The Birmingham age-herald., 1908-05-04

!
 urge that it is necessary to have sys-
 tenn under which differences can be known for some definite period in advance on the ground that otherwise. merchant cannot conduct a spot cotton business with any reasonable degree of certainty. The argument is that cotton merehahts
 usually operate on a very narrow mar gin of proft-sometimes not over one
 tenth of a cent a pound-and that 1t IS impossible for them to take the risk that grade differences applying on contract de- ifveries may be changed after they enter into such commitments. This merely
 means that some one else must bear the inevitable and natural risk of the market changes in grade differences; that is to say. the supporters Of thls argd-
 ment show a desire to reduce this part of the business to a sure thing for the seller.
 As corolary of the above argument, it is urged that by reason of being able thus to calculate their profits with exact ness, merchants are able to pay the grow
 CT of cotton a higher price for his product | than they can when they are obliged to
 take into consideration tho risk of fiuetua- tions in grade differences. The conten- ton is that, in proportion as the risk
 of the merchant is increased. he is com , peled to demand wider margin ot compensation for such risk. and conse- quently to offer reduced prices to the grower.
 In considering this second point, it must be borne in mind that if the fixed con- tract differences are wrong the tendency
 is usually to send the contract price itself to a discount relative to the price of spot middling cotton. In other words. the risk of fluctuations in grade differ ences, which the seller thus escapes IS
 thrown upon the buyer. but the buyer, in turn endeavors to escape it by re-
 aucing his bids for contracts. The cerr tainty as to the fixed differences is more
 than offset by the greater uncertainty produced in the basis price itself by such differences While occasionally the fixed difference system may permit the cotton merchantsto pay somewhat higher prices for spot cotton than he could under com mercial differences, it is certain that this | cannot be a constant feature of that sys- tenn If this were the case, it would
 mean that New York, with its fixed-dif- ference system. could regularly pay high CT prices for cotton than New Orleans, which in turn would result in drawing practically all the trade to New York i That this has by no means happened is
 substantial refutation of the argument. Indeed, it is the firm belief of many per sons in the cotton trade that the effect of the fxed-difference system has been to
 
 cotton, instead of to increase it.
 The main argument in favor of fixed difference, as above presented, considers only the position of the seller of future contracts. The answer to it is that, in
 return for any such additional security to the seller, the insecurity of the buyer
 is correspondingly aggravated. The in-
 justice of thus adding to the disadvantage of the buyer is all the more indefensible,
 because, by the very nature of basis contract, his disadvantage is necessarily
 great. That basis contract, in connec- ton with fixed differences. throws the risk of fluctuations in grade differences upon the buyer is apparent Advocates
 of the difference system frankly ad-
 init this but contend that It is altogether proper Their argument overlooks the vtally important distinction between basis contract and a specific contract. It is unquestionably true that in ordinary contracts for specific property such as
 a piece of real estate, the buyer who
 agrees to take such property at future date at a fixed price has no just reason to complain because after he enters into such a contract, it's value declines. It is his business to take the risk of such subsequent change in value. The argu- ment that he should take the entire risk of change in value under a basis contract, however, by no means follows. The op- ton of the seller under a basis contract, of rendering such grades as he may de- sire creates a fundamental distinction between such basis contract and a spe- cifc contract. The buyer is absolutely unable to know with any degree of cer- tainty what grades of cotton he will be compelled to take. If in addition, he is compelled to take such unspecified grades at arbitrary values relative to middling,
 then the contract really assumes much of a gambling character. A contract of this
 sort, while extremely advantageous to the seller, becomes for the buyer almost
 a lottery The selle- not only has the
 privilege of selecting any grades which
 he may desire to tender, without notify
 ing the buyer what they are, but also has the obvious inducement to select those grades which it Win be of the greatest
 advantage to himself to deliver and usual
 ly of the greatest disadvantage to the buyer to receive.
 While advocates of fixed differences
 admit that the system has been at tended by serious evils, they contend that these evils are less serious than those occurring under the commercial difference system. In fact, they assert that it is because of the abuses at tending the commercial-differe sys- tenn in New York years ago that the fixed difference system was adopted.
 
 against commercial differences is. first that the committees which establish 1 spot quotations or the arbitrators who 1 apply the differences on contract de- 1 liveries often are deceived by large 1 operators who manipulate prices of 1 cotton in the spot market so as to 1 bring about improper differences to be l used in settlement of contracts, and l second, that those who establish or ap 1 ply such differences act from motives | of self-interest or are knowingly sub 1 servient to such large operators and l still more frequently that they are l careless in quoting the market. It is asserted that abuses of this character l occurred in the New York marke years 1 ago, when the commercial difference 1 system was in effect, and that they still occur on an extensive scale in the New Orleans market.
 An instance which caused especial complaint occurred in the early part of September, 1907, when differences for several low grades in New Orleans were widened by a half cent on d single day but narrowed by half cent three days later. A change of half cent in actual differences in l day very rarely occurs in the spot mar
 ket and this widening of differences in New Orleans in September, 1907, and
 the almost immediate restoration of the former differences were cited as conclusive evidence of manipulation or misquotation. There was unquestion ably a serious error somewh ere.
 Whether there was deliberate abuse of trust, it Is impossible to say. Several
 other instances of a similar character are discussed in the body of the re-