The Washington herald., 1910-02-06

describes the function Of speculation as
follows.
ITO relieve trade Of the risks Of fiuctu-
atIng values by providing a class always
ready TO take or deliver a property at
the market price and IN so doing 20 d.
rect commodities 70 their most advan-
tageous uses and the investment Of CAPT.
tai into the most profitable channels by
fixing for commodities and securities COM
parative prices for delivery at different
times and places"
Exchange speculation theoretically per-
forms these beneficial services. The trou-
bic is not with the theory. but with the
actual practice. as follows.
First There is one class OF spectators
who actually contribute information and
valuable knowledge liz influencing future
prices-"true speculation" But there is
another class who are wholly ignorant Of
the cotton COR other business and who
are merely betting - commercial gam
bling They do no good and often exert
d fals.fying influence on price quotations.
Conditions NuIIify Benefits.
Second. The theoretio benefits Of ex-
chance transactions are IN practice seri-
ously reduced. and often nullihed by i'm
proper conditions on the exchanges them
selves. as, for example. on the New York
Cotton Exchange The basic defect of
that exchange is its so-caIled fixed diff
ference" system. The operations Of this
system are complex, but. briefly stated, #
amounts 10 an attempt on the part Of
the exchange TO FIX arbitrarily for ten
months in advance certain prices Of cot
ton. No contract can be made on that
exchange except under the absurd price
conditions thus fixed.
Obviously any such arbitrary prices, IN
view Of the unforseeable conditions Of
supply and demand viii inevitably be
come erroneous. Being. however. an un-
alterable part of the future contract It
/ self, this fundamental error necessarily
disturbs the price Of that contract This
/ IS a plain abnegauon Of one OF the prime
/ functions Of an exchange, providing true
/ quotations Of future prices based on nat
/ ural conditions. These false quotations
/ are widely distributed daily, and are re
He'd upon by the public, and especially by
merchants and farmers in handling the
/ crop. My last report on the cotton ex-
! changes parts and 81 demonstrated
/ that these false quotations. produced IN
/ der the fixed difference system. frequent
lily decreased the prices Of cotton received
/ by the farmer.
Interferes with Hedging.
Third. The other prime function Of the
exchange, hedging. is disturbed and often
nuIined by this fixed difference" sys-
TEN. As pointed out. successful hedging
/ depends upon a parity Of movement be
tween the prices Of actual cotton and Of
future contracts. When the price Of fU-
ture contracts is disturbed, as it fire.
quenty is. by this artificial regulation.
the parity disappears and hedging be
Genes. not a protection, but a source Of
danger The American Cotton NTanufac-
/ turers' Association has justly termed
such false quotations "a curse 10 the
cotton industry.
Fourth. Cotton exchange transactions
/ In the last decade have shown a surpris-
/ ing increase in fluctuations OF cotton
prices, an ominous departure from the
proper function Of reducing fluctuations
Evils Attend Speculation.
Finally. there are evils attending future
/ exchange transactions. chiefly affecting
the individual which are only too serious
and too obvious. The crimes, embezzle-
ments, financial disasters, and moral de-
/ generation that have resulted therefrom
are matter Of common knowledge.
I should refer in passing TO the expert
Ience Of Germany. Germany in 1856 pro-
hibited exchange dealings for future de-
| livery in grain and flour and IN mining
and industrial stocks. In 1908 the pTOhihi-
ton Of dealings in mining and industrial
stocks was repealed. the government stat
Ing that "the prohibition has proved in
furious TO the public without accomplish
ing its original purposes" The prohibi-
ton Of future dealings in grain and -four
is still in force.
/ Ny own information IS too slight TO
| justify me in commenting hereon. A study
by Prof. Emery (see Congressional Rec
! ord, December 16, 1903 states:
The ten-year experiment which has
been made In Germany has clearly dem
onstrated itself failure. Trade was dis
organized and the old barometer Of mar
ket conditions, T. e, the quotation of
prices on the central exchange, had dis
appeared. Strenuous efforts were made
to substitute official figures collected and
tabulated by an official board, but proved
/ confessed failures
Summarizes the Situation.
To sum UP the matter, future exchange
transactions include several very differ
ent classes. Some, like hedging are
proper and necessary; others. which
| should perform in theory a beneficial
function, work in practice large amount
1 Of evil as well, owing to improper ex-
change conditions. Still others are IN
Fquestionably evil in their net results. But
while these distinctions are clear as a
matter Of economics and morals, they
present difficulties in the practical franz
ing and application of remedial legisla-
tlon.
River Power Going to Waste.