THE UNIVERSITY OF ILLINOIS LIBRARY 3326 D566u Return this book on or before the Latest Date stamped below. A charge is made on all overdue books. U. of I. Library 23 Nov’sd 8057-S THE UNIVERSITY OF ILLINOIS LIBRARY 3326 D566u | THE UBRARY OF THE MAR 3” 1996 aa UNIVERSITY OF ILLINGIS hi ‘ { : iM 4 yin Rigen SOARS oe it i hiss i, afi ie A A ‘h s ioe uy >, if i: im 7 ee. + < a, ae o > - ~ 4 “ ~ ~ = ‘ “ ha ‘3 > * i (ME LIBRARY OF THE UMIVERST BE AL ee el ee fh -_ Lld FHL The Wheat Pit By Edward Jerome Dies THE LIBRARY OF THE MAR 3 1926 NIVERSITY OF HLLINGIS Published by The Argyle Press Chicago 1925 COPYRIGHT 1925 By THE ARGYLE PRESS First Printing, November, 1925 Second Printing, November, 1925 Third Printing, January, 1926 ' Contents From the Balcony - : Z Birth of the Pit - s IM 4 Futures - - i : 3 2 Speculation at ‘ : Hedging - z Seis ae That Wicked Short-Selling : On Cornering Grain - 2 : “Let's Investigate” - - -~ - F’rom the Balcony T is nine-twenty in the morning. The vast trading floor is stirring to life. Brokers are gathering in the pits or rings. Boys race about with blue, green and yellow order slips. Specta- tors mount the low slung balcony over the wheat pit. It is from this vantage point that the public views the great world drama of wheat. Quickly the pit fills. At nine twenty-eight the recording clerks climb to the telegraph “bridge’’ hard by the wheat ring. “They resem- ble camera men preparing to film some spectac- ular event. Suddenly lights flare up, fringing the pit. Electric fans begin their low whir. For a mo- ment a strange stillness falls. Then, on the stroke of nine-thirty, a gong sounds. It echoes through the old clock tower. And the roar of the pit begins. THLE Win £ AL eee It is a deep-throated roar. It swells into vio- lence like a wintry gale; it sinks into a low, steady hum.. On occasion when panic hits the pit the roar all but shakes the rafters of the quaint old structure and rumbles out into the - street like the roll of far-away thunder. Then it is that the spectator rejoices. He thrills to the stampede. Screaming headlines may have told him the world had gone wheat crazy. And the pit is the outward expression of that madness. ‘There it is before him, teeming, seething, boiling. A mass of milling humanity struggling for attention. In stark fascination the spectator stares into the strained faces below. “Thoughts flood his mind, thoughts of romance, adventure, the matching of wits for millions. Vaguely he re- calls tales woven with glamour about the crimson careers of long dead plungers, buccan- eers who sailed the high seas of the wheat pit. He fancies their ghosts now stalk the worn floors of the trading ring. Onward the market races to its daily denoue- ment, rising in high fever, falling in violent 6 ae Wan EAST OP IT chills and war-dancing crazily as powerful world forces clash in the battle of wheat. Finally, with the clang of the gong, it stops as abruptly as it started. The spectator stirs from his reverie and slowly descends to the street, the roar of the pit and the song of a thousand wires still pounding in his ears. Reluctantly he departs, for it has been an exciting day, a day in a world set apart—a day in the world of wheat. It is true that his study of the grain market has been a bit brief and superficial. Neverthe- less the spectator likely has acquired some defi- nite views as to the merit of the marketing machinery. And, of course, he will express these views, for the man without positive views on the marketing of grain is forsooth deemed stupid. Such views are as necessary as those on religion or politics or prohibition. And to have views on grain marketing one must have views on the merit of the Chicago Board of Trade, for that exchange is the machin- ery by which grain passes through the chan- nels of commerce. It is the wheat pit. Long has it stood, to many a strange, mysterious giant 7 TA VE | WORE AY Tee in the center of a warfare handed down by the ages. Embattled, victor of a hundred skirm- ishes, it is perhaps the most romantic figure in the whole world of commerce. ‘There it stands today with its old-fashioned high windows and its lofty clock tower, brooding over the canyon of finance known as La Salle Street. There it has stood for a life time, outwardly unchanged by the swift passions threatening its downfall. Back of these victories by the wheat pit there must be a fundamental soundness. Were it not so the exchange system should have been wiped out in a single fell stroke during one of the in- numerable periods of price insanity when public fancy swam in the tide of sensation. In the discussion that follows it is purposed to draw back the veil of mystery and step behind the scenes. It is intended to trace in broad out- line the story of the grain exchange, setting forth some of those characteristics that have made it one of the largest of commercial institutions. The story is plain; the uninitiated may readily observe the wheels go round, and perhaps gain an understanding of the wheat pit of today. The 8 meee WORE ALT Poli’ discussion contains dispassionate facts undiscov- ered by some of the “‘economists’’ who are wont to master the science of grain marketing be- tween the opening and closing gong—from the balcony. Birth of the Pit HITE-TOPPED prairie schoonets crawling toward the setting sun. Plains flecked with buffalo and antelope. Traders gliding up and down interior streams bargain- ing for fur. ... Such were the early days of the nineteenth century. Like the finger of destiny, the historic pilgrim- age of pioneers pointed ever westward, strag- gling onward in unending lines. ‘“‘Caravans of Faith’ they were called as they joggled across Illinois and into Jowa. And theirs was a pro- found faith, the faith of the dreamer striking out for the land of his dreams. The acreage which the pioneers planted to grain continued widening each year. They shipped their grain to Chicago, then an ugly lit- tle town cuddled on the shore of the lake. Part of the money received in return was quickly con- verted into farm implements. These imple- 10 ea rem AL YP uD ments meant larger production. Subsequently the stream of grain that poured into Chicago bulged the sides of the little town and made nec- essary almost constant expansion of marketing and storing facilities. /’ There were no established rules in the pur- chase and sale of farm products. Farmers sim- ply hauled their grain to market over rugged, mud-gashed trails and received what the mer- chant cared to pay. Unscrupulous buyers took advantage of the situation and abuses developed. oreover the shady practices went unpunished for the simple reason that_there was no way of determining actual values! ~ In 1848 a group of eighty-three highly re- putable merchants determined to put an end to the chaotic conditions in the grain trade. “hey cathered in response to a general call and forth- With organized the Chicago Board of Trade. he purposes as laid down then and as followed today were to maintain an exchange, promote uniformity, enforce justice, and gather and dis- tribute commercial information. =“ It was an important move. ‘The press hailed it as a forward step of first magnitude. ‘The 11 THE OW HR EA ee news overshadowed the other salient news of the day—passage of an ordinance ending “horse racing and careless shooting on Chicago’s prin- cipal streets.”’ At once the exchange set about enforcing rules which eventually drove from the field those mer- chants who had prospered unfairly at the ex- pense of the farmer. Throughout the grain district there developed a faith in the new ex- change which never wavered over a long pe- riod of years. Indeed, for half a century the Chicago Board of Trade was one of the lead- ing factors in the upbuilding of Chicago and the central west:~’ Growth of Chicago as a grain exchange was amazing. But so was the expansion of agricul- ture. In the two hundred and fifty years pre- ceding 1860 a total of only 407,000,000 acres of land had been incorporated into farms. From 1860 to 1900 some 431,000,000 acres were added, more than doubling the farm area. In 1860 there were but 30,000 miles of railroad lines. In the next forty years 162,000 miles of the shiny rails bit their way across the continent, forming a network of transportation. 12 eae we ABCA OP Lk So from a wagon-load market Chicago—rose to premier grain market of the entire world At length it became the gateway to a vast garden that sprawls out over an area wide enough to contain a score of small nations. Its position on the eastern rim of the wheat area and on the northeast corner of the corn belt made it a nat- ural market for grain. “Phantom wheat’ was a favorite cry of ex- change critics during the recent post-war agra- rian unrest. But there is really nothing ghostly about the tremendous volume of grain received at Chicago. Four hundred million bushels is the annual total. It is equal to twenty trainloads of fifty cars each for every working day in the, year. Two million bushels of wheat has been ) received in a single day. Sheer growth of agriculture heaped marketing problems upon the grain exchange from its very inception. One by one these problems were ironed out, sometimes slowly, painfully, only to be followed by others of equal weight. So it has not been an easy road—at least not a road for tender or for casual feet—along which the exchange has wavered since those dim days of its birth. 13 Futures a fa AGICAL changes were wrought by the [WH civil war. These changes were economic as well as social. One of them reached out into the marketing of grain. For during the conflict there was created the nucleus of the present grain futures market. ‘The government wanted to erase all doubt as to definite supplies at certain future dates. At the same time it desired to shift the risk to a single responsible individual instead of scatter- ing large contracts among a number of Chicago men. ‘This one man did assume the enormous risk of the government contract, but he immediately interested a number of other men and thus suc- ceeded in spreading the risk among many. These other men agreed to deliver to him at certain future dates specific amounts of grain at a stipu- 14 mew e AN Li Pid lated price. The aggregate of these amount equaled the government contract. These were the first contracts for the future delivery of grain. So successfully did the plan serve in the case of government war requirements that it contin- ued to expand after the war and at length became a vital part of the whole grain marketing sys- tem. It originated as a means of protection an such is its purpose today. As agriculture enlarged and commerce de- veloped the futures market became too narrow to perform the service intended. It was difficult to quickly bring together buyers and sellers of the particular grade of grain being exchanged. De- lays involved extra costs and confusion. To solve the problem of a ready buyer and a ready seller there grew up a branch of the grain trade commonly referred to as the speculative class. ‘his speculative division, always in the market prepared to either buy or sell at any minute of the business day, enabled the man desiring grain at some future time to make his purchases months in advance. He was sure of receiving the commodity at the price agreed upon. 15 THE WH EVAGT eee It likewise enabled the man desiring to deliver grain at some future time to sell that grain at any minute of the market day, with the privilege of delivering it during the future month agreed upon. Thus the futures market became broad and liquid. Business was facilitated. Eventually leading economists credited the Chicago futures exchange with remarkable accuracy in the regis- tering of grain prices. It was also credited with being by far the most economical distributor of staple foodstuffs. Nevertheless it is a singular fact, as pointed out by Van Buren Denslow in his Principles of Economic Philosophy, that “‘markets have been the subject of popular prejudice and moral ob- jection, almost in proportion to the perfection with which they economize time, transportation and effort, and equalize prices.”’ This authority further says that a market rises into its highest value when it concentrates into one focus so large a portion of the buyers and sellers of a certain commodity as to become, in conjunction with one or two other markets of the same kind, an authoritative standard of 16 Pee Win EA Died prices of the articles in which it deals, for all buyers and sellers throughout the world. “Most advanced and useful markets,’’ he says} “are those whose prices are most widely authori- tative. In grain these are the Chicago, Liverpool | and New York exchanges. ‘The instant a price | is made buyers and sellers all over the world y deal in accordance with it. If each dealer had to wait until he himself could learn the causes in- fluencing supply and demand commerce would be paralyzed.”’ Three factors are locked together in the pres- ent system of grain marketing. ‘They are specu- lation, futures trading and hedging, which is a form of commercial price insurance that will be fully discussed later on. Without speculation there could be no futures market. And with- out a futures market the hedge, so invaluable to the farmer, elevator man, miller and exporter, would be at once eliminated. Learned jurists and economists have time and again warned that law-making bodies should ap- proach the grain futures market only in the most cautious manner if they were to avoid destruction / of the hedging facilities. | 17 THE (WA. & Avil ae Senator White, who later became Chief Justice of the United States Supreme Court, character- ized the futures market as an agency of great service to producer and consumer. “The system of future dealing as found in this country today is a part of the common acquisi- tion of the human mind for the past two hun- dred years or more,’ he said. ‘There is no political economic writer in any language recog- nized as authority, unless he be tinctured either with socialism or communism, who does not ap- prove of these contracts and state that they are necessary for the development of commercial af- fairs and that they operate wisely and beneficially upon both the producer and consumer.’ 18 Speculation UBLIC fancy has associated speculation with something deeply sinister. “The out- standing figures in the speculative profession have been pictured at times as spectres that prowl the channels of commerce, biding their time, and then striking down their prey with lightning speed. Curiously there has always been some doubt as to the precise identity of the prey. ception, speculation is recognized as a part of the great system of distribution to which credit and transportation belong. In its way it performs the same general service. It facilitates the dis- tribution of products to consumers. Henry George likened speculation to a balance wheel by which the whole machinery of industry is regulated. Mr. Justice Hughes of the Unite States Supreme Court said speculation ‘‘consists in forecasting changes in value and buying and selling to take advantage of them.” Contrary to this rather widespread ea 19 TO AOB WANE AV ie In a celebrated decision in which the Supreme Court sustained grain exchange contentions, Mr. Justice Holmes pointed out that “in a modern market contracts are not confined to sales for immediate delivery.”’ “People will endeavor to forecast the future and make agreements according to their proph- ecy, he said. “Speculation of this kind by com- petent men is the self-adjustment of society to the probable. Its value is well known as a means of avoiding catastrophes, equalizing prices, and providing for periods of want. It is true that the success of the strong induces imi- tation by the weak, and that incompetent persons bring themselves to ruin by undertaking to speculate in their turn. “But legislatures and courts generally have recognized that the natural evolutions of a com- plex society are to be touched only with a very cautious hand, and that such coarse attempts at a remedy for the waste incident to every social function as a simple prohibition and laws to stop its being are harmful and vain.” Speculation’s service to society, then, is in avoiding or mitigating catastrophes, equalizing prices, and providing for periods of want. 20 memes) Wit EB VAT Pal Abundant proof is available that this service is actually performed by the grain futures market. It has been shown, for instance, that had specu lation in grain suddenly ceased in the summer of 1920, when post-war prices began tumbling, the resultant situation might well have been termed a catastrophe. And precisely that very thing happened in wool, hides, leather, tobacco, silk and scores of other articles which are not com- modities of speculation on the organized ex- changes. In this connection, there has been a strong movement in recent years toward extend- ing the futures trading system to other com- modities. [he single purpose is price ae) tion. he ruinous price swings in commodities not dealt in upon the futures exchanges are a dreaded hazard to which the owners of the com- modity must submit. It is but necessary to com pare prices of such commodities over a period of years with the price of grain to understand how the futures market eliminates the risks of grain ownership. It has been fairly asserted that the most use- ful portion of the speculative class are those who speculate in commodities affected by the vicissi- tudes of seasons. 21 TH\IE WHEAT (Pea Without wheat speculators the price varia- tions would be much more extreme than at present. Moreover in a deficient season the needed supplies might not be forthcoming at all. With- out speculation the price in a season of abundance would fall without limit or check, with the danger of wasteful consumption bringing on a later famine. John Stuart Mill stresses these points clear and sharp in his Principles of Political Economy. Critics of the grain futures market, while de- fending its hedging facilities, have attacked the vast volume of speculative transactions. It has been claimed, for example, that the futures trades on the Chicago Board of Trade are several times the nation’s total wheat crop. ( ‘To the layman this is an arresting thought. © ‘And many a farmer has been disturbed by the notion that his wheat was sold over and over from the time it left his wagon until it reached the ultimate consumer. The fact is that the volume of futures trading has no effect upon price other than to add stability. if In the futures market the trading is in wheat Canin The same contract may pass through 22 Pee, UW EV AYE «PAD the hands of a dozen ora score of buyers an sellers, each time adding to the volume of futures transactions. Hence the large total as compare with the actual crop. But this volume is no more striking than the enormous disproportion between the currency of the country and contracts for the payment of money. ‘These contracts are set off in the clear- ing houses of the banks. No one ever dreams of attacking their integrity. For example, at this writing the savings ac- counts total some twenty thousand million dol- lars. Yet the Treasury Department report shows that all the money circulating in the United States amounts to only four thousand seven hun- dred and seventy-six million dollars. Note the wide disproportion. Five times as much money is in the banks today as there is in all the United State com- bined. “The answer is simple. ‘The same dollar is used over and over, just as actual wheat is contracted for over and over again. Should all depositors of banks and trust companies ask for their money at once, it is estimated they would receive no more than 10 per cent. Yet their money is perfectly safe. 23 THE OW AE AT Sie Chicago is the clearing house of the world wheat trade. Accordingly vast quantities of wheat that never were intended for shipment to Chicago are hedged in that market. It is the price insurance center, used constantly for in- surance purposes by dealers of Europe, Argen- tina, Australia, Canada, and a score of American interior and export cities. Millions of bushels are handled annually by Chicago merchants, which have been purchased by outside dealers in one market and consigned to another. In such cases Chicago’s future mar- ket simply furnishes the price insurance. Speculative trading must be broad in order to provide a market that will give the necessary pro- ‘tection. And the protection is indeed necessary, for prices are affected by drought, rain, heat, cold, good crops and bad crops, foreign supply and demand, transportation, embargoes, panics and boycotts. All these factors are registered promptly in the futures market. There can be no absolute stability of grain prices unless there is absolute stability in those conditions which make prices. Grain prices fluctuate simply be- cause the conditions that control prices fluctuate. 24 Pepe kW BAT Pal or When prices fluctuate downward there is a speculative class ready to absorb offerings and prevent a slump to artificially low levels. Con- versely, when prices rise out of bounds, the speculative class again becomes a stabilizer. / Cause for price fluctuations may be understood when one considers the difficulties in determin- ing supplies, present and future. Dealers do not face actual supplies but estimates of supplies which change hourly. Receipts at the market are a more important supply factor than the crop. Back of the re- ceipts is the grain actually in terminal elevators, known as the visible supply. Back of this is the estimated holdings of some twenty thousand country elevators, and back of these are the esti- mated holdings on two or three million farms, which are always a factor of great uncertainty. Therefore the supply of merchantable grain that may come to market, and is vitally import- ant in price making, is but vaguely known and changes with all new information. With the best avenues of knowledge in the world, there are such possible errors in advance estimates of 25 T AOE. We EB AV apa supply and demand that it is impossible to ac- curately forecast the price movement. It fre- quently happens that months must pass before the relation of supply to demand can be closely determined. Consequently, merchants, millers, exporters and others interested must exercise infinite cau- tion to avoid disaster. While the ill-informed have on occasion at- tacked the volume of trading in the futures market, they have never questioned the integrity of the grain contract. It is a highly-developed form of credit. Aside from bank credit, it is the most liquid contract in existence. Courts have given these contracts the stamp of approval, as has also the United States government. They are never called into question. If the holder of one of these futures contracts, whether he be speculator, merchant or exporter, wishes to have his grain, it will be forthcoming at the time fixed by the contract. He will find that the grain is neither phantom nor mythical. 26 SLALOM ANN UAE 9 abd lay LAL BRO wale d Ad In this connection, authorities have pointed out that the volume of these futures contracts, whether speculative or not, is of no real conse- quence so long as the integrity of the contract re- mains unquestioned. The greater the volume the less costly is the operation of the marketing ma- chinery. 27 Hedging HIS has been called the age of insurance. One may insure against virtually every known risk. “The carnival man insures against rain. ‘[he farmer against droughts or hail or tornado. ‘The steamboat company against dis- aster at sea, and the star dancing girl against in- jury to her legs. A merchant who fails to insure his wares against fire is deemed stupid and in- competent. Hedging is simply another form of insurance. It is a commercial price insurance which protects the owner of grain against price fluctuations. It makes dealing in actual grain a safe business. In sustaining the legitimacy of futures con- tracts on the Chicago Board of Trade the United States Supreme Court called hedging “‘a means by which collectors and exporters of grain or other products and manufacturers who make contracts in advance for the sale of their goods, 28 Pee Wilk Aik) Pilih secure themselves against the fluctuations of the market by counter contracts for the purchase or sale . . . of an equal quantity of the product.”’ Cost of the futures market with its hedging facilities is very low as compared with premiums on other forms of insurance. It has been figured that maintenance of the futures market ex- acts a toll of about two-fifths of a cent a bushel on the whole crop. Without this insurance the producer would receive less for his grain and the consumer would pay more. In markets having no hedging facilities the additional toll has been placed at approximately ten cents a bushel. ‘Therefore it may be readily seen why even the most aggressive critics of the grain futures ex- change become alarmed over any move to inter- fere with the hedging market. Its economic value is recognized by all. Russia had no fut- ures or hedging market when it was a great wheat producing country before the war. And prices paid the farmer were relatively much lower than in the United States and Canada or in any western European country. Hedgers in the futures market may be divided roughly into two classes. [There are those who 29 TO AvE Wo EV ANT sell futures against grain they own. And there are those who buy futures against sales of actual grain or flour. Those selling futures in the pit as a hedge against grain they own include line elevators, © which are companies having a line of elevators at country railway stations; country shippers which are called independent elevator companies and farmers’ elevators companies; big farmers and terminal elevator companies at the market centers. Those who buy futures as a hedge against sales of grain and flour are millers, local elevator shippers at every market center, grain commission houses and exporters at the seaboard. Here it should be pointed out that the daily transaction of these buyers and sellers in the hedging markets do not by any means balance. Such a condition is impossible. The balance, as mentioned elsewhere, is maintained by the speculative division of the market. Without speculation the hedging market would be nar- row, there would be crazy price gyrations and the whole purpose of the market would be de- feated. > When the crop is moving freely @ line elevator company, with perhaps fifty houses in the country, may buy a thousand bushels of wheat a day at @ach Station. it is the: business of Such companies to buy grain on & reason- able Margin and to sell it again as quickly as possible. These companies do not Gare to speculate. . They know that it would be speculation to own the wheat a single day without hedging, for the price very likely would be higher or lower at the end of the next twent;-foOur hours, meee WHE AT Pil tT Hedging begins in June or July in the winter theat markets and early in August or September 1 the spring wheat centers. During the next four 1onths it is heaviest because of the movement of ae wheat and oats crops. New corn crop hedg- 1g does not begin on a large scale until December. When the crop is moving freely a line eleva- or company, with perhaps fifty houses in the Juntry, may buy a thousand bushels of wheat day at each station. It is the business of such »mpanies do not care to speculate. They know ad to sell it again as quickly as possible. These »mpanies to buy grain on a reasonable margin vat it would be speculation to own the wheat single day without hedging, for the price very kely would be higher or lower at the end of le next twenty-four hours. So as the actual wheat is accumulated by one * these companies, sales of an equal amount are ade in the wheat pit as a hedge. If the com- iny buys fifty thousand bushels of wheat in 1e day it will sell in the wheat pit a contract to ‘liver fifty thousand bushels of wheat during certain future month. As the company dis- ses Of the actual wheat, it buys back in the 31 T HE (WHE AT eee wheat pit the same volume which it had sold for future delivery. Thus it is protected against price fluctuations while holding the physical wheat. For should the price of wheat go down, an offsetting profit - is made on the futures contract. Should the price go up and involve a loss on the futures con- tract, it is offset by the rise in value of the actual grain. Thereby the company makes precisely what it set out to make, which is a fair merchan- dising profit. In like manner a country elevator will hedge its holdings. If it places five thousand bushels of wheat in its elevator, it will wire its represen- tative at the futures market to sell a like amount for delivery at some future date. “The company still owns the wheat in its house. But it has made a contract to deliver a like amount during a certain month, the actual day of the month be- ing optional with the seller. Thereafter the country elevator is disinter- ested in price fluctuations. “The hedge will pro- tect whether the price rises or falls. The ele- vator company’s profit is in the difference be- tween the price paid for the wheat in the country 32 meee Wie BACT Pal af and the price at which the future was sold, less freight and other charges. Terminal elevator companies buy the day- to-day surplus at the markets and carry it until decreasing supplies late in the winter and in the spring bring forth a demand. They are located at the market centers. At most markets they buy their grain at the exchanges instead of in the country as in the case of the line elevators and farmers’ elevator companies. Five million bushels of wheat carried by a terminal elevator company would be an enor- mous risk without the protection of hedging. So as rapidly as the wheat is accumulated the company hedges by selling an equal amount of futures in the wheat pit. Hedging has a vitally important bearing upon the crop movement. For instance, banks loan money readily on grain in store. ‘They loan almost up to its market value if the grain is hedged. Should elevator companies fail to hedge their grain the banks would look upon them as speculators with dangerous risks. Un- der present conditions terminal elevator compan- ies, carrying millions of bushels of grain, are 33 T HE \W: HE AW! eee enormous borrowers. of money. Nor do they have any difficulty in obtaining these funds when their grain holdings are insured in the hedging market Millers are by far the largest class among those who buy futures as hedges against grain and flour. It has been estimated that the hedges of millers in various markets equal as much as 400,000,000 bushels of wheat annually. This, incidentally, helps to account for the very large volume of futures as compared with the na- tion’s annual crop. Millers may sell by early autumn all the flour they can make by the first of the year. As they contract to sell the flour they make purchases of Wheat in the futures market. It would be im- possible for them to buy an equivalent amount of actual wheat of the new crop when they are contracting ahead for sale of flour. The new crop wheat would not as yet be available. Even if it were mills could not buy it unless they owned most of the line and terminal elevators, for the problem of financing and storing would be too great. A mill may have in July an order for ten thousand barrels of flour to be shipped in Sep-- 34 Pm wi Wi By AG. YPOled tember. ‘he price of the flour cannot be based upon the prevailing price of cash wheat. It must be based upon the probable price of wheat in September. And the only place in which that price is determined is the futures market. When it has contracted to deliver the flour in September, the mill at once buys an equivalent amount of wheat in the futures market for Sep- tember delivery. “Then the mill is hedged and unconcerned with price fluctuations, for like the elevator man who is hedged, a loss on the futures contract will be offset by a profit on the actual wheat, and vice versa. As soon as the mill buys its actual wheat with which to fill its flour contract, it closes out the hedge in the futures market. In the meantime the element of speculation has been eliminated. Millers of the United States grind approxi- mately 600,000,000 bushels of wheat annually, being the ultimate buyer of 80 percent of the American farmer's wheat. “They contend elim- ination of price interest with such a large buying element is most desirable, and that such a large purchasing power should be utilized to stabilize wheat prices. “Ihe miller should receive his re- 35 T HE Wt E Acta turn from the manufacture and distribution of wheat products and not from the purchase and sale of the raw material. Hedging makes that possible. - There are a number of reasons why a miller must buy wheat.in excess of flour sales or con- versely. One of the largest millers in the world explained some of these reasons to congress by pointing out that production of wheat 1s sea- sonal, flour demand is periodic, and the periods of heaviest wheat offerings and heaviest flour demand do not necessarily occur at the same time. “The areas of greatest consumption both dom- estic and export are east of the large fields of wheat production,’ he said. “Seventy per cent of all the flour produced in the United States is in direct proximity to the fields of wheat pro- duction. The movement of grainand grain products is from west to east. “Wheat must be bought by the miller when it is offered, otherwise it flows by the mill door and passes to export. The miller must, regard- less of immediate flour sales, maintain at or back of milling centers sufficient supplies to meet fu- 36 ME OWHE AT PIT ture flour demand. He must sell flour when the demand exists regardless of his ability to buy im- mediate wheat supplies. “He must maintain a flow of eat to the mill to insure operation and a flow of flour to the consuming points to meet occurring demand. Otherwise continuity of operations would be im- possible and inadequate flour supplies would re- sult from-time to time. “How can the miller buy wheat in excess of his flour sales or sell flour in excess of immediate wheat supplies without interfering with the free reflection of actual values? “We maintain that the miller who utilizes the present marketing facilities and sells a fu- ture wheat contract against his wheat purchases or conversely purchases a future contract against flour sales, is not interested in the price levels except that they should so far as possible be the same in both cases. It matters little if he contracts at $1, $2, or $3 a bushel, provided his sales of wheat or flour reflect similar prices. “It is clear therefore that he is not interested in enhancing or depressing prices and that the volume of his transactions flows through the 37 TUACE Wh EB AT Va markets at current prices without interference. His operations are reduced so far as possible to actual manufacturing only. “On the other hand, it is apparent that the miller who does not use the contract facilities and whose position is therefore directly affected by the rise or fall of prices, must necessarily pos- sess a very decided price interest. “The volume of his transactions must necessarily become a factor and an important one in influencing price as his position demands that he should buy at the low- est and sell at the highest levels. “Under our present system, in futures con- tracts, the margin as between producer and con- sumer is not only extremely narrow, but lower than in any other country. ‘This is due largely to the features of safety embodied in the present grain machinery and extended to those who un- dertake the marketing of our great wheat crop. ‘These features operating successfully over a con- siderable period of time have inspired financial confidence to an extent that makes the advances necessary to move and market the crop readily available.” Exporters of grain utilize the futures market 38 Pe We BAR Be bot ———— for hedging purposes to a very large extent. [he exporter will contract to sell grain abroad before he has purchased the actual grain in this country. But when he enters into the foreign contract he will buy in the futures market an amount equal to his sale abroad. ‘The price will enable him to deliver the physical grain abroad at a profit. In the meantime he need not fear a rising market, for he is safely hedged. His transaction becomes a plain business deal and not a speculation. ‘There can be no doubt that without the specu- lative market with its hedging facilities the grain business would eventually become concentrated in the hands of a small but powerful group. Large capital would be necessary. Small dealers and the present highly developed competition would be eliminated. It is a gfotesque error to assume that the specu- lative wheat market with its hedging facilities is not a benefit to the farmer as well as to the man in the street. 39 That Wicked Short-Selling IKE the sword of Damocles there hangs over the man who sells wheat short an old pit adage which runs— He who sells what isn’t his’n Must buy it back or go to prison. Homely as it is, this little couplet expresses a truism so fundamental that it has lived in that precise phraseology for half a century despite the obvious lack of word-magic on the part of its author. The pit knows the meaning. Perhaps of all the market bugaboos that have stalked the marble halls of court and congress, none has caused such consternation as that of short-selling. It is the eternal signal for trem- bling and quaking and viewing with alarm. In the records it is written that the one time Abraham Lincoln used stout language in the White House was when he said to Governor Cur- 40 eae Wel A I Pon TL tin during the Civil War crisis: ‘“What do you think of those fellows in Wall Street gambling in gold at such a time as this? or my part, I wish every one had his devilish head shot off.” A corrective law was enacted at once, but was removed from the books a few days later because the government’s attempt to limit the market only made matters worse. ‘The speculation and short-selling in time proved beneficial to the country, while the law did precisely what it aimed to prevent. In order to protect their mercantile business, countless people had been compelled to sell gold short, expecting to cover later on. Instead of be- ing wicked gambling, this proved to be sound, legitimate commerce. ‘“The event,’’ wrote Presi- dent Hadley of Yale in the Cyclopedia of Poli- tical Science, ““‘proved that gold speculation had been the means of steadying the market.” “A short sale is not a gambling operation,” declared Judge Barnard of the Circuit Court of the District of Columbia, in rendering a judg- ment in a celebrated Stock Exchange case. ‘“The law defines a gambling operation to be one where the parties make a contract of purchase and sale 41 TAHOE Wi Hi Be AUT” eae without intent on the part of either to deliver or receive the article named in the contract. Nothing passes between the parties beyond the money from loser to winner, and nothing else was in- tended to pass. his is a mere bet—a gamble. “But where actual delivery is made of the goods contracted to be sold and received, the transaction becomes a commercial one. The testimony shows that in a short sale delivery of the stock sold is made, and the purchase price paid. hat fact establishes it as a commercial transaction. It may be speculative. Itis speculative. But commercial transactions generally are more or less speculative, the speculative element in them varying mainly in degree.”’ Since the very inception of the futures markets it has been common knowledge that the vast majority of speculators are buyers rather than short-sellers. Some authorities have asserted that nine of every ten men engaged in grain speculation are “‘bulls’’; that is, they believe in higher prices and direct their efforts accordingly. ‘“The average man,”’ said one of the nation’s greatest financiers, ‘‘is a bull on the United States of America.’”” And that is as true in the grain 42 eee a WBA TPP ST market as in all other lines of commercial endeavor. Except under extremely rare and unusual con- ditions, the short-seller is not able to unduly de- press the price of wheat. For the very minute wheat prices sink below a parity with world values, exporters and foreign buyers seize upon the offerings. Millers likewise grasp the oppor- tunity and the rebound to normal levels is quickly brought about. Those who would correct the real or fancied evils of the futures market have sometimes sug- gested that short-selling be eliminated. “The spec- ulator would be permitted to buy contracts for the future delivery of grain. But he would be restrained from selling a contract to deliver a cer- tain amount of grain at a certain future time. ‘This proposal has been based upon the fallacy that the short-seller depresses prices by tossing upon the market a supply of what has been re- ferred to as fictitious grain. Anyone familiar with the marketing machinery will readily ob- serve the weakness of such a proposal. In the first place, the market would be thrown off its balance and completely upset if speculative 43 THE: OW HE ACT ae buying were permitted and speculative selling prohibited. If speculators were permitted only to buy first and sell last it might be possible to run prices up to ridiculous levels for the simple reason that there would be no influence to coun- teract such a course. he bubble would burst, of course, and the drop would be severe. ‘Then it would be discovered that the whole futures market had been destroyed. There is little of merit in the statement that short-selling depresses prices by creating a ficti- tious supply. If the supply of wheat were to be judged simply by the amounts offered for sale there might be some reason in the argument. But in a broad, liquid market where there is displayed all the crop information of the world, the volume of grain offered by short-sellers has no bearing whatever on the condition of actual supply. The short-seller by no means creates a fictitious supply of grain. Nor is he able by any such process to depress prices. In considering short-selling, the point that should be kept in mind is that the short sale is also a purchase. “There could be no short sale if there were not a buyer to take the other end of 44 fer Wille BACT PIP OT the transaction. ‘The short-seller always finds the buyer who believes in a higher price level. A multitude of buyers are greedy to accept offers that appear lower than the world situation would justify. Any depressing influence then is offset by the elevating influence of the purchase. Even were the immediate effect of the short sale a depression of prices, it would later bring about an equal influence for a rise. For, just as the old pit adage warns, every man who sells must subsequently make a purchase of the same amount. ‘Therefore if his short sale were of such a character as to depress the price, his later pur- chase would bring about an enhancement. It is difficult to determine where short-selling has any effect whatever upon the general market trend, particularly in a market of such vast volume as the Chicago exchange. Records of the past thirty years show that any artificial price situation was almost invariably of the upward character, which is in line with the general contention that ninety per cent of the speculators are on the bull side of the market. Short selling is simply a balance wheel. And a mighty valuable one. 45 On Cornering Grain T is almost as easy to corner the stars in the sky as to corner the wheat market of today. ‘That remark was made one day by a veteran of the exchange. He had been a member for half a century. From those dim days when grain marketing became his life’s work he had passed through all the storms that kept the exchange tossing about on a sea of turmoil. “Stop ten men on the street and nine of them will be of the firm belief that cornering grain is almost an every day occurrence,” he said. “Yet there has not been a corner in years. And there never will be another corner for the simple reason that exchange rules and rigid supervision by the federal government make such a condition ut- terly impossible. “Long ago when disgraceful land frauds were being perpetrated and railroads were engaged in 46 mee AWA EY AST A Pal amazing cut-throat methods, the grain exchange was the scene of real and attempted corners. But those were the slumming days of commerce. Business was feeling its way. Ethics were mis- erably low. Practices that would be darkly frowned upon today were winked at in most every commercial line. So in its period of grow- ing pains and wild oats the grain exchange was not without company. “But remember this. Grain exchanges did not introduce corners. Corners were handed down by antiquity. It is written that Joseph con- ducted the first successful corner in grain. Phil- osophers and historians including the great Aris- totle tell us of corners in food and other necessi- ties by ancients crafty and unscrupulous, and by ancients judicious and long-headed, whose fore- sight warned them months in advance of certain critical events. “Men of such superior intellect and vision, who foresee probable future events, have always prospered and will continue to prosper. In much lesser degree has prosperity shone upon those crafty and unscrupulous men who have sought through artificial means to profit by the distress of their fellow man. 47 T A\E WHE AV eae “In the rude, embryonic days of the exchange there were grain corners good and bad. Most of them were distinctly bad. And here is a curious fact that for some reason has never been realized by the public. Nearly every grain corner ever at- tempted was a failure and brought financial ruin to the perpetrator. Still another fact should be borne in mind. ‘The man who attempted to run a corner always forthwith became the enemy of the exchange. He was an outlaw with the trade generally, a fugitive that had to be disarmed if members of the exchange were to be afforded any measure of protection. i “It was common practice in the old days to / refer to every tight situation in the market as a corner. Many so-called corners were nothing more than natural conditions. It is true that those who anticipated such conditions profited. But they were following the trend rather than creating it. “There were three so-called corners in the his- tory of the exchange of sufficient magnitude to remain in public memory. One was really not a corner at all, one ruined the man who tried it, and one was a temporary success. [hey came ten years apart. 48 meee WE AM ee Pek sy, “B. P. Hutchinson, that most fascinating of grain market plungers—hated, loved and feared— by bold strokes with his personal fortune was a dominating figure in grain during 1888. ‘The government report in May predicting a wheat shortage found ‘Old Hutch’ a seller of wheat. “After a temporary rise prices slipped down- ward until July, showing large profits for Hutch- inson. [hen in August he took the buying side, accumulating a large volume of September wheat. Frost damage and a tightening European situa- tion created fear. Hutchinson received and paid for quantities of actual wheat, and by late Sep- tember the price for September wheat rose to two dollars, the Northwest in the meantime having suffered a staggering crop disaster. “Old Hutch made a huge sum through his ability to judge the course of prices and switch from one side to the other. Fundamental factors were with him, and his attempt to enhance prices certainly was a temporary success. ‘The next year he again tried and failed. “In later years he fed his fortune back into the market from which it came and died a poor man. 49 T ACB OW ACE AQT “Then in 1898 there was the so-called Leiter deal. Joseph Leiter had accumulated wheat in 1897, believing in a later shortage. The price rose steadily, but the high prices attracted large receipts. Speculation turned to December wheat. and there were large exports, supposedly a part of the Leiter plan. Great quantities were later received in Chicago, most of the wheat going to Leiter. One big operator chartered a score of lake vessels and with a small army of ice-breakers and a fleet of tugs brought cargoes of wheat from the Duluth harbor. Leiter’s puny attempt to stem the tide failed. Prices finally collapsed and his losses totaled millions. “The attempted cor- ner was a complete failure. “The so-called Patten corner of 1909 was not a corner at all. Prices rose in May of 1908 from general bad crop conditions, and in the fall heavy exports, combined with other factors had reduced our supply. In the meantime Patten had been credited with buying, and to critics he properly replied that he had bought wheat and put it in store, thus keeping it in America. ‘This event- ually proved to be a service worth while. High prices, he said, were due to supply and demand, 50 Serer Wen BALL Pyle and this statement was true, for prices remained high until the new crop came in. June wheat, with no semblance of a corner, rose above May wheat. “Incidentally, all these attempts, like smaller ones, carried prices higher and complaint from the farmer was not heard. “Tt is no small task to eliminate abuses in an industry as widespread as grain marketing. But the exchange, particularly in the last decade, has given a good account of itself. Its progress has come from within. After years of most bitte and costly warfare it drove the bucketshops out of existence. It wrote into its rules provisions which would prevent any sane man from risking his fortune in an attempt to actually corner grain. A man of great means might tempo- rarily affect the course of prices, but he could not run a corner regardless of funds available. “Besides the rigid rules of the exchange, the United States government directly supervises the market. Under the Grain Futures Adminis- tration all information as to volume of trading on the part of any single individual or any group of individuals is made available to the govern- 51 To ACE WOR VE VA i ment. A corps of government agents is con- stantly on hand and the market is kept under close scrutiny. Severe penalties are provided under this law. ‘The act goes so far as to au- thorize the government to revoke the privileges © of a futures contract market in event the exchange fails to fully observe the conditions laid down in the law. “Today the grain exchange is an open book. And an attempt to corner its commodities is either madness or utter stupidity. [he days of corners are buried with the past.” 52 “Let's Investugate” RAMERS of the constitution, guided by the eternal principles of justice, set forth certain individual rights. [hese rights were inalienable. They were not to be invaded. They were free from regulation by force. Secure under these righteous principles of the constitution, farmer, merchant and _ artisan forged steadily ahead. In America individual initiative was ever the driving force. It trans- formed rugged lands into highly productive areas. It built highways and railways and opened up giant arteries of trade. It developed markets and exchanges for the buying and selling of securities and produce. The broad policy of encouraging individual initiative, a policy conceived by the framers of the constitution and continued unhampered until after 1890, proved a sort of chariot of progress for the nation. TA EE W ROE A Tee It is the drift from this policy that has cre- ated a growing sense of uneasiness in the busi- ness world in recent years. [here has been a tendency to regulate, to supervise, and to curtail © the normal activities of commerce. ‘This ten- dency has hung like a dark cloud on the business horizon. Instead of rejoicing at the convening of a new congress, business figuratively shudders, tightens its lines and impatiently awaits ad- journment to launch new projects. All of which is unhealthy from the standpoint of na- tional progress. Regulating grain exchanges has been a favor- ite pastime. Like railroads and a number of other industries, the exchanges long ago became a political football of the opportunist. Unrest has been capitalized and facts obscured. Ob- serving the grain exchanges and various public service groups squirm under the attacks of the crusaders, every other industry has wondered with some alarm just how soon its own thumb- screws would be given another twist. In the case of the grain exchanges it is a cu- rious fact that most of the legislative onslaughts, 54 meee Wee ART Pelt based as they were upon absurd contentions, have gone far wide of the mark. But time and again they have forced the exchanges to drain their resources in a fight for existence. And in- cidentally the costs drew a huge toll from the tax-payer. Millions have been spent by the govern- ment in investigating the grain exchange over a period of thirty odd years. Published reports of such inquiries equal one hundred full length novels. There are twenty-two thousand two hundred and eighty-one printed pages, most of the records being in small type on large sheets. The ten-year period following 1890, when the Butterworth bill finally failed, was a par- ticularly exciting one for the exchanges. For four years the Hatch bill to abolish grain futures kept the battle at fever heat. ‘This and like bills failed when farmers themselves withdrew support after finally realizing that to abolish the futures market would put them at the mercy of a small but powerful group who could dictate prices. Fortunes were spent in the fight both by the government and the exchanges,all to no purpose. 55 T BOE Wl BE AUT Then in 1898 congress had the Industrial Commission launch a _ three-year investigation directed mainly at farm distress. “There were nineteen volumes of report. General price re- cession during the twenty years beginning in the - seventies, the report discovered, had given rise to a belief that futures trading was the cause. On the contrary such trading was found to be beneficial to producer and consumer. ‘Con- clusive evidence shows that under speculation prices at the time producers dispose of the greater part of their products are greater in comparison to the rest of the year than they were before the advent of modern speculation.’ ‘That investigation cost one million dollars. ‘The tax-payer paid. Desultory attacks continued until 1910 when there was a federal investigation of the Chicago Board of Trade by the attorney general’s office. Charges against the exchange proved groundless and congress took no action. Low grain prices in 1913, resulting from heavy world production, prompted congress to authorize an investigation by the President. There were strong suspicions against specula- 56 PE Wy MO BV ANT. o POL iT tion. But after an exhaustive study by the de- partment of agriculture the President advised congress that the cause was a natural one. Again grain exchanges were exonerated. Wheat and flour prices from farmer to con- sumer was the subject of ponderous reports in 1914, while half a thousand pages of futures trading testimony was heard by the rules com- mittee. [hat same year the secretary of agricul- ture completed an exhaustive survey of Kansas wheat prices and reported back to congress that “since the margins of profit taken by grain deal- ers in the large markets are very small, averag- ing about one cent a bushel, it appears far- mers of Kansas, as a general rule, are obtaining all their wheat is worth.” ‘Those hungry for further official information on the subject of futures trading were given the voluminous report of the Commission of Indus- trial Relations two years later. A hundred thou- sand copies were printed. The hourglass of grain exchange history was turned upside down in 1917. Complaints had always been directed against low prices and spec- ulation had been suspected. But the war 57 TORE WHE Aol ape brought on high prices and incidentally pro- ducers were silent at last. But a loud outcry came from consumers and the President ap- pointed a committee to investigate, while con- gress ordered the federal trade commission and the department of agriculture to probe the ex- changes. ‘They must be at fault. From five to twenty men remained in the field constantly for the next four years, and re- port after report was compiled, the federal trade commission turning out five huge volumes up to 1924. It was found, to the amazement of all, that the high level of prices was due to the war. Half a million dollars was the cost of the in- quiry. Reports on food investigations came from the trade commission two years later and still other reports on wheat and flour milling were submit- ted by that body after another two years. Drastic price deflation following the war en- gaged the federal trade commission in a new and sweeping investigation of exchanges. “The severe decline in prices of export grain in 1920, and the low prices in 1921,” reported the commission, ‘‘were chiefly due to the various 58 fee Whee BAYT) OPV T adverse factors in the general situation of the world market, such as large crops at home and abroad,general business depression, unfavorable exchange rates, and limited purchasing power and credit in foreign markets. “Evidence available does not establish manip- ulation of wheat prices by large operators in fu- tures, nor that the recent low average, or down- ward trend of wheat prices has been due to a speculative manipulation.” Along came the sixty-sixth congress, whose agricultural committee devoted weeks to the study of the grain exchanges, and with the aid of the congress which followed, added two thou- sand pages of testimony to the official records on the subject of grain futures trading. Mean- while the federal trade commission continued writing endless reports, and swung into a new investigation of Chicago terminal markets which was still progressing in 1925. Late in the summer of 1924 evidence of a pos- sible world wheat shortage was registered in the futures market and prices climbed steadily. The American farmer, with a bumper wheat crop, 59 TL ACE WORE Al ieee profited handsomely. Speculation had made the real situation obvious. And the farmers re- joiced. Just before the Presidential election oppo- nents of the administration charged that high wheat prices were a political conspiracy intended to secure the farmer vote. ‘This campaign ca- nard, like all other political tampering with the grain market, caused prices to slump off sharply. But after election they rebounded with dazzling resiliency, disproving the conspiracy charge. Winter wore on with the evidence of a world wheat famine becoming stronger and stronger, while the pits continued their roar and the quo- tation wires sang their old song of UP, UP, UP! Leading statisticians of all lands pointed to the gravity of the outlook. Foreign govern- ments sensed the impending crisis and at times caused near panic in American markets by their frenzied scramble for our wheat. The Wash- ington government, replying to an inquiry as to prevalent high prices, publicly announced that the world wheat shortage justified the values registered in the futures markets. 60 Mee Wik iE An ly Rib ad After the world had virtually agreed upon the dangers underlying the wheat situation, the public, always last to recognize an economic condition as reflected by the exchanges, leaped into the wheat market and bought with a mad- ness perhaps unequaled in history. “There was utter abandon. Speculation was in the air. The public was drunk with it. Money was plenti- ful. At the polls radicalism had been defeated. A President with sound business judgment and the confidence of the people had just been elected. The public press, in year-end reviews, saw naught but abounding prosperity for the next year and probably the next four years. Why not take a flyer? So, guided more by sensational headlines than by sound judgment, the public climbed into the market. “The market boiled over and before the orgy ended May wheat twice had been carried over the two dollar mark. ‘The speculating pub- lic was abusing the marketing machinery, throw- ing it out of gear. It was like dropping rocks into the thresher. But so long as prices soared everyone was happy. Then came a day of reckoning. ‘The over- 61 TORE WotR Al i inflated bubble burst. And as is usual the public got soap in its eyes and cried. Wheat prices in the tumble from dizzy heights went to a down- ward extreme before finally steadying to true values. "it There was actually a shortage which justified high prices, as was proved when May wheat fin- ished up that month around a dollar seventy-five. But because a frenzy of public speculation, brought on by prospects of a crisis, carried prices twenty-five or thirty cents too high, there was the usual thunderous outcry: Investigate the exchanges! What have the innumerable investigations, congressional debates and legal battles of the last thirty-five years established? ‘These simple facts: The exchanges with their futures trading and hedging facilities are a vital part of the whole complex business structure. [hey serve producer and consumer at lowest possible cost. Organized speculation makes a wider, more liquid market with greater price stability. Instead of depressing or controlling prices, the exchanges merely regis- ter true values as determined by world supply and demand. 62 Pee Wan bi Ae bh CPi D. In connection with crime mystery the French have a saying, cherchez la fermme—‘‘Seek the woman.” When the marketing machinery acts up, the investigators might well use as their guiding thought: “‘Seek the outside influence.’’ Invari- ably the trouble comes from the outside. Left undisturbed the grain futures market is indeed one of the marvels of present day commerce. — ae Tee ee NNN 1354