling. The margin on dry goods is said to average 19 per cent. The California Fruit Growers' Ex- change found that the average margin taken by the jobber in distributing the oranges from the Growers' Exchange to the retailer was 8.4 per cent, and very little risk was involved 34 SPECULATION AND THE CHICAGO BOARD OF TRADE on the part of the jobber; the retailer, in turn, took a margin of 29 per cent. The fact that grain is handled at 1 per cent the lowest margin of any farm product is due to the evolution of the present grain exchange with its coordinated and interrelated system of cash and future trading. The subjects of speculation and hedging claim a good share of attention by those who discuss the Chicago Board of Trade. The discussion of the subject of speculation forms an important portion of this book. At this point, however, the discussion must be limited to hedging. Hedging. Hedging is a form of insurance against loss through price fluctuations. In its simplest form, a person who has bought grain may hedge by selling an equal amount : conversely, a person who has sold may, for protection, buy an equal amount. In other words, a person who is neither long nor short is running no risk; he is hedged. To make concrete these two forms of hedging, consider the following typical cases: (1) A country elevator in North Dakota is buying the farmers' grain and paying cash for it. This grain cannot be put on the Minneapolis market for two weeks: or in case of the usual car shortage prevailing in recent years, not for several weeks. If the price rises, the manager will make money for his company; if the price falls, he will lose. To stablize his business, to keep his business margin of profit narrow and safe, in short, to protect himself, he will hedge in the Minneapolis pit by selling as much as he has bought. He will sell for future delivery. Some speculator or industry will be willing to buy. When this hedged grain reaches the market and sells for cash-, the hedge is bought back in the pit. When grain is thus hedged, the manager, has no further interest in market fluctuation, whether the price rises or THE CHICAGO BOARD OF TRADE 35 falls, since he has both bought and sold, and will gain as much on the cash as he loses on the future, or vice versa. In this simple case the car of grain has been bought and sold once iii the pit. The smallest lot which can be hedged is 1000 bushels. The expense for hedging 5000 bushels, round turn, is $12.50, a fairly cheap insurance. A fluctuation of one cent a bushel would mean $50 on the five thousand bushel lot a risk which most managers cannot afford to take and which the farmer himself, if he knows it, does not care to have shifted to his shoulders in the form of wider margins taken by the country elevator. If the car of grain above noted had been sold to a Term- inal Elevator as it likely would be, the Elevator would in turn hedge by selling a future against it. Thus the 5000 bushels of wheat would be sold twice over in the pit, in the way of legitimate hedges. (2) The second general type of hedging is represented by the flour mill which has made a contract, for instance, with a large bakery company, agreeing to deliver 2000 barrels of flour a week for the next six months, at a specified price. This will require 234,000 bushels of wheat much more wheat than the largest flour mill cares to carry in stock. In such a case the mill goes into the future market and buys wheat to offset the flour sold, and is thereby hedged. The usual milling profit is assured, and the mill does not specu- late on price changes. While most flour mills buy in the pit, very few ever take deliveries on their future contracts. They buy the cash wheat from day to day, from the samples on the tables, which suits their particular milling demands. As fast as they buy cash wheat, they sell an equal amount of futures. Thus their future contracts are sold out, that is, passed on to others who either want to speculate in wheat 36 .SI'F.crLATIOX AND THE CHICAGO BOARD OF TRADE contracts or to take the grain when delivery time conies. Thus it comes about that the same wheat may be hedged three times in the pit. It is obvious, therefore, that only a small part of the grain traded in the pit is actually delivered, although each transaction is an unconditioned contract to deliver. The contract itself is sold, or passed on, till it reaches its final hands the man who wants the grain, or the speculator who settles it by paying or receiving the balance due on it. These two general types of hedging transaction , illustrate also the relation of hedging to speculation. There are not at all times enough cash grain interests in the market to ab- sorb the hedging transactions, hence this function falls in part on the professional speculator and on the amateur speculator. The sellers of futures in the pit, for hedging purposes, arc, in addition to the country elevators, the following: line elevator companies, terminal elevators, buyers of to arrive grain, and farmers. Farmers are mentioned in this connec- tion because in certain sections of the country, particularly Illinois, Iowa and North Dakota, a large number of farmers now use the machinery of the grain exchange. This was strikingly illustrated just after the World War, particularly in the fall of 1919 the period being one of great business unrest, due to widespread labor strikes, government suits against the "Big Five" Packers, and government propa- ganda against the high cost of living. As a result of these and various other factors the price of corn began to fall in August and registered a heavy and steady decline during the next sixty days. Many Iowa and Illinois farmers, with their corn crop assured, sold for December delivery in the Chicago pit. In this manner they made effective their own market THE CHICAGO BOARD OF TRADE 37 opinion, and soon rod the price for their corn which suited them best. On the Inlying side of the hedging market are flour mills, shippers, exporters, the industries using grains, etc. It will be borne in mind that the buyers of hedges become later, sellers in the pit, when the hedges are closed out. Like- wise the sellers of hedges above described finally become buyers, when their hedges are bought in. The question may be asked, how is grain hedged that is not subject to future trading? The answer is very simple. It is handled on a wider margin. Where wheat is handled on a one-cent margin, barley is handled on a three-cent margin. The farmers thus bear this additional two-cent margin, by receiving a smaller price for the grain. Hedging in the pit costs one-fourth of a cent a bushel. If we may rely upon the 'various published investigations as to the "middleman's toll," the cost of moving grain from producer to the consumer is lower than the cost of moving any other standard food product. This low cost is directly related to the methods of handling grain on the organized exchanges, and particularly to the process of hedging on a wide, open market. This whole matter is better understood after looking at the background of our grain marketing, and seeing through what evolution it has passed. Evolution of the Board of Trade. A careful study of any commercial institution generally shows that its roots go deep into the past, and that it is largely the product of a natural evolution, the "survival of the fittest" among commercial usages and customs. This is true of the Chicago Board of Trade, for, like Topsy, it "just growed." Beginning as a voluntary association of a few business men, it was at first 38 SPECULATION AND THE CHICAGO BOARD OF TRADE merely a sort of headquarters for anybody interested in local and general commercial and financial matters. It was not a market. In fact, at the early meetings much attention was given to the fundamental economic issues of transportation and banking, both of which institutions were sadly inade- quate in the fast growing village. As railroads were secured, superseding the canal and supplementing the lake, and as a sound banking system was painfully achieved, the Board narrowed its interests primarily to market problems. The first Preamble to the Board's Rules stated the objects of the Board in these terms: " Having a desire to advance the commercial character, and promote the manufacturing interests of the City of Chicago. . . . "and so on. However, in seeking to reform the wildcat banking system prevailing before the Civil War, the Board found considerable opposi- tion. A sound banking scheme -was submitted to the State Legislature, in the form of a General Banking Act, but so violent was the opposition encountered, particularly from farmers, that the measure was dropped. The early historian of the Board states that ''Farmers as a class lent a willing ear to the misrepresentations so industriously circulated by certain newspapers." The Board, as stated above, gradually narrowed its activities to current market problems. Various articles came to be traded in, among which were the following: flour, grain, dressed hogs, lard, hides, high wines, whisky. By 1856 the Board had become a Grain Exchange, plus trading in so-called provisions salt pork, lard, short ribs. The various important historical features of the Board are best taken up for discussion, one by one, in topical order. (1) Membership. When the Board began as a volun- tary association it was open to " members and strangers THE CHICAGO BOARD OF TRADE 39 introduced by them." This western hospitality to strangers, however, was found incompatible with the Board's avowed purpose of "inculcating just and equitable principles in trade, establishing and maintaining uniformity in the com- mercial usages of the city. . . . and avoiding and adjusting, as far as practicable, the controversies and misunderstand- ings which are apt to arise between individuals engaged in trade when they have no acknowledged rules to guide them." The present set of rules attest the high ethical code of com- mercial conduct imposed upon the members of the Board. And since only members could be controlled by the rules, it quite early became necessary to limit trading on the floor of the Exchange to members only. The " stranger " who wishes to trade must trade through the member in good standing. No discrimination is made against farmers' companies seek- ing to join. (2) Weighing, Inspection, Grading. "The development of the system of grading and of elevator receipts is the most important step in the history of the grain trade," says Emery, the recognized American authority on that subject.* And the Chicago Board of Trade, in pursuing a policy of enlightened self-interest, has contributed more than any other one factor to the growth in America of standard weigh- ing, inspecting, and grading systems for grain. In the original charter of the Board, we find this important grant of power: "Section 10. Said corporation shall have power to appoint one or more persons, as they may see fit, to examine, measure, weigh, gauge, or inspect flour, grain, provisions, liquor, lumber, or any other articles of produce or traffic * Emery, H. C., Speculation on the Stock and Produce Exchanges of the United States, p. 38 40 SPECULATION AND THE CHICAGO BOARD OF TRADE commonly dealt in by the members of said corporation; and the certificate of such person or inspector as to the quality or quantity of any such article, or their brand or mark upon it, or upon any package containing such article, shall be evi- dence between buyer and seller of the quantity, grade, or quality of the same, and shall be binding upon the members of said corporation, or others interested, and requiring or assenting to the employment of such weighers, measurers, gaugers, or inspectors; nothing herein contained, however, shall compel the employment, by any one, of any such ap- pointee." The system of handling grain in America by the measured bushel, instead of by weight, continued many years after its unwisdom was generally recognized. The writer recalls very vividly the time when as a boy he used to "hold sacks" at the thrashing machine, while a man carefully lifted the over- flowing half-bushel measures of wheat, past the registering meter, and poured them into the grain sack. How awkward, how expensive, how inaccurate the process! And sometimes the farmer measuring his own grain would forget to click the meter (the black sheep in the grain trade are not all "middle- men"). The modern thrashing machine dispenses with this man and this boy, and measures its own grain by weight. When the Chicago Board of Trade began to load Lake vessels by weight, it encountered opposition from both Buffalo and New York. But in the end this reform was forced on the eastern markets, and led to the present uniform system of the grain trade of selling by weight. The Weighing Department of the Board of Trade is now one of the important parts of the Board, comprising about 150 persons, and representing an annual expenditure for all purposes of about $300,000. Approximately 600,000,000 THE CHICAGO BOARD OF TRADE 41 bushels of grain are weighed (receipts and shipments) each year. The weighing charges are fixed by the Board and vary with the character of the service performed, ranging from twenty cents per thousand bushels for weighing in and out of vessels, to from fifty cents to two dollars per car for grain in bulk, depending on location. Chicago weights are now accepted universally by the grain trade as standard. To the country shipper of this grain this means a protection in all cases of filing claims for shortage against transportation companies. Inspection and grading came up for discussion at the first meeting the Board ever held. Inspectors of fish and provisions were appointed an important step at that time towards securing uniformity in grades and in guaranteeing quality. Grain inspection was foreshadowed in an article in the Chicago Democrat of October 11, 1843, quoting these words from the Buffalo Economist: "We all know its good quality (i. e., Chicago wheat), but there is some poor raised there too, and some farmers are less careful than others to keep their grain clean. If good and bad, sand and clay, are all thrown into a vessel's hold together, it cannot be very satisfactory to those who buy the cargo for clean wheat " And to this the Democrat adds, "There can be no doubt but the course of our merchants and forwarders in mixing various kinds of wheat has in- jured our farmers much by keeping prices down." The story of grain inspection in Chicago is too long a story to tell here, and hence only its outlines can be sketched, from the time the Board of Trade made the beginning of inspection, till the State of Illinois took it over and estab- 42 SPECULATION AND THE CHICAGO BOARD OF TRADE lished it under Civil Service rules. And the long struggle by the Board for effective inspection forms part of its greater and longer controversy with the railroads and terminal ele- vators for satisfactory warehousing of grain and the correct method of dealing with warehouse receipts. As early as 1851 we see evidence of the forthcoming fight. At that time a petition was circulated among the produce dealers graying the Legislature to pass an Act " prohibiting any railroacl company from engaging in the storage, coniT mission or produce business/' and expressing the fear that the Railroad is planning to " extend to this city a gigantic monopoly," which "said company has established in a neighboring state and city." Railroads quite naturally built terminal storage at first, in the absence of existing terminal warehouses. In the ab- sence of public regulation of railroads (the Interstate Com- merce Act was not passed till 1887), and in accordance with business ethics and business standards of the day, certain serious abuses were developed by the railroad, in handling their part of the grain trade. These serious abuses largely connected themselves with the Terminal Elevator problem, and particularly with the granting of rebates and privileges to terminal elevator owners or lessors. The Board began its inspection and grading activities at the very outset, before the power was formally granted to it by the Charter of 1859. Thus, in 1856 the Board passed a resolution, saying, among other things, "also that the Standing Committee be directed to embody in the agree- ment with the proprietors of grain houses anything that in their opinion will promote open, straightforward, fair dealing." In 1858 grain grades were formulated anew, and for the first time the test weight per measured THE CHICAGO BOARD OF TRADE 43 bushel was introduced. Thus began a new era in grain inspection. The President of the Board at this time, Mr. Julian S. Rumsey, was a vigorous advocate of reform. Against his reelection a campaign was waged by the warehouses and transportation interests opposed to strict enforcement of the inspection rules. He was reflected, showing how the majority of the Board stood on this question. The minutes of the meetings of the Board of Directors from this date or till the election of Hiram Sager as Presi- dent for a second term in 1908, are the story of continuous and sustained effort by the majority to compel a powerful minority to observe open and fair methods of business in dealing with the public and with their fellow members. Apparently, by 1908, the majority had won its victory. This is an indication of how vital a matter weighing, inspection, grading, and warehouse receipts are understood by the Board to be. In 1861 the Board was stirred by general complaints of laxity in inspection and of fraud on the part of the terminal elevator owners. A committee reported on this subject early in 1862, recommending that all grain bagged on the track should be refused admission to the regular warehouses, and that the names of any members guilty of frauds should be posted on the bulletin board together with a statement of the facts of the case. The members adopted this report, and the warehousemen pledged themselves to observe the new rules. However, complaints continued. There were charges of mixing grain, unfairness, discriminations and fraud in connection with grain warehousing. The tense situation was summed up by the Chicago Tribune (of January, 1867) in these Words: 44 SPECULATION AND THE CHICAGO BOARD OF TRADE Facts, charges, surmises and suspicions show that, as at present conducted, the grain trade of the Northwest is demoralized. It abounds in abuses which vex and defraud every honest dealer, and inflict great harm upon our city. We think the question is a proper one for our Legislature to consider, and we are in favor of legislative enactments, whereby these evils shall be mitigated if not entirely removed. First, let the Legislature pass a law compelling all rail- roads to give a specific receipt for the number of pounds of grain shipped in bulk. This will determine where the leakage is if there be any. Second, compel the railroads to deliver grain at any warehouse specified by the shippers, if there be a railroad track to it, whether the same belong to it or any other railroad. This will break down the monopoly which now exists, and open up the elevator business to competition. Third, adopt a uniform grade of inspection through- out the state making weight one of the essentials and taking for a basis the grades adopted by our Board of Trade, which may be vested with discretionary power to change the same, when the nature of the condition of the crop demands it. Fourth, the rail- road agents who receipt for the grain on the cars to specify the grade in the receipt. If legislation can reach the evils complained of, this is the way to do it, and no honest man can object to such a law. The present accepted idea that a public grain elevator is a public utility and hence subject to public regulation was of course not in force at the time of the early struggle of the Board with the warehouse problem. Not till the new Illi- nois Constitution of 1870 made the warehouses subject to public regulation did the warehouses definitely assume the legal status which they now hold. The Board of Trade, at its meeting July 1, 1870, passed a resolution urging all mem- bers to work and vote for the new constitution. The Board of Trade Inspection service at this juncture received a black eye from which it never recovered. In the year 1870 a cargo of grain was inspected out for Buffalo and THE CHICAGO BOARD OF TRADE 45 was graded as No. 2 oats under the Board inspector's certifi- cate. This cargo contained a mixture of 27,700 bushels No. 2 white oats and 8000 bushels of barley (part No. 3 and part rejected). The Board had a trial in the matter and removed the inspector and suspended a director who was a member of the inspection committee. However, in April, 1871, the State of Illinois passed the famous Warehouse Law, taking inspection of grain out of the hands of the Board, and plac- ing it in charge of thefRailroad and Warehouse Commission, where it has since remained. In 1916 the United States Con- gress passed an Act providing for federal supervision of the existing inspection systems of the country, and providing for federal grades for grain. The weighing of grain by the Board of Trade of Chicago was not disturbed by the 1871 Warehouse Act. The Board of Trade also continues to take samples of grain from cars in Chicago, for purpose of comparison with state samples, in order to determine whether or not reinspection should be asked for. The State reinspects samples upon formal re- quest. Appeals may be taken from the state inspector to the federal grain supervisors. Captain Charles H. Taylor, the historian of the Board, sums up its work in this field as follows : " The epoch-making requirements for the grading, weighing, storage and shipment of grain in bulk, which were adopted early in the Board's history, and contributed so largely to its supremacy in this department of commerce, were prompted by this motive (fair dealing), and the same is true of the long fight to compel railway companies to discontinue the practice of granting unfair freight rates to certain favored shippers."* * Taylor, Charles H. (Editor) History of the Chicago Board of Trade. 3 Vols. Vol. I, p. 6. 46 SPECULATION AND THE CHICAGO BOARD OF TRADE (3) Cash Grain. Little need be said about the evolution of the cash grain business, except the successful work done by certain individual members of the Board in helping break the monopoly in the country elevator situation. All thoughtful persons who are familiar with the history of the grain trade in the United States know that the country ele- vators, particularly in the States of Illinois, Iowa and Ne- braska, prior to the year 1901, were in the grip of a monopoly which fixed prices. The price fixing was done through the organization of grain elevators known as the State Grain Dealers' Association, but in which organization a few power- ful terminal houses either terminal elevators or line eleva- tor companies or both completely dominated. Thus, in Nebraska, the State was mapped and divided into thirteen districts, as a basis of price-fixing. In Iowa the price-fixing was done through the Secretary with his head office in Des Moines. Any man or woman starting an independent elevator was forced to pay the so-called " regular" price, or bo driven out of business. Farmers, sensing the situation and resenting it, began to build farmers' elevators. The organization declared them " irregular" and took steps to force them to behome " regular" or give up their existence. An interesting sidelight on this situation is contained in a certain volume of testimony taken by the Interstate Commission, in the year 1906, on the Relations of Common Carriers to the Grain Trade. The following quotation is from the testimony of Mrs. Kate A. Kehoe of Platte Center, Nebraska, who had en- deavored to continue the operation of a country elevator and implement business after the death of her husband. Mr. Marble (for the Commission): You refused to buy some- times? THE CHICAGO BOARD OF TRADE 47 Mrs. Kehoe: Very, very frequently. Mr. Marble: You maintained yourself with the implement busi- ness? Mrs. Kehoe; Yes; when I could not handle the grain business at a margin, I let it go. Mr. Marble : If you had been dependent on the grain business for a living could you have remained in that town? Mrs. Kehoe: No, sir. Mr. Marble: Did you have difficulty in getting a market for the grain you bought? Mrs. Kehoe: At one or two special times I did. That was when the grain dealers' association was in force. I did not belong to it. Mr. Marble: What difficulty did you have? Mrs. Kehoe: I would not receive the offers or bids. Mr. Marble : No one would bid for your grain? Mrs. Kehoe: No. Mr. Marble: No one at all? Mrs. Kehoe: At one particular period I got all my prices from Chicago by wire. Mr. Marble: You depended on the Chicago market? Mrs. Kehoe: Yes, sir. Mr. Marble: And could not get bids from Omaha? Mrs. Kehoe: None at all.* It should be added in this connection that this happened before the Omaha Grain Exchange was established, and that the leaders in this fight on "irregular" houses were also opposed to the organization of a Grain Exchange at Omaha. In the same hearings conducted by the Interstate Com- merce Commission, Mr. E. G. Dunn of Swaledale, Iowa, a * Testimony taken by Interstate Commerce Commission, October 5 November 23, 1906, in matter of Relations of Common Carriers to the Grain Trade, 59th Congress, Second Session. Senate Document 278, Washington, 1907. 48 SPECULATION AND THE CHICAGO BOARD OF TRADE traveling solicitor for the firm of Eschenburg and Dalton of the Chicago Board of Trade testified that the Des Moines Secretary of the Iowa Grain Dealers' Association had put out a letter condemning the Eschenburg and Dalton firm for supporting farmers' elevators, and asking the "regulars" of Iowa not to consign grain to this firm. The firm of Eschen- burg and Dalton was an old, well-established firm of cash grain receivers, and could ill afford to risk their patronage. Nevertheless they stood by the few farmers' elevators that had started in business. The attack on this firm's business, testified Dunn, caused its list of Iowa customers to shrink from 200 to 3. Faced with this emergency, the firm began a vigorous campaign of organizing more farmers' elevators throughout Iowa. Mr. Dunn, who had considerable force as a persuasive orator, stirred the farmers into activity and very soon a large number of farmers' elevators were organ- ized. Similar tactics were used by the " regular" associations of Iowa and Illinois to compel the young grain firm of Lowell Hoit, Chicago, to refrain from doing business with farmers' elevators, and this firm also carried the battle back to the country and organized more farmers' elevators. The following are samples of two letters, quoted from the testimony above mentioned, showing how pressure was applied to the Chicago firms: THE CHICAGO BOARD OF TRADE 49 (Copy) ILLINOIS GRAIN DEALERS' ASSOCIATION Secretary's Office, Foray th, 111. October 7, 1902. Lowell Hoit & Company, Gentlemen : I am told that you are bidding on irregular firm at Howard, Illinois. I presume you supposed them to be regular. I am Very truly yours, (Signed) H. C. Mowry, Sec'y. DCS Moines, Iowa, September 22, 1903. Lowell Hoit & Company. Chicago, 111. Gentlemen : I wish to advise you that F. M. Terry, of River Sioux, has no facilities for handling grain and is not recognized as a dealer by this association. Will you please advise me what your disposition is in regard to doing business with shippers who have no facilities? Not hearing from you I shall conclude that you are disposed to take business from scoop shovel shippers and will be compelled to advise our mem- bers of the facts. Yours truly, (Signed) Geo. A. Wells, Secretary. 50 SPECULATION AND THE CHICAGO UOAKJj OF THADE (Copy) Des Moines, Iowa, Aug. 31, 1904. Confidential To Members: Will you please correspond with Lowell Hoit & Company, Chicago, Illinois, with a view to giving them some shipments. They are taking business from farmers' elevator companies not recog- nized by this association, and I find that they are not getting any business from regular dealers. My purpose is thus to place them under sufficient obligation to the members of this association, so that they will consider it for their best interest to confine their dealings in the future to the firms that are recognized. Do not raise the question about the farmers' elevator com- panies in your first letter, but take that up with them later, after having given them some business. Please keep this matter con- fidential and advise of your actions and results. Please answer questions in blank form given below, detach, and return same to me at once. Yours truly, (Signed) Geo. A. Wells, Secretary. Blank Form in part as follows: Have you done any business with firms named below during the past year, to wit: Hateley Brothers, Chicago, 111. Ans. Eschenburg & Dalton, Chicago, 111. Ans. Lowell Hoit & Co., Chicago, 111. Ans. These quotations are given at length they form but a small fraction of the published testimony because they illustrate the sometimes neglected point that the central, organized market has given the farmer substantial protec- THK ( FIK'AdO HOARD OF TRADE 51 (ion in time of dire need. At the present time 50 per cent of the grain arriving at Chicago comes from farmers' elevators; only 5 1/2 per cent comes from line elevators. The balance comes from independent elevators and interior cities. (4) To Arrive Grain. The practice of buying grain "to arrive" is older than the Exchange itself. It is one method of making "forward-contracts" which seems to have been in use, to a limited extent, in our eastern markets from the time of the Revolutionary War on. As soon as Chicago became a grain market this method of dealing came into vogue. Thus the local papers of September 2, 1848, quote corn at 37 to 38 cents, "at which price contracts have been made to deliver within a short time." The Chicago Daily Journal of April 21, 1848, quotes a sale of corn to arrive. Several to arrive sales are reported for May. Most of the corn arriving at Chicago during Septem- ber, 1848, was on to arrive contracts. On August 25, 1849, the Chicago market report told of poor crops, rust damage to wheat, etc., and quoted choice samples of winter wheat selling at 95 cents to arrive. Own- ers with grain in store along the Illinois river or the Canal made a common practice of selling this grain to arrive in Chicago. When storage facilities increased in Chicago, and particularly when the great Terminal Elevator Com- panies came into power, the reasons for buying to arrive in- creased. This ultimately led to a long controversy on the Board and in the courts, over the "Call Rule" question. The Call Rule. Manifestly the owner of storage could safely send out large bids to the country for "to arrive" grain, knowing that he could at least have facilities for storing it. Whereas, a dealer in cash grain, depending for an outlet on eastern .mills, for instance, must be limited in 52 SPECULATION AND THE CHICAGO BOARD OF TRADE his "to arrive" buying to actual orders in hand. It is ob- vious that such a situation would put into the hands of the small group of Terminal Elevator owners a larger control of the cash grain market than that held by the receivers and shippers who depended in part on receiving consigned grain and in part on receiving buying orders from eastern con- sumptive buyers. To preserve a competitive market and to preserve the protection to the country shipper furnished by the receivers and shippers (cash grain commission mer- chants), the so-called "Call Rule" was adopted in the year 1906. Prior to this time some of the large terminal houses were making secret bids by wire to the country, overnight, for grain to arrive.' The Call Rule put an end to secret bids. One bid was established by an open, competitive call at the close of each day's trading, and this official bid price held good overnight, or until the opening of the Exchange next morning. Any one was free to bid for any quantity of grain to arrive, at this price. This rule was attacked in the Courts, under the Sherman Anti-Trust Law, as being in restraint of competition. It was defended by the Board as preventing concentration of the grain trade in few hands and in keeping alive competition. The testimony of the country grain trade proved the Board had the facts on its side. The Su- preme Court of the United States early in the year 1918 handed down a decision upholding the Call Rule of the Board. When the Call Rule was under fire by the Courts, the Board adopted a modified rule governing the to arrive busi- ness. On October 6, 1913, this new rule went into effect, permitting any house to bid the country overnight any price for to arrive grain, provided only, that a notice of such bid be sent to a "reasonable number" of competing firms (who THE CHICAGO BOARD OF TRADE 53 may offer the grain themselves at the bid price), and that a notice of the bid and a list of the notified firms be filed in the office of the Secretary of the Board. Each competing firm in turn notifies the Secretary's office of its receipt of the to arrive bid, and in this manner the Secretary is able to check up and determine how faithfully the rule is obeyed. In practice the large Terminal Elevators the principal buy- ers notify from twenty to thirty firms. These firms, then in turn, bid the country overnight on the basis of the "firm bid " which they have received. During trading hours on the floor, any firm may bid the country any price for to arrive grain, all such bids being immediately posted on a large blackboard so that the price is an open, competitive one. The country shipper of course follows his own prefer- ence in shipping grain on consignment or on to arrive sales. What he actually does do depends on condition of crops, weather, prices, market tendencies, and the car shortage problem. In some seasons to arrive selling is preferred by country shippers; in others, consignment. (5) Future Trading. Future trading on the Chicago Board of Trade has had two periods of growth,- namely (1) before the'Civil War; and (2) after the Civil War. The days before the war were days of a small volume of future trading; the days since the war may be called a time of a large volume of future trading. Future trading, in its smaller scope, has its definite beginning, in the to arrive grain business. This was clearly foreshadowed in the preceding discussion of to arrive grain. As further illustrating the early method of to arrive trading, leading to ordinary future trading as now known, attention may be called to the situation in Chicago in the spring of 1856 a typical condition. On April 1, 1856, Chicago had f> I SI-KCTLATIOX A.VD THE CHICAGO BOAKD OF TRADE in store 447,000 bushels of grain, while boats with a capacity of 1,500,000 bushels were waiting in the harbor for a cargo. Grain was stored in the country, along the canal and the Illinois river. By the end of February 100,000 bushels of this grain had been sold for spring delivery, May being the favorite month of shipment. To further illustrate the origin and growth of future trading, a few concrete examples may }>e given from the Board's early history. The year 1851 was noted as a year showing a marked in- crease in the quantity of corn sold for future delivery, par- ticularly in March and April for June delivery. During 1853 corn and oats were sold very commonly for future delivery, mainly to arrive, from Canal and River points. During 1854 there was an increasing amount of selling for future delivery. The Crimean War introduced a new specu- lative factor in the market. New Orleans at this time was also making forward contracts, for the local papers of Jan- uary 13 reported contracts for 150,000 bushels of corn deliv- erable in March and April. The Chicago Democratic Press of January 31 said, "There is a strong disposition to operate for future delivery here and elsewhere on the part of the buyers, but holders in store are extremely sanguine and quiet." The same paper on March 12 reported the arrival of 70,000 bushels of corn in the last three days, adding ' ' 1 >y far the greater proportion is for shipment on contracts al- ready made." The St. Louis Evening News at this time, us quoted in The Chicago Journal of March 29, 1854, said: Wheat contracts, flour contracts, and purchases of corn, weeks and months since, during the inflation, are beginning to mature and some to fall through, as they usually do when there is a sudden depres- sion or inflation in prices. . . . We have seen during the past few THE CHICAGO BOARD OF TRADE 55 weeks heavy arrivals of flour, grain, provisions, etc., which were bought during high prices, received and paid for cheerfully. . . . The truth is, it requires considerable moral honesty and a fair share; of mercantile integrity to receive and pay for large purchases of grain which have declined from 25 to 35 cents per bushel, and flour which has slipped down $1.00 to $1.50 per barrel, but nevertheless it is done, we may say daily and hourly in this city. The Journal of April 21 made note of a future contract for 100,000 bushels of corn at 50 cents, delivery in July on board a vessel; the purchaser had just sold out half his contract to New York parties at a profit of $3000. There is no evidence that there was a class of dealers giving their whole time to speculation, at this period. How- ever, the evidence does indicate that most of the dealers themselves were also, at times, speculators. Uncertainties as to arrivals, as to weather conditions, as to movement of lake shipping, as to foreign markets and other factors, sub- jected the market to more severe fluctuations than is the case at present. And wide fluctuations in turn begot speculation. At this early period there was also future trading in grain in New York, St. Louis, New Orleans, Milwaukee and Buffalo. But it was in Chicago that this form of trading in- creased and grew to large proportions. The Chicago Democratic Press of June 4, 1856, reported that the great bulk of the transactions in corn were for fu- ture delivery. "Contracts are almost daily maturing," says this journal. This indicates that there were no fixed months for deliveries, as at present. Short Selling. Most of the forward contracts for de- livery of grain were made by parties owing the grain. How- ever, more and more the practice developed of contracting 56 SPECULATION AND THE CHICAGO BOAKD OF TRADE to deliver grain which the seller did not, at the time, own i. e.j short selling. Some evidence of these "bear operators" may be interesting. In 1850 an abundant corn crop depressed the market from 52 cents to 31-35 cents. In the face of this big crop, a "bear," on October 18, sold 30,000 bushels for delivery next June at 28 cents. This bear apparently lost seven cents a bushel, although by November, 1851, the price had fallen to 26 cents. The Chicago Journal of May 13, 1853, reports: "High price of corn is due to scarcity of boats on the Canal, ren- dering parties on the Illinois River unable to send forward but little more than sufficient to supply contracts previously made for delivery at this point. In some cases even doubts are entertained of the ability of contracting parties to fill engagements against the time stipulated for, and some spec- ulative feeling has been observable in consequence." The Chicago Democratic Press in 1856 (June 11) stated, "Thus far sellers have made all the money at the expense of the buyers." That week, wheat had declined 18 to 20 cents a bushel. The buyers were limited to "one or two shorts, who, having sold largely last week at higher prices are now advantageously providing for their contracts." This same year, 1856, affords a good illustration of a very modern method of settling contracts. "A single lot of 15,000 bushels," says the Press of August 1, 1856, "Jjas within two days passed through fourteen hands, and in these transfers settled contracts for some 200,000 bushels." The second period of future trading, the period of big volume, dates from the Civil War. The cause of the large increase in future trading was due to the practice of the Quartermaster's Department of the United States Army in THE CHICAGO BOARD OF TRADE 57 buying large orders of oats for future delivery. The Govern- ment used the speculative market to avoid speculation to have a definite supply of a definite grade at a definite price. Without definite grades there could of course be no future trading in grain. And evidently, by the time of the Civil War, the Board of Trade had put inspection and grading on a workable basis. First Rules on Future Trading. That future trading was a voluntary and spontaneous growth in the grain mar- ket of Chicago is evidenced by the fact that the Board had no rules on the subject until many years after the practice became common, or, to be specific, not till October 13, 1865. A margin rule (requiring ten per cent margin) had been adopted in May, 1865, but no comprehensive rules covering future trading. The rules adopted in October merely faced and squarely met the existing situation. Future trading was now brought under fixed, standard, definite and public rules. These rules covered the rights of parties on time contracts, and the failure to deliver on contracts. Future trading proved to be a two-edged sword cutting both ways. For a time in the earlier years of its growth, the abuse of it threat- ened to overshadow the use of it. Some highly respected officers and members of the Board were caught in squeezes and market manipulations and threatened with bankruptcy. For some years a commercial "code of honor" prevailed, like the old code duello, to the effect that it was honorable to manipulate the market against your fellow member, but that it was dishonorable in 'him to refuse to settle at the fictitious price. This code of honor was cloaked behind the ethical claim that a person voluntarily entering upon a con- tract must live up to it. However, self-interest led the Board to take in hand the whole question of Corners, and to 58 SPECULATION AND THE CHICAGO BOARD OF TRADE evolve rules accordingly, as will be seen in the discussion of corners just below. Among other abuses which the " black sheep " of the Board introduced quite early were those techni- cally known as bucketing trades, matching trades, and crossing trades. These mean, respectively (1) for the house to take the other side of its customer's trade, instead of executing it in the open market : (2) for the house to put the trade of one customer against the trade of another customer, instead of executing both trades in the open market : (3) for one house to turn a customer's trade (a buying order, for instance) over to a second house in exchange for a trade made by a customer (a selling order) of the second house, instead of both houses executing these trades in the open market. A Rule was adopted prohibiting all three of these practices. The penalty is expulsion from membership. This extreme penalty has been inflicted at different times, and, in one conspicuous case, upon an ex-president of the Board of Trade. The Rules governing future trading, after fifty years of growth and amendment have now been stabilized to meet the needs of the various parties immediately concerned in grain marketing, namely, the speculators, the hedgers, the cash grain interests, the warehouse interests and the banks and credit interests. Credit, Banking, and Future Trading. It may be that in an ideal condition of society, there will be no credit trans- actions, everything being on a strictly cash basis; but that question cannot be discussed here. The condition which confronts us in business now is one of a vast and ever growing credit structure. And in the grain trade credit is mobolized and safeguarded to a very high degree of business efficiency. David R. Forgan, President of the National City Bank of THE CHICAGO BOARD OF TRADE 59 Chicago, briefly and clearly stated the relation of credit to future trading in these words:* " Warehouse receipts for grain, or anything else that finally becomes human food are, in my opinion, the best possible collateral for bank loans. I have seen the time more than once when high class stocks and bonds, and even government bonds, could not readily be sold, but I have never seen the time, nor do I even expect to see it, when any- thing that has to be eaten could not be sold. The warehouse receipts, therefore, above alluded to, constitute a collateral which is always available for the payment of debts. Fur- thermore, if the grain or provisions represented by the ware- house receipts, 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 have 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 market had a large and sudden drop, with the result that the elevator concern failed, and the bank with which I was connected made a loss. The present method, therefore, of carriers of grain or provisions selling them for future deliv- ery is a highly satisfactory 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." Influence of Future Price on Cash Price. Does the future price control the cash price? Some experts on the * National Huij and Grain Reporter, May 20, 1911, p. 29. GO SPECULATION AND THE CHICAGO BOARD OF TRADE- grain trade claim that it does. And since the future price is made in the pit, largely under speculative trading, the con- clusion is also reached that the cash price is a mere football of speculation. Jt has already been stated in Chapter I thai cash price reflects supply and demand conditions. It may now be stated at this point, that future price does not deter- mine cash price. The course of corn prices on the Chicago Board of Trade for 1917-1918 illustrates the fact that futures do not domi- nate cash prices. The 1916 corn crop was small. In 1917 the crop was large the largest on record, according to the fig- ures published by the Department of Agriculture. But this corn was wet and very largely unmerchantable. Coupled with this fact came war conditions, government food con- trol, car shortages, coal shortages, and general market demoralization. However, the consumptive buyers of corn (the corn products companies, the mills, the feed manufac- turers, livestock interests, etc.) needed the corn and bought freely. In January, 1917, cash corn ranged from $.93 1/4 to $1.03, and the May corn at the same time was $.93 1/2 to $1.03 1/4, or practically the same as the spot. From this date on the premium on cash corn gradually increased, as both the spot and the future rose in price. In July cash corn had climbed to $2.32 a figure so high as to alarm govern- ment officials. At this period we were shipping every possible ounce of wheat to our allies in the World War, and hence we were consuming all sorts of wheat bread substi- tutes, one of which was corn. Officials of the federal govern- ment gave a warning to the Board of Trade that corn prices were getting too high, and that speculation on corn must be curtailed or stopped altogether. The assumption apparently was that speculation was in part the cause of the rise in price, THE CHICAGO BOARD OF TRADE 61 an assumption which later events proved to be contrary to the facts. The Directors accordingly on July 11 fixed a maximum or upset price on corn futures for 1918 of $1.28 and forbade the making of any future contracts for delivery during 1918 in excess of this upset price. And on the next day July 12 the Directors made the same rule apply to all future corn contracts for December, 1917, delivery. This of course held the future price below $1.28. Now, according to the theory of some thinkers, this regulation would have held the cash price down also. But the contrary thing happened. The trend of cash price was upward, till the new corn crop began to arrive on the market. At no time after July did cash corn fall below $1.60, and most of the time it was above $2.00.* The natural position of futures, in months under old-crop influences, is of course above cash by the amount of the^ carrying charge^ The "carrying charge" includes the stor- age charge in the terminal elevator (fixed by the Rules of the Board of Trade), the insurance on the grain, and the interest on the money invested. But when cash grain is selling under old-crop influences (as wheat in April or corn in July) and the future delivery is under new-crop conditions (wheat for July delivery, corn for December delivery), there is of course no influence of futures over cash or cash over futures. Oats futures ranged below cash oats during the year 1918, instead of above. Corn futures ranged below cash corn dur- ing the same year. The pressure of consumptive demand was strong enough to keep the cash grain at a premium over futures. The conclusion seems warranted that neither future nor cash price has a dominating influence, permanently, over the * See Appendix 5 for statistics. 62 SPECULATION AND THE CHICAGO BOARD OF TRADE other, but that both are merely effects of supply and deinand causes^ _ 'I'hev are, in short, effects of the same underlying causes. Delivery Months. At first future trading was done for delivery in every one of the twelve months of the year. Gradually however, trading concentrated on certain months with reference to the harvest period, the crop moving period, and the opening of Lake Navigation. For wheat, this meant July, September, December and May. Corn usually has one or two more delivery months. It is custom which has fixed the delivery months. (6) Corners. " Cornering the grain market" is, in the minds of many people, a popular pastime on the Board of Trade. And this belief is founded on facts in connection with the history of the Board, from its earliest days, down to ten or fifteen years ago. What the past history has been and what the present condition is can best be shown by a simple narration of the facts. It was the Civil War, as stated before, that gave a great impetus to future trading, but it was the period immediately following the war that saw a great spurt in the business of cornering the market. Chicago's historian Andreas speaks of the year 1868 in these terms: "The year of corners. There was a corner a month, three on wheat, two on corn, one on oats, one attempted on rye, and the year threatened to go out with a tremendous one on pork products. The corner on Number 2 spring wheat which succeeded in June, started at $1.77 and culminated June 30, at $2.20. The price in New York at the time was $2.02, and the day after the corner the Chicago price fell to $1.80, and the second of July to $1.75. This corner rivaled much discussion as to restrictive rules, and the THE CHICAG-O BOARD OF TRADE 63 apt Ml ion was brought, to a. head by a corner on September com." This September corn corner squeezed many prominent members of the Board, including the President. The Board passed the following Resolution against corners October 13, 1868: Resolved, That the practice of "corners" of making contracts for the purchase of a commodity, and then taking measures to render it impossible for the seller to fill his contract, for the purpose of ex- torting money from him, has been too long tolerated by this and other commercial bodies in the country to the injury and discredit of legitimate commerce; that these transactions are essentially im- proper and fraudulent, and should any member of this Board here- after engage in any such transactions, the Directors should take measures for his expulsion, under the provisions of Rule V for the prevention of improper and fraudulent practices. But alas for this good resolution! It went the way of many other good intentions. That was the era of the settle- ment of the public lands, with their concomitant land frauds and land speculations, of unabashed railway rebating, and of general laxity in business morals not tolerated to-day. And so the Board of Trade was at this time far from being able or willing to deal firmly with the evil of corners. For instance, in 1871 (July) there were corners in wheat and oats. In August there was a squeeze in wheat, but wheat was rushed in by boat, and the market broke 20 cents a bushel, ending the squeeze. The year 1872 was a year of manipulations and attempted corners. One firm attempted to corner oats in June, but were themselves bankrupted and suspended. In August a wheat corner was promoted by two Toronto and two local traders; wheat was shipped in, break- 64 SPECULATION AND THE CHICAOO BOARD OF TRADE ing the price 47 cents in a little more than twenty-four hours. One of the Toronto traders was suspended from the Board. At this juncture the Board attempts a constructive re- form, by adopting an anti-corner rule, permitting the settling of contracts on an "intrinsic value" basis rather than a ''fictitious price." basis. The Chicago fire of 1871 seemed to encourage, rather than discourage speculation in its various forms. One of the ablest secretaries the Board of Trade has ever known, Mr. Randolph, spoke of the pathological condition of affairs in his Annual Report for 1872, in these words: "The year has probably, as a whole witnessed more irregularity and excitement in the grain trade than any of its predecessors. The trading (largely on speculation) has been enormous, and the tendency for speculation has indeed been rampant. Various theories are advanced as accounting for this growing mania, the more plausible one, perhaps, being that owing to large losses by our fire and other sweeping misfortunes here and elsewhere, men have been anxious to hazard on operations apparently promising speedy and fortunate results; but this cannot account for all this in- crease in this class of business. It is well known by those familiar with the business that much the larger portion of it is transacted by order of and on account of parties not resi- dents of this city." In 1874 two full-fledged corners are reported, despite the good resolutions of the Board. There was an oats corner by G. W. Adams and a corn corner by W. N. Sturges. But in a September corn corner Mr. Sturges himself was caught, and was expelled by the Board for violation of its rules. In 1878 there was a squeeze in May wheat; a corner in July wheat ; and a squeeze in December wheat. The last was THE CHICAGO BOARD OP TRADE 65 engineered by a Mr. Keene of New York, and was carried over into 1879. By the year 1881 the men with millions, the " giants," began to operate in the pit. Hence we have a decade famous in Board of Trade annal for the number and size of the attempts to corner the market. In January a big wheat deal was started. In February a big packer began operations in pork. In March there was a flurry in the wheat pit. In April there developed a shortage in rye. In July the biggest dealings thus far in corn, wheat and oats were seen, the month closing with a big oats corner. August saw a wheat corner engineered by Cincinnati parties. In October came a squeeze in corn. The year ended with a corner in barley. The Directors finally took steps to regulate and curb to some extent the evil. They fixed anrttpsetprice on corn at 62 cents much to the disgust of the bulls. ^The Board also considered' the advisability of havinVtratKority given them by the membership to declare grain stored in boats and out- side warehouses regular for delivery on future contracts, thus making a corner more difficult. The year 1882 saw four corners and defaulted contracts in wheat in April, June, July and August: also a corn corner in August, a lard corner in September, and a ribs corner in October. A great many lawsuits followed these corners. Sentiment on the moral question involved in corners was not crystallized. Thus, the anti-corner rule of 1871 was resub- mitted, and was repealed by a vote of 490 to 410. "During the year 1883 there were few corners, and not one of them a success. The corner of the wheat market in 1887 is known as the Harper deal and the Kershaw failure. A squeeze was run in May wheat. But the amount of wheat in store increased rapidly, to meet the squeeze. The Directors (if) SPECULATION" AND TlfK CHICAdO HOARD OF THADK declared additional storage regular, thus adding 300,000 bushels to the storage capacity of the city. The clique runn'ng the corner now sold May wheat and bought June and July wheat. The clique became a heavy buyer and prices rose. The high prices attracted wheat to Chicago. The price of June wheat was maintained at 88 cents for sev- eral days. The price of some June deliveries rose to 91 14 cents. More wheat poured in. The directors made addi- tional buildings regular with a capacity of 1,000,000 bushels. The directors discussed the question of making wheat on track regular. The clique running the corner showed signs of inability to receive and pay for so much wheat. On June 11, July wheat fell from 86 1/8 to 82 1/2 cents. Cash wheat was now selling at 92 cents, and a new crop in sight of more than average size. The crisis came on June 14 when wheat dropped nearly 19 cents, following the failure of a Cincinnati bank. The clique made money on their short sales: losses on the long wheat were never paid. The Kershaw house was unable to settle with any of its creditors during the year and so with many other houses. A Cincinnati banker, who wa^ helping finance the corner with money obtained illegally from his bank, wrecked his bank and was given a sentence of ten years in the penitentiary. However, later evidence tends to prove he was merely the scapegoat, not the real criminal. One outstanding feature of this corner was the fact that one Chicago Elevator Company completed the erection of a 400,000 bushel elevator in 14 days, and another grain deakr*' built and equipped an elevator in 30 days. This Kershaw corner of 1887 was the most disgraceful deal in connection with the whole distory of the Board of Trade. It was frankly a premeditated raid by a few outsiders, aided THK CIlICAfJO BOARD OF TRADE 67 and abetted by a traitor to his associates of the Board of Trade. It should have been treated by the Board for what it really was an act of piracy. The year of 1902 is known as "Oats corner" year on the Board of Trade. This frank and deliberate cornering of the market brought much financial disaster and led to forty-one lawsuits. The court held that contracts, in case of a corner, must be settled at a price representing the actual value of the commodity, and not the fictitious " corner " value. The John W. Gates corner of 1905 may be mentioned, since it is typical of the cornering operations of the period. In February, 1905, May wheat began to show signs of a corner, the understanding of the Board of Trade being that certain Wall Street interests headed by Mr. John W. Gates were long. At the close of March May wheat stood at 25 cents over July. There was talk of litigation, should a cor- ner develop and force artificial price levels. On April 22 the Gates interests began to unload their wheat, in order to re- alize their paper profits, selling 10,000,000 bushels. This broke the price to $1.05, whereas the wheat had cost $1.15. Later the rest of the line was sold, 8,000,000 bushels in all, adding another $800,000 to the losses of the Wall Street- interests. The price declined to 86 3/4 cents on April 27. The corner, like most corners, had failed, and its promoters had lost money. The " Three Big Corners." In the minds of the public there stand out sharp and distinct three so-called corners on the Board of Trade, namely, the Hutchinson corner, the Leiter corner, and the Patten corner. One of these was not a comer; one was a failure and wrecked the man who ran it; one may be properly called a temporarily successful corner. The importance of these three " corners" warrants their dis- 68 SPECULATION AND THE CHICAGO BOARD OF TRADE cussion in detail. These corners mark approximately twenty years of Board of Trade history, and are associated with the three dates, 1888, 1898 and 1908. The Hutchinson Corner: 1888. Mr. B. P. Hutchinson was a factor in the market during the entire year of 1888. In the second week of May the Government Crop Report appeared, forecasting an immense shortage in the wheat crop. Wheat advanced 4 cents, and Hutchinson was sup- posed to be on the losing side (short side) of the market. The general course of the market, however, was downward until July, and by July 8, Hutchinson was said to be a heavy winner. During August he took the bull side of the market, buying September wheat, and becoming long, it was esti- mated, 5,000,000 bushels of wheat. Then came serious frost damage; and a sharp advance in wheat. By August 25 European markets were higher on account of European crop shortages. When September delivery arrived, Hutchinson received and paid for large quantities of wheat. He then began to buy December wheat. By September 22 wheat for September delivery reached $1.00 for the first time in five years. Hutchinson sold 1,000,000 bushels at a profit, with- out checking the price advance. The Northwest had suf- fered a, crop disaster of the first magnitude. The September shorts found wheat at $1.28 on September 27; at $1.50 on September 28; at $2.00 on September 29. Wheat for December delivery opened at 104 1/4 on October 1. Hutchinson bought December wheat, bidding the price up to $1.08. In October a correction in the Government Crop Estimate reduced the figures on the wheat crop by 100,000,000 bush- els, and this helped the bull movement. The market showed some reaction about this time, falling THE CHICAGO BOARD OF TRADE 69 ten cents. It is now supposed that Hutchinson took first one side and now the other of the market. Unquestionably Hutchinson had supply and demand factors with him during most of the year, and realized great profits. During the year 1890 Hutchinson was very active, but was unable again to dominate the market. He took the bull side, but supply and demand factors were against him. After this date he ceased to be an important market factor. His successful corner was a combination of bold and daring- use of millions of dollars, on the side of the market which had the fundamental factors of supply and demand with it and not against it. The Leiter Corner: 1898. Mr. Joseph Leiter entered the market in 1897 on the bull side, believing conditions justified higher prices. January 1, wheat opened at 81 cents, and stood at 74 cents at the close of the month. Cash wheat worked down to 70 cents and under, in June. There was then a rumor of a corner in July wheat. Towards the close of June wheat advanced to 73 1/2 cents. The first week in July came hot winds in Kansas, affecting corn but not wheat. On July 10 wheat stood at 69; on July 26, at 79. July deliveries amounted to 1,000,000 bushels, and with a profit to the buyer. The August wheat market opened at 76 cents, and by August 11 it stood at 83 cents. The next day September wheat advanced 3 cents. Cash wheat reached $1.00 during this bull campaign. High prices attracted large receipts, the western roads bringing in over 5,000 cars of grain on the thirtieth and thirty-first of August. Cash wheat failed to hold at these high prices during September. William Jennings Bryan issued a statement that the higher prices for wheat were due entirely to crop 70 SPECULATION AND THE CHI (AGO BOARD OF shortages in India and Europe, and had nothing to do with political events or free silver. Speculation was shifted to December wheat. Just prior to the first of December came the great export movement of wheat, a part of the Leiter plan to keep up prices on December wheat of which he was the owner. By December 9 a scarcity of cash wheat put the price up to $1.09. This high price attracted an avalanche of wheat to Chicago. Big receipts forced the market down to 97 1/2. Supplies from Minneapolis and Duluth, and from Ohio, Indiana and Michigan made it easy for the shorts to deliver. It is said that Armour alone chartered a score of large lake vessels, hired icebreakers and tugs, and got safely out of the Duluth harbor and through the Soo canals, bringing down 2,000,000 bushels of wheat in time for December delivery. At any rate, contract grade of wheat in store in Chicago in- creased from 5,180,000 bushels, December 18, to 9,026,000 bushels December 31. Nearly all of this was delivered to Leiter. In an interview at this time, Mr. Leiter is quoted as saying: I am confident that the price of wheat will go up, and that we will sell our wheat at much higher prices than now quoted for cash wheat. There is no special reason why we should feel despondent when we know that our wheat is of exceptionally high grade. It lias been bought cheap, and the general conditions of supply and de- mand are in our favor. The wheat probably cost him from 80 to 85 cents a bushel. The cost of carrying this wheat for insurance and storage was $4,450 per day, and with the new year 1898 came the prob- lem of selling this wheat. But 1898 brought a declining- market. THE CHICAGO BOARD OF TRADE 71 Early in the year we were plunged into war. Wheat kept arriving in Chicago in large quantities 10,000,000 bushels from February 1 to June ! Prices held up fairly well for a few months. The Government Crop Re- port on June 10, however, forecast a record crop. At this date the price was $1.00 to $1.03. Next day the price was 89. On Monday June 13 the price was 85. The occurred the collapse of the Leiter deal. Leiter's loss has been esti- mated at between two and three million dollars. At any rate he failed to settle in full and was indefinitely suspended from the Board. The Patten Corner: 1909. The Patten corner in May wheat, socalled, began in a preliminary way in the spring of 1907. The year began with good crop prospects. Crop damage reports, however, soon began to affect the May wheat market. The green bug was destroying a large por- tion of the wheat in Oklahoma, Kansas, and southern Missouri, Illinois and Indiana. The estimated damage was given as 106,000,000 bushels. On May 10 came the Government Crop report, showing a large abandoned acreage of wheat. May wheat now reached 86 3/8 cents, although it had been as low as 75 1/4 cents in January. It was during May that Mr. Patten was commonly men- tioned as being a bull in wheat. September wheat and then July wheat went above the dollar mark. December wheat soon rose to $1.05. During the last half of May the market fluctuated up and down with a few sharp backsets. There was an upturn at the end of the month. Trading during June was active, but not of so much vol- ume as May had been. The green bug damage continued: 72 SPECULATION AND THE CHICAGO BOARD OF TRADE- hot winds added to the damage. Mr. Patten, it is supposed, was on the bear side of the market during June, notwith- standing the unfavorable crop outlook. With continued bad crop outlook in July, Mr. Patten again it is said, took the bull side of the market. During August cash wheat prices advanced due to un- seasonably cold weather. During September the price held firm for some weeks, but the approaching financial panic was already making money increasingly difficult to obtain. September closed with wheat below one dollar. The heavy buying of Patten upheld the market during October. During the latter half of October the severe financial panic of 1907 was in full force. During the year 1908 Mr. Patten laid the foundation for his so-called corner of May, 1909, wheat. In May, 1908, the wheat market opened with prices rising. General bad crop conditions, Hessian fly, reports that the world's wheat stocks were low, all served to advance prices. The Government crop report for May forecast a crop some 200,000,000 bushels below the average. During September, 1908, Mr. Patten was credited with being the heaviest buyer of wheat. This buying also continued during November. The 1909 market campaign was one of the most remark- able in history, for its size. Heavy exports in the fall of 1908, several poor crop years, increase in domestic consumption had left the United States short of wheat. May 13, 1909, cash wheat sold at $1.28. Mr. Patten was blamed for the rising cost of wheat, of THE CHICAGO BOARD OF TRADE 73 flour, of bread. But he replied that he had kept wheat in America by buying it and putting it in store, and that the high prices were due to the law of supply and demand. He denied he was working a corner. The top price for May was $1.35 1/2, the month closing at $1.34. Cash wheat during May opened at 142 1/2 to 145 3/4, ranging as high as 154 on May 25, and closing at 150 to 152 at the end of May. June 1 cash wheat opened at 150 to 153, and ranged gradually higher to the middle of the month, reaching 155 to 160. Prices held high till the new crop came in, when prices fell to 123 to 124 cents for cash wheat the middle of July. Hence according to these market figures the high price of May was not due to a Patten corner, but to supply and de- mand. For June wheat, without a corner, rose above May wheat. The conclusion seems warranted, therefore, that so far as these three famous corners are concerned, the Patten corner was not a corner: the Leiter corner was a failure: and the Hutchinson corner was a successful corner. Shortly after the May, 1909, wheat " corner "'the Supreme Court of the United States (in a cotton corner case) handed down a decision making unlawful and criminal the cornering of interstate commodities. In brief, then, this is the story of corners on the Board of Trade. In the early years, and indeed down to within recent years, the legitimate function of future trading was largely prostituted to the running of corners. Who suffered and who was the beneficiary? Since corners always tempo- rarily raised prices the farmers did not suffer. In a few cases bread prices were temporarily raised so that the consumer 74 SPECULATION AND THE CHICAGO BOARD OF TKADE "suffered" (although the average American's consumption of wheat for seed, bread and all purposes is only 41/2 bushels per year, which, with wheat at $1.00 per bushel, means 11/3 cents per day hence a consumer would not "suffer" very serious impairment of his pocketbook if wheat were tempo- rarily raised to $2.00 per bushel.) Since most corners failed, the greatest loss fell on the promoters of the corner. In the long run, however, the Board of Trade itself suffered most by permitting this lax and immoral practice to run so long. Since the public knows the Board of Trade only through the press, and since the press conveys to the public, as a rule, only the spectacular events, it follows that the reputation of the Board of Trade is based on the spectacular and the evil, rather than the commonplace and the useful. And again, in a more tangible way, each cornering of the market has resulted in financial loss to many members of the Board, and to financial ruin to a few. Manifestly then, the Board has suffered much more than it has gained from corners. In short, experience proves that corners do not pay. It is, therefore, both to the public interest and to the Board's interest to abolish corners on the P]xchange entirely. It is within the power of the Board of Directors to do this. The absence of corners in late years is evidence that some progress has been made in this direction. But has the Board gone far enough? Steps Taken to Prevent Corners. What action the Board has already taken to prevent corners may be summarized under the following five steps: a. Shipping Grain Out of Store. The Board of Direc- tors in May, 1910, adopted a resolution branding as uncom- mercial and dishonorable conduct the practice of selling out the Chicago grain on other markets, at less than Chicago THE CHICAGO BOARD OF TRADE 75 prices, to produce a shortage in Chicago in order to help the bulls squeeze the bears. Some big wheat bulls had indulged in this practice. b. Delivery at a " Fair Price," and not at a " Fictitious Price." In June, 1910, the Board membership adopted a drastic anti-corner rule by a vote of 348 to 191. It provided that the short, in case of a market squueze, could settle at a fair market price plus liquidated damages of not over 10 per cent. The rule provided that the settling price should be fixed by a committee of three, appointed by the President, which committee should take into consideration the cash price in Chicago on the last of the month, the prices in other markets for cash grain, and also for futures: whereas up to this time the rules had provided that the average price of a future should be the settling price for the day. c. Grades Deliverable on Contract. The fewer the grades deliverable on contract, the easier it is to corner the market. In the early days, when corners were very common, only one grade of wheat was deliverable on contract, namely, No. 2 spring. At the present time, however, the following 21 grades of wheat are deliverable: (1) Deliverable on contract, at contract price: No. 1 dark hard winter wheat No. 1 hard winter wheat No. 1 yellow hard winter wheat No. 2 dark hard winter wheat No. 2 yellow hard winter wheat No. 1 red winter wheat No. 2 red winter wheat No. 1 dark northern spring wheat No. 1 northern spring wheat No. 2 dark northern spring wheat 76 SPECULATION AND THE CHICAGO BOARD OF TRADE No. 2 northern spring wheat No. 1 red spring wheat No. 2 red spring wheat (2) Deliverable on contract at 5 cents a bushel under contract price: No. 3 dark hard winter wheat No. 3 hard winter wheat No. 3 yellow hardwinter wheat No. 3 red winter wheat No. 1 hard white wheat No. 2 hard white wheat (3) Deliverable on contracts at 8 cents a bushel under contract price: No. 3 dark northern spring wheat No. 3 red spring wheat Formerly one grade of corn was deliverable on con- tracts and corners were easy and frequent. Now the lowing 12 grades are deliverable: (1) At 1/2 cent per bushel over contract price: No. 1 white corn No. 2 white corn No. 1 yellow corn No. 2 yellow corn (2) At contract price: No. 1 (mixed) corn No. 2 (mixed) corn (3) At 2 cents per bushel under contract price: No. 3 white corn No. 3 yellow corn (4) At 2 1/2 cents per bushel under contract price: No. 3 (mixed) corn (5) At 4 1/2 cents per bushel under contract price: THE CHICAGO BOARD OF TRADE 77 No. 4 white corn No. 4 yellow corn (6) At 5 cents per bushel under contract price: No. 4 (mixed) corn In the case of oats, three grades are now deliverable all white oats No. 2 at contract price; No. 1 at 1/2 cent pre- mium; No. 3 at 1 1/2 cent discount. d. Delivery on Track. Normally, deliveries are made only of grain in " regular" public warehouses, the evidence of ownership being the warehouse receipt properly registered and indorsed. In case the operator of a corner owned all the grain in store at the regular terminal warehouses, manifestly the shorts would have to buy of the cornerer at his own price or default on contracts. To meet this emergency a Rule was adopted providing for delivery of grain : on track within the Chicago switching district during the last three business days of the delivery month. Kansas City has a similar rule for the last six days of the month, and made use of this rule a few years ago to deliver to the manipulator a few hundred cars of grain on track much to his discomfiture. e. Declaring Additional Warehouses Regular. A regu- lar warehouse is one whose receipts are deliverable on future contracts. A Rule has been adopted, giving the Directors authority, in case of emergency, to declare any storehouse in the Chicago switching district with proper trackage facili- ties, or any vessel in the harbor, to be regular places for the storage of grain deliverable under Board of Trade rules. These are all very important safeguards and they have apparently worked successfully for several years. In the opinion of the writer, however, the problem of corners is a serious and a fundamental one, and not to be paltered with, or subject to mere good-intentioned regulations. A drastic 78 SPECULATION AND THE CHICAGO BOARD OF TRADE remedy is needed. And that remedy, ready to hand and easy to apply, is expulsion from the Board. . Any corner or at- tempt to corner should meet this treatment. A rule of this kind, once adopted and applied (if need arose) would go far to improve the Board and reassure the public. And, in all human probability, it would definitively end all corners. (7) Clearing House of the Chicago Board of Trade. There are two kinds of clearing houses in use in the grain trade, the kind used by the Chicago Board of Trade, and the kind used by all the other Exchanges doing future trading. The functions of a clearing house in the grain trade are some- what similar to those of bank clearing houses namely, to economize time and money in settling accounts. The clear- ing houses of the Minneapolis Chamber of Commerce, the Kansas City Board of Trade and the other secondary future markets are used to keep all open trades margined to the market daily. In these cases the clearing house actually assumes the position of buyer to the seller, and of seller to the buyer. The member filing his daily clearing sheet files with it a check to make good his margins, if the market has gone against him, or, in the event the market has moved in his favor, he receives a check from the clearing house. A cer- tain degree of joint protection is thus afforded all traders which is absent in the Chicago system, as will be explained. The Minneapolis clearing system (as we may call it for short) is based on a clearing house which is a separate corpo- ration from the Exchange, and is a financial institution with adequate funds to protect traders. The Chicago clearing house is entirely different, being sometimes referred to as a mere " post-office" of the Board of Trade for the exchanging of checks and the handling of margin certificates. The Chicago system has been in force 36 years, and many un- THE CTTI( 1 AC,0 BOARD OF TRADE 79 successful attempts have been made to change over to the Minneapolis system. Thus far the majority of members apparently favor the old plan. Organization. The Clearing House of the Chicago Board of Trade is in charge of the Clearing House Committee, which consists of three persons chosen by and from the Board of Directors. The Clearing House, as such, has no capital stock or assets of any kind, but is a mere department of the Board of Trade. There are at present (1919) 160 members of the Clearing House, representing the following activities: cash grain; pit scalpers; brokers; terminal eleva- tors; private wire houses; cold storage; meat packing. Firms not holding memberships in the Clearing House clear their trades through members. The income of the Clearing House is derived from two sources fees for clearing and fines. The clearing fee is 1 1/2 cents for each item on the daily clearing sheet. Fines are as follows: $5.00 if late to the clearing house; $1.00 for each error on the clearing sheet. Operation. The Clearing House of the Chicago Board of Trade is used for settling closed trades only. In other words, the party doing the clearing must first have bought and sold an equal amount, and of course for the same de- livery month. A man who has bought 100 May corn and sold 50 May corn, is obviously "even" on 50 corn, and is still "long" 50 May corn. The closed trade on 50 corn he will settle through the Clearing House. Trades are closed in three ways, taking the buyer, for an example: (1) by taking delivery of the grain itself; this is done by feeders, shippers and others needing grain: (2) by receiving a delivery notice that the grain is in store, ready for delivery, which delivery notice is passed on from hand to hand, till it reaches the feeder, shipper, etc., who wants the 80 SPECULATION AND THE CHICAGO BOARD OF TRADE grain: (3) by selling in the pit to "even" or " close" the trade. Most future trades are closed this way. An open trade cannot be settled through the clearing house. Closed trades (i. e., bought and sold amounts equal) are settled in two ways, (a) by direct settlement, and (b) by ringing out. A direct settlement occurs when only two parties are con- cerned in the trade, as illustrated by the case below : Direct Settlement A buys from B 100 May oats at 81. B buys of A 100 May oats at 79. This is reported to the clearing house as a direct settle- ent. A owing the clearing house $2000 and B claiming from the clearing house $2000. However, most closed trades are settled by ringing out, and it will be necessary to explain what rings are and why and how they are made. A ring consists of a chain of buyers and sellers, each of whom has bought and has sold the same amount. Take the following typical case, for illustration : Ring Settlement Adams buys 200 May oats of Bryan at 90. Bryan buys 200 May oats of Call at 89. Call buys 200 May oats of Dole at 85. Dole buys 200 May oats of Ellis at 85. Ellis buys 200 May oats of Franz at 80. Franz buys 200 May oats of Adams at 79. Here is a six-name ring. Rings are formed by clerks of the various houses, designated Settlement Clerks, who con- gregate mornings in a noisy group in the lower hall of the Board of Trade building, and there, by dint of much THE CHICAGO BOARD OF TRADE 81 shouting and running about and inspecting of "long and short " memorandum books of fellow clerks manage to form rings of the trades on their books. The ring is then entered upon the firm's Ring Book. By following out the settlement of this six-name ring, the reader will see that it is the simplest and the cheapest way to make the settle- ment. Each of the six traders in this ring enters in his Ring Book his own ring only, i.e., to whom sold and price, of whom bought and price. A daily settlement price is posted daily by the Board of Trade is a convenient basis for calcu- lating balances due. Six Name Ring Becomes Six Rings Settling Price 85 Adams' ring Owe Collect Sold to Franz 200 May oats at 79 $12,000 Bought of Bryan 200 May oats at 90 10,000 Bryan's ring Sold to Adams 200 May oats at 90 $10,000 Bought of Call 200 May oats at 89 8,000 Call's ring Sold to Bryan 200 May oats at 89 8,000 Bought of Cole 200 May oats at 85 Dole's ring Sold to Call 200 May oats at 85 Bought Ellis 200 May oats at 85 Ellis' ring Sold to Dole 200 May oats at 85 Bought of Franz 200 May oats at 80 10,000 Franz's ring Sold Ellis 200 May oats at 80 10,000 Bought of Adams 200 May oats at 79 12,000 $40,000 $40,000 SPECULATION AND THE CHICAGO BOARD OF TRADE When the clearing sheets have come in from those 1 six firms and the six rings have been checked, they will bo found to balance, and five checks will settle all these trades. In actual practice, a firm will form many rings in one day. These will all be reported on the daily clearing sheet and one check will settle the entire day's balance. Some of these trades have been open many days: some are trades made that day in the pit. Thus we see that in the Clearing House system now in vogue in Chicago, only closed trades are cleared, and only balances due on the day's closed trades are paid through the Clearing House. In other words, the day's clearings give no indication of the actual volume of bushels traded in for the day and has no relation to such volume. Since in practice most future trades are finally settled by offsetting other trades against them (paying the balances due in money), the question of the legality of such forms of trading has often been raised. Legality of Settling by Offsets. Sometimes the charge is made that contracts for future delivery which are settled by offsets instead of actual delivery are mere gambling transac- tions. There are two reasons for saying such dealings are not gambling. The first reason is, any trader can always stand on his. contract and call for and receive the grain, for the trade is an unconditioned contract. The second reason is, the courts of the land, including the United States Su- preme Court, have upheld as legal this form of trading on the Chicago Board of Trade. In what is known as the Christie Case (Board of Trade v. Christie, 198 U. S. 236), decided May 8, 1905, the Supreme Court of the United States used this language: "When the Chicago Board of Trade was incorporated we cannot doubt that it was expected to afford a market for TFfE CHICAGO BOARD OF TRADE 83 future as well as present sales with the necessary incidents of such a market and while the State of Illinois allowed that charter to stand, we cannot believe that the pits, merely as places where future sales are made, are forbidden by the law. But again, contracts made in the pits are contracts between members. We must suppose that from the beginning as now if a member had a contract with another member to buy a certain amount of wheat at a certain time and another to sell the same amount at the same time, it would be deemed unnecessary to exchange warehouse receipts. We must suppose that then as now, a settlement would be made by the payment of differences, after the analogy of a clearing house. This naturally would take place no less that the contracts were made in good faith for actual delivery, since the results of actual delivery would be to leave the parties just where they were before. Set-off has all the effects of delivery. The ring settlement is simply a more complex case of the same kind. "It seems to us an extraordinary and unlikely proposition that the dealings which give its character to the great market for future sales in this country are to be resisted as mere wagers or as ' pretended ' buying or selling, without any in- tention of receiving and paying for the property bought, or of delivering the property sold, within the meaning of the Illinois act. Such a view seems to us hardly consistent with the admitted fact that the quotation of prices from the mar- ket are of the utmost importance to the business world, and not least to the farmers; so important, indeed, that it is argued here and has been held in Illinois that the quotations are clothed with a public use. It seems to us hartfly consist- ent with the obvious purposes of the Board of Trade's char- ter, or indeed, with the words of the statute invoked. The to 1.49 .... 1.48 No. 3wh ........ 1.47 to 1.47^ No. 6wh ........ 1.45 1.43 Milwaukee Kansas City St. Louis No-. 2mx ........ 1.45^ 1.48 1.48 No. 3mx ........ 1.45^ No. lyel ........ 1.46^ No. 2 yel ........ 1.46^ 149 No. 3 yel ........ 1.46^ .... 1.48 Ho. 2wh.. 1.48 1.49 THE CHICAGO BOARD OF TRADE AND (SPECULATION 139 Minneapolis Buffalo Toledo No. 3yel 1.44 to 1.45 1.51 No. 4yel 1.42 to 1.43 ..'.. No. 3mx 1.43 to 1.44 OATS Chicago Kansas City St. Louis No. 2 wh 69% to 71 . , 69 - 69^ No. 3wh 66%to70 67 68 683^ No. 4wh 65 to 68 67 67 Milwaukee Omafe** Minneapolis No. 2 wh 68% to 69% 64 5 / 8 to 67Vs No. 3 wh 66% to 69 3 / 8 66 to 66^ 64 J /8 to 66 5 /8 No. 4 wh 65% to 68% 65 ^ to 66 61 5 / 8 to 64 5 /s Buffalo Toledo Peoria No. 1 wh 75 No. 2wh 74^ 72 at 74^ No. 3wh 73^ 67^ RYE, BARLEY AND FLAX Rye Barley Flax Chicago 1.44 1.15 to 1.32 Milwaukee 1 .43 1 .44 1 .23 to 1 .39 Minneapolis 1.39|^ 95 to 1.26 4.81 to 4.87 Duluth 1.42^ 98 to 1.25 4.88 NEWS OF THE CROPS Plowing for winter wheat is 15 per cent less than normal for this season, as shown by reports to the Modern Miller, and is 35 per cent less than at this time last year. The delay was caused by drought arid hard ground. Plowing for spring wheat has been comparatively small so far, although farmers have put in less time thrashing and moving wheat than ever before at this season. Wheat thrashing in the southwest is delayed by scarcity of cars and thrashing crews. Much wheat is being piled on the ground. 140 SPECULATION AND THE CHICAGO BOARD OF TRADE It is expected that there will be a falling off in the wheat movement, as farmers say they intend to hold wheat for higher prices. Corn is mainly out of the way of frost. Practically all of the corn is out of danger from frost, according to the American Steel and Wire Company's weekly report. Much of it is in shock, and silo filling is progressing rapidly. Owing to dry and hard soil fall plowing is much delayed and the wheat acreage will be greatly lessened. CHICAGO GRAIN RECEIPTS Inspection of grain by cars for Friday follows: Nos. 1 and 2 No. 3 No. 4 No grade Total Hard ....51 47 43 14 155 Red 79 83 20 9 191 Mixed 11 7 8 2 28 Spring 12 10 9 3 34 Totals 153 147 80 28 408 Corn 130 8 19 157 Oats 21 61 3 .. 85 Rye 6 33 .. 12 Barley 9 7 5 21 GRAIN STATISTICS Argentine exports of grain the last week aggregated nearly 8,000,000 bu. Details follow: Wheat Corn Oats This week 3,421,000 3,825,000 467,000 Last week 4,706,000 2,628,000 418,000 Last year 1,233,000 647,000 636,000 Since Jan. 1 74,993,000 50,197,000 10,408,000 Year ago 102,130,000 12,557,000 21,350,000 Visible supply This week 1,850,000 4,800,000 Last week 1,850,000 4,400,000 Last year 3,300,000 3,960,000 THE CHICAGO BOARD OF TRADE AND SPECULATION 141 North American exports of wheat and flour are holding up well despite the slow unloading of boats at European ports. Details, as compiled by Bradstreet's follow: Wheat and flour, bu. Corn, bu. This week 8,146,000 42,000 Last week 8,010,000 50,000 Last year 4,438,000 72,000 Since July 1 79,961,000 754,000 Year ago 62,511,000 7,213,000 PRIMARY RECEIPTS Primary receipts of grain yesterday, with the last three ciphers omitted, follow: RECEIPTS SHIPMENTS WESTERN POINTS Wheat Corn Oats Wheat Corn Oats Chicago 610 255 317 506 183 193 Milwaukee 119 46 63 34 25 Minneapolis 535 10 69 224 7 103 Duluth 438 St. Louis 366 38 98 244 20 62 Toledo 53 3 8 14 1 7 Detroit 13 14 9 6 Kansas City 393 13 15 211 6 25 Peoria 25 59 27 28 39 59 Omaha 132 10 6 92 20 22 Indianapolis 23 44 45 14 19 7 Totals 2,697 492 657 1,338 299 509 Week ago 2,502 602 682 886 282 569 Year ago 2,742 1,061 1,291 1,379 565 525 SEABOARD Totals 787 30 297 747 ... 101 Year ago 537 10 66 296 ... 170 142 SPECULATION AND THE CHICAGO BOARD OF TRADE These detailed and extended quotations represent the amount and kind of market information available to every trader every day on the Chicago Board of Trade, and avail- able, furthermore, to the general public. This illustrates how well the Board performs one of its original functions, namely, "to acquire and to disseminate valuable commer- cial and economic information." This quotation also throws some light upon the fallacy of " phantom wheat" depressing prices or otherwise affecting the market. Judging the market by what it does and by the way it acts, the conclusion is warranted that the bulls and bears put on the brake: if the bear feels the price is too high, he sells short putting the brake on a further rise; if the bull thinks prices are low, he buys, putting the brake on a further fall. Thus the choppy market, between bulls and bears, full of small fluctuations but free from wide swings not justified by crop conditions.* * Contrast the Chicago market with abundant information every hour concerning world markets, with Argentina's market with dearth of market information, and a proposed fortnightly service. The fol- lowing quotation from our official consular reports makes clear the situation: "Investigation of Grain Markets in Argentine. Proposed Corn Commission" "The condition of the corn market is regarded as serious. The stock on hand is not large, and the quality is good, but the price is low. This depreciation is attributed not only to high freights and limited demands from consuming countries, but to the fact that individual pro- ducers are not well informed regarding world markets, and are unable to withstand the concerted action of a few buyers. It is recommended that the Government establish, through the Minister of Agriculture, a fortnightly service of official information on world markets. It is also recommended that the President appoint a special commission to ac- cept consignments of corn from farmers and merchants for sale and THE CHICAGO BOARD OF TRADE AND SPECULATION 143 (e) Corners. An artificial corner of the market occurs when the buyer has intentionally bought more grain than the short seller can deliver. A natural corner of the market occurred during the World War (in April and May, 1917) when the government grain buyers, buying contracts in May wheat, had purchased more contract grade wheat than was available for delivery. The situation was temporarily acute in Winnipeg and Chicago, where the future contracts were mostly placed. The allied governments in the end accepted much wheat below contract grade, at a discount. Such a corner is wholly free from manipulation or wrong intention. It was due to the emergencies of war. The artificial corner the deliberately planned corner has already been de- scribed in this report. Some experts in Grain Exchange problems, such as John Hill, Jr., consider only those corners artificial in which the operator takes steps to impede and check and make difficult the delivery. For the "natural corner" he blames only the short seller. The popular fallacy about corners is that they are the fruit of the grain exchanges; that before we had grain exchanges we had no corners; and that should grain ex- changes be abolished corners would cease. We may classify these beliefs as " superstitions, " since a superstition is de- fined as a belief not founded on facts. It is not necessary to ransack many pages of ancient his- tory to find that corners were common two or three thousand shipment. This commission would obtain credit from national banking institutions, with the corn as security, and it would advance 4 pesos ($1.70) per 100 kilos as a maximum on the corn received for sale. Upon receipt of proceeds from the sale of the corn, all accounts would be liquidated. This measure is recommended for immediate adoption." Daily Commerce Reports, September 7, 1916, p. 903. 1 14 SPECULATION AND THE CHICAGO BOARD OF TRADE years ago. Just as an illustration of this, take the writings of one of the world's greatest thinkers of all time Aristotle. Writing in Greek about 300 years before Christ, he pictures two corners which seem almost modern in their setting, even to the use of "margins."* "He (Thales) knew by his skill in the stars while it was yet winter that there would be a great harvest of olives the coming year; so having a little capital, he gave earnest money for the use of all the olive presses in Chios and Miletus, which he hired at a low price because no one bid against him. When the harvest time came, and many wanted them all at once and of a sudden, he let them out at any rate which he pleased, and made a quantity of money." "There was a man of Sicily, who, having money deposited with him, bought up all the iron from the iron mines: after- wards, when the merchants from their various markets came to buy, he was the only seller, and without much in- creasing the price he gained 200 per cent. " It seems that human nature has not changed much since the days of Aristotle. At any rate, the economic history of different peoples continues to record corners in all sorts of commodities, and will continue to do so, until proper ma- chinery is created to control corners, governmental or other- wise. One school of thinkers always says about all prob- lems: "Let the government do it. " The writer claims some familiarity with the government, and his contention is, that so far as corners are concerned, the grain exchanges them- selves suffer most and profit least by corners, and hence may be depended on to work out the machinery necessary to end this evil. * Aristotle's Politics (Jowett's translation), p. 48. THE CHICAGO BOARD OF TRADE AND SPECULATION 145 But to submit further evidence of corners, before the days of the exchanges. Coming down to our own country, we may give a few quotations from the outstanding economic authority of the period following the War of 1812, namely, Nile's Weekly Register. These quotations are worthy of very careful study, and the sophisticated reader will read much between the lines. Very Late from England Everybody was on tip-toe in Baltimore on Thursday last. Every one was asking "what's the news?" Expresses had arrived in the preceding night and others were despatched with great haste and mystery. The speculators wefre abroad; flour immediately rose $3 per barrel, wheat was up to $3 per bushel; corn at $2, and oats at $1.25. No one seemed to know why this hurly burly was raised there was said to have been an arrival at New York in a very short passage it was said that there was a revolution in England it was said. . . . What was not said? Curiosity made up stories to gratify itself, and anything, probable or improbable, was said. The only fact ascertained was, that the knowing ones were purchasing up all the flour, etc. Then we heard that the Harlequin, formerly an American priva- teer, had arrived at New York from Liverpool that, on the Satur- day previous to her sailing, she had not a mast standing, and was every way unfitted for sea, but that she sailed on the following Monday, all things being prepared in the interim of two days, and was towed out of the harbor by a steam boat. She was ballasted with salt, and brought no letters or papers that had been made public. She was first reported to have had a passage of 28 days this was denied, and her passage was given at 48 days but the fact was, that she left Liverpool on the 14th of October. Thus the thing was twisted and turned in New York, exciting the same desires and uncertainties that it did in Baltimore. 146 SPECULATION AND THE CHICAGO BOARD OF TRADE Just after this, it was said to be ascertained that there would be a scarcity in England, and that the import of flour and grain would be immediately permitted. But could this fact be so suddenly ascer- tained? would flour bear the cost here of $14 per barrel? Were not the crops in some parts of Europe, in Poland and Sicily, espe- cially (its great granaries), abundant? etc. All were lost in con- jecture; but it was generally agreed that some great event had taken place! Thus the matter stood on Thursday evening. The mail of Friday morning settled the business down into this that it was a mere commercial speculation a manoeuvre to buy or to sell some certain sorts of commodities; and letters from England of the 14th of October were published, saying it was concluded that the crop would be short by a third that American wheat would sell for 16s per 70 Ibs., and flour at 65s per barrel. If the crops be really one-third of their usual quantity short, greatly, indeed, must the distresses of the people be increased! Ireland too, which last year had an abundance, in consequence of the coldest and wettest sum- mer ever known (there were only 5 or 6 days favorable to the harvest) will be exceedingly straightened. The bubble seems to have burst, and speculation is already at an end here. It is not believed that anything important has transpired in Europe. Flour is falling, and probably will be at its former price in a day or two. The moral honesty of this mercantile hoax is very questionable. Niks' Weekly Register, Vol. XI, p. 189. Nov. 16, 1816. Spain and Portugal are quietly proceeding to the organization of their newly acquired rights and liberties, and France is still. Several letters from England give doleful accounts of the state of the wheat crop in consequence of a long season of wet and damp weather, it had very generally grown in the ear. This caused some rise in the price of flour at Baltimore as high as six dollars per barrel was asked on Tuesday last on Thursday, in consequence of later intelligence which came on from New York by express, eight dollars were asked, which price it still nominally maintains; but we have not THE CHICAGO BOARD OF TBADE AND SPECULATION 147 heard of any sales, and there is but a small quantity in market. Indeed, we apprehend that, from the low price of wheat last year, which checked its cultivation in the present, as well as from the short crops at the late harvest, we have not a great deal to spare, unless there is much of it far in the interior or in the western states. We are not satisfied, however, that the whole matter is anything more than the acts of speculators. We have been oftentimes amused with such reports from England; but one of the passengers in the ship that brought the news and her owners, have made heavy purchases of flour at New York and Philadelphia; at the latter, sales were made at seven dollars, and orders are said to have been received to purchase large quantities at eight. The passenger is stated to have left the ship, so that he was in New York incognito a whole day before she actually arrived, during which he drained the market. Niks' Weekly Register, Vol. XXI, Oct. 27, 1821, p. 129. Great Britain. It appears certain that the crop of wheat has been exceedingly injured by successive rains, and that a great advance had taken place in the price of flour Thirty-five shillings (nearly $8), per barrel had been offered at Liverpool for a cargo of Philadel- phia flour and refused 38 to 40s. asked. The harvest on the continent is also reported to be very short and much damaged by the rains. Niks' Weekly Register, Vol. XXI, Oct. 27, 1821, p. 144. One Week Later FLOUR. We are much inclined to believe that the late rise in the price of this article had little more than the spirit of speculation for its foundation. The real sales made in Baltimore were of a small amount, and both buyers and sellers are now at a stand the price of the commodity is nearly nominal, except what is sold for domestic consumption, which is various and uncertain. Later advices from Europe are impatiently waited for. There are verbal reports by an arrival at New York, a day or two later from Liverpool, that the crops were turning out better than was expected, and that the market had not advanced. Niks' Weekly Register, Vol. XXI, Nov. 3, 1821, p. 145. 148 SPECULATION AND THE CHICAGO BOARD OF TRADE One Week Later There is an arrival at New York that gives Liverpool dates of the 22nd Sept. No particulars of importance have yet reached us, except unqualified assurances that sales of wheat and flour were dull, and that the ports cannot open. They had fallen back to their old prices. Some sales were made at Baltimore during the present week at seven dollars the real price here this day does not exceed six and a half and probably is less. Niles' Weekly Register, Vol. XXI, Nov. 10, 1821, p. 161. FLOUR AND GRAIN. There has been much fluctuation in the price of these articles durmsTthe present week. The " best Howard street flour" had fallen Imck to $7.75, and was dull but on the arrival of accounts from England to the llth October, advanced to $8.75 and $9.25, by the quantity. Wheat, on Monday last, was sold at from 1.85 to 2 dollars old corn at 61 cents, new 50 to 55. The British accounts are not to be relied on. Without enter- taining any disposition to deceive, ardent speculators (as well in commerce as in politics), deceive themselves and mislead others. Whether the crop in England and on the continent, is really much short, we think cannot yet be fully ascertained. Old wheat was selling at Liverpool from 11 to 11s. 6d. per 70 Ibs. equal to about 9s. 6d. per American bushel of 60 Ibs., and American flour at 50s. per bbl. duty paid, which latter, at the then fixed average price of grain, was 14 shillings say 36 shillings, equal to 8 dollars per barrel for the flour. It is a subject about which we do not often venture our advice, but we think that if the farmers can obtain two dollars a bushel for their w r heat, they ought to sell every grain that they in- tend to spare. There has been much bustle in the flour market in Baltimore the streets seem as if filled with wagons and drays loaded with it and, no doubt, the same parcels have rapidly passed through many different hands. A large quantity, however, has been sent away chieflv coastwise. THE CHICAGO BOARD OF TRADE AND SPECULATION 140 The following extract of a letter from Liverpool, dated October 7, is important just now "There has been recently considerable speculation in the grain market but, whether the opinions now getting into operation are founded correctly, will require some time to decide in the mean- time, I hope the fanners of the middle states will be getting clear of their superfluous stock at a good price. "The crop of potatoes in Ireland has been uncommonly abundant, more so than for some years, which will leave the whole of the wheat crop applicable to this country and the supply from that quarter is immense What designing speculators can accomplish on public opinion, has been tested in 1825, and has shown the little dependence that can be placed on estimates of interested parties and if the fears now prevailing of deficiency be just, the government has exhibited a gross ignorance of, and inattention to, the true state of the country; in not earlier providing for so important an ex- igency." The London Free Press says "Bread is daily advancing and the present prospect is that it will advance to a price far beyond the reach of the mass of the community" that "the French are buying up corn everywhere on the continent" that of "the state of the manufacturers we have most disastrous tidings" that "money is abundant in the hands of a few," but becoming excessively scarce "with the middling classes" that Ireland is in an alarming condi- tion, " the violence of the Orangemen exceeding that of the Catholic leaders;" but these things being mixed with complaints against the government, induces us to suppose that they may be exaggerated. It is certain, however, that there has been a considerable rise in the price of grain that Ireland is greatly disturbed, and that many are asking themselves the question, What's next? Since the preceding was in type, we have received, by way of New York, extracts from English papers of the 18th October. The importations of flour and grain had been heavy the price had considerably declined, and was yet falling, and large quantities were shipping for the north of Spain, etc. And so, we fear, endeth this nine 150 SPECULATION AND THE CHICAGO BOARD OF TRADE hundred and ninety-ninth British bubble, extending itself into the very interior of our country and injuring many innocent persons. Further advices, however, should be waited for to determine the real state of things. As speculation puffed-up the price, so speculation may have effect to reduce it, too suddenly or to too great an extent. Niks' Weekly Register, Vol. XXXV, Nov. 22, 1828, p. 193. These quotations show how easy it was for speculators to manipulate the market, and exploit the lack of market in- formation generally prevailing. The theory of organized speculation is that such market manipulation is made increasingly more difficult, with the better dissemination of market news, and the better enforce- ment of rules against manipulations and corners. The Omaha Grain Exchange was opened February 1, 1904. It is a significant fact that certain strong interests in that market, fighting farmers' elevators and other so-called "irregular" country houses, were opposed to opening an organized exchange in Omaha. For an organized exchange meant certain definite rules, adopted by the majority. The organized exchange meant protection to the country shipper. The tobacco crop represents a staple agricultural commod- ity, in which there is no organized exchange, no "future trading" on any organized exchange. The question may be asked, is this market harder to corner, harder to manipulate, than the wheat market where the speculators stand face to face in the pit and shout their bids and offers at one another? That all is not well with the tobacco market is a matter of common observation. The situation is made somewhere concrete for us in the following testimony of two planters, before a Committee of the United States Senate. F. G. Ewing. "It has been the custom for the past four years for one buyer to come to a barn and make one bid on THE CHICAGO BOARD OF TRADE AND SPECULATION 151 that tobacco, and generally speaking, he does not come any more. He comes and says, 'I will give you 4 1/2 cents/ or M will give you three and one/ or c I will give you something else; ' and it is that or nothing. Most frequently he will not have another opportunity of selling." Charles H. Fort. The buyer, "came to my house and made me an offer for my tobacco, and I knew that I had to sell, for there was no other way in the world to sell it, no other recourse, and I sold it to him. He was on his way to one of my neighbors. We had telephones in the house and I telephoned to my neighbor before this buyer got to his house, and told him that he had better take the first offer; that unless he did, he would knock him down. The neighbor could not take the offer that day, because his share hands and tenants were not convenient, and he could not take the liberty of selling their tobacco without their consent and authority. So the buyer said to him, 'You had better take this offer; when I come to-morrow I will give you less.' In two days from that time this neighbor went to accept the former proposition and he knocked him down a hundred dollars on a $600 crop; and, gentlemen, he kept going lower and lower until he got $250 below the first offer."* To come back to the original question, What is the rela- tion of the Chicago Board of Trade to corners? The Board furnishes machinery, the abuse of which promotes corners. The history of the Board, however, shows that the Board has the machinery for controlling corners, so far as the Chicago market is concerned; and that in recent years the Board has exercised this power. In short, the Board lessens corners by its machinery of control. * Hearings before subcommittee of the Finance Committee, U. S. Senate. 59 Cong. 2 Sess., Senate Doc. No. 372, pp. 54, 117. 152 SPECULATION AND THE CHICAGO BOARD OF TRADE (f) Manipulation. The subject of manipulation has al- ready received considerable attention in connection with the discussion of corners. Webster defines manipulation in these words: " Manipulate to work up and down in price by transactions other than those made bona fide or in the ordinary course of business, as by cash sales, cornering the market, spreading fictitious reports, etc., to rig. " To "rig the market" is defined as to "manipulate the market. " The underlying idea of manipulation is the deliberate and conscious influencing of price through dissimulation. A vigorous campaign of advertising may bear or bull a stock or a grain. Is this advertising manipulation? Not so long as it is free from deception and fraud. There must be some deceit. Influencing the grain market by spreading false crop reports (easily done fifty years ago) is manipulation, and is of course forbidden by Board of Trade rules. In- fluencing the grain market by spreading true reports of crop damage is not manipulation. The following instance of "influencing price" is submitted to the reader's judgment, and left for him to decide whether or not it constitutes manipulation. The following telegram was sent by the Illinois Agricul- tural Association on September 15, 1919, to every one of the county agricultural agents in Illinois, to be passed on by them to the 50,000 farmers constituting the membership in the State Association; the telegram was given a prominent place on the front page of Chicago's leading morning paper, so that when the Board of Trade opened at 9 :30 every trader was familiar with its contents. It had likewise been wired to New York, Minneapolis, Kansas City, and other market centers, so that the whole trade were subject to its influence. THE CHICAGO BOAKD OF TKADE AND SPECULATION 153 (Copy) Chicago, Illinois, Sept. 15, 1919. Wm. G. Eckhardt, De Kalb, Illinois. Manipulation grain market by Board of Trade and agitation by government against high cost of living temporarily unsettling mar- ket. Suggest you notify entire membership your county not to be stampeded but hold grain awaiting sane market. In so far as possible this should apply to live stock. (Signed) H. J. Sconce, President, D. 0. Thompson, Secretary, Illinois Agricultural Ass'n. The occasion of this message was the decline in the price of corn, the decline extending over a period of more than a month. This decline in corn price came at the time of simi- lar declines in the price of hogs and cattle but not in clothing and machinery. Hence the farmers felt that they were getting unfair treatment from somebody. This decline oc- curred simultaneously with the inauguration of a tremendous national and state campaign against the "High Cost of Living/' and of the beginnings of a government suit against the "Big Five" packers, and of widespread labor disorders and strikes. The effect of these telegrams was to put up the price of corn futures sharply for the first hour or two of trading the advance being 8 1/2 cents on September delivery, and about 3 1/2 cents for December and May deliveries. By noon, the flood of buying orders from New York, other cities, and the country trade had spent itself, and the price settled back to about the closing level of the day before. The bulk of corn futures (at this date) fell in the December and May deliveries. 154 SPECULATION AND THE CHICAGO BOAKD OF TRADS The interpretation put by press reporters on the market significance of this telegram was reflected in their daily market reports. Since they are disinterested parties, their views on this highly important matter are worth quoting: (From the Chicago Daily News, Sept. 17, 1919) GRAIN VALUES CLOSE NEAR THE LOW POINT Militant Attitude of Labor Leaders in Regard to Steel Strike a Factor Corn market showed further strength, with the September leading the upturn. The campaign of the Illinois Agricultural association among farmers advising them to hold their grain as well as the buying by cash interests who were removing hedges on cash corn sold to go east overnight were responsible for the big upward swing in the current month. Reports that the gulf storm had caused loss to the Texas corn crop was a factor in the late months and this together with the strength in the September caused shorts to cover and some investment buying, while selling pressure was light, the upturn in the current month holding bearish senti- ment in check and restraining bears from replacing short lines recently covered. Commission houses who were conspicuous buy- ers around the low point were active sellers on the bulge. New England points accepted all offers of cash corn made to them over- night and sales for shipment reported early totaled 165,000 bu. Country offerings of com to arrive were just fair and to-day's re- ceipts are estimated at 185 cars. Cash corn premiums were lower; No. 1 yellow sold early at l^c over September but later Ic pre- mium was the best bid obtainable. Weather is generally favorable for the crop, which is practically made, according to the weekly weather and crop report issued by the weather bureau. THE CHICAGO BOARD OF TRADE AND SPECULATION 155 (From the Chicago Tribune, September 18, 1919) STEEL STRIKE THREAT BRINGS GRAIN BREAK Finish is Well Toward the Low Point; Oat Bulls are Hit By CHARLES D. MICHAELS Between the attitude of the farmers, who have been advised to hold their grains, and prospects of serious labor troubles in the steel trade which will indirectly affect other lines of business, the grain traders were kept busy. An early bulge which carried prices up sharply was due to the former, and the break at the close to the latter influence. The finish was well toward the low point, with September corn 4^c higher and distant futures 1 at ! 7 /sC lower, December leading, while oats lost ! 5 /s at l^c, and rye, 1 at 13^c, despite the claims of 500,000 bu. sold for export and removal of hedges here. Outside markets were irregular. September corn in Kansas City closed 5 3 / 8 c higher, while other months were ! 3 / 8 to l%c lower. St. Louis lost 1% to ! 7 / 8 c. Oats in the southwest were 5 /s to ! 7 /sC lower, and Minneapolis 1^ to l^c lower, while Winnipeg gained Ic on October and lost ^ to 5 / 8 c on the deferred futures. Receipts 80 cars. Corn Bulges, Then Breaks Heavy and general covering by shorts on the advice given to fanners to hold their grains for higher prices swept values up sharply during the early trading in corn, September jumping 8>^c, and the deferred deliveries 3 5 / 8 to 3^c over the previous day's close, Septem- ber touching $1.49, or 18^c above the low on Monday. A break in foreign exchange to a new low level was ignored as local, and commission house shorts scrambled for the free offerings from many of the strong operators and other commission houses who bought on the recent break. Trade was enormous at times, but setbacks were of minor importance until around noon, when 156 SPECULATION AND THE CHICAGO BOARD OF TRADE the selling against offers, as well as the general profit taking, checked the demand. Fears of damage to the Texas crop by the recent gulf storm and of an excellent eastern demand for cash grain were factors in inducing short covering. The market plainly showed the effect of the profit taking when some of the early buyers started to sell. The pit element were caught long and all tried to unload at once, a drop of 5 l /s to 5}^c following, with support limited all the way down, the close being at the bottom, with December $1.21^ and May $1.19%. Cash houses sold September on the bulge and it closed to $1.443/2, show- ing more strength than the distant deliveries. Sample values were 7 to 9c higher early, but lost 4 to 5c before the close. Shipping sales aggregated 310,000 bu., including a fair quantity of new. Receipts 161 cars. Country offerings were small. Continuing this discussion of the farmers' telegram in the Chicago Tribune for September 19, the market reporter wrote as follows: "The attitude of the farmers in holding back their corn and light offerings of cash grains on the whole are influences which, coming after the big break, cause careful operators to go slower on the selling side. Liquidation has been drastic and an increase in the buying power, which some commis- sion houses claimed to have yesterday from the west, in- duced them to be cautious in advising short sales. Others thought that on any further advance short sales should be made. " "'If the position of the farmer is right in holding his corn he will win out, but if not he will have to take his loss,' said a corn specialist. A country elevator man here yester- day said the holders in many instances will either get more for their corn in the near future, or sell for much less later. THE CHICAGO BOARD OF TRADE AND SPECULATION 157 He offered this as an explanation of their attitude." (In Appendix 10 are given cash corn prices for this whole period.) When it is remembered how large the membership of the Board of Trade is and how many tens of thousands of cus- tomers trade through these members, it is obvious how diffi- cult collusion among a large share of these members is for purposes of manipulating the market. It is also apparent that so many widely scattered traders some near and some far all watching the markets, are difficult to stampede with market news, reports, rumors, etc. And at the large termi- nal markets, where continuous market quotations are re- ceived, there are always a number of powerful bulls and bears, ready to put on the brake should any sudden bulge or break impend in the Chicago pit. One proper function of an organized market is to protect that market against manipulations, as well as against cor- ners, as a matter of self-protection. The unorganized market is easier to manipulate than the organized. Organization, high standards of membership, strict rules of commercial conduct, all tend to lessen manipulation. (g) Increasing Use of Future Trading. The making of forward contracts is an old business custom in many lines. Short selling, so-called, has come into common use in more recent years. In the flour and grain trade in the earlier days of our country, merchants often made contracts for future delivery involving a short sale. The following case illustrates this usage in 1836: Flour forward contracts short sales. The New York Express of Monday says, "It will be seen by the report of the market, that flour has advanced considerably up to 158 SPECULATION AND THE CHICAGO BOARD OF TRADE the close of Friday's market. What western there was in market Saturday has been sold at $8.373^ to 8.50. On the 20th western flour sold at $7.37^ to-day, the same brand at $8.50. We learn that a house which contracted to deliver about this time 2,000 bbls. at $7.373/2 is now buying at $8.50 to $8.62 to complete the con- tract. No new wheat had been received at the western mills at last advices." Niks' Register, Vol. LI, p. 16. Sept. 3, 1836. One of the greatest users of the future contract is the federal government itself. In buying supplies for the Quar- termaster Department of the army, in dealing with labor, and in many other ways, the matter is covered by a definite contract, the contract for one year being a common form. Apples. In the fruit industry, particularly apple grow- ing, buyers appear in the orchards early in the summer and sign contracts with the growers for the delivery of the crop. Thus in the spring of 1919, a local firm of Wenatchee (Wash- ington) apple dealers made contracts with orchard owners to take the crop of Jonathans and King Davids at $2 a box. The New York Packer (May 10, 1919) reports the following situation in Oregon: Portland, Oregon, May 9. The recent taking of an option on the coming crop of one big apple grower at Hood River even before the trees were fully blossomed, caused considerable interest in the trade. The option was taken as told in the Packer at $1.50 for C grade, $1.75 for fancy and $2.00 for extra fancy, but the first report indicated the payment of a liberal sum down. This was later found to be merely $1.00. Now the parties who first took the option claim they have resold it to a Spokane firm acting for London parties, a profit of $1,000 being taken before the trees are* through blossoming. Later reports indicate that the same English buyers were offering a similar price for additional contracts on Spitzenbergs and Yellow Newtowns and had written several of these. At the THE CHICAGO BOARD OF TRADE AND SPECULATION 159 closing of the week business in contracts was impossible because growers were refusing to tie up their expected yields. Mr. Robert C. Paulus, Manager and Sales Manager of the Salem Fruit Union, Salem, Oregon, addressed the Four- teenth Annual Meeting of the Washington State Horti- cultural Association, January, 1918, and following his ad- dress this discussion took place, on the subject of forward contracts: Mr. Dean. "Is it the plan of the company (fruit cannery) to contract for a period of years from the farmers?" Mr. Paulus. "They won't go into a community unless they can get five, six, eight or ten year contracts. Any factory that goes into a community on the basis of one year's run either figures on making a big stake of that one year's run, or else within a year or two they will go broke, because conditions will arise which some year will cause them to go without fruit if they haven't it con- tracted for in advance." The following quotation is from the Grain Grower's Guide of Winnipeg, for October 1, 1919. This paper is the official organ of the Manitoba Grain Growers' Associa- tion, the Saskatchewan Grain Growers' Association, and the United Farmers of Alberta. The quotation is as follows: Apples. Three hundred thousand dollars worth of apples. No, that is not the value of all apples used in Western Canada during a year. It is simply the value of the apples handled by United Grain Growers last year for distribution among western farmers. It shows the western farmer is fond of apples. It shows too, that he has discovered a good system of getting them for himself through his company. 160 SPECULATION AND THE CHICAGO BOARD OF TRADE This is how it works. During the year the company watches the fruit market closely, and the progress of the crops in the three districts that supply Western Canada, which are Ontario, Wash- ington, and British Columbia. During the growing season these districts are visited and dis- cussions held on the ground with the dealers in apples. It may take several visits before the company determines where the best apples are to be had at the lowest price. Finally a contract is made for the estimated number of cars required, shipment to begin as soon as the apples are picked and packed. Sometimes part of a seasons' requirements are purchased in one district and part in another. California Walnuts. The California Walnut Growers' Association, in its report of April 30, 1918, describes in the following terms its manner of making forward contracts and of correlating its cost-of-production price to supply-and-de- mand price. The selling end of the California Walnut Growers' Association is at present operated as follows: Usually in January the Board of Directors authorizes practically one-half of the Association's estimated output to be sold for delivery during the coming fall on contracts which are non-cancellable. . . . Usually during the month of June the directors of the Association, after having a thorough and careful estimate of the growing crop made, again authorize the sale for fall delivery of whatever surplus of walnuts it is estimated the crop will produce after filling the firm orders taken in January. These offerings are again allotted to the various markets of the country, depending on population, etc., in a way that will insure the widest and most thorough distribution, with the results that by the time the crop is ready for shipment the Association's entire estimated holdings of all grades have been sold for ship- ment. . . . The prices of the various grades of walnuts produced by the THE CHICAGO BOARD OF TRADE AND SPECULATION 161 California growers must necessarily ho based upon the laws of supply and demand. If prices are set so high as to prevent normal consumption a carryover must necessarily result, which always tends to demoralize the market and makes necessary a material price reduction. In order to move an entire crop valued at from five to seven million dollars within a period of two months, and to move it as fast as the goods are packed and ready for shipment and ut an absolutely uniform price, it is necessary that that price be a trifle under what is absolutely justified by the laws of supply and demand, for if the wholesale purchaser cannot figure on a slight advance in price as the season wears on he will purchase only his minimum requirements and will not stock up with several months' supply, but will purchase lightly at first, forcing the growers to store such goods as are not necessary for immediate consumption, and the wholesaler will buy later and usually at a lower figure. The method now pursued in determining the proper prices is through advices received from salaried agents that the Association main- tains in France and Italy, the principal countries producing walnuts which come into competition with the California line. Advices are constantly received through these agents as to the extent of the foreign crops, the quality, prices being paid, whether the harvest is early or late, etc. The Association's sales department then gathers all possible information regarding the consumer demand in America. Accurate estimates of both domestic and foreign walnuts carried over in this country are secured, the purchasing power of the nation considered, then a careful and accurate estimate of the quantity and quality of the California crop is made, and all of these matters laid before the Board of Directors about the time the shipping campaign opens. The directors first examine and crack samples of walnuts gathered from practically all districts, and determine the average percentage of sound merchantable nuts that can be guaranteed to the purchaser of Diamond Brand goods. They then consider all factors that enter into the value of the product and name prices at which the Association's various grades and brands of walnuts will be offered the trade. And for reasons above stated, these prices 102 SPECULATIOX AND THE CHICAGO BOARD OF TRADE must l)e slightly below the figure justified by the actual supply and demand as long as the policy of selling at one uniform price through- out the entire season is deemed advisable. California Prunes and Apricots. The California Prune and Apricot Growers, Incorporated, have a practice some- what similar to that of the Walnut Growers. An "Offering Price" is fixed early in the summer, and on this basis for- ward contracts entered into for future deliveries. The Industries, Steel, Furniture, etc. The public is already familiar with the practice of many of the large industrial corporations keeping their plants running "on orders. " The steel industry is one example of this, the bulk of their work being the execution of orders in the nature of forward contracts. The practice of the furniture trade in this matter is very strikingly set forth by an advertisement published in the New York Tribune of July 23, 1919, by Wanamaker's, relative to the annual August furniture sale of that store: Copy of Advertisement Grand Rapids, as most people know, is the furniture center of the United States. Twice a year 350 of the leading furniture manufacturers of the country, in addition to about 40 local makers, exhibit their samples there and take orders for six months ahead. This year the Summer exposition-and-sale was scheduled to begin June 23 and continue for one month. It closed practically within a week. As a matter of fact most of the factories were oversold the first day. More than 2,200 retail buyers attended the sale. The highest number in former years was about 1,700. ... On all exhibits this card was prom- inently displayed. THE CHICAGO BOARD OF TRADE AND SPECULATION 163 " All orders accepted at current prices not shipped November 1 will he shipped at the prices prevailing at time of shipment. Orders unfilled November 1 are subject to cancellation at buyer's option." Pure Food Products. In the manufacture of preserved foods, canned food products, and the various forms of pickles, jams, jellies, etc., it is customary for the manufac- turer to make future contracts to safeguard the source of his supply. A conspicuous example of this is the H. J. Heinz Company of Pittsburgh, with its "57 varieties" of pure food products. It is the practice of this company to contract with growers for certain products in advance, such as cu- cumber pickles, cabbage, tomatoes and cauliflower. The Company's fifty years' experience has demonstrated the necessity of arranging in advance for a definite source of supply to meet its business requirements. Butter and Eggs. The Chicago Mercantile Exchange adopted a new set of rules during the year 1919, and on December 1 trading in futures was introduced here in the butter and egg trade. Beans. The bean business of Manchuria and Corea has reached a magnitude comparable with the grain trade in America. It is now a custom for the Japanese buyers the principal buyers there to make forward contracts with interior dealers. American importers in turn make forward contracts with exporters in the Orient. In the Bean Bag magazine for December, 1919, occurs a full page advertise- ment of one such American dealer in New York City, stating, "We are now booking business to arrive." Large Bakeries. Companies which manufacture baking products generally contract well in advance for their supply of flour. The writer recently made inquiry of several of the 164 SPECULATION AND THE CHICAGO BOARD OF TRADE largest baking firms of the country concerning their custom in this matter. Some typical replies are quoted. Statements by Large Bakers Maine. "We have no set practice for purchasing our requirements, but as a rule we would usually purchase in the latter part of August or the first part of September enough flour to last us well into the spring, depending entirely upon conditions. If we made such a purchase of flour to last us say from the first part of September until the first part of April it would be bought on the condition of delivery as wanted. We calculate usually to have deliveries made so that we would have at least thirty days' supply of flour on hand. We have also purchased flour that would last us even longer than the first part of April but that was unusual, as we considered by the first of April the Government crop re- ports for the coming year would usually have more or less effect on the price of flour. " Pennsylvania. "We use approximately 2,000 barrels of flour monthly, and divide this among two or three mills in quantity to carry us over several months, and by this method we believe we get a slightly better price on our flour. Our observation is that this is the plan of buying by the bakers." Alabama. " I understand that it is the practice with some of the larger bakers throughout the country to hedge on the wheat market, personally I have never done this, but have contracted for flour at a stated price, covering a long period, sometimes as long as one year, this arrangement has generally proven satisfactory. "During the last four or five years, in fact since the be- THE CHICAGO BOARD OF TRADE AXD SPECULATION 165 ginning of the War, millers have sold for not. over 60 day shipments. Of course during a great part of that time the Food Administration did not permit them to do so, nor did it permit the baker to carry more than a 30 days' supply on hand. " A long time contract, if entered into between parties who show the proper spirit in fulfilling such a contract is gener- ally a very good arrangement, in that it permits the miller to run his mill steadily, and permits the baker to figure his cost basis, a certain price for his flour. " Indiana. "In normal times it is the custom of the aver- age or large baker to contract their flour several months in advance and some of the bakers have contracted their flour for an entire crop year. Of course this has not been permis- sible during war period; if this custom was generally carried on I would think it would enable the miller to sell his flour at a very narrow margin. " Grain Futures off the Exchanges. Future contracts for grain are becoming increasingly common outside the grain exchanges. One illustration of this is the practice by many farmers' cooperative elevator companies of using a written contract with their patrons, calling for the delivery of grain. Another illustration may be given from the region about Waco, Texas. In this vicinity, where the best red rust proof oats are grown, it is the custom of the dealers to contract with the farmers for the delivery of these oats of No. 3 grade or better, these contracts being entered into before the oats are planted, sometimes, and certainly before they are har- vested. The dealers then in turn contract to deliver these oats to buyers in the East, where these oats are largely used for seed as well as for general consumption purposes. In 166 SPECULATION AND THE CHICAGO BOARD OF TRADE ordinary years there is no difficulty in following out these contracts.* Use of Futures to give Certainty and Stability. The foregoing discussion, citing as it does but a few common uses of futures, illustrates the widespread practice among busi- ness men of introducing into their business as many factors of certainty and stability as possible, and, conversely, of eliminating from their business as many risks and uncer- tainties as possible. The future contract is one way of doing this. But the future contract does not eliminate the risk, it only shifts it. Judging by past experience, it seems very probable that the use of future contracts will increase rather then decrease, irrespective of any action the grain exchanges may take. (h) Hedging, Insurance, and Speculation. The eco- nomic importance of insurance of shifting or distributing the risk is sometimes overlooked. Formerly there was but one kind of insurance, namely, property insurance. Then appeared life insurance, and it became one of the greatest protective and financial institutions of modern times. The idea of insurance has grown so much during the last fifty years that its ramifications are extended almost beyond be- lief. Selecting at random only a few of the commoner forms of insurance in vogue to-day, and we have a list like this: fire insurance, life insurance, accident insurance, sickness insurance, health insurance, marine insurance, lumber in- surance, traveler's insurance, church insurance, plate glass insurance, landlord insurance, druggist insurance, physician insurance, credit insurance, rents' insurance, profits insur- ance, use and occupancy insurance, elevator insurance, grain elevator insurance, compensation insurance, fidelity * Price Current Grain Reporter, July 23, 1919, p. 7. THE CHICAGO BOARD OF TRADE AND SPECULATION 167 insurance, liability insurance, automobile insurance, col- lision insurance, agricultural insurance, horse insurance, hog insurance, livestock insurance, hail insurance, cyclone insurance, windstorm insurance, sprinkler leakage insurance, exports and imports insurance, parcels post insurance, household furniture insurance, merchandise in transit in- surance, baggage insurance, dog bite insurance, arsony in- surance, burglary insurance, theft insurance, 'robbery insur- ance, riot insurance, fly wheel insurance, explosion insurance, boiler insurance, strike insurance, civil commotion insurance, bombardment insurance, floater insurance and team insur- ance. t It is not surprising that in the grain trade there should be developed that form of insurance technically known as hedging. The baker hedges by contracting for flour. The flour mill hedges by offsetting its flour sale contract with a wheat purchase contract in the pit. Those not familiar with the grain trade are prone to look lightly upon hedging as a mere disembodied theory, and having no place in the daily handling of cash wheat or coarse grains. To persons of this kidney, if any such there be, it is necessary to submit concrete evidence. Turn to the great wheat region of our North. The largest cooperative association of farmers in the grain business in that section of the United States is known as the Equity. This association operates country elevators and a terminal elevator, its chief function being to receive and sell consign- ments of grain. This Association has issued certain text- books for its partons, known as " Grain Growers 7 Text Book No. 1 " and " Grain Growers' Text Book No. 2. " The follow- ing extended quotation is from book No. 2, mentioned above, and the reader is asked to bear in mind, when reading the 168 SPECULATION AND THE CHICAGO BOARD OF TRADE quotation, that the word " option" is wrongly used to desig- nate " future." Hedging. From Equity Grain Growers' Text Book No. 2, pages 26-27. Wheat, Durum, Flax, Rye and Oats can be sold to arrive on grades. Barley cannot, as a rule, be sold to arrive on grade, but sample must first be sent in and sales can be made on barley on samples, to arrive; but usually the buyers will pay a little more for barley when the car has arrived at the terminal than they will offer on sample. On straight sales to arrive, shippers have 20 days in which to deliver the grain. You can sell in "broken lots" to arrive, any number of bushels, say 500, 600, 700, 750 bushels or more; while hedges can be sold only in even thousand bushel lots, as will be explained later; but in wiring sales, always spell out the number of bushels instead of using figures, to guard against errors in transmission. Watch the Market Circulars, and C. N. D's and see if sales to arrive bring the same price as for grain "on track" at the terminals, and if it does, selling to arrive is the simplest way of protecting pur- chases at country elevators. But if you see that Wheat or Flax "on track" is quoted considerably higher than "to arrive," then you cannot afford to sell to arrive, but should hedge by selling an option as will be explained in the following: By "Hedging" is meant that you will sell an option either September, October, November, December or May, according to the time of the year. Wheat, Durum, Flax and Oats Hedges can be sold in even thousand bushel lots of 1,000 bushels and up. Rye and Barley cannot be hedged, but must be sold to arrive. For instance, if you have bought at your elevator 700, 800, or 1,000 bushels of wheat you wire us to sell a thousand bushels December of May Wheat. When you ship that wheat you write on the advice slip an instruction to sell the actual wheat when it arrives at the terminal and at the same THE CHICAGO BOARD OF TRADE AND SPECULATION 169 time buy in again the 1,000 bushel hedge you sold for protection. The principle of this hedging system is, that, if the wheat goes down in price while you have it in the elevator or in transit, the option also goes down with it, so that you can buy it back again so much cheaper and thus make on the hedge what you may lose on the actual wheat, and vice versa. If the wheat advances while you have it in the house or in transit, the actual wheat will sell so much higher, but you will lose about the same amount on the hedge, by having to buy it in at so much higher than it was sold for, so you cannot make anything by the actual hedging; it simply protects you from losses and keeps you even and protects your margin of profit. For that reason, this hedging is not speculation at all, simply a legitimate business proposition. On the other hand, if you don't sell to arrive or hedge your bought grain, then you are speculating on it, and that is dangerous, because no one knows what the market is going to be in the future. You must have at least ^ cent per bushel more for "on track" grain over the "to arrive" to pay for commission on hedges, revenue stamps, etc. Hedges can only be sold upon receipt of Bill of Lading or receipt of check for 10 cents per bushel to protect us; i. e., 1,000 bushels of option would require check for $100, to accompany. In the matter of sales to arrive, we can accept such sales only from grain dealers, of record. We cannot accept to arrive sales from individuals unless 10 cents per bushel margin accompanies the order or upon receipt of Bill of Lading showing that grain has been loaded. In case grain goes down we will only carry hedges to the point where your margin ceases or as close to this as possible. The way to be safe is to have plenty of margin money up. All balances on margins will be returned as soon as trade is closed. We can carry any kind of legitimate hedge but we do not accept any trade for speculation. Stored Grain Protected As long as you have the stored grain in the house or in transit (i. e., grain not bought by the house), it will make no difference to 170 SPECULATION AND THE CHICAGO BOARD OF TRADE the shipper whether prices go up or down, as far as the stored grain is concerned. The stored grain should, therefore, not be sold or hedged until it is disposed of at the terminals, but if you use this hedging system and sell as fast as you buy, whether you buy it from the wagon or buy up storage tickets, wire in and sell hedges for all you have bought every day especially during the busy season, and as fast as you buy close to 1,009 bushels during the slack season, and if you order us to buy in as near as possible hedges to offset the number of bushels in every car, then your stored grain will always be protected, even if you ship it in and sell it. Stored gram should never be shipped out when it is possible to hold it. Sometimes, however, it is necessary in order to make room and for other causes. When stored grain is kept in the elevator you take no chances but when the grain is shipped out and the option spreads away from the cash grain then you can readily see that you are the loser. It is impossible to hold all stored grain in the house in most cases, but every bushel possible should be held to protect your storage tickets. Then again, it is illegal in North Dakota to ship out stored grain in excess of the amount of your bond. Remember that we can handle any hedge at any time or on any market, but we do not handle speculative trades. This quotation is given at length because it sets forth two cardinal principles in the successful operation of country grain elevators in the Northwest, namely, that hedging should be used as an insurance against loss, and that the manager of the country elevator ought not to speculate in grain. He holds a position of trust, and the temptation to speculate with other people's money or other people's grain is a peculiarly strong one. A few fall before this temptation. The largest wheat market in the world is now Winnipeg. And the largest cooperative organization among farmers on the North American Continent is the organization of the wheat growers in the region between Winnipeg and the THE CHICAGO BOARD OF TRADE AND SPECULATION 171 Canadian Rockies. In the May, 1917, crisis in the wheat market, when future trading was temporarily suspended at Winnipeg, and hedging operations were in consequence out of the question, the farmers' country elevators met the situa- tion by the safe but drastic method of simply stopping all buying. These heroic measures met the war-time emer- gency. Since these events have an importance of the first magnitude in the history of the grain trade, a full and com- plete account is here reprinted from the official paper of the Canadian grain growers.* WHY WE STOPPED BUYING AT OUR ELEVATORS Although the recent crisis in the Western Canadian grain trade has been well reported in the newspapers, it is reasonable to presume that few, outside of the grain trade itself, fully understand the cir- cumstances that culminated in such an unprecedented happening as the general stoppage of country elevator business. Buying and Selling Wheat To explain the matter it is first necessary to outline the methods used by country elevator companies in buying and selling wheat. The country elevator companies obtain large loans from banks to finance the buying of grain, and the banks insist on country elevator companies protecting their purchases against market fluctuations by hedging, or, in other words, making sales for future delivery. The banks are not unreasonable in making this provision, and the elevator companies also do not wish to speculate, so the common practice is for elevator companies to sell each day, on the Winnipeg market, an amount of futures equal to their total daily purchases of all grades of wheat. When the wheat so hedged arrives at the Lake terminals, it is sold and an equivalent amount of the future bought back in one transaction. On the other hand, exporters or * The Saskatchewan Co-operative Elevator News, June, 1917, pp. 7-9. 172 SPECULATION AND THE CHICAGO BOARD OF THADE millers wishing to assure themselves necessary supplies of wheat at certain future dates, buy futures for the delivery they require, and eventually exchange them with the elevator and commission com- panies for the actual wheat. Thus, when the wheat belonging to an elevator company arrives at Lake terminals, the elevator company sells and the miller or exporter buys the wheat, also the elevator company buys, and the miller or exporter sells the future which each has respectively sold or bought. This exchanging of the cash wheat and future forms one transaction; the wheat passing on to the consumer and the future being automatically eliminated. While the buyers have generally been willing to exchange the future contracts for wheat of almost any grade it should be noted here that the present rules and regulations of the Winnipeg Grain Exchange provide that only 1, 2 and 3 Northern wheat are de- liverable on future contracts at certain spreads, so that elevator companies hedging all grades of wheat by selling futures, incur a possible risk of being unable at times to get back from the buyer of their lower grades an equivalent amount of the future which they have previously sold. In such case the spot wheat of low grade would have to be sold flat and the future bought back in the open market, with the consequent possibility of having to bid up the future out of price relation to the sale price of the lower grade. This and the constant fluctuation of spreads, or differences in value, between the lower grades, constitute the weak points of the practice of hedging all grades by selling futures. As an illustration of these two features a table is appended of the spreads of each grade of wheat under the current future delivery value on certain dates. The constant changings of spreads, especially on the lower grades, is very noticeable and Feed Wheat almost throughout the season has been sold on flat bids. Buying Stops Turning now to the real theme of this article, it is well known that in the fall of 1916 the British Roj^al Wheat Commission, by ap- pointing a buying agent on the Winnipeg market, practically THE CHICAGO BOARD OF TRADE AND SPECULATION 173 eliminated all export companies; and this agent, buying for the allied governments, together with the few Canadian milling com- panies then became almost the sole buyers of wheat on the Winnipeg market. The Royal Wheat Commission made extensive purchases throughout the winter, and spring found them with tremendous holdings of May and July delivery contracts, which according to the rules of the Winnipeg Grain Exchange called for 1, 2 or 3 Northern wheat only. It was, however, presumed that the Royal Wheat Commission would accept any grades of milling value, even if lower than 3 Northern, so elevator companies anticipating no trouble in disposing of lower than contract grades continued the usual practice of selling futures as a hedge against their purchases of lower grades than 3 Northern. The Royal Wheat Commission, of course, preferred the higher grades which would yield most flour for the bulk, as ocean tonnage was scarce and space a great consideration; hence, the Royal Wheat Commission were somewhat reluctant to accept lower grades. Consequently, abnormally wide spreads pre- vailed this season, especially on Five and Six wheat. Feed wheat they would not accept at all, which explains why it has been at a flat price since last November. As the 1916 crop was of low average grade, approximately 50 per cent of the Royal Wheat Commis- sion's holdings of May and July delivery contracts would have to be filled with lower grades than 3 Northern, and any refusal by the Royal Wheat Commission to accept such lower grades would precipitate a most serious situation. This is just what happened. On May 2, 1917, the Winnipeg agent of the Royal Wheat Com- mission refused to accept any grades except 1, 2 and 3 Northern, and tough 1 and 2 Northern on May contracts; on lower grades a flat bid, very much out of relation to the May delivery value, was offered. Elevator companies were thus forced to sell lower grades flat and buy back their hedge (the future delivery contract) in the open market. Panicky buying in of contracts followed and the wildest of wild markets on that memorable day showed a 33^ cent range of fluctuation. On May 3rd May delivery touched $3.05 with a fluctuation of 29^ cents. Briefly, the Royal Wheat Com- 174 SPECULATION AND THE CHICAGO BOARD OF TRADE mission had cornered the market, but not for profit as is usual with corners. Their purchases were for actual consumption and would not be resold. To prevent further panic, and the undue inflation of values, the Council gf the Winnipeg Grain Exchange prohibited further trading in May and July deliver contracts. This deprived the elevator companies, even if they had wished to continue buying, of any means of hedging country purchases, and also of a basis for arriving at spreads on the lower grades. Our company deemed it advisable to stop buying until matters were adjusted. We do not speculate and consequently refuse to have anything to do with any form of speculation. To buy wheat at our elevators during a time when we had no means of making hedging sales would have meant specu- lating with whatever we purchased, so we stopped buying. Buying Resumes After a few days of inactivity an arrangement was arrived at between the Royal Wheat Commission, the Canadian millers and the elevator companies, whereby the May and July delivery con- tracts would be liquidated and business for the balance of the season taken care of by substituting Basis 1 Northern Contracts on which all grades of wheat down to and including No. 5 would be delivera- ble. Buying was at once resumed in the country. The following spreads were agreed upon to cover deliveries on May and July delivery contracts, and the new Basis 1 Northern Contracts : Rej. afc Rej. afc Straight Dried Tough Seeds Smut 1 Northern... . Basis -9 -10 -15 -15 3 Northern No 4 -8 -20 -9 -21 -20 -40 - 23 - 23 Special No. 4 No. 5. . - 20 ..-45 -21 -46 -40 Special No. 5. -45 -46 Note. Tough grades are not deliverable after May 15, 1917. THE CHICAGO BOARD OP TRADE AND SPECULATION 175 We hold no brief for the Winnipeg Grain Exchange, but, before concluding, a word of praise must be extended to the President and Council and the special committee who brought the various interests together. The aims of the association called " The Winnipeg Grain Exchange" as set forth in its constitution are in part as follows: " To organize, establish and maintain an association not for pecu- niary profit or gain, but for the purpose of promoting objects and measures for the advancement of trade and commerce respecting the grain, produce and provision trades for the general benefit of the Dominion of Canada as herein provided." "To inspire confidence and stability in the methods and workings and integrity of its members." The members of the Winnipeg Grain Exchange responsible for the above satisfactory settlement of difficulties, which presented so serious an aspect, have certainly acted in accordance with the high sentiment as expressed in the terms of the constitution. In this situation as outlined in Canada, the local elevator had two alternatives: (1) stop buying; (2) buy at a wide enough margin to feel reasonably well protected. A similar situation existed for a few days on the American side of the boundary line, and in the crisis, some farmers' elevators bought wheat on a margin of fifty cents a bushel in order to be protected against market changes.* The speculative nature of the hay trade was described as follows in the Nineteenth Annual Report of the President of the National Hay Association at the Kansas City Meeting of the Association in 1912: "The very nature of hay, its large bulk when loose in farmers' barns or baled and held in shippers' or dealers' storage sheds, keeps it from being bought and sold as grain and other farm products are on the Chicago Board of Trade and the other commercial exchanges of like character throughout the country. Hence every man that handles hay from the producer to the consumer speculates largely and takes great * Speculation and the Hay Crop. No Hedging. 176 SPECULATION AND THE CHICAGO BOARD OF TRADE chances as there is no way in which he can hedge his trades. For this reason the fluctuations of the market are large and often a few days will show a variation of values from 25 per cent to 50 per cent. No farm product grown in this country is as hazardous to deal in as hay." President P. E. Goodrich, p. 42. In theory and in practice, hedging enables the country elevator to do business on a smaller margin, just as the flour miller, by contracting his flour output ahead and also his wheat requirements on the future market, is hedged thereby, and can safely work on a very close margin. A conspicuous example of a well-managed farmers' elevator was that of the Cooperative Farmers' Elevator Company of Hartford, South Dakota, under the late Mr. Iver S. Henjum, well and favor- ably known to the grain trade. The directors of this com-* pany issued from year to year a notice covering the buying margins on grain. While this margin was set at 1 cent a bushel on wheat and oats, it was 3 cents on barley, the bar- ley not being subject to hedging by future trading. With the increased use of hedging in recent years, coupled with other factors, has come a narrowing of the margins on which country grain is handled. Thus Mr. Pillsbury, the Minneapolis miller, testified before the Committee on Agri- culture of the House of Representatives that he formerly bought cheaper of the farmers and sold dearer to the con- sumers.* The validity of hedging as insurance may be accepted as an established fact. The real point in controversy now is, how wide a future market is needed in order to provide ample hedging facilities? By a wide market is meant a market with enough traders participating on each side so that mil- * Testimony before Committee on Agriculture, House, 52d Congress, 1st Sess., p. 193. THE CHICAGO BOARD OF TRADE AND SPECULATION 177 lions of bushels of grain can be bought or sold, at any mo- ment, without bulling or bearing the market. This is exactly the condition which differentiates the Chicago futures market from the futures markets of St. Louis, Kansas City, Minneapolis or Winnipeg. An order to buy a million bushels of grain in the Kansas City pit would raise prices there sharply. The same order would have little immediate effect on the Chicago pit. Hence large future orders arriving at these secondary markets are first placed in the Chicago pit, and then gradually worked back into the secondary market, a fraction at a time. The difference between a wide and a narrow market is very convincingly illustrated by the Winnipeg market when future trading was resumed there in July, 1919. The follow- ing quotation describing it, is from the Commercial West (Minneapolis), July 26, 1919, page 49. WHEAT TRADING ON THE WINNIPEG GRAIN EX- CHANGE 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, and the first sale was made at $2.20, the price rising to $2.25 asked, with no buyers. But 5,000 bushels of October were dealt in in the first hour of trading. The first bid for December was $2.23, with no sales. Dealers are inclined to be cautious, but are inclined to think the market is going higher, and are waiting for the government to announce the minimum figure, which it is expected will be between $1.75 and $2. The millers are not in the market, but are watching the situation closely. Here is a market without speculators. And it is a narrow market so narrow that it could offer no hedging facilities. 178 SPECULATION" AXD THE CHICAGO BOARD OF TRADE It is the universal and unanimous opinion among all handlers of cash grain, with whom the writer has conferred on the sub- ject, that the speculator is needed to make a wide market, and the wide market is needed for hedging, and hedging is needed for keeping the costs of handling down. And keeping the costs of handling down is desired by society. There is another intensely practical aspect of the matter. The commission house through whom the speculator (if a non-member) must trade has no means of knowing whether the trade be a hedge or a speculation. Thus a Kansas City firm received an order from Texas to buy two hundred thousand bushels of September oats. The order was placed (first in Chicago, then in Kansas City), the house thinking it was a speculative trade. But the trade stood till September, and the cash oats were delivered. An Iowa farmer sometime in September decides that his corn crop is made; that the December price in Chicago is high enough to suit him ; and that anyway prices are sure to trend downward. To take advantage of the machinery provided by the Chicago Board of Trade for situations like this, he sells 10,000 bushels of December corn in the Chicago pit. Now he can wait till December and deliver and collect the price. Or, he rnay change his mind before December and decide to feed hogs and market his corn in the form of hogs. He buys back his December future, or what amounts to the same thing, settles with the house for the balance due him between his bought and his sold price. The house does not know what is in the mind of the trader: and if it did the trader may change his mind. Thus it is that hedging is inextricably interwoven with speculation. The theory is sometimes advanced that speculation in grain should be limited to men in the grain trade. This THE CHICAGO BOARD OF TRADE AND SPECULATION 170 would not work out well in practice, for there is a large class of grain men in fact the most numerous class of grain men namely, managers of country elevators who ought not to be allowed to speculate in grain at all. They are supposed to use hedging to avoid speculation. It is interesting to note, that in the North where country elevator managers are financed by terminal commission merchants, they are re- quired to hedge and do hedge, whereas in the Middle and South, they are financed locally and are not required to hedge and many do not hedge. They have, accordingly, larger speculative losses and larger speculative gains and also do business on a larger margin. However, there seems to be an increase in selling to arrive, which is one form of hedging. The to arrive buyer at the terminal hedges in the pit, and thus indirectly the country shipper is hedged in the pit, (i) Summary of Benefits of Organized Speculation. Assuming the right of a free American citizen, with money and brains enough, exercising that " pursuit of happiness" which is one of the three " inalienable rights" with which his Creator endowed him (according to that noble and im- mortal document known as the Declaration of Independ- ence), assuming, I say, the right of such a citizen to buy and sell freely on an open market, then a citizen has a right to speculate, so long as he is not injuring society thereby. Leaving on one side for later discussion the evils of specula- tion, we may very briefly summarize the recognized benefits of speculation conducted on the organized exchanges under the rules of fair play there in force. Stabilize prices. Prices are stabilized near the supply and demand level. Wider swings of the market are greatly lessened in range. In place of the wide swings, there are 180 SPECULATION AND THE CHICAGO BOARD OF TRADE many minor fluctuations reflecting very sensitively the pres sure of changing supply and demand. Registers prices. Speculation does not fix prices, but registers prices. The speculator who names prices is working under the laws of supply and demand or he ceases to be a speculator and is eliminated from the market. The law of the survival of the fittest obtains in the pit. Wide, continuous market. Speculation furnishes a wide and a continuous market. There are not always on hand consumptive buyers ready to take the grair at the full market price although they doubtless would at a discount. Here is where the speculator steps in, and makes the market. Assumption of Risk. The distribution of risk, as we may term the assumption of risk, is a factor of first importance on the organized exchanges. That large class of persons who do not want to bear the risk of price fluctuations, and ought not to do so, can, on the future market, shift the risk to that class who prefer to bear the risk. It is well to bear in mind the wider swings of the market when considering the significance of this service. Over any series of years, due to lack of coordination between production and normal con- sumptive demands, there occur at times a certain marked downward movements of price, or certain long-continued upward movements of price. These big downward swings would wreck the large flour millers, the manufacturers, the big bakers and others with forward contracts, were it not possible to shift risks of this kind to the traders on the future market. Losses in such cases are passed down, step by step, to the traders who are in and out of the market. It may be compared to passing a load down the stairs, one step at a time, instead of throwing it down with one big crash. The whole commercial world benefits by having business stabi- Till: CHK'ACO BOARD OF TRADE AND SPECULATION 181 lized and kept relatively free from suddon and violent charges. Enemy of Monopoly. The pit is one market which is open to an unlimited number of traders any hour of any day, by the simple process of forwarding their orders to their brokers. There is little room for doubt that should the or- ganized grain exchanges be abolished (and particularly fu- ture trading) the grain trade would very rapidly be central- ized in the hand of a few powerful houses. They alone would be the buyers. They would declare the margins on which the farmers' grain would be handled, as indeed they once did before the Exchanges were able to curb them. The big dealers in the trade themselves confess that such a cen- tralization of the grain trade would occur, should future trading be abolished. But the speculators in the future market, numbered by the tens of thousands, and living all the way from New York to San Francisco, from Winnipeg to the Gulf, and in foreign lands, are too widely scattered and too independent to be controlled so long as the market re- mains free and open to them. In fact these many " small men" curb the few "big ones." The highly competitive nature of the business conducted on the trading floor of the organized grain exchange is appar- ent to any one who will spend a few days or weeks in atten- dance at this market. The foregoing pages of this book should have made this fact perfectly obvious as it applies to the Chicago Board of Trade. It is not necessary to repeat at this point the facts concerning the number and occupa- tions of the members of the Board of Trade, their scattered places of residence, the number of non-members trading daily through these members, the competition among large terminal markets, and the rise of numerous strong interior 182 SPECULATION AND THE CHICAGO BOARD OF TRADE markets. The trading on the floor of an organized exchange is, in letter and in spirit, a great auction, open to the whole world, where buyers and sellers in nearly equal numbers, make their bids and offers. This situation is best appre- ciated only by contrasting the grain trade with other im- portant trades, such as oil, lumber, sugar, steel, tobacco, etc., in none of which is there an organized exchange. It is a matter of common knowledge, for instance, that when oil exchanges flourished, during the 70's, there was competition in the petroleum industry. With the passing of these ex- changes there arose the domination of the oil trade by one centralized group. The one great preventative of monopoly in the grain trade is the organized exchange, with its rules of self-government actually made by the majority of small traders. Stability of Values. The favorite banking paper in the Northwest is known as " grain paper," representing grain in warehouses, and hedged in the pit. It is this speculation which renders hedging cheap and easy which also gives, thereby, stability to values and safety to all investments connected with grain. (j) " Prohibit Speculation " : Germany's Experience. There is always in evidence a strong undercurrent of feeling that speculation should be "prohibited," and should in some manner be entirely " eliminated. " There is a somewhat more conservative viewpoint, also in evidence, that specula- tion should be checked and in some manner lessened in amount. Some would have this checking done by and through the organized exchanges themselves. Others, of course, say, "Let the government do it." There is one government which, prior to the World War, was pointed out as the great model of efficient administration of its laws. THE CHICAGO BOARD OF TRADE AND SPECULATION 183 This government was Germany. Whatever criticism was leveled against its principles, policies, and programs, the administration of those laws was always conceded to be a very model of scientific and expert efficiency. Now this country, Germany, undertook to prohibit speculation in farm products. We have every reason to believe that the law was administered with Prussian efficiency. Yet this law did not eliminate speculation. Neither did it help the Farm- ers' Party (Agrarians), who had it passed on the grounds that "speculation depresses prices." The effect of this law on speculation and on prices is best told by absolutely disin- terested witnesses. To give the reader the benefit of such testimony, there is reprinted here in full the official reports of our consuls in Germany at that time, just as these reports were made to our own government. The German law was passed in 1896, and is discussed as follows: GERMAN LAW AGAINST EXCHANGE SPECULATION U. S. Consular Reports, Vol. LII, No. 194, Nov., 1896 Germany, under the pressure of the Agrarian party, has under- taken what other nations have been desirous of doing, viz., to check speculation on the exchanges, not alone in stocks, but also in food products, principally grain. Whether this will be accomplished by the new law, remains to be seen, and it will certainly be very in- teresting for other nations to watch the experiment. Below are given the most salient features of the law: 1. No exchange can be established without the consent of the Government, which, through a commissioner, will exercise a con- tinued supervision over its actions and dealings. 2. A court of honor is created, which may exclude persons from the exchange after due trial. Parties who have been judicially de- clared bankrupt will be excluded for at least six months, and per- manently, if the bankruptcy was fraudulent. 184 SPECULATION AND THE CHICAGO BOARD OF TRADE 3. When the listing of stocks or bonds is applied for at the ex- change, a committee will make a thorough investigation of all circumstances affecting their security and desirability and will then decide whether they may be admitted. Before this is done, a prospectus must be published, giving all particulars of such se- curities. Stocks will not be admitted until one year after the entry of the firm name in the commercial register, nor before the publica- tion of the balance sheet for the first business year. All parties who have signed the prospectus are legally liable for the correctness of the statements in the same, and must make good any loss or damage to the takers of such securities resulting from false, misleading or omitted statements, in the prospectus. Besides, they are liable to be criminally prosecuted if the circumstances warrant such pro- ceedings. 4. All dealings in futures or on term at the exchange are pro- hibited, unless the parties to the transaction are entered in the so-called exchange register. The original entry in this register costs 150 marks ($35.70) and an annual fee of 25 marks ($5.95) is exacted to keep the entry alive. The register is public and can be inspected by any person. The entries are at once published in the Imperial Gazette (Rei-chsanzeiger] and the local official papers, at the expense of the parties, and a compilation of all names will be published once a year hi the Imperial Gazette. Persons omitting to have their names entered in the exchange register have no legal claims against each other by reason of any term transactions. Such claims are considered in the light of gambling debts. 5. The term business or dealing in futures in grain and mill products or stocks of mining and manufacturing establishments on the exchange is entirely forbidden. 6. Whoever habitually and for selfish purposes induces inex- perienced persons to speculate on the exchange in such articles as are outside of their sphere of business will be punished with imprisonment and a money fine not exceeding 15,000 marks ($3,570). 7. With the exception of the paragraph referring to the exchange THE CHICAGO BOARD OF TRADE AND SPECULATION 185 register, which will become operative on November 1, 1896, this law will go into effect on January 1, 1897. As seen from the above, the main purpose of the law is to check speculative dealings on term, and, as far as this relates to stocks, its influence will probably be beneficial. As to term dealings in mer- chandise and forbidding term sales of grain and mill products, this remedy may prove to be of doubtful value. The produce exchange was created for want of an institution, the primary and main object of which was to facilitate the handling of agricultural products after the harvests and to distribute them over the entire year as the necessity arose. It is true that, with its development, such evils as "corners," dealing on margins, and other forms of speculation have also crept in, often much to the disadvantage of farmers and con- sumers. From a moral point of view, the effort to check gambling and illegitimate dealings on the exchange is very laudable, but how will this work in reality? In future, when the farmer, after the harvest, shall offer his crops to the dealer, the latter must be very cautious in naming a price, because he has no facilities of covering himself by term sales. The new law will not prohibit a dealer from buying "long" grain from a fanner or another dealer, if the bar- gains are consummated privately at the farm or the offices of the dealers, but will not allow that the terms of such bargains be pub- licly recorded. Thus the dealers really have no scale of prices except for "spot" grain, which fact prevents them from buying freely, and therefore necessarily exercises a depressing influence upon prices, especially after the harvest, when the pressure and necessity to sell are greatest. It becomes, at a glance, apparent what a terrible blow this law is to the produce exchanges, and nobody can foretell what will hereafter become of them. The dealers are very much alarmed, lest it may threaten the very existence of these time-honored establish- ments, and, what is worse for them, may wipe out Germany's influence and importance in the international markets and induce German capital to remove to foreign countries. Although the Agrarians expect many advantages, especially a rise in the price of 186 SPECULATION AND THE CHICAGO BOARD OF TRADE grain, from this law, they have so far been disappointed, because, since the law was passed, the prices have moved in the other direc- tion, no doubt greatly influenced by the lack of enterprise occasioned by the damaging influences expected by its operation. The export of grain from the United States to Germany will also suffer, because the German dealer can not now buy great quantities at a time, for the reason that he can not cover himself in advance by term sales. Another interesting feature of the law is the establisliment of the exchange register, or gambling register, as it is commonly called. The term business in grain and mill products on the exchange is forbidden by the law, as I have mentioned before, but the term business in stocks or other farm products is allowed, provided the parties to the transaction enter their names in the exchange register. As the latter is on public record, secret gambling on the exchange by private individuals is thereby done away with, because a private party can not afford to have his name publicly exposed in the gambling register, and a dealer can not venture to do business with a party against whom he could not press a claim. Even a deposit will not protect him, because he can not touch it, having no legal claim against the speculator. This feature of the law really appears to be a good one, because it will prevent private individuals from speculat- ing in things of which they know nothing, a speculation which has seldom brought wealth, but often ruin and shame to a man and his family. The dealers naturally dislike this very much, because it robs them of the opportunity of continuing to shear the lambs. They say that, without speculation, it will be very difficult to dis- pose of such enormous crops, as, for instance, the sugar crop, and that the keeping away of private speculators can not but have a depressing effect upon prices. This is no doubt true to some extent ; but, on the other hand, the moral advantage of keeping innocent outsiders away from the demoralizing influences of exchange gam- bling in a thing worth trying, and if this feature of the law succeeds it will indeed be a blessing. But human ingenuity will probably also find a way to get around this stipulation of the law, and I should THE CHICAGO BOARD OF TRADE AND SPECULATION 187 not be surprised to see the German lambs go speculating in London or Paris or Vienna hereafter, carrying not alone the commission, but also their wool to foreign countries, instead of letting their German countrymen do the clipping, as heretofore. The establishment of the exchange register will necessarily diminish transactions at all German exchanges, thus curtailing their importance and influence on the world's markets in general. It will no doubt also tend to drive considerable money and business to foreign countries, much to the detriment of German commerce. The general opinion is that the law, in its present form, will not stand, but must be modified in many ways before its effects will be less detrimental to commerce in general than corrective of the evils which it is intended to remedy. Magdeburg, August 31, 1896. (Signed) JULIUS MUTH, Consul. WORKING OF GERMAN LAW ON EXCHANGE SPECULATION U. S. Consular Reports, Vol. LXII, No. 235, April, 1900 In compliance with a request from a San Francisco editor, an instruction was sent by the Department to Consul General Mason, December 13, 1899, asking for information in regard to the working of the law to prohibit speculation in grain on 'change in Germany. The reply, dated January 6, 1900 (copy of which has been sent the correspondent) reads: The statute in question was translated and fully described by Consul Julius Muth, of Magdeburg, in a report dated August 31, 1896, which was published in CONSULAR REPORTS, No. 194, Novem- ber, 1896, page 447. Its effects have been exactly what was in- tended, to prevent grain speculation in chambers of commerce and produce exchanges; but it is stated that such transactions are still carried on to some extent privately, the negotiations taking place in counting rooms, restaurants, and on the street. As there is no public or other definite record of these transactions, it is impossible 188 SPECULATION AND THE CHICAGO BOARD OF TRADE to give any approximate estimate of their number or amount; but commercial men and journals generally agree that the law, while favoring to some extent the interests of the agrarians or agricul- turists, has operated badly for Germany by throwing discredit upon what is elsewhere recognized as a legitimate form of trade, and thereby driving out of the country to Antwerp, London, and Amsterdam dealings which would otherwise take place at Bremen, Hamburg, Berlin, Frankfort, Mannheim, and other German cities. WORKING OF THE GERMAN LAW AGAINST SPECULA- TION IN GRAIN U. S. Consular Reports, Vol. LXIV, No. 243, December, 1900 In response to the request of the Department for a more detailed report of the practical effects of the German law restricting specula- tion in stocks and forbidding operations in grain futures, I have to report as follows: The statute in question was enacted in 1896, and, with the excep- tion of one paragraph relating to exchange registers, went into effect on the 1st of November in that year. Its effective provisions relating to speculation in grain are contained in paragraphs 3 and 4, the first of which prescribes that: "All dealings in futures or on term at the exchange are prohibited unless all parties to the transaction are entered in the so-called ex- change register. Persons omitting to have their names entered on the exchange register have no legal claims against each other by reason of any transactions on term. Such claims are considered gambling debts." Paragraph 5 declares that: "The term business, or dealing in futures in grain and mill products or stocks of mining and manufacturing establishments on the exchange, is entirely forbidden." The law as it was enacted was inspired by the Agrarian party in Germany, which includes most landowners and representatives of agricultural interests, arid its avowed purpose was to steady the THE CHICAGO BOARD OF TRADE AND SPECULATION 189 market values of securities and especially cereals, which, as the Agrarians claimed, were unduly depressed and disturbed by specula- tions in which grains were bought and sold on exchange for future delivery. The law is a drastic and radical piece of class legislation, and its enforcement during the past three and a half years has con- stituted an experiment which has naturally been watched with interest by the economists of other countries. As to its effects, opinions differ in accordance with the interests and preconceived ideas of the person consulted. The Agrarians claim that while it has not increased the market values of home-grown cereals in the German markets to the extent that was expected, it has at least rendered them more steady and uniform ; that it has given Germany an autonomous home market, dominated by their own grades and qualities of grain and controlled by German conditions of supply and demand, independent of the markets at Odessa, Antwerp, Liverpool, or Chicago; and, finally, that it has stimulated and elevated the morals of trade the sale or purchase, on paper, of produce not actually in sight being considered, from the Agrarian standpoint, to be immoral. On the other hand, the commercial and industrial classes of business men in this part of Germany, including also many of the more intelligent agriculturists, seem convinced that the whole effect of the law has been abortive, and not only of no practical advantage, but a positive injury to the interests of German agricul- ture. It is of course impossible to harmonize opinions so radically diverse as these, and it only remains for the impartial student of this subject, who seeks to get at the truth whatever it may prove or disprove to follow the. register of grain imports, prices, and other facts of record during the past three years and see what bear- ing they have upon the point of dispute. It was hoped by the farmers and advocates of the law that its effect would be to restrict the importation of foreign grain, but statistics show that grain imports which are governed here, as elsewhere, by the relation between consumption and local supply 190 SPECULATION AND THE CHICAGO BOARD OF TRADE have increased rather than diminished. The population of the Fatherland is rapidly increasing; all classes of working people here have been more prosperous during recent years than ever before, and the consumption of wheat and the better grade of rye bread has become more general. The harvests of Germany have not been able to meet this growing demand, and consequently imports of both these cereals have increased, as might have been readily foreseen. The claim of the Agrarians that the effect of the law has been to render steady and uniform the prices of cereals is not confirmed by the record of expert opinion, so far as the latter can be obtained. For instance, during the summer and autumn season of 1897-1898, the natural influence of a good harvest reduced prices and the German farmers, being all at sea as to the harvests of other coun- tries and therefore at the mercy of a few well-informed speculators, hastily sold a large part of their crops (estimated at 3,400,000 tons) at low rates for export to France, England and Austria. When, later in the season, the general wheat market rose nearly $25 per ton above the summer rate, the deficit created by this excessive export had to be filled by importation from the United States and Russia. Commercial experts writing on the teachings of that episode assert that the prohibition of legitimate speculative operations in grain kept the price in Germany for a long time from $6 to $10 below where it would have been otherwise, and thus facilitated the exces- sive exports which afterwards had to be replaced and made up for at such heavy cost to the people. As it failed to sustain the prices of home-grown cereals during the season of plenteous harvest, so also the law failed to restrict in any way the actual importations of foreign-grown grains when the needs of public consumption re- quired them. In proof of these conclusions, it is only necessary to follow the course of the market during that period and trace each successive fluctuation to its obvious and recognized cause. In the year 1897, when the statute first went into effect, wheat cost in Berlin about 180 marks ($42.84) and rye 130 marks ($30.94) per metric ton. In June of the same year, these grains stood at THE CHICAGO BOARD OP TRADE AND SPECULATION 191 150 marks ($35.70) (sold) and 115 marks ($27.37) respectively, or about the lowest price that has been reached. From then on the prices began to rise continuously, with small setbacks, until the 9th of May, 1898, when wheat reached 270 marks ($64.26) and rye 185 marks ($44.03) per ton. There was therefore a fluctuation in the course of this year of 120 marks in the price of wheat and 70 marks in that of rye. From the 10th of May, the prices began to fall so rapidly and suddenly that in the first half of August of the same year wheat stood at about 150 marks ($35.70) and rye at about 127 marks ($30.22) per ton; that is, a decline in three and a half months of 120 marks ($28.56) per ton in wheat and of 60 marks ($14.28) in rye. Since then, the prices for wheat have fluctuated between 140 marks ($33.32) and 170 marks ($40.46) and rye be- tween 135 marks ($32.13) and 155 marks ($36.89) per ton. The reasons for these large fluctuations without sale by commis- sion were as follows: The partial failure of crops in Hungary and France and light harvests in Russia caused a rise in the world's market for wheat and rye, which was further sustained by reductions of grain duties in France, Spain, and Italy, by the operations of Mr. Leiter, at Chi- cago, and especially by the gathering clouds of the Spanish-American war. As a direct normal result of these causes, prices were high during the winte:: of 1897-1898 and only yielded when the favorable spring weather and fine outlook for large crops of both spring and winter wheat broke the market and brought prices down to their natural level. Corn and oats passed through similar fluctuations, showing that only the elementary forces of nature really control the grain market. The German statute against speculations was powerless to produce any other result than that of rendering the farmers subject to the whims of local millers and small traders. The high average price which rye maintained in Germany during 1898 and 1899, which Agrarian economists sometimes ascribe to the influence of the law of 1896, is easily traceable to the other facts: light crops in Russia the source of Germany's chief foreign sup- ply the increased consumption of rye bread by the Russian 192 SPECULATION AND THE CHICAGO BOARD OF TRADE peasantry, and the consequently greatly diminished supply for export from that country. Finally, there is the interesting if somewhat less important question, What has been the effect of the law upon the commercial classes, members of produce exchanges, and chambers of commerce in Berlin and the other leading grain marts of Prussia, viz, Stettin, Magdeburg, Halle, Danzig, and Konigsberg? Upon this point, the testimony of experts is practically unanimous and conclusive. The market editor of the leading financial journal of Berlin says, hi a special report: "The effects of the law of 1896 upon the legitimate interests of the bourse have been disastrous. One class of business men commission merchants has wholly disappeared. Through its important and direct connections with the provinces and foreign countries, Berlin was formerly one of the most influential markets of Europe, but since the law against grain futures went into force, it has dropped to the rank of a small provincial market. For providing Germany with grain during periods of stringency and short home supply, the system of buying and selling on commission is indispensable. It protects the importer from the danger of a heavy decline in prices by enabling him to dispose of his imports at the same time that they are ordered. To some extent, Berlin mer- chants have speculated during the past three years through agents in Liverpool, New York, and Chicago, and this with the apparent knowledge and tacit approval of the German Government, which realizes that the German grain market is controlled by influences outside of .this country and that Germany can not play an inde- pendent role in relation to the supply and price of breadstuffs." In view of the importance and technical difficulties of this sub- ject, it has been deemed advisable to obtain for the purposes of this report, from a high and impartial German authority, a formal review of the conditions which led to the enactment of the antigrain Option Law, its effects, so far as they can now be estimated, and what prospect, if any, there is on an early modification or repeal of the statute. For this purpose, application was made to a Berlin THE CHICAGO BOARD OF TRADE AND SPECULATION 193 jurist of high standing and ripe experience in the practice of com- mercial law, who has with great courtesy prepared for this report the following statement: "The grain traffic in Germany, which forty years ago had a limited scope and importance and which, partly because of the limited demand and partly on account of the restricted develop- ment of the railway system, was confined mainly to the interior of the Empire, has since then gradually but solidly increased as Germany became more and more unable to produce the requisite supply of cereals. First from Austria, then from Russia, then from other grain-exporting countries came especially wheat, until finally it became necessary to supply the demand by drawing upon the general wheat market of the world. "It thus followed that international commercial usages were adopted in Germany and among these dealings in grain futures, which had been found necessary and requisite. This international grain trade developed rapidly in Germany and centered especially in the chambers of commerce at Mannheim and Berlin. "During the early nineties, an unusually large number of bank- ruptcies on the stock exchange attracted public opinion in this country much more closely to the general conditions of business on the bourse, and led to an official inquiry into the subject. "Meanwhile, the Agrarian party in Germany had acquired such strength and influence as to practically control all measures of legislation. A law governing bourse transactions was enacted, and the Agrarian party, with the hope of raising the inland market price of grain, inserted a clause in the bourse statute absolutely pro- hibiting the sale and purchase of 'futures' in cereals and mill products. At the same time the Prussian Minister of Commerce issued a regulation based on the bourse law, in which he forced the representatives of agriculture into the boards of management of the produce exchanges, and there was chosen for the Berlin bourse the hotspur of the Agrarian party, together with whom the merchants were obliged to decline to work, for the reason that during the recent debates over the bourse law the Agrarian orators had vilified the 194 SPECULATION AND THE CHICAGO BOARD OF TRADE merchants with shameless abuse. It was especially in consequence of this regulation, which the commercial and financial classes recog- nized as a direct slap in the face that the members of the Berlin Produce Exchange declared unanimously (January 2, 1897) that they would no longer remain on the bourse, and they thereupon left it altogether. At the same time, the prosperous grain business of the exchange was completely ruined by the prohibition as to dealing in futures. A number of the principal commercial cities of Prussia, Stettin, Magdeburg, Halle, Danzig, and Konigsberg followed the example of Berlin. "In consequence of the absolute impossibility of dispensing wholly with sales and purchases for future delivery, the grain mer- chants were forced to conduct their business under a plan by which they made at places other than the bourse the so-called legal specified term orders (handelsrechtliche Lieferungsgeschaft), in so far as they related to produce not actually in hand. These specified time contracts are in fact a method of business authorized by commercial law, in which the buyer, in case of non-delivery of the goods on a specified day, must grant (to the seller) a still further extension of time. Meanwhile, the meetings for these operations were recognized by the officials as 'exchanges' and were ordered to be discontinued. The results, therefore, of the prohibition of transactions in grain futures in Berlin may be synopsized as follows: " (1) Dealings in futures are necessary and indispensable to dealers, importers, exporters, and millers for the avoidance of mere gambling in grain. Such dealings prevent sudden fluctuations in prices and equalize the prices of cereals from one harvest to another in accordance with the natural conditions of supply and demand. It is a fact of definite record that since the 1st of January, 1897, our inland cereals, in spite of their good quality, have ruled considerably below the market prices of other countries, a condition which was formerly of rare occurrence and merely temporary. " (2) The legal specified term orders (handelsrechtliche Lieferung- sgeschaft) is for a good market like Berlin no adequate substitute for regular dealings in grain futures on a produce exchange. TIIK CHICAGO HOARD OP TRADE AND SPECULATION 195 " (3) With the abolition of dealings in futures it became impossi- ble to establish fixed standard prices, while prices that were made by secret transactions have had none of the authority and fixedness that belonged to open, legitimate operation on the bourse prior to January 1, 1897. " (4) The creation of stocks of grain here in Berlin has greatly diminished since the prohibition of dealings in futures. "(5) The legitimate local speculations have been necessarily conducted in foreign markets, where they were subject to high fees and expenses, and to the influence of 'corners' all of which would have been avoided had local dealings in futures been permitted. " (6) The so-called ' small man' in the grain trade is the one most injured by the suppression of futures many have been wholly ruined; only a few have been able to maintain a modest and un- certain existence. " (7) The importation of foreign cereals which covers only a small percentage of the total consumption has, contrary to the hopes of Agrarians, not been affected one way or another. "(8) The stability of the grain market during the past three years has been in no way affected by the prohibition of dealings in futures, but has been solely controlled by natural causes (short crops in Germany and foreign countries). "Quite recently, there has been a movement looking toward the reorganization of the produce exchange by means of a revision of the bourse regulations by the Prussian Ministiy of Commerce, so as to eliminate the affront to the honor of merchants which is im- plied by the first regulations (January 1, 1897); and since the bourse law forbids transactions in futures, it is proposed to agree with the Government upon the use of final bills of sale (Schlus- scheine) which, while they would not reestablish dealings in futures, would endeavor to provide some sort of substitute for them. "Under this new regime, based upon the final bills of sale (Schlus- scheine) which have been approved by the Prussian Government, the bourse ratification for grains and mill products is again reestab- lished. 196 SPECULATION AND THE CHICAGO BOARD OF TRADE "On the whole, the Government is thoroughly convinced of the unjustified injury which legitimate commerce has suffered through the prohibition of dealings in grain futures. It knows quite as well as the Agrarians that this prohibition has secured for cereals grown in the interior of Germany no better market and no higher prices. But, in view of the present dominating influence of the Agrarians, whose leaders naturally seek to avoid any confession of their mis- takes, the Government is not now in position to secure a repeal of the prohibition." Such are the verdicts of two men whose positions and experience entitle them to recognition as expert observers of the actual work- ings of the German antioption law. While their opinions may bo to some degree shaped by their interests as members of the commercial class in Berlin, there can be no doubt that they express substantially the sentiment of the whole industrial and mercantile community in this country, which, in matters of fiscal and economic policy, is opposed to Agrarian exclusiveness and conservatism. (Signed) FRANK H. MASON, Consul-General . Berlin, August 28, 1900. These quotations bring the story of Germany's legislation down to 1900. On April 2, 1900, future trading in grains was reopened. According to the report of the " Eldest of the Merchants" at this time, the only persons benefiting by the Bourse Law of 1896 were the interior dealers who worked on wider margins paid the farmers less and sold the grain for more. The Bremen Cotton Exchange, whose future trading in cotton was stopped by this same Bourse Act, was later reopened to future trading. Thus did Germany undergo a change in policy towards future trading. (k) Speculation a Social Question. In the foregoing THE CHICAGO BOARD OF TRADE AN T D SPECULATION 197 pages speculation has been discussed as it is related to and forms a part of our organized exchanges. There is, however, but an insignificant part of the world's speculation con- ducted on produce exchanges. Speculation is as wide as society itself and as old as society. The John Law scheme, the Mississippi Bubble, Holland Tulip, Spanish Jackasses, Western lands, Oil wells, Gold mines, Rubber plantations, "Booms" in western cities, Black Friday and Gold Specula- tion, always some speculative activity. There is not only much speculation outside the exchanges, but there is much speculation in grain outside the grain exchanges. Is it possible to draw the line between " unwise invest- ments" and speculations? Every village can point to at least one empty and idle factory, now failed and out of busi- ness, due to "unwise investment" of capital by some one. The sum total of money wasted in this way runs up into many millions. The art of safe and sound investment is an art which likely not more than one man in a hundred posses- ses. Such a man, directing his own investments and those of others into productive channels is entitled to great financial reward and to great praise. The writer was once asked to prepare a paper on "Edu- cated Gullibility," the purpose of the paper being to show the "unwise investments" made by two educated classes, college professors and preachers. Fifty persons were inter- viewed for the purpose. Every one of these persons had lost money through "unwise investments." The term specula- tion is more correct but less euphonious in this connection. If the educated classes are "economic illiterates" in this field of investing money, it stands to reason that many other persons are.* * A surprisingly large number of middle-aged farmers have in their 198 SPECULATION AND THE CHICACJO BOARD OF TRADE It is not strange that so many men of noto, whose his- tory we now know, became entangled, not through " unwise investments" of their own, but through being drawn in by their friends. When Mark Twain's estate was settled, it is said that there was found among his assets a goodly sized pile of " securities" in bogus and fake enterprises. The great financial calamity of his life was his venture, with his friends, in starting a publishing house. A somewhat similar- tragedy befell Walter Scott, who was held for the debts of a failed publishing venture. The years of grinding toil which followed this "unwise investment" of his friends, in order to lift the burden of debt, unquestionably shortened the life of Scott. William E. Gladstone's experience with "unwise 1 investments" was somewhat similar to Walter Scott's. This great statesman, while occupied with problems of the British Empire, had to meet out of his personal income heavy debts incurred by others. The story of President U. S. Grant is familiar how he permitted the use of his name by a company which later failed, and how he felt in honor bound to pay the creditors and how it took years of time and the- sacrifice of his personal belongings to meet these debts. These "unwise investments," or speculations, as we may frankly call them, have this evil in common, namely, the speculator was speculating with somebody else's money. This is an evil of speculation which is without one redeeming feature. The foregoing illustrations show that speculation is a bigger question than the mere organized exchanges. It suggests the possibility that an organized exchange possession an assortment of beautifully printed certificates of stock in defunct corporations, particularly in "cooperative" corporations. THE CHICAGO BOARD OF TRADE AND SPECULATION 199 might limit and curtail some of the evil aspects of specu- lation. Successful speculation fails to receive the same social condemnation as unsuccessful speculation. Take the sub- ject of land speculation always the leading form of specu- lation in America. The richest man in America, at the close of the Revolution, was our revered first President, George Washington. At the time of his death in 1799 his estate was worth nearly one million dollars. The bulk of this fortune, we now know, came from land speculation, particularly in New York, Pennsylvania, and along the Ohio River. While George Washington was a successful farmer, so far as the worn-out Virginia estate would permit success, he was un- able to increase his wealth by farming this soil. But his land speculations proved very profitable. The ethics of this speculation is not generally called in question. Prior to Washington's day all large business ventures were deemed hazardous and were uniformly called "adven- tures, " and the men carrying them out were officially termed " adventurers. " Thus the good Pilgrim Fathers who first settled in New England were sent over by a corporation, designated by its charter as a "company of adventurers." In a modern sense, they were speculators, endeavoring to establish "trade, fisheries and plantations" in the New World. This illustrates the better side of the speculative spirit, adventuring into new fields, assuming risks, out of which may come social gains. Without some speculation of this kind, no new continents would have been discovered; no new lands settled; no new cities built; no railroads or mines or steamships put to man's use. All progress is dependent upon a certain degree of speculation, in the wholesome use of the term. 200 SPECULATION AND THE CHICAGO BOARD OF TRADE (1) Evils of Speculation. The ethical aspects of the abuse of speculation, rather than the economic aspects of the use of speculation, are uppermost in the minds of the people. "The people hath spoken." Hence the rather general con- demnation of speculation of all kinds, good and bad alike. The employment departments of large corporations gener- ally require the applicant to be vouched for by those com- petent to speak, and one question on the blank form used is "Does the applicant speculate?" Positions of trust are barred to the man who speculates. There are two kinds of speculation good and bad, and there are two kinds of speculators the fit and the unfit. Speculation by the unfit is bad speculation. Those unfit to speculate are those (1) who lack the financial means to stand losses; (2) those who have not sufficient information, and (3) those who are occupying positions of trust, especially those who are directly entrusted with funds belonging to others. The evils of speculation arise from the speculation by the unfit. The Board of Trade realizes this fact more than the outsider. Members of the Board of Trade are constantly paying the penalty of the abuse of speculation by the unfit. Within recent years, for instance, a house, lax in its methods, accepted speculative trades from the cashier of a large firm on the Board of Trade. This ran on for some time, till the crisis arrived, and the cashier honest man though he had been for seventeen years was found to have stolen $60,000 of his employer's money. All firms on the Board with a big list of speculative customers experience losses through "bad debts," that is, through allowing credit to unfit speculators. Some of these losses are very large. Every member of the Board is familiar with cases among his own acquaintances of suicides caused by speculation and losses. The Board is per- THE CHICAGO BOARD OF TRADE AND SPECULATION 201 haps more wide awake to the evils of speculation that the ordinary citizen is. And it is to the self-interest of the Board to eliminate, so far as possible, the evils of specula- tion. The past history of the Board shows that in every case of a clear-cut issue of reform, the majority of the mem- bers have supported the reform. The past history also shows that the " black sheep" of the flock have met with punish- ment either suspension or expulsion. Some writers and speakers judge the Board of Trade only by the black sheep of the institution. It would be just as unfair a thing to judge our other social institutions in the same way to measure the medical profession by the quack doctor; the legal pro- fession by the shyster lawyer; the bench by the venal judge; the church by the faithless priest; the family by the divorce court; the State by the graft in politics; the school by the educated failures in life. We do not judge the school, the state, the family, the church, by these standards. We allow for a certain margin of imperfection. (m) Constructive Reforms. If we may judge by Ger- many's experience, an attempt to "eliminate speculation" must fail. Repressive laws do not eradicate it or improve it. The evolution of our industrial system has been inter- woven with speculation. No one can forecast the future. Three things might lessen the amount of speculation in grains. The abolition of the credit system would doubtless eliminate one class of risks, but at what cost no one can say. If farmers would market 1/52 part of their crop each week, it would largely abolish the job of the common pit speculator, the farmer in this case becoming his own speculator. Or, in the third place, the future may bring such a development of collective bargaining that prices will be set in this manner for six months or a year at a time. This would stabilize prices, 202 SPECULATION AND THE CHICAGO BOARD OF TRADE and if conducted with due regard to the consumer's interests, would be a large step in lessening speculation in the grain trade. But since grains are world crops, and are sold on world markets, the prices of grain in America would of necessity bear some relation to crop and price conditions in other lands. The United States Grain Corporation "stabilized" the price of wheat during the war, by buying it at the fixed price of $2.26 a bushel (contract grade). However, finding the demand strong, the government itself became a speculator, selling out the cash wheat at a higher price, and realizing a net profit on the first year's speculation of over $23,000,000. To "stabilize" price without "stabilizing" both production and consumption is impossible for any length of time. Program of Reform. Recognizing that there are serious evils connected with the abuse of speculation, we may sug- gest three measures of reform: (1) Education. The whole subject of investing money being one in which most people are "economic illiterates," the first need in this field is a scheme of education that will teach the fundamental principles of this subject. Now that the various Liberty Loans have familiarized some ten or twelve million persons with buying securities, who previ- ously had no first-hand knowledge of bonds or stocks, the time is ripe to interest people in the subject of good and bad investments. The very slender chance the amateur spec- ulator has should be taught, in season and out of season. Several heads of large speculative houses never make a spec- ulative trade themselves! They know the subject too inti- mately. It is a theory of our government that the individual is not to be coddled and protected too much as some pater- nal governments have unsuccessfully tried to do but that THE CHICAGO BOARD OF TRADE AND SPECULATION 203 he is to be educated to stand on his own feet, with the choice before him of going up or going down. Therefore, if the individual be taught that 90 per cent of the amateur speculators fail (according to tradition), and what is the difference between sound and unsound investments, he has reached the point where he must make his own choice, in Biblical phrase, " between good and evil." A successful program of education would no doubt lessen speculation by the unfit. (2) Government. The government's supervision over national banks suggests one method of government "regula- tion" of the grain exchanges. National banks are inspected once a year, and report certain facts as to their condition five times a year. Since the individual member of the Board* of Trade is acting as agent for his customers, handling their trades, their grain and their money, his business has ceased to be a purely private one. The fiduciary relationship is paramount. The grain market is a matter of public concern. Surely public policy would justify a certain amount of government inspection. The program the writer has in mind is simply this. Let the federal government at least once a year inspect the books and records of every firm trad- ing in futures for its customers, in order to determine the financial status of that firm, particularly whether or not it is solvent. When a bank is insolvent, it must cease receiving deposits. Yet it is a fact that there have been firms on the Board of Trade which were insolvent, and yet continued to do business for the public, for some time, be*fore the state of their affairs became known. Insolvencies come from two sources speculation by the firm itself, and "bad debts" of the customers of the firm customers in many cases who were unfit to speculate. A system of inspection of this kind 204 SPECULATION AND THE CHICAGO BOARD OF TRADE would surely make the firm more careful in taking on new customers, and in extending credit to customers. The present credit system makes speculation easier for custom- ers. The spirit of the times demands that speculation be made .harder, not easier for the public. A government inspection of the kind outlined would perform a service for the Board of Trade which it is unable to do for itself. The members of the Board, being competitors in business, are not in a position to inspect the books of one another. Hence some independent, disinterested authority must do this, if it is done at all. Firms which were found to be insolvent should be wound up at once. As to the "bad debts" on the books of solvent members, the writer has no set plan in mind for handling this matter. The government might publish an annual re- port, lumping together in one item, the total amount of these bad debts, without making public the names of the firms involved. To carry out a program of this kind, the government would need to employ expert accountants, versed in Board of Trade bookkeeping, and these accountants would devote their entire time to future trading accounts on the four or five exchanges where future trading is conducted. In addition to one annual inspection, each firm should make, like the banks, five short reports on forms prescribed, which would reveal the condition of solvency or insolvency of the firm. A reform of this kind would in no way affect the legitimate speculator, the man of means who has a market opinion which he is ready to back up with his money. It would, in the opinion of the writer, eliminate from the firm's books a great many doubtful and frankly unfit specu- THE CHICAGO BOARD OF TRADE AND SPECULATION 205 lators. It would dignify the business, and put it on a little higher plane than it is now. And last, but not least, the remedy is a very simple one. (3) Board of Trade. The Board of Trade, in the opinion of the writer has within its power the means of curing most of the evils arising from the abuse of speculation in grain futures. The Board has constantly fought abuses and de- vised remedies to fit the needs in the past, largely as a matter of self-interest. The Board of Trade is, however, very sensitive to public opinion, and does make rules from time to time which are dictated more by a decent respect to public opinion than by self-interest. It is a notable fact that certain prominent firms on the Board of Trade which once derived their income almost entirely from the trade of specu- lators now have important cash grain departments. As a definite program of reform, however, the writer would sug- gest four things: (1) Greater care and scrutiny should be exercised in admitting new members, to the end that those not worthy of the dignified name of grain merchants would be kept out. (2) Stricter rules should be adopted and en- forced concerning the taking on of new customers for future trading. The data concerning the customer's occupa- tion and financial standing should be verified before he is put on the books as a customer. No person holding any position of trust whatsoever should be accepted as a cus- tomer. (3) A little closer censorship should be kept on the market news letters sent out daily by speculative houses, to the end that no "tips" or temptations to speculate be in- cluded in such letters. (4) Wire houses having branch offices in small towns should be doubly cautious about developing trade of a purely speculative nature among the "unfit speculators." The rapid spread of wire house offices 206 SPECULATION AND THE CHICAGO BOARD OF TRADE into the country districts of the grain belt is justified only on the grounds that the wire house is offering the country grain trade a " superior service" a thing, oddly enough, which its competitors accuse it of doing. It seems to the writer that most of the hope of curing the evils of organized speculation must of necessity be placed in the organized exchange itself. The situation may be com- pared to city government, with its good and its bad features. It has been truly said that gambling or any other form of vice cannot exist twenty-four hours in the city without the police knowing it. If it continues to exist after that, it is by the sufferance of the police. And similarly, it may be just as truthfully said of the Board of Trade that manipulation of the market, crooked dealings, uncommercial conduct, etc., cannot go on very long without the Directors, sooner or later, knowing about it. And whether the practice be stopped instantly upon discovery or be permitted to continue is wholly within the hands of the Directors. Almost every day some petty squabble or complaint comes to their attention and is settled. It has happened (and not rarely) that some member has fallen into habits that are not up to the com- mercial code, and such member has been quietly "re- quested" by a Director to sell out his membership. Such a member always quits, to avoid the scandal of a trial and ex- pulsion, and to save the value of his membership. It some- times happens, too, that members of great power and prom- inence are disciplined, and even suspended or expelled. Members who have belonged to the Board of Trade for fifty years or more and there are several of them in business on the Board yet testify to the high standard of men generally chosen to the Directorate. It is therefore to this Directorate of eighteen men that we must look in the last analysis, for THE CHICAGO BOARD OF TRADE AND SPECULATION 207 such sa,no and wholesome changes, improvements, and re- forms as aro needed. (n) Summary on Speculation. There is a saying that fire and water are good servants but bad masters. To a much milder degree, it may be said that speculation is a good servant but a bad master. It is potent for evil, or it is benef- icent, depending on how it is used. It cannot be eliminated. It can be checked. To a certain extent it can be directed into useful channels. By whom shall it be checked and directed? The government can help check it by a system of inspection and publicity. The Board of Trade itself has l)oth the necessary information and power for both checking speculation and directing it into useful channels. Under Board of Trade rules, speculation is organized conducted according to fixed rules, out in the open, in the full light of day, and each transaction is given its proper weight in in- fluencing prices. Speculation is put to work, helping market and finance the grain crops of the country on a lower margin than would be possible without the help of the speculator. During the World War the United States Food Adminis- tration decided at different times that certain restrictions should be put on grain speculation. The decisions were communicated to the Directors of the Board of Trade. Immediately, in every case, the requested restriction was put into effect. Thus did the Board of Trade demonstrate its ability to check and control speculation in a manner which a war emergency seemed for the moment to justify. It did not seem advisable to the Food Administration at any time to request that speculation be entirely stopped. In other words, it was recognized that speculation is part of the machinery for cheaply handling the grain crop between producer and consumer. 208 SPECULATION AND THE CHICAGO BOARD OF TRADE All men speculate.. They may condemn speculation in others, but they themselves speculate in something in town lots, or Florida lands, or fruit orchards, or farm lands, or oil wells, or gold mines, or in something else. The fact re- mains that every normal man speculates. Most forms of speculation are inconsequential and lead nowhither. They are simply dissipated in the economic life of our society. Organized speculation is power. It is liable to abuse. As Chief Justice Marshall said, all power is liable to abuse. And one colonial governor of Virginia made himself famous for publicly thanking "God that there are no free schools or printing presses in Virginia. " His statement continued that schools and printing presses make the people read and know and thus these people might come to have a power which they might turn against their kingly government. And so they did. They used their power wisely. The organized exchanges use the power of organized speculation in conduct- ing the grain markets of the world. The fundamental question is, do they abuse this power or do they use it wisely? In the opinion of the writer, the abuse of this power is local, temporary, and incidental: the wise use of this power is the general, and characteristic practice of the exchanges. APPENDIX I World's Wheat Harvest, Total Crop and Amount of Wheat Im- ported or Exported by Various Countries Month Jan. Feb. Mar. Countries harvesting wheat Australian and New Zealand Chili Argentina continued. Upper Egypt Lower Egypt. India. . . . Au. crop . 140,000,000 . 20,000,000 . 40,000,000 325,000,000 Surplus exported 50,000,000 3,000,000 10,000,000 55,000,000 Imported Apr. Syria, Cyprus, Persia, Asia Minor Arabia Mexico . 150,000,000 . 10,000,000 10,000,000 May Cuba Algeria and Tunis China 40,000,000 500,000 1,000,000 June Japan United States Greece. . 28,000,000 .750,000,000 6000000 150,000,000 3,000,000 7000000 Italy Spain . 175,000,000 . 150,000,000 53,000,000 4,000,000 Portugal . 8,000,000 3,000,000 France .300,000,000 40,000,000 Jugo-Slavia . 20,000,000 5,000,000 July U. S. and France, con- tinued. Roumania . . 80,000,000 52,000,000 Bulgaria , , 40,000,000 10,000,000 209 210 APPENDIX July Austria 40,000,000 } Hungary 200,000,000 J l > (m > Serbia 10,000,000 Russia ami Siberia 850,000,000 l. r >0,0<)(),000 Germany 150,000,000 70,000,000 Switzerland 4,000,000 19,000,000 England (United King- dom) 60,000,000 220,000,000 Czecho-Slovaka 10,000,000 Aug. U. S. and Russia, con- tinued. Belgium 8,000,000 51,000,000 Luxemburg 500,000 Holland 4,000,000 23,000,000 Denmark 0,000,000 7,000,000 Poland 10,000,000 Colombia 1,000,000 Sept. Canada 200,000,000 100,000,000 Sweden 9,000,000 7,000,000 Norway 350,000 Oct. Canada continued. Nov. Brazil 20,000,000 Peru 2,000,000 South Africa 6,000,000 7,000,000 Dec. Uruguay 10,000,000 2,000,000 Argentina 175,000,000 95,000,000 Burmah 200,000 4,038,050,000 693,000,000 535,500,000 Note. Persons familiar with the grain trade, particularly the wheat and corn market, always take into consideration the crop of our prin- cipal competitors. Conversely, growers in competitive areas such as Argentina, are much interested in the size of the American crop. A good illustration of this fact is found in the Argentina wheat crisis of 1916, following America's bumper crop of a billion bushels in 1915. The story is told in our official consular reports as follows: APPENDIX 211 Investigation of Grain Markets in Argentina The Argentine Government recently appointed a commission to make an investigation of grain markets, with a view to protecting the interests of domestic growers and shippers. The report of the commission, as quoted in a recent number of the Revista Finan- ciera y Commercial, showed that the present low price of wheat in Argentina is due chiefly to the extraordinarily large world produc- tion of wheat in the 1915-1916 crop year. North America alone is able to supply nearly all the wheat needed in Europe, and the difference in freight does not permit Argentina to compete ad- vantageously in this trade. The present wheat supply in Argentina is estimated at 1,500,000 tons (50,000,000 bu.), which is gradually being marketed. Daily Commerce Reports, Sept. 7, 1916, p. 903. APPENDIX 2 Wheat: Production and Farm Value in the United States 1866-1915 Average farm price per bushel December 1 (Yearbook of the Department of Agriculture, 1915) Year Bushels Price 1866 152,000,000 152.7 1867 212,441,000 145.2 1868 224,037,000 108.5 1869 287,746,000 76.5 1870 235,885,000 94.4 1871 230,722,000 114.5 1872 249,997,000 111.4 1873 281,255,000 106.9 1874 308,103,000 86.3 1875 292,136,000 89.5 1876 289,356,000 97.0 year Bushels Price 1890 399,262,000 83.8 1891 611,781,000 83.9 1892 515,947,000 62.4 1893 396,132,000 53.8 1894 460,267,000 49.1 1895 467,103,000 50.9 1896 427,684,000 72.6 1897 530,149,000 80.8 1898 675,149,000 58.2 1899 658,534,000 58.4 1900 522,320,000 61.9 212 AI'I'KXDIX Year 1877 1878 1879 Bushels 364,194,000 420,122,000 459,483,000 Price 105.7 77.6 110.8 1880 498,550,000 95.1 1881 383,280,000 119.2 1882 504,185,000 88.4 1883* 421,086,000 91.1 1884 512,765,000 64.5 1885 357,112,000 77.1 1886 457,218,000 68.7 1887 456,329,000 68.1 1888 415,868,000 92.6 1889 468,374,000 69.8 Year Bushels l*rUv 1901 748,460,000 62.4 1902 670,063,000 63.0 1903 637,822,000 69.5 1904 552,400,000 92.4 1905 692,979,000 74.8 1906 735,261,000 66.7 1907 634,087,000 87.4 1908 664,602,000 92.8 1909 683,366,000 98.6 1910 1911 1912 1913 1914 1915 635,121,000 621,338,000 730,267,000 763,380,000 891,017,000 1,025,801,000 88.3 87.4 76.0 76.9 98.6 91.9 Note. With the exception of years influenced by financial panics and by wars, the price of wheat in the above table is seep to fall with increase in yield, and to rise with fall in yield. In other words, the basic law of supply and demand is not violated. APPENDIX 3 Prices on Chicago Board of Trade Wheat Price Fluctuations in Relation to Supply and Demand By Crop Years /or Ten Normal Years, 1905-1914 The factors influencing price are supply and demand. "Supply" is measured largely by (1) world crop; (2) United States crop; (3) Visible supply in the United States. " Demand" is supposed to increase in about the same ratio as population increases; However, API'KNDIX 213 serious events such as strikes, riots, panics, food boycotts, embar- goes, war, etc., influence the demand side of the market. Price also varies with value of money. The following figures show how closely the Chicago wheat prices follow the supply and demand factors of the market: Bradstreet's Index No. U. S. visible showing Av. price No. 2 supply U. S. wheat World wheat price level h inl red wheat, wheat crop crop (value of Chicago 000 omitted 000 omitted 000 omitted money} e . bu. bu. bu. 190r> 100 27,413 092,979 2,903,421 8.0987 1000 S3 36,027 735,261 3,252,520 8.4176 1907 77 47,305 634,087 3,319,072 8.9045 1908 90 33,125 664,602 2,950,840 8.0094 1909 114 28,896 737,189 3,093,816 8.5153 1910 115 27,182 635,121 3,609,656 8.9881 1911 95 47,800 621,338 3,524,824 8.7132 1912 99 45,057 730,267 3,422,368 9.1867 1913 105 52,781 763,380 3,704,140 9.2076 1914 93 47,057 891,017 3,725,488 8.9034 Per Capita Consumption of Wheat (Broornhali) : bu. bu. Argentina 10. India 0.9 Australasia 7.2 Italy 6.5 Austria-Hungary 5.0 Norway 1.6, Belgium 8.6 Portugal 1.8 Canada 13.0 Balkans 6.0 Denmark . 4.0 Russia 4.0 Hgypt 3.5 Spain 6.8 France 9.0 Sweden 2.7 Germany 3.3 Switzerland .6.7 Greece 4.5 United Kingdom 6.0 Holland 4.0 United States 6.4 214 APPENDIX In the above table it will be noted that the price follows the Visible, decreasing with an increase in Visible, and increasing with a decrease in Visible. This holds true up to the years 1913 and 1914. We have large Visible here, large United States crops, large world crops, and yet high prices for wheat. This price cannot be explained on the supply side. We must look to the demand side. And here a factor is clearly in sight. For each of these two years the importing countries of Europe took over 100,000,000 bushels in excess of their average, normal requirements a demand which stiffened prices. Apparently some countries in Europe were storing up wheat or flour against the opening of the World War which began Au- gust 1, 1914.* In Chicago heavy buying for wheat came through Italy, destined presumably for Germany. * Figures for world's wheat crop are taken from Broomhall's Corn Trade Year Book, Liverpool, 1914. Chicago wheat prices are taken from Annual Reports Chicago Board of Trade. The average price per year is arrived at by adding the highest and lowest cash prices for con- tract wheat, for each month in the year and dividing the sum by 24. The visible supply is the average of the highest and lowest visible for each year. The index numbers are from Bradstreet's, July 12, 1919, p. 446. APPENDIX 215 APPENDIX 4 List of flour mills grinding 1.000 barrels of flour annually in the eleven states tributary to Chicago, and amount of wheat ground for one year. (U. S. Census 1909) From the Millers' Almanack, 1917-1918, p. 218 State No. of mills Wheat ground in 1 year Minnesota 248 104,251,138 bu. Kansas 209 49,607,646 " Illinois 220 30,137,000 " Ohio 527 27,142,000 " Missouri 388 26,753,000 " Indiana 411 22,825,000 " Michigan 293 16,621,000 " Wisconsin 149 16,096,000 " Nebraska 189 10,712,000 " Iowa 122 6,933,000 " South Dakota 72 4,685,000 " APPENDIX 5 Relation Between Future Price and Cash Price When the future price is stabilized (On July 11, 1917, the Board of Directors of the Chicago Board of Trade adopted a resolution prohibiting members from making any future corn contracts for delivery during any month of the year 1918 at a price in excess of $1.28 per bushel. The next day the Directors made this same rule apply to corn for December, 1917, delivery. These rules were not rescinded till April 9, 1918, per- mitting contracts for delivery on and after June 1, 1918 to be made 216 APPENDIX at market price. The U. S. Food Administration desired to reduce the price of corn, and to this end asked for a curtailment of " specula- tion in corn." The result of this action is shown below.) Com prices, cash and future, Chicago Board of Trade, 1917-1918 No. 2 Spot No. 2 Dec. delivery Mould low high low high July 1773/2 to 2.32 108^ to 124% Aug 169 " 236 105 5 /s" 118 7 / 8 Sept.. . . . . 195 " 224 111 " 122 3 / 8 Oct . 189 " 215^ lll'Vs" 121 Nov. . 185 " 229 114 " 125 Dec .160 " 190 121 7 /s" 127% May delivery Jan . 170 to 185 123% to 126 Feb.... .170 " 180 124^ " 127% Mar. . . . . 165 " 175 120 7 / 8 " 127^ Apr .... .160 " 165 124^ " 127^ May.. . . . 150 " 155 127 7 / 8 " 127 7 / 8 ' Upset price being 1.28, Dec. and later futures (Trading in May Con- tracts suspended by Directors, May 21.) June 150 to 165 July 160 to 175 Jidy delivery 130% to 148% Nos. 3, 4) July de- livery 146 M to 164 (Change in grades de- liverable on contracts, owing to condition of corn crop.) The above table should be considered in connection with the one below, showing the price of cash corn for 1917, from January 1, up to the time the maximum price was set on the December futures, namely, July. The market movement was tending upward and so continued till the new crop arrived. APPENDIX 217 Corn (Spot) January to July, 1917, Board of Trade, Chicago Low High January 93 34-103 February 96^-102% March ' 102*4-122^ April 123 -160 May 152 -174 June 158 -176 APPENDIX 6 Private Wire Houses Members Chicago Board of Trade, 1919 Name Branch Offices Correspondents Armour Grain Company 13 7 J. S. Bache & Company 10 1 Bright Sears & Company 1 Bartlett Frazier Co 7 4 Beach Wickham Grain Company 1 5 James E. Bennett & Company 25 13 H. & B. Beer 1 34 N. L. Carpenter & Company 4 15 Childs, Kay & Woods 3 1 Clark, Childs & Company 2 9 John F. Clark & Company 20 E. J. Feehery & Company 2 2 Halle & Stiegletz 1 Harris Winthrop & Company 3 . 7 A. A. Housman & Company 1 Hughes & Dier 7 Hulburd, Warren & Chandler 7 E. F. Button 6 11 Jackson Brothers Company 2 7 Jenks, Gwynne & Company 1 2 King Farnum & Company 1 1 218 APPENDIX Name Branch Offices Correspondents Lamson Brothers and Company . . . , 20 11 Laidlaw & Company 4 Charles E. Lewis & Company 1 Arthur Lipper 1 Logan & Bryan 23 86 E. Lowitz & Company 9 4 Miller & Company 2 1 S. Mincer 2 McDonnell & Company 1 Orthwein-Matchette Company 5 Otis & Company 5 Post & Flagg 12 Pynchon & Company 1 J. Rosenbaum Grain Company 1 E. C. Randolph 5 13 Sawers Grain Company 6 Shearson, Hammill Company 6 7 Simons Day & Company 12 9 Shaffer & Stream 5 Strandberg, McGreevy & Company 4 Thompson & McKinnon 6 38 Trans-Mississippi Grain Company 3 Updike Grain Company 9 Gardner B. Van Ness Company 11 M. L. Vehon Company 1 E. W. Wagner & Company 31 20 Ware&Leland. . 12 13 APPENDIX 219 APPENDIX 7 Wheat Price Fluctuations (1) Before Grain Exchanges were estab- lished, and (2) After Grain Exchanges were established. For 100-year period Prices of Wheat at Albany for 60 years, 1793-1852 The following table, showing the price of wheat per bushel at Albany, New York, on the first day of January in each year, from 1793 to 1852, has been prepared from tables kept at the office of the Van Rennselaer Manor at Albany (Hunt's Merchants' Magazine, Vol. XXXI, p. 109): 1793-$0.75 1813-S2 . 25 1833-$!. 25 1794- 1.00 1814- 1.87^ 18341.00 1795- 1.37^ 1815- 1.623^ 1835- 1.00 1796- 2.00 1816- 1.75 1836- 1.50 1797- 1.50 1817- 2.25 1837- 2.25 1798- 1.25 1818- 1.873^ 1838- 1.62^ 1799- 1.18% 1819- 1.75 1839- 1.75 1800- 1.56M 1820- 1.00 1840- 1.12H 1801- 1.81M 1821- .75 1841- 1.00 1802- 1.00 1822- 1.12K 1842- 1.25 1803- 1.12J4 1823- 1.25 1843- 1.87^ 1804- 1.25 1824- 1.25 1844- 1.00 1805- 2.00 1825- 1.00 1845- .93% 1806- 1.43% 1826- .87J^ 1846- 1.18% 1807- 1.37^ 1827- 1.00 1847- 1.12V6 1808- 1.12^ 1828- 1.00 1848- 1.3114 1809- 1.00 1829- 1.75 1849- 1.18M 1810- 1.56J^ 1830- 1.00 1850- 1.18% 1811- 1.75 1831- 1.25 1851- 1.12H 1812- 1.87J^ 1832- 1.25 1852- 1.00 Price ranges, 20 years (1793-1812) .75 -2.00= 1.25 (1813-1832) .75 -2.25= 1.50 (1833-1852) .93%-2.25= 1.31% Prices of Wheat, Chicago Board of Trade, 40 years, 1874-1913 The following table, showing the price of No. 2 wheat, Chicago, on the first business day of the year, from 1874 to 1913, has been prepared from the Annual Reports of the Chicago Board of Trade: Price ranges, 20 years (1874- 1893) . 72i/8-'l. 32% = 605/ s (1894-1913) From the above table it is evident that price fluctuations in wheat were twice as large in amount, before future trading was used, as they were after future trading was used. 220 APPENDIX APPENDIX 8 Grain Storage in Chicago (1918 Report Chicago Board of Trade) I. Regular Public Elevators. Name of warehouse Operated by Capacity, bu. Armour Elevators A and B. . . .Armour Grain Company. . . 1,500,000 Armour Elevator C Armour Grain Company. . . 1,000,000 Calumet Elevator B Central Elevator Co 1,000,000 Chicago & St. Louis & Annex . . . J. Rosenbaum Grain Co. ... 2,000,000 J. Rosenbaum Elevator A J. Rosenbaum Grain Co. . . . 400,000 J. Rosenbaum Elevator B J. Rosenbaum Grain Co. . . . 1,550,000 Rock Island Elevator A J. Rosenbaum Grain Co. ... 1,250,000 S. Chicago Elevator C & Annex S. Chicago Elevator Co 3,000,000 Total Public Storage 11,700,000 II. Private Elevators. Name of warehouse Operated by Capacity, bu. Central Armour Grain Company. . . 1,000,000 Chicago & Northwestern Rail- way Terminal Armour Grain Company . . . 0,000,000 Grand Trunk Armour Grain Company . . . 400,000 Minnesota Armour Grain Company . . . 750,000 Santa Fe Armour Grain Company . . . ,500,000 Union Armour Grain Company . . . ,800,000 Calumet A Central Elevator Co ,200,000 Calumet C Central Elevator Co ,200,000 National Central Elevator Co ,000,000 New York Central Central Elevator Co ,500,000 Irondalc J. Rosenbaum Grain Co ,000,000 J. Rosenbaum C J. Rosenbaum Grain Co. ... 250,000 South Chicago D So. Chicago Elevator Co 1,500,000 A. Dickinson (35 St.) A. Dickinson Company. . . . 600,000 Acme Malt Acme Malt Company 200,000 APPENDIX 221 Name of warehouse American Linseed Company . . American Maize American Malting Company . . American Malting Company . . American Malting Company . . Atlantic B.A.EckartMill, Badenoch Bell Byrnes Calumet Malting Co Columbia Malting Co Concrete Edwards El Hales Hamilton Elevator and Tanks. Merchants El Cragin Fleischman Grand Crossing Haler & Garden Harvey Hayford Hirst & Begley Interstate Keystone Wabash Keelen Brothers Matteson McAvoy's Brewery McKenna & Rodgers Michigan Central Mueller & Young Northwestern Yeast Norris Range & Sons Operated by Capacity, bu. . American Linseed Co 200,000 . American Maize Products Co 100,000 .American Malting Co 500,000 .American Malting Co 550,000 .American Malting Co 500,000 . Arcadia Farms Milling Co. . . 50,000 . B. A. Eckhart Milling Co ... 1,000,000 . J. J. Badenoch Company! . . . 350,000 .Rosenbaum Brothers 1,500,000 . W. J. Byrnes & Company 40,000 .Calumet Malting Co 420,000 .Columbia Malting Co 1,000,000 .Hales & Edwards Co 1,500,000 . Hales & Edwards Co 20,000 .Hales & Edwards Co 1,000,000 . Hales & Edwards Co 500,000 . Hales & Edwards Co 20,000 .F. J. Delany 600,000 .Fleischman Malting Co 1,000,000 .F.G.Ely 60,000 . Brooks Elevator Co 550,000 . Harvey Grain Company. . . . 270,000 . Frank Marshall 100,000 .Hirst & Begley Linseed Co.. 75,000 .Quaker Oats Company 775,000 .E. R. Bacon 1,500,000 .E. R. Bacon 1,500,000 .Keelen Brothers 100,000 .C. L. Daugherty & Co 100,000 .McAvoy Brewing Co 100,000 . McKenna & Rodgers 50,000 . F. H. Mcaliff & Son 300,000 . Mueller & Young Grain Co. . 1 ,000,000 . Northwestern Yeast Co 350,000 . Norris A Company 1,000,000 .T. Range & Sons 20,000 222 APPENDIX Name of warehouse Operated by Capacity, bu. Rialto Nye-Jenks Grain Co 1,000,000 Rockwell W. E. Ellis 80,000 Schwill Malt House A. Schwill & Company 3,000,000 Seipps Brewery Seipp Brewing Company . . . 325,000 Standard Brewery Standard Brewing Co 100,000 Standard Taylor & Bournique Co 400,000 Star & Crescent Star & Crescent Milling Co. . 500,000 U. S. Brewery.. U. S. Brewing Company 100,000 Total Private 45,605,000 Total Public 11,700,000 Total Chicago 57,375,000 APPENDIX 9 Price Fluctuations Due to Unforeseen Causes, at Times Odd Example, "horse disease" 1872 In October, 1872, it was announced in Chicago that further eastern grain shipments on Erie Canal would likely be embargoed due to the prevalence of a so-called "horse disease." Hundreds of eastern horses were dying daily, according to reports. Very soon the canal traffic was almost suspended. By the 31st of the month the spread of the epidemic had affected the markets and prices of grain and other produce went down. The "horse disease" spread rapidly, the wholesale business of Boston being practically sus- pended, and New York's business suffering severely. By the first of November* the disease had spread to Chicago, and street cars, omnibuses, and coal wagons were stopped. All horses for towing were taken off the Illinois & Michigan Canal. Some ox teams were put on. While the horse disease was raging for a few weeks, the business of the country was almost completely paralyzed. APPENDIX 223 APPENDIX 10 CORN Closing Prices of Spot Com (No. 2 Mixed) Chicago, May 1, 1919, to September 30, 1919 May 1 164 -165 June 2 175 -176 July 1 180 -181 2 167 -168 3 176 -177 2 183 -184 3 170)4-171 4 175%-176% 3 186 -187 5 175 -176 5 166^-167 6 174 -175 4189 -1SQ% 6 170)4-171 7 172 -173 8 192 -193 7 169 -170 9 197 -198 8170 -171 9172 -172% 10 195 -195% 9 174 -175 10172 -172% 11 191 -192 10174 -175 11 171 -171% 12 194 -195 12173 -173^ 12 181 -182 13175 -176 14 193 -194 13 179 -180 14 175 -176 15 192 -193 14 175 -177 16193 -194 15 176 -177 16178 -178^ 17 193 -194 16 176 -177 17 177 -177% 18 190 -191 17 175 -176 18 181 -182 19 1W%-191% 19 m%-m% 19 176 -176^ 20 183%-184% 21 19334-194 20 177 -178 21 182 -183 22195 -196 21 181 -183 23 195 -197 22 182 -183 23 182 -183 24 196 -197 23 181 -182 24 180 -181 25197 -198 24 179 -180 25 180 -181 26 196 -197 26 17934-1803^ 26178 -179 27 17$%-m% 28198 -200 27 180%-1S1% 28 176%-177% 29 199 -200 28 181 -182 30 200 -201 29 175 -176 30 17734-1783^ 31200 -201 31 174 -176 224 APPENDIX August 1 197-198 2 196-198 4 190-192 5 182-184 6 190-192 7 194-196 8 198-200 9 201-203 11 202-204 12 202-204 13 203-205 14 200-202 15 198-199 16 198-199 18 193-195 19 195-196 20 196-198 21 197-198 22 197-198 23 194-196 25 193-194 26 193-194 27 192-193 28 187-188 29 184-185 30 183 September 1 Labor Day 2 177 -179 3 173 -174 4 165^-166 5166 -166^ 6 167 -167^ 8 166 9 163 10 11 156 12 146 -164 -147 13 129 J4- 140 15 136 -137 16 140; ' 2-141 ?.j 17 145 -146 18 147 -148 19 148 -149 20 22 149 -149^ 23 1.54 -156 24 155 -156 25 149 -150 26 143 -144 27 142 -143 29 14U 30 APPENDIX 225 APPENDIX 11 Market News Restrictions Board of Trade of the City of Chicago, Secretary's Office. Bulletin No. 49 (1919) Chicago, March 15, 1919. To Members: Your attention is called to the following notice sent out by the Directory in 1910; and the Executive Officers ask that you comply with same without fail: Members of the Board publishing circular market letters are re- quested to send one of such letters, in each case, to the Secretary of the Board. The Directory on February 23, 1915, instructed the Secretary to notify all members of the Board that, in disseminating news that would tend to influence the market, other than that of a statistical nature, they must be sure of their information and the reliability of its source, and be prepared at all times to supply the Secretary with their authority for it. This is again called to your attention. All rumors are prohibited : only facts should be stated. (Signed) JOHN R. MAUFF, Secretary. 220 APPENDIX APPENDIX 12 Regulations of Crop Reporting Methods Board of Trade of the City of Chicago, Secretary's Office. Bulletin, R 1 (1919) Chicago, April 16, 1919. To Members of the Clearing House: The following action was reaffirmed by the Directory at its regular meeting held on April 15, 1919: Hereafter crop reports shall be given publicity only when compiled by accredited crop experts; further, that those wishing to qualify as such experts shall register their names in the Secretary's Office and be duly approved. After such registration and approval, crop reporters will be per- mitted to compile the results of their investigations and make public, information relative to crop conditions, when the reports are sufficiently comprehensive to indicate the general situation. Circulation in any manner whatsoever by members of this Association of crop reports from other sources that are not official will be a violation of the action of this Directory and will be con- sidered a grave offense against the good name of the Association. Please give this all the publicity possible, so that it may be understood by every one connected with the trade. (Signed) JOHN R. MAUFF, Secretary. APPENDIX 227 APPENDIX 13 Regulation of Future Trading Board of Trade of the City of Chicago, Secretary's Office. Bulletin No. 45 (1918) Chicago, December 26, 1918. To Members: At a special meeting of the Board of Directors held this day, a telegram from Mr. J. J. Stream, Chief, Coarse Grains Division, U. S. Food Administration, was read : New York, December 24, 1918. John R. Mauff, Secretary, Board of Trade, Chicago. Grain Exchanges are advised that on and after January 1, 1919, they may, in their discretion, remove all quantity restrictions on trading in future deliveries of Corn, Oats, Rye and Barley. This relaxation does not abrogate or modify any of the provisions of the Food Control Act, and Grain Exchanges and their members will continue to be held strictly accountable for any manipulative prac- tices resulting in undue depression or enhancement of grain prices*. (Signed) J. J. STREAM, Chief Coarse Grains, Food Administration. Be it therefore Resolved, that on and after January 1, 1919, all quantity restrictions or trading in future deliveries of corn, oats, rye and barley be rescinded, and a copy of this action be forwarded to Mr. Stream. Be it also resolved, that the Secretary notify all members of this action and call their special attention to the last three lines in the telegram from Mr. Stream to the effect that members will continue 228 APPENDIX to be held strictly accountable for any manipulative practices re- sulting in undue depression or enhancement of grain prices. Tin's will indicate the policy of the Officers of this Exchange in the future handling of this matter. (Signed) JOHN R. MAUFF, Secretary. APPENDIX 14 Restrictions on Future Trading Board of Trade of the City of Chicago, Secretary's Office. Bulletin No. 51 (1919) Chicago, May 19, 1919. To Members: Whereas, under authority delegated to the United States Food Administration by President Wilson, Mr. Julius H. Barnes, Chief of the Cereal Division, has suggested that the Board of Directors of this Association reinstate the ruling limiting the amount of open trades in corn for any one interest or individual to 200,000 bushels; and further, That in the case of any accounts now open beyond that quantity, the officers make proper effort to secure a reduction to that basis in the near future, and further: That cognizance must be taken of the fact that restrictions against hoarding, Section 6 of the Food Control Law, is in full force and effect until the existing state of war between the United States and Germany shall have terminated, the fact and date to be ascer- tained and proclaimed by the President of the United States; and, Whereas, the Board of Directors of the Board of Trade consider the above suggestion from Mr. Julius H. Barnes as equivalent to an order from the United States Food Administration, therefore, Be it Resolved, that no individual, firm, or corporation, except for APPENDIX 229 hedging purposes, have or control any contracts cither for purchase or for sale, calling for corn for future delivery in excess of 200,000 bushels; further, Resolved, that contracts for deferred acceptance, whether daily or weekly, and spreading between different months of deli very, and contracts open during a session as well as between sessions, are all included in these restrictions; further, Resolved, that contracts entered into as a hedge shall be un- limited in amount, but not incommensurate with actual require- ments; and in determining the nature of a hedging contract, the direct manufactured products of corn, may be included, and hedging in connection with the feeding of live-stock is permissible without license and free of restrictions; further, Resolved, that contracts now r open in excess of 200,000 bushels must show progress towards adjustment from time to time and a full compliance therewith on or before the close of the market session June 7, 1919; further, Resolved, that any evasion of these resolutions by trading in the name of a third party, or joint account, or opening or keeping an account not properly designated by the legal name and address of the person, firm or corporation actually represented thereby is prohibited; further, Resolved, that any violation of the loyal and patriotic intent of these resolutions or failure to comply with the written demands of the Executive Officers acting in accordance therewith, shall be considered a grave offense against the good name and dignity of this Association, and punished by suspension or expulsion, under the provisions of Section 18 of Rule IV of the rules of the Board. By order of the Executive Officers. (Signed) JOHN R. MAUFF, Secretary. 230 APPENDIX APPENDIX 15 Executing Trades in the Open Market Board of Trade of the City of Chicago, Secretary's Office. Bulletin No. 6 (1919) Chicago, July 24, 1919. To Members: The Secretary was instructed by the Board of Directors to put before our membership, by illustration, various acts that would constitute a violation of the rule on principal and agent (section 11, of Rule IV), reading as follows: Sec. 11. No member of this Association is allowed under any cir- cumstances to be both principal and agent in any transaction in any of the commodities dealt in under the rules of this Board. Furthermore, no member of this Association in any transaction in any of the commod- ities dealt in under the rules of this Board shall allow himself directly or indirectly, either by his own act or by the act of an employe or of a broker or other member of this Association, to be placed in the position of agent for both buyer and seller. The Board of Directors has approved of the following in that connection : When a customer entrusts his order to a member of this Associa- tion for execution, whether such member, in his capacity as agent, is an individual, firm or corporation, the customer is entitled under the rules of this Association to an execution in the open market and in a manner in which the agent can have no personal interest, either directly or indirectly, in whole or in part. Therefore, a violation of section eleven of Rule IV would occur, should a member of this Association, whether an individual, firm or corporation, while acting as agent, take for his personal account, or for the account of his firm or a member thereof, or his corporation or APPENDIX 231 an officer thereof, the other side of a contract on an order entrusted to him for execution, whether directly or indirectly, in whole or in part. The penalty for this is expulsion. This would occur whether the act was accomplished through an employe, broker, partner of a firm or officer of a corporation. This applies with equal force to brokerage firms not members of the Clearing House, and a member of any such firm trading with his partner, directly or indirectly, where one side of the contract was for his personal account, such firm would be placed in position of "principal and agent." The Board of Directors also instructed the Secretary to call attention of the members to Section 8 of Rule IV, reading as follows : "All orders received by any member of this Association, firm or corporation doing business upon the Board of Trade of the City of Chicago, to buy or sell for future delivery any of the articles or commodities dealt in upon the floor of the Exchange (except when in exchange for cash property) must be executed in the open market in the Exchange Hall during the hours of regular trading, and under no circumstances shall any member, firm or corporation assume to have executed any of such orders or any portion thereof by taking tho trades, or any portion of any of them, for their own account, cither directly or indirectly, in their own name or that of an em- ploye, broker or other member of this Association. Any member convicted of violation of this rule by the Board of Directors shall be expelled. (Signed) JOHN R. MAUFP, Secretary. APPENDIX 16 The following story illustrates how a small piece of paper "money" ("credit money," that is, a "promise to pay money") does the work of real money (gold). " Mr. Brown, a Kansas gentleman, is the proprietor of a boarding house. Around his table at a recent dinner sat his wife, Mrs. Brown ; the village milliner, Mrs. Andrews; Mr. Black, the baker; Mr. Jor- 232 APPENDIX dan, a carpenter; and Mr. Hadley, a flour, feed arid lumber mer- chant. Mr. Brown took a ten-dollar bill from his pocket and handed it to Mrs. Brown, with the remark that there was ten dollars towards the twenty he had promised her. Mrs. Brown handed the bill to Mrs. Andrews, the milliner, Saying, " that pays for my new bonnet." Mrs. Andrews, in turn, passed it on to Mr. Jordan, re- marking that it would pay for the carpentry work he had done for her. Mr. Jordan handed it to Mr. Hadley, requesting his receipted bill for flour, feed, and lumber. Mr. Hadley gave the bill back to Mr. Brown, saying, "that pays ten dollars on my board." Mr. Brown again passed it to Mrs. Brown, remarking that he had now paid her the twenty dollars he had promised her. She in turn, paid it to Mr. Black, to settle her bread and pastry account, Mr. Black handed it to Mr. Hadley, asking credit for the amount of his flour bill, Mr. Hadley again returning it to Mr. Brown with the re- mark, that it settled for his month's board; whereupon Brown put it back into his pocket, observing that he had not supposed a green- back would go so far." A greenback is not money. It is a promise to pay money. The greenback may be presented to the United States Treasury and exchanged for real money gold. The above story is quoted from Among the Hunwrislts ami After- dinner Speakers, Collier & Sons, New York, 1909, p. 251. APPENDIX 17. Prices of Wheat to Producers in Kansas, etc. (63d Congress, 3d Session. House Document 1271) The following quotation is the summary of findings of this report. This investigation of the grain trade was made by the Federal government pursuant to House Resolution 571 calling for a report by the Department of Agriculture concerning the prices paid for wheat to the producer in the State of Kansas, and the prices at which said wheat was sold for export at Kansas City, and how such APPENDIX 233 prices were fixed and determined. This important report shows that the " consumer's dollar," in the case of Kansas wheat, went largely to the farmer. Summarized statement showing the spread between the price received by a farmer in southern Kansas on Sept. 28, 1914, and the price received by an exporter for wheat to be delivered at Liverpool, together with the various elements of marketing costs. Cents per bushel Price received by farmer in Kansas 87 . Margin taken by country elevator 3.0 Price paid country elevator by shipper 90 . Freight rate point in Kansas to Galveston 15.0 Inspection and weighing at Galveston 25 Gross profit of shipper 1 . 25 Price paid by exporter at Galveston 106 . 50 Cost of elevation, loading into boat, etc 1 . 25 Freight, Galveston to Liverpool 6.0 ' Insurance, etc., in transit 75 Overhead expenses of exporter 1.0 Net profit of exporter 1 . 25 Price delivered at Liverpool 116 . 75 Summarized statement of approximate spread between Kansas farm price and price delivered at Philadelphia on Kansas City terms, Sept. 30, 1914. Cents per bushel Price received by farmer in Kansas 87 .0 Margin taken by country elevator 3.0 Freight rate to Kansas City 6.2 Inspection, weighing, and interest on draft 25 Commission .... 1.0 Price paid by shipper in Kansas City 97 .45 234 APPENDIX Freight rate, Kansas City to Philadelphia 15.6 Mixing in Kansas City elevator 25 Exchange 20 Overhead expense of shipper 375 Net profit of shipper . 625 Price delivered in Philadelphia 114. 500 SUMMARY 1. The State of Kansas is fortunately situated for marketing its wheat in that it has a great number of domestic outlets and the foreign market via Gulf ports. This situation leads to vigorous competition between grain dealers of the various terminal markets for Kansas wheat. 2. The prices of wheat paid to farmers in Kansas are based largely upon the prices in Kansas City, Mo., and at the Gulf ports for export. From these basic prices must be subtracted the freight rate, shipper's profit, and other incidental charges and the margin taken out by the country elevator to determine the price which is paid to the farmer. Since the margins of profit taken by the grain dealers in the larger markets are very small (averaging about 1 cent a bushel), it appears that the fanners of Kansas, as a general rule, are obtaining all their wheat is worth. 3. The weakest link in the chain of marketing Kansas wheat is the country elevator. Compared with the value and difficulty of service rendered, the margin taken by the country elevator is per- haps larger than that taken by any other middleman in the market- ing of wheat. One special weakness is in the failure to use the future market to hedge holdings. Elevators frequently become congested with unhedged stored grain. The elevators, as a general rule, are operated inefficiently, with inadequate accounting sys- tems and lack a sufficient working capital. 4. In conspicuous contrast with the country elevator situation is the great efficiency and highly organized method of operation of the APPENDIX 235 terminal grain operators and the exporters. In the case of the ex- port trade especially the profits per bushel are extremely low con- sidering the service rendered and the capital and risk involved. 5. No evidence was discovered of collusion between large inter- ests to restrain -competition or to depress prices in Kansas City. In Kansas City 86 per cent of the terminal-elevator capacity is con- trolled by six firms, but these firms appear to be in competition with each other. 6. 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. APPENDIX 18 Mixing The Mixing Problem as Applied to Butter The mixing of grain to bring it to the level of the official grade has nn interesting parallel in the mixing of water with butter to bring the butter to the level of the federal standard. Under our federal law (Act of May 9, 1902) any butter in the manufacture or manipulation of which any process or material is used with intent or effect of causing the absorption of abnormal quantities of moisture is adulterated butter. The normal moisture content of butter (i. e., the amount of water in the butter) was apparently set at 16 per cent by a regulation of the Commissioner of Internal Revenue (Regulation No. 9, United States Internal Revenue, p. 87). Hence farmers' cooperative creameries and other creameries mak- ing butter containing only 12 or 13 per cent of water were able to comply with the federal standard after adding three or four per 236 APPENDIX cent of water to their butter. And with butter selling at fifty cents a pound, it was of course profitable to sell all the water possible at fifty cents a pound. Dairy scientists, experts in State Agricultural Colleges, State Department of Agriculture and others, soon began to explain and commend ways of " controlling " the moisture content of butter in other words, mixing water with butter. For instance, the follow- ing may be mentioned as calling the attention of butter makers to the moisture content problem. Professor C. L. Peck in his book, Profitable Dairying (1906-11), p. 114; Professor Charles A. Publow, Questions and Answers on Butter Making (1916), pp. 30, 34, 37, 38, 44; Professor Henry Stewart, The Dairyman's Manual (1911); Larsen and White, Dairy Technology (1914); Professor Martin H. Meyer, Butter Making and Dairy Arithmetic (1915, 4th edition). On pages 116-117, and 132-133 of this book, Professor Meyer dis- cusses these topics: Controlling moisture in butter; Methods and processes by which the amount of water in butter may be increased and retained; How not to exceed the legal moisture limit. Professor John Michels, Creamery Butter Making (1915, 8th edition), on pages 127 and 154, shows how the moisture content of butter has been increased during the past few years, and advises those butter makers who desire to be on the safe side to make 15 per cent their limit, and avoid "falling into the clutches of the law." Professor Wm. A. Stocking, Manual of Milk Products (1917), pp. 256-257, shows that by modifying the methods of manufacture butter makers can increase the water in their butter "2 or 3 per cent," which "means a large difference in the money returns to the creamery." Professor G. L. McKay, "Some Facts About Moisture and Its Effect on Butter" (Hoard's Dairyman, Vol. 37, p. 432, May 25, 1906), de- clared that if the maker of butter could incorporate 14 or even 15 per cent of water and make a uniform high grade of butter, it was to his own and his patron's interest to do so. The State Dairy Commissioner of Iowa in his 19th annual report (1905) spoke commendingly of the dairy work done at the State's Agricultural College at Ames. This language was used: APPENDIX 237 "The Daiiy Department at Ames by a series of experiments and investigations showed that not only could a skillful butter maker make his overrun almost anything he desired, but that certain butter makers in successful creameries were already doing it; that a 16 per cent overrun could easily and legitimately be increased to 20 per cent or even 25 per cent overrun. That is, the skillful butter maker can make butter having in it only 80 per cent of butter fat just as easily and as certainly as he can make butter containing 86 per cent of butter fat " (p. 13). APPENDIX 19 Threatened Corner in the Malaga Dried-Raisin Market (Consul Gaston Smith, Malaga, Spain, Oct. 15, 1919) An example of forward contracts not protected by any organized exchange. The "Union Sindical de Almacenistas de Pasas," an association of dealers and exporters of Malaga dried raisins, fear financial loss on their export contracts. It appears that a number of these ex- porters have contracted to supply foreign importers, principally in Great Britain, with dried raisins at a specified price without taking the precaution of covering their contracts, and now the raisin producers and commission merchants, aware of these contracts, are holding back for higher prices. It is said that certain exporters to Great Britain will lose heavily in filling their contracts. The principal exporters to the United States have been inter- viewed and they report that all their contracts will be promptly filled. The raisin production of this district is estimated for 1919 at approximately from 1,150,000 to 1,200,000 boxes of 22 pounds each, so there is no shortage to justify the canceling of sales contracts. The producers and commission merchants are not organized, but 238 APPENDIX due to high prices received they have made such large profits this season that they can afford to hold the remainder of their products indefinitely. Commerce Reports, No. 267, Nov. 13, 1919, p. 884. APPENDIX 20 The Life of a Car of Grain Shipped by a Country Dealer to Lamsoii Bros. & Co., No. 6 Board of Trade, Chicago, with Documents Attached Showing Protection to Shipper when dealing with member of organized Exchange. When a car of grain is loaded at a country elevator the shipper usually informs us he is billing the car by mailing an advice of ship- ment (Ex. A), giving the car number, kind of grain, stating the approximate weights, the amount of draft, if any, and possibly specific disections in regard to the handling or information in regard to the quality of the grain to aid us in making sale to best advantage are given. Often the advice of shipment is neglected, but a bill of lading (Ex. B) is issued by the railroad agent and the shipper fills in the name of the commission merchant to whom the car is going, des- tination, car number, kind of grain, and his weights. This is signed both by the shipper and the railroad agent and is forwarded to us either direct by mail or through a bank if draft is made. As a rule the shipper will make draft (Ex. C), attaching the orig- inal bill of lading, for around seventy-five (75%) per cent of the value of the grain and when this draft is presented to us by a Chi- cago bank for collection, we honor it with our check. The car moves by local freight to the nearest division point, then is usually placed in a through train for Chicago. If there is an unreasonable delay in transit, a tracer (Ex. D) is started in order that the car may be located and kept on its way. When the car arrives in Chicago, a railroad notice (Ex. E) bear- APPENDIX 239 ing our name, the car number and initial, is sent to the State Grain Inspection Offices and the State Grain samplers are given the car number, so that official samples may be drawn from the load. The seal is broken by a railroad employee; then the sampler, using n grain trier, draws official samples from the different parts of the car. The condition of the car itself is inspected by a Board of Trade employee and a certificate (Ex. F) prepared for the shipper. The official samples from the car are taken to the State Grain Inspection Offices, where licensed inspectors, using as a guide the federal grade specifications, determine in which grade the car should be placed. Test weight per bushel, moisture content, quality and color are all important factors in connection with the grade. An inspection certificate (Ex. G) in duplicate for the shipper and buyer is furnished by the State. After the grade is established, part of the official sample is placed in a small paper bag (Ex. H), on which is written the car number, kind of grain, moisture content, test weight, and other details vary- ing with the kind of grain; also the date of inspection. The railroad notice, also carrying details of the grade, is placed in the sample bag along with the grain, and the bag is then delivered to us on the Exchange floor, where it is shown to different buyers and finally sold to the industry, feed dealer or warehouse which will pay the most money. If the car is inspected before 11 A. M., it must be ordered that day to avoid car service, but if after 11 A. M., it need not be ordered until 6 o'clock the next day. The buyer gives us a written order (Ex. I) and these directions are followed in making out our order (Ex. J) to the railroad. The bill of lading is surrendered to the railroad when the car is ordered and a receipt (Ex. K) secured. The trade made on the Exchange floor is confirmed by a check slip (Ex. L), giving the details of the trade, grade, price and terms of sale. Some buyers combine their order and confirm. Immediately after the car is sold on the Exchange floor a wire report (Ex. M) is sent to our branch office in the country nearest to the town from which the car was shipped, and information concerning the sale is 'phoned to the 240 APPENDIX country shipper and details given him which may be of value in connection with grain he may be buying from the farmers that day. A letter telling of the sale (Ex. N) and a formal mail confirmation (Ex. 0) of the trade are also sent to the shipper. When the car arrives at the mill, warehouse or elevator of the buyer, it is unloaded, the grain officially weighed under supervision of the Board of Trade Weighmaster, and the next day a weight certificate (Ex. P) is furnished to us by the Weighmaster's office. A custodian receipt (Ex. Q) is also furnished by the Custodian Department under the supervision of the Weighmaster in connec- tion with grain unloaded at certain elevators and warehouses. The buyer cannot dispose of the grain represented by the receipt until this receipt is canceled. Our bill on the buyer based on the official weight certificate and the terms of sale made on the Exchange floor is made up the day the weight certificate is received in our office, so that there may be no delay in making final returns to the shipper, and the bill (Ex. R), with weight certificate, inspection certificate, custodian receipt, and bill of lading receipt attached, is rendered to the buyer before 2 P. M. who must, under the Exchange Rules, pay for the grain before 2:45 P. M. that day. On Saturdays the bill must be pre- sented by 11:20 A. M. and paid by 11:50 A. M. that day. While collection is being made from the buyer, we prepare a final statement, called an account sales (Ex. S), on the grain for the shipper, which carries the shipper's name, date car is sold, car number, official weights, number of bushels, grade, selling price, gross returns as a credit; then detailed charges, draft, freight and freight tax, inspection and weighing charges, interest on the draft, our commission, or any other necessary charges against the ship- ment. The net amount still due the shipper is shown and a check sent to him with the account sales, a copy of official weight certifi- cate, inspection certificate and condition certificate. The outline given covers the natural life of a consignment, but there may be extra difficulties encountered. A car may be wrecked in transit, which will necessitate a claim against the railroad com- APPENDIX 241 pnny for the full value of the shipment. The car may be damaged in transit in such a way as to cause a grain leak, and we then make claim (Ex. T) for the shipper against the railroad company, using as a basis for the claim certified shipper's weights (Ex. U), a car condition blank, or information concerning damage to the car, and the price secured for the car when it was sold. The grain may be injured in transit by a leaking roof on the car and thus grounds es- tablished for a claim against the carrier. We are glad to render service to the shipper in connection with these claims and consider it due him in connection with commissions received from grain handled. I I "8 O O > 5 -< EH S S SoUonn BUI of Liaing-Stuftirf tan f Orin Sill of lallag pymd J thi tntinut* Ccmm Camalistoi by Ordr W. 787 1! JSM 27 19CS CHICAGO, MILWAUKEE & ST. PAUL RAILWAY COMPANY. ORDER BILL OF LADING ORIGINAL. Shipper. No- Agent* No he date'of issue of this Original BUI of Ladi 1919, J at Mid destination, if on iu road, ottenrise to felier to of all or an.T of *..' ropertjr over all or any portion of said r, that every service to be performed hereunder shall be Bui >ytb inlv In writing by the a#4 laincd (inci property. Inspection of property covered b] b indorsed on this original bill of lading or giv The' Rate of Freight fi _ _ tion, and as to conditions, nhe imaell and his a ll be requir be permitted unless pruvided by Uw or unless pcmlssioa :each panr at anr time interectvd iu bether priuled or written, h.-ia ooo- igns. In . . i^ in Cent) jwr ItiO ll. IFSptcwi "*- H'- *" Consigned to O EXHIBIT B. Bill of Lading. LAMSOH BROS. A CO, MAIN. PKOVI..OM, QS&T Slr:- The following car* have r.ot arrived in Chicago up to the prssent writing. Please put wire tracer cut on them and advise ua last record fcy return mall. Ycurs truly, LAMSOH BROS * 00. -car no.- -contents- -shipped EXHIBIT D. A Tracer. tpns qjiM Apieipauiuii paujmaj aq p|noqs ODUOU siiji Sui|diufS joj Xpvaj MOU si aDijou utja[[nq siqi Xq paiMOO 3 m ;s< ill n.151ffi - Z fc f! *) * FHS -.M3cStSpg4 F 1 * Sil LOOK AT DATE ON RAILROAD NOTICE QurNo. Grain Grade Wit Moiitur* C.nl.B 0(0- /% EXHIBIT H. Paper Bag Containing Official Sample. LAM SON BROS. &, CO. ORIGINAL CHICAGO, .... ,..R. R. Co. 191?.... INITIAL CAI NO. KIND OF GKAIN It Please deliver ....R'y Yours respectfully, LAMSON BROS. CO. TRANSIT. EXHIBIT I. Buyer's Order for Car Disposition. hereby confirrrr S&. L E S of car lots of Grain to you this day as follows. We request prompt attention to any errors in amount, grade, price or terms: CAR NO. GRADE PRICE TERMS LAMSON BROS. TNI HUB j. ftlMQLCV CO., CMICAOO EXHIBIT L. Confirmation Slip for Checking Accuracy of the Trade. o o (fl ^ OS ^ DC u o E (0 LAMSON linos. & Co. CHICAGO Feo. 30, 1919. Cr.A Live Stk. Exch., 3*nborn, la. AiiiJtuJbUt Gentlemen: When your oar of corn #36589 arrived today, Inspecting #5 yello, good quality but carrying 20.60 jcoisture near the limit for the 15 grade, we had difficulty makinr ale at $1.43,- a good pries In tcday'* aarket for corn with that auch molature In the #5 grade, and we trust It will zean satisfactory returns. The flrit corn arrivals today brought froa 1 to 2o less than late figures of yesterday. Eefor- the cloee fur- ther weakness developed and late sales *ere full 2 to 4c lo*er than trades made early la the iay. After the decline there appeared to be a better eastern demand and sales ran-ed as follows: #3 grades f 1.46-1. 53; 4 r *des 11.43-1.46^; #5 grades $1.41-1.44; 6 grades |l. 39-1. 43. In a. g-neral way prevailing values appear to be Justified. HJR IIC Youra truly, LAKSOH SBO " EXHIBIT N. Letter to Country Shipper Telling of Sale of his Grain. \ UNITED STATKS RAILROAD ADMINISTRATION Standard Form for Presentation of Loss and Damage Claims. Approved by the Interstate Commerce Commission, National Industrial Traffic Letfue, and Various Other Traffic Or|inUiUjns _ _H _ C.B.Q. R.R. 1111M lass IH ^ ^ (onowio , deseribed sh:pment Bill of Lading issued by 5 .B.i. Co.; Date of Bill of Lading ?/*9/l* _ Paid Freight Bill (Pro) Number_iP_TQO__ . Original Car Number and InitiL_J?_*M._??'_?_ __ Name and address of consignee (Whom shipped to) ._ IAM3.0J__BR03.I_4 ._QP_. _ _. If shipment resigned enroute. state partic,4ar S : JJQlaIfln_jlIJf-_JfllrlaJQ_Ifial3IliU5, _H.A_SO.trrHERJH _R,R. W*5ML .. UK LOADED 6247Q* 69gQO_ -3i?r LESS l/8^jB^ - 99.24 W. at 70o "~15ss- 069.82 S&4.S4 1. Original bill of lading, if not previously surrendered to < 2. Original paid freight ("eipense"Xbill. - Original Invoice or certined copf ' liars obtainable in p _COPI EXPEN3K 'iHSPECTIOa each claim a number, inserting the space provided at t , Reference should be made thereto in all correspondence pertaining -to this claim. nanl will please place U) befure such at the documents mentioned as have been attached, and explain under "Remarks of any of the documents called for in connection with this claim. When for any reason it is impossible for claiman EXHIBIT T. Claim against the Railroad . 02 Ic O i f 264 APPENDIX APPENDIX 21 An Argentina Need There is no "gambling" in grain in Argentina, so frequently denounced in our Congress and by the public in this country. The grain business in Argentina is in the hands of a " trust," which pays its own price as a rule for the products of the soil, exacting an enormous toll not only on the grain, but even on the bags which are furnished for transporting the grain. What the Argentine producer would like to have is a great Chicago or Minneapolis market where he could know just what the world thinks concerning grain prices. What he has are a few enormously wealthy exporters setting their own price upon his product. Argentina will never be a great agricultural country until she emerges from the chrysalis of monopoly which surrounds her grain trade. If the American farmer desires to test the efficacy of our own system of marketing and handling grain and of our own methods of establishing prices for grain, let him proceed to study the Argentina system. I returned with a most wholesome respect for the American farmer, and I realize as never before, that the stability of this coun- try depends upon the prosperity of the man who produces its wealth just as much or perhaps more than the man who consumes the products of the soil. But I also came back with a more in- telligent regard for the great economic system which prevails in this country, which enables us to market grain at a minimum of profit between the man who produces it and the man who con- sumes it. Pickell, J. Ralph, Agricultural Argentina, pp. 58-59. APPENDIX 265 APPENDIX 22 Reference Library for a Board of Trade 1. Annual Reports of all organized exchanges, domestic and foreign. 2. All publications (in English) of International Institute of Agriculture, Rome. 3. Daily Consular and Trade Reports, Department of Commerce, Washington. 4. Yearbook, IT. S. Department of Agriculture, Washington. 5. U. S. Census Reports (Decennial and Special). 6. United States Industrial Commission Report, 19 Volumes, Washington. 7. United States Commission on Industrial Relations Report, Washington. 8. Report of Country Life Commission. 9. Current Periodicals dealing with the grain trade and allied interests, such as hay, seeds, milling, grain elevators, the country shipper, farmers' elevators, etc. Including Broom- hairs Corn Trade News, Liverpool. Also current yearbook, Miller's Almanacks, Price Current Bulletins, Market Re- porters, etc., of all kinds from every market possible. In particular, a complete set of daily price bulletins for the local market should be on file. The list of periodicals should include representative farm papers, particularly official organs of farmers' organizations, including the Grain Growers' Guide of Winnipeg and the Cooperative Elevator News of Saskatchewan (Regina). 10. Hearings, Committee Reports, Congressional Investigations, Interstate Commerce Commission Hearings and Investiga- tions. All federal and State reports involving grain exchange practices and the grain trade in general. 11. Proceedings of the Grain Dealers' National Association, com- plete, Also "Who's Who in the Grain Trade." 260 APPENDIX 12. Proceedings of the various State Grain Dealers' Associations, including the Farmers' Grain Dealers Associations, complete. 13. Weighing, Inspecting, Grading. Complete Reports from each state (or each Exchange exercising this function) of the departments having charge of grain weighing, inspection and grading. 14. Elevators and Warehouses. Complete reports from each State Railroad and Warehouse Commission (or other similar body with jurisdiction) covering the subject of warehousing grain. 15. Bulletins of the U. S. Department of Agriculture, the State Colleges of Agriculture, the State and Federal Experiment Stations, dealing with the production and marketing of farm products. The Experiment Station Record and the Monthly Crop Reporter should also be included, both issued by the U. S. Department of Agriculture. 16. Canadian Documents on the Grain Trade: (1) Report of the Royal Commission on the Grain Trade of Canada, 1906, Ottawa. (2) Report of the Elevator Commission of the Province of Saskatchewan, 1910, Regina. (3) The Canada Grain Act of 1912 with Amendments. Ottawa. (4) Grain Inspection in Canada, by R. Magill, chief com- missioner Board of Grain Commissioners of Canada. Issued by the Department of Trade and Commerce, Ottawa. (5) Report of the Grain Markets Commission of the Province of Saskatchewan, 1914, Regina. (6) Annual Reports Department of Trade and Commerce: Grain Statistics, Ottawa. 17. Progress Reports from the Royal Commission on the Marketing, Transportation and Storage of Grain. Presented to the Parliament of Victoria, Australia, 1913. Melbourne. 18. Wheat and Flour Prices from Farmer to Consumer. Bulletin U. S. Bureau of Labor Statistics, No. 130. Washington. APPENDIX 207 Miscellaneous Material Emery, N. C., Speculation on the Stock and Produce Exchanges of the United States. Published by Columbia University, 1896. Van Antwerp, W. C., The Stock Exchange from Within, 1913. Con- tains the full report of the Governor Hughes Commission on Speculation in Securities and Commodities. Brace, H. H., The Value of Organized Speculation, 1913. Smith, Rollin E., Wheat Fields and Markets of the World, 1908. Weld, L. D. H., The Marketing of Farm Products, 1916. Huebner, Grover, Agricultural Commerce, 1915. Piper, C. B., Principles of the Grain Trade of Western Canada, 1915. Usher, A. P., History of the Grain Trade in France, 1400-1700. 1913. Gras, N. S. B., The Evolution of the English Corn Market from 12th to 18th century. Lysias, Speech against the Grain Dealers. Aristotle, Constitutions of Athens. Worrall, Th. D., The Grain Trust Exposed, 1905. American Produce Exchanges. The Annals of the American Academy of Political and Social Science, September, 1911 (Vol. 38, No. 2). American Economic Review. Vol. 5, No. 1, Supplement, March, 1915. Kirkland, John, Three centuries of prices of wheat, flour, and bread. War prices and their causes, London, by the author, at Na- tional Bakery School, Borough Polytechnic Institute. London, 1917. Perlmann, Loms, Die bewegung der weizenpreisen und ihre ur- sachen. Miinchen und Leipzig, 1914. Rutter, Wm. Pickering, Wheat Growing in Canada, the United States and the Argentina, including comparisons with other areas. London, 1911, 2(38 APPENDIX Bucknell, Frank W., Wheat Production and Farm Life in Argentina. Bulletin No. 27, Bureau of Statistics, U. S. Department of Agriculture, 1904. Pickell, J. Ralph, Agricultural Argentina. Chicago, n. d. Schelle, Gustave, Turgot et le pacte de famine, Institut de France, Acad. d. sci. mor. et polit. Seances et travaux, n. s. V, 74, pp. 189-217. Paris, 1910. Shepherd, Robert P., Turgot and his Six Edicts. In Columbia University Studies in History. Economics and Public Law. Vol. 18, No. 2, 1903. Say, L., Turgot, 1887. Schelle, G., Turgot, 1909. Neymarck, A., Turgot et ses doctrines. Stephens, W. Walker, Life and Writings of Turgot. Afanessieo, G., Le Commerce des Cergates en France, 1894. Bond, G., Le Pacte de Famine, 1889. Poncador, Bruno Heinrich. Wesen und wirkung der agrarzolle. Jena, 1911. Johlinger, Otto, Die praxis des getreidegeschaftes an der Berliner Borse. Turowsky, Leo, Der russische getreide export, seine entwickelung und organization. Stuttgard und Berlin, 1910. Das getreide im weltverkehr. Statistische label len iiber produc- tion, handel, consum, und preise/ Dritte folge. Zusammen- gestellt im auftrage des K. K. Ackerbauministeriums durch die K. K. statistische zentralkommission. Wien, 1909. Fridrichowicz, Eugen, Die technik des internationalen getreide- handels. Berlin, 1908. Ruhland, Gustav. Die Lehre von der Preisbildung fiir getreide. Berlin, 1904. Young, Arthur, The expediency of a free exportation of corn at this time, with some observations on the bounty and its effects. London, 1770. Beandeau, Nicolas. A vis au peuplesur son premier besoin. Amster- dam, 1774. APPENDIX 269 Ricardo, David, On Protection to Agriculture. London, 1822. Roscher, Wilhelm Georg Friedrich. Ueber kornhandel und theue- rungspolitik, 3d Aufgabe. Stuttgart und Tubingen, 1852. Sering, Max, Die landwirtschaftliche konkurrenz Nordamerikas in gegenwart und Zukunft. Leipzig, 1887. Dittman, Otto, Die getreide preise in der Stadt Leipsic im XVII, XVIII und XIX jahrhundert. Ein beitrag zur geschichte der preisbewegung. Leipzic, 1889. Fridrichowicz, Eugen, Die getreidehandelspolitik des ancien regime. Weimar, 1897. Gaudemet, Eugene, L. abbe* Galiani et la question du commerce des bles a la fin du regne de Louis XV. Paris, 1899. Wildenfeld, Kurt, Die organization des deutschen getreidehandels und die getreidepreisbildung im 19 jahrhundert. Leipzic. Sseminov, D. P., Russlands landwirtschaft und getreidehandel. Miinchen, 1901. Zaharia, Al, Der rumanische weizen, Herrn prof. dr. Th. Kosutany zur antwort mit einem anhang iiber die untersuchung der ernten der jahre, 1900-1908. Buccuresti, 1911. Zaharia, Al, Le ble roumain. Recoltes des aimees, 1900-1908. Public par le Minist&re de F agriculture et des domaines. Buc- carest, 1910. Taylor, Ch. H. (Editor), History of the Board of Trade of the City of Chicago. 3 Vols., Chicago, 1917. INDEX Acme Malt Co., 220. Adams, G. W., 64. "Adventurers," 199. Amateurs, 27, 28. American Linseed Co., 221. American Maize Products Co., 221. American Malting Co., 221. Apples and future trading, 158- 160. Arbitration, 113. Arcadia Farms Milling Co., 221. Argentina, grain market, 142, 211; market needed, 264. Aristotle, quoted, 144. Armour Grain Co., 217, 220. Atchison Board of Trade, 10. Australia, wheat crop, 1917-1919, 3. Bacon, E. R., 221. Bade, J. S. & Co., 217. Badenoch, J. J. Co., 221. Baker, Wm. T., Pres., 93, 105, 106. Bakeries and future trading, 163. Barnes, Julius H., 228. Bartlett Frazier Co., 217. Beach Wickham, 217. Bears, 24. Beer, H. & B., 217. Bennett, James E. & Co., 217. Bright Sears & Co., 217. Brooks Elevator Co., 221. Bryan, Wm. Jennings, 69. Bucketing trades, 58, 230. Bucket shop, 89; fight on, 89-96. Bulls, 24. Bulls and bears, put on brake, 142. Byrnes, W. J. Co., 221. Cairo Board of Trade, 11. California Fruit Growers' Ex- change, 33. Call Rule, 51-52. Calumet Malting Co., 221. Carpenter, N. L. Co., 217. Carrying charge, 61. Cash grain, 31, 46. Cash grain market, 133-142. Cash grain, relation to specula- tion, 115. Central Elevator Co., 106, 220. Chicago Board of Trade, as a grain market, 1, 7, 8, 10, 22; flow of grain to, 11; competi- tion, 10-13, 16, 30, 181, 230; as a corporation, 14; objects, 14; membership classified, 15- 16; farmer members, 17, 39; membership qualifications, 18, 271 272 INDEX 38; government of, 18; rules, 18; committees of, 18-19; physical equipment, 20; use of market information, 20-21; one day's trading, 23-26; "toll," 29, 32; volume of business, 29; hedging and speculation, 34; history, 37; farmers' elevator movement, 47-51 ; rules against corners, 74-78; clearing house systems, 78-88; fight on bucket shops, 89-96; market news service, 96; terminal elevator, 97-113; railroad relations, 97-113; arbitration of business disputes, 113; speculation ques- tion, 115-142; wide market, 176-179; government super- vision, 203; regulation of specu- lation, 205. Childs, Kay & Woods, 217. Christie case, 82-84, 95. Christie, G. I., 119. Civic Federation, 95. Clark, Childs & Co., 217. Clark, John F. & Co., 217. Clearing house, Chicago Board of Trade, 78-85; arguments for and against Chicago system, 86-88. Cleveland Telegraph Co., 94. Collective bargaining, 201. Columbia Malting Co., 221. Commission merchant, 31. Competition in grain trade, 11. Consumption, wheat, per capita, 213. Contract grades, 75-77. Coordination, lack of, in grain production, 2-4. Corners, 57; early, 62-67; "Three Big," 67-74; Hutchinson, 68; Leiter, 69; Patten, 71; illegal under Supreme Court decision, 73; prevention of, 74-78; and speculation, 126, 181; artificial corner, 143; relation to Board of Trade, 143-151; antedate Board of Trade, 143-150; Malaga grapes, 237. Cost of production, and the farmer, 5. Crerar, Hon. Thomas, 17. Crossing trades, 58. Daugherty, C. L. & Co., 221. Delany, F. J., 221. Denver Grain Exchange, 11. Des Moines Board of Trade, 11. Detroit grain market, 10. Dickinson, A., Co., 220. Direct settlement, 80. Dockage, 238. Duluth grain market, 10. Dunn, E. G., 47. Eckhardt, B. A. Milling Co., 221. Eckhardt, Wm. G., 153. Ellis, W. E., 222. Ely, F. G., 221. Emery, H. C., quoted, 39. Enid Board of Trade, 11. Equity Society, 167. Eschenburg & Dalton, 48, 50. Ewing, F. G., 150. INDEX 273 Farmers' elevators, 17, 39, 47-51, 167-175; Hartford, S. D., 176. Feehery, E. J. & Co., 217. Fleischrnan Malting Co., 221. Flour mills, growth of, 11. Forcing grain into storage, 110. Forgan, David R., quoted, 58-59. Fort, Charles H., 151. Fort Worth Grain and Cotton Exchange, 10. Future trading, defined, 23; origin, 51-58; first rules, 57; and credit, 58; influence on price, 59; delivery months, 62; settling contracts by off- sets, 82; compare credits, 231; margins, 85; price fluctuations, 133-142, 215-217; increasing use of, 157; apples, 158; wal- nuts, 160; prunes and apricots, 162; in industries, 162; pure foods, 163; butter and eggs, 163; beans, 163; bakeries, 163; off the Exchanges, 165; gives certainty and stability, 166; regulation of, 227; restrictions, 228. "Gadfly" of the Board, 109. Gates, John W., 67. German law on speculation, 182- 196. Germany, rye bread, 3. Gladstone, Wm. E., 198. Goodman crop reports, 96. Goodrich, P. E., 176. Grading, 39, 41, 43, 44, 99, 103, 238. Grain Growers' Export Company, 17. Grain marketing, an important question, 1; an internal ionrU question, 20&-211. Hales & Edwards, 221. Halle & Stieglitz, 217. Harper deal, 65-66. Harris Winthrop & Co., 217. Harvest, 209-210. Harvey Grain Co., 221. Hateley Bros., 50. Hay trade, speculative, 175. Hedging, 24, 34; and banking, 59; insurance and speculation, 166, 176; Equity Society on, 167; in Winnipeg, 171-175; lacking in hay, 175; wide market needed, 177-178. Heinz, H. J., 163. Henebry, Joseph A., 17. Henjum, Iver S., 176. Hill, John, Jr., 143. Hirst & Begley Linseed Co., 221. Hoit, Lowell & Co., 48-49, 50. Hoover, Herbert, and hog prices,4. Hospital elevators, 112. Housman, A. A. & Co., 217. Houston Grain and Hay Ex- change, 11. Hughes, Charles E., 116. Hughes & Dier, 217. Hulburd, Warren & Chandler, 217. Hutchinson, B. P., 68. Hutchinson, Board of Trade, 11. Hutton, E. F., 217. 274 INDEX Ideal market, 1. Illinois Agricultural Society, 152. Illinois Grain Dealers' Associa- tion, 49. Illinois Railroad and Warehouse Commission, 103. Indianapolis Board of Trade, 10. Inglis crop reports, 96. Inspection, 39, 41, 43, 44, 99, 103, 238. Insurance, 166. > Jackson Bros. & Co., 217. f Jenks, Gwynne & Co., 217. Kansas City, grain market, 10. Keelen Bros., 221. Keene, Mr., 65. >Kehoe, Mrs. Kate A., testimony of, 46-47. /Kershaw failure, 65-66. / King, Farnum & Co., 217. >Laidlaw & Co., 218. Lamson Bros. & Co., 218, 238. Larsen & White, 236. Leiter, Joseph, 69. Lewis, Charles E. & Co., 218. Lipper, Arthur, 218. Liquidated, 25. Little Rock Board of Trade, 10. Livestock feeding, 11. Logan & Bryan, 218. Longs, 24. Louisville Board of Trade, 10. Lowitz, E. & Co., 218. Manipulation, 152, 157. Marble, Mr., Interstate Com- merce Commission, 46-47. Margins, 26, 85-86. Market, fundamental function of, 3. Market information, 132-142. Market news, 96; restrictions, 225, 226. Marshall, Frank, 221. Martineau, Harriet, 118. Mason, Frank H., Consul Gen- eral, 196. Matching trades, 58. Mauff, John R., Secy., 225, 226, 227, 228, 229. McAvoy Brewing Co., 221. McCafferty, Vice Consul W. J., quoted, 3. McDonnell & Co., 218. McKay, Prof. G. L., 236. McKenna & Rodgers, 221. Mealiff, F. H. & Son, 221. Memphis Merchants' Exchange, 11. Merrill, J. C. F., Secy., 89. Meyer, Prof. Martin H., 236. Michaels, Chas. D., 133, 134, 155. Michels, Prof. John, 236. Miller & Co., 218. Milwaukee Gram Market, 10. Mincer, S., 218. Minneapolis, grain market, 10. Mixing, 111-112; applied to but- ter, 235. Monopoly, 46. Mowry, H. C., 49. Mueller & Young, 221. Munn, Ira Y., 104. Munn versus Illinois, 103. INDEX 275 Munn versus Scott Elevator Co., 104. Muth, Julius, Consul, 187. Niles' Weekly Register, quoted, 145-150, 157. Norris & Co., 221. Northwestern Yeast Co., 221. Nye-Jenks Grain Co., 222. Omaha Grain Exchange, 47. Omaha, grain market, 10. Option trading, 88, 89; differs from future trading, 88. Orthwein-Matchette Co., 218. Otis & Co., 218. Overbought, 25. Oversold, 25. Patten, James, 71. Peck, Prof. C. L., 236. Peoria, grain market, 10. "Phantom wheat" question, 125. Pickell, J. Ralph, 264. Pillsbury, Mr., 176. Pit scalper, 17, 24, 28, 20i. Plainfield Grain Company, 17. Post & Flagg, 218. Postal Telegraph Co., 94. Price, function of a market, 4; fair price and equilibrium price, 6; price fixing question, 6; fluctuations and supply and demand, 8-9; cash and future, 59-62. Price fluctuation, "horse disease," 222. Price and speculation. 117-125, 179, 180. Private wires, 17, 217. Publow, Prof. Chas. A., 236. Pynchon & Co., 218. Quaker Oats Co., 221. Railroads, 27, 42, 45; terminal elevator monopoly, 97. Randolph, Charles, Secy., 64. Randolph, E. C., 218. Range, T. & Sons, 221. Rings, 80; six name ring, 80. Robbins, H. S., Attorney, 90. Rosenbaum Bros., 221. Rosenbaum, J., Grain Co., 218, 220. Rumble & Co., 92. Rumsey, Julian S., 43. Russia, rye bread, 3. Rye bread, in Germany and Russia, 3. Sager, Hiram, 43, 110. Salina, Board of Trade, 11. Saskatchewan Cooperative Ele- vator News, quoted, 171. Sawers Grain Co., 218. Scalping, 27. Schwill, A. & Co., 222. Sconce, H. J., 153. Scott, Walter, 198. Seipp Brewing Co., 222. Shaffer & Stream, 218. Shearson Hammill Co., 218. Short selling, 24, 55-57, 157. Simons Day & Co., 218. Sioux City Grain Exchange, 11. Smith, Gaston, Consul, 237. 276 INDEX Snow crop reports, 96. South Chicago Elevator Co., 220. Speculation, 115; definition, 116; cash and futures, 117-120; land, 118-119; organized and unorganized, 119; price fluc- tuations, 120-142; wheat, bar- ley, and oats prices, 122-123; wheat for 100 years, 123-124; " phantom wheat," 125; hedg- ing and insurance, 166; wide market question, 177; benefits of, 179; stablize price, 179; continuous market, 180; as- sumption of risks, 180; enemy of monopoly, 181; stability of values, 182; prohibition of, 182; Germany's experience, 182; a social question, 196; farmers, 197; evils of, 200; good and bad speculation, 200; constructive reforms, 201; Grain Corporation, 202; edu- cation, 202; Government ac- tion, 203; Board of Trade ac- tion, 205; summary on, 207. Standard Brewing Co., 222. Star & Crescent Milling Co., 222. Statistics wheat production and prices, 211-212; flour mills, 215; future and cash prices, 215-217; wheat prices for 100 years, 219; corn prices, 223-224. Stewart, Prof. Henry, 236. St. Joseph Grain Exchange, 10. St. Louis, grain market, 10. Stocking, Prof. Wm. A., 236. Strandberg, McGreevy & Co., 218. Stream, J. J., 227. Sturges, W. N., 64. Sullivan, Mark, quoted, 4. Superior (Nebraska) Board of Trade, 11. Superior (Nebraska) Corn Prod- ucts Co., 117. Supply and demand, fluctu- ating, 2. Supply and demand, and price, 8, 61; market information on, 20-21, 125-127, price making, 180; price fluctuations, 209- 210, 212; Kansas wheat, 232. Taylor & Bournique, 222. Taylor, Chas. H., quoted, 45. Terminal Elevators, 27, 44, 45, 220; to arrive grain, 52-53; speculation, 59; regular, 77; public and private, 99; class A, 104, 105; relation to Board of Trade*, 97-113; Illinois Con- stitution of 1870, 101; law of 1871, 103; Judge Tuley's de- cision, 106. Terry, F. M., 49. Thompson, D. O., 153. Thompson & McKinnon, 218. To arrive, 169, 179; grain, 23, 51-53. Tobacco marketing, 150-151. Toledo, grain market, 10. Topeka Board of Trade, 11. Trade documents, 33, 238. Trans-Mississippi Grain Co., 218. INDEX 277 Tuley, Judge, decision in ware- house case, 106. Twain, Mark, 198. U. S. Brewing Co., 222. United States Food Adminis- tration, 207. United States Grain Corporation, 202. Updike Grain Co., 218. Van Ness, Gardner B. Co., 218. Vehon, M. L. Co., 218. Wagner, E. W. & Co, 218. Wanamaker, John, 162. Ware & Leland, 218. Warren, Wm. S, Pres, 94. Washington, Geo, 199. Weighing, 39, 40, 45, 238. Wells, Geo. A., Secy, 49, 50. Western Union Telegraph Co, 92-94. Wheat marketing, Kansas, 232. Wide market, 176. Winnipeg Grain Exchange, 171, 177. Wire houses, 217. Wright, Joseph, 99. Printed in the United States of America. CO s 5 u H tf H U ^ ^ : S 2 1 II UNIVERSITY OF CALIFORNIA LIBRARY BERKELEY Return to desk from which borrowed. This book is DUE on the last date stamped below. -FEB TM8 to \3# * I519SI ; 0'j-/K2||5| REC'D LD NOV 91962 REC'D LD JUN15'64-11.AM JAN 2 4 1968 AUG2419& LD 21-100TO-9,'47(A5702sl6)476 .Y.C 87210 UNIVERSITY OF CALIFORNIA LIBRARY