SUPPLEMENTAL STATEMENT BY WILLIAM RHEA BLAKE, EXECUTIVE VICE PRESIDENT, NATIONAL COTTON COUNCIL OF AMERICA

The National Cotton Council of America, which represents the entire raw cotton industry, the farmers, ginners, merchants, warehousemen, seed crushers and spinners, wishes to register opposition to the proposed new section 611 in subtitle B of S. 1397 and H. R. 3871.

This proposal would give the President the power to prescribe rules and regulations governing margin requirements for speculative futures trading in commodities on the commodity exchanges.

A similar proposal was rejected by the Congress last year, and similar proposals in past years also have failed to receive approval after careful consideration by congressional committees and Members of Congress.

We can state very briefly our reasons for opposing section 611 of subtitle B in S. 1397 and H. R. 3871.

1. Trading on the commodity exchanges does not govern the price fluctuations in commodities. These fluctuations are governed by the supply and demand for the commodities. In 1946, the New York Cotton Exchanges increased margins for cotton futures trading at the direction of OPA, which sought thereby to curb cotton price rises. Instead of declining, cotton prices continued to increase. In 1947, the Chicago Board of Trade increased margins on grains at the request of the President but in this instance also prices continued to rise.

2. A primary function of the cotton exchanges, and other commodity exchanges, is to furnish price insurance for their industries through hedging. Hedging enables elements of the cotton business to reduce the irprice risks involved in buying and selling cotton. Speculation in the commodity markets is necessary if the markets are to perform their hedging function efficiently. To illustrate: Merchants would normally be expected to buy most of the anticipated 16 million bale crop within the short space of a few months. Mills at home and abroad normally purchase cotton from merchants more slowly-over the course of the year-as they sell their goods. To protect themselves against a decline in the value of their cotton stocks, merchants would normally sell futures. This is a hedge. Unless speculators are available to buy these hedge contracts as they are offered, the selling pressure would force the level of the market down severely at the time the farmer is selling his crop.

3. The Government's contention that an increased volume of speculative trading on the commodity exchanges causes prices to rise, is not borne out by the facts. For example, speculative trading in cotton has declined since Korea while prices have risen sharply due to a short cotton crop in 1950 and increased demands for cotton. On May 25, 1951, the speculative interest in cotton on the New York Exchange was at one of the lowest points on record.

4. Secretary of Agriculture, Charles F. Brannan, admits that he now knows of no instance where an increase in margins for speculative trading on the exchanges is needed to help curb speculation. The National Cotton Council takes the view that no extension of Government authority over our economy should be authorized when the need for it cannot be clearly established.

The CLERK. The next witness is Mr. Perry E. Moore, president of the New York Cotton Exchange.

STATEMENT OF PERRY E. MOORE, PRESIDENT, NEW YORK COTTON EXCHANGE

Mr. BROWN. Come around, Mr. Moore.

Mr. MOORE. Mr. Chairman and gentlemen of the committee, this is Mr. Scanlon, assistant to the president; this is Mr. Mound, attorney for the exchange, and Mr. Bell, also an attorney for the exchange. Mr. BROWN. You may proceed, Mr. Moore.

Mr. MOORE. My name is Perry E. Moore, I am president of the New York Cotton Exchange. I am a member of the firm of Robert Moore & Co., commission merchants of New York City. I am appearing here on behalf of the New York Cotton Exchange.

The measure before you, H. R. 3871, contains provision in subtitle B, section 611, which would extend the Commodity Exchange Act by providing for Government regulation of margins for the purchase or sale of commodities for future delivery. It also would place under the provisions of the act the purchase or sale, for future delivery, of all agricultural and forest products or byproducts, on any commodity exchange in this country.

We are appearing here today in opposition to the provisions mentioned and we also wish to register opposition to price ceilings on raw

cotton.

I can tell you very quickly why the New York Cotton Exchange has opposed and still opposes price ceilings on raw cotton.

First of all, price ceilings prevent the market from performing its functions of reflecting prices as they rise and fall in accordance with the law of supply and demand. Price controls throws a road block into this process.

Secondly, price ceilings interfere with hedging. At present, a contract to buy and sell cotton for future delivery on the cotton exchange may not be an enforceable contract for the simple reason that OPS may make it invalid by rolling back existing ceilings. Already, fulfillment of exchange contracts has been rendered impractical because of price ceilings.

Furthermore, as we have insisted and as experience has demonstrated, price ceilings on raw cotton are unworkable. If cotton is in demand and prices remain at the ceiling, a black market in cotton develops. No one benefits, least of all the consumers, but great injury is done to the cotton industry and, in particular, to those in the industry who try to abide by the law.

Summing up, I would say (1) price ceilings will not work if prices remain at ceiling levels and under such circumstances they are an illusion and a hoax; and (2) if prices decline below ceilings and remain there, ceilings are not needed but remain to make it difficult for the exchanges to render efficient service to the cotton industry.

I do not propose to discuss the provisions which would place the purchase or sale, for future delivery, of all agricultural and forest products on domestic commodity exchanges under the Commodity Exchange Act, except to say that we are against any extension of Government power over the commodity exchanges unless the need for it is clear. All trading in cotton on any exchange in this country already is under the provisions of the Commodity Exchange Act and United States Cotton Futures Act. My remarks are directed to the provisions which would give the President the authority to fix the margins for futures trading on the cotton exchanges and the other commodity exchanges of this country.

This subject was before you last year in the measures which eventually became the Defense Production Act of 1950. The request is not a new one but has been put forward by the Government during each session of the Congress since 1947. It has been the subject of extensive study by the Agriculture Committees of the Congress. The committees referred to invariably have come to the conclusion that the Government's persistent requests for control over margins were not warranted, or desirable.

An exchange witness appeared before the Senate Banking and Currency Committee in opposition to the proposal last year. The

Senate committee struck the margin provisions from the bill before it. We did not testify before your committee. However, this matter was debated in the House at some length and the section which would have authorized Government fixing of margins for futures trading was stricken from the House bill on a roll-call vote.

In view of the fact that we did not testify before you last year, I would like to review briefly some of the functions of the New York Cotton Exchange to explain our request that the provisions which would give the Government the authority to fix margins for trading on the exchange be eliminated from this bill.

The New York Cotton Exchange is the principal world cotton market. The Liverpool Cotton Exchange, once a world market, was put out of business by Britain's Socialist government.

As we see it, the New York Cotton Exchange and other cotton exchanges in this country serve three primary purposes:

1. They provide a ready market where cotton can always be bought and sold. The marketing of cotton is a complex operation. The exchanges furnish a vehicle which enables this operation to be handled throughout the year in an orderly and economical fashion.

2. The cotton exchanges furnish, through hedging operations, price insurance for the producers, shippers, merchants, and manufacturers of cotton. Under the existing marketing system, hedging is an indispensable function so far as cotton is concerned. If the cotton exchanges were no longer able, through hedging, to provide price insurance for the industry, the entire system of cotton marketing in this country would have to be revolutionized.

3. The exchanges are indispensable sources of price and market information with regard to cotton.

Everyone concerned agrees that the commodity exchanges do perform a vital function for the industries they serve.

The issues then are whether the Government should be given the additional authority which it seeks over the exchanges and whether price ceilings on raw cotton are serving any useful purpose.

As I have stated, the House Banking and Currency Committeewithout hearings-last year approved a provision in the proposed Defense Production Act, to give the Government the authority to fix margins for futures trading. This committee is the only congressional committee which, in recent years, has approved such a proposal and, as I also stated, the House later rejected this provision on a roll-call

vote.

As I

I am not criticizing the action of this committee last year. stated, you did not hold hearings on the matter. We are hopeful that the committee, after considering the matter this year, will come to the conclusion that this legislation has no place in this bill.

The principal argument advanced last year for margin regulation was that it was necessary to help curb speculative price increases. We contended, and the contention has since been borne out by Mr. J. M. Mehl, Administrator of the Commodity Exchange Authority, that trading, speculative or otherwise, on the commodity exchanges does not govern the rise and fall of commodity prices, except for very brief periods of time, but that this rise and fall is governed by the law of supply and demand.

Before your committee on May 14, 1951, Secretary of Agriculture Charles F. Brannan also stated unequivocally that he knew of no

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immediate situation in any commodity traded in on the exchanges where an increase of margins was necessary to curb prices.

This is an extremely important admission. The arguments which. attended the effort to extend additional Federal authority over margins last year no longer are valid—and, in the opinion of a majority of the Members of the House, they were not valid in 1950.

Witnesses who have urged the extension of Federal power over margins this year contended that the authority might be useful at some future time.

If this is the case and if, according to the Government's own admission, the authority is not needed now, we strongly recommend that this matter be referred to the committee of the House, which has jurisdiction over this subject, the Committee on Agriculture. That committee, we feel, knows more about this subject than any other House committee and is best fitted to deal with it. That committee almost unanimously opposed the margin provisions in the 1950 defense production bill and the motion to strike that provision was made by the chairman of the House Agriculture Committee, Mr. Cooley.

Simply stated, hedging on a cotton exchange, or any other commodity exchange, is price insurance. Through it purchases or sales of spot cotton are offset by sales or purchases of cotton futures so that any decline or increase in the price of the actual cotton will be offset by corresponding increases or declines in the prices of the futures.

Let us say, for example, that a cotton merchant buys 10,000 bales of cotton from producers. He sells 10,000 bales of cotton on the exchange for delivery in some future month. If the price of his spot cotton goes down, he gains enough on his future sales to offset this loss since he will buy back his 10,000 bales which he has sold on the futures market at less than he paid for them. Generally speaking, the prices of spot cotton and futures cotton rise and fall together. To repeat, whatever he loses on his purchase of spot cotton will be covered by his gain on his futures transaction.

There are, of course, ramifications to hedging but the principle is as I have stated, and operates on other commodity exchanges as it does on the cotton exchange.

Hedging for those persons in the cotton industry who make their money by the services they perform as producers, or middlemen, or manufacturers substantially eliminates the risks of price fluctuations involved in buying or selling cotton.

Who assumes these risks? To a large extent, it is the speculator. The assumption that we should permit only persons who want to hedge to trade in the cotton futures market also assumes that when one hedger wants to sell 10,000 bales of cotton, for example, that another hedger-at that same instant-wants to buy 10,000 bales of cotton and that these sales and purchases by hedgers balance out perfectly.

It just doesn't work out that way. The presence of speculators in the market, the person who thinks cotton is going to rise or fall, and is willing to risk his money on his judgment, makes it certain that any cotton offered for sale will be bought within a few seconds, or that any offer to purchase cotton will be accepted immediately.

The elimination of speculation from the cotton market simply would mean that someone wanting to hedge cotton would never be certain that someone else was in the market to enable that hedging

transaction to be carried out quickly and efficiently. The market would be much more subject to fluctuation under such circumstances than it would be if offers to buy and sell were speedily absorbed.

As an example, let me say that a group, or an individual, on a particular day wanted to buy a considerable quantity of cotton for hedging purposes and that sellers were not present in the market. The result would be sharp increases in the price of cotton, followed by sharp declines when we had a reverse picture.

We feel very strongly that the attempt by the Government to govern prices through margin controls would not work. But, even if we grant that the Government is right in its intentions and conclusions something we do not grant-the result will be the reverse of what the Government expects.

An increase in margins might drive out the small speculators but it would not interfere with speculators who are well financed. Obviously, if the market were limited to a few large operators, manipulating the cotton market to force prices up or down would be easier than it would be if there were many persons trading and ready to absorb offers to sell or purchase.

We think the Government's effort to manipulate the cotton market through margin controls would fail and that the attempt is likely to make the cotton exchanges valueless to the cotton industry.

The margin provisions of H. R. 3871 apply only to speculative transactions on the cotton exchanges and exempt hedging transactions. But hedging is possible only because the speculators are present in the market to buy the hedges. If we drive speculators out of the market, as the Government plans to do, we are taking a long step toward the destruction of the commodity exchanges.

The Government states that it wants only to drive some speculation out of the market but we have no assurance that such action will not proceed to the point where the exchanges can no longer do business. If the power of life and death over the exchanges is given to the Government, the day is likely to come when the Government's decision will be that the exchanges must die.

The Government's point of view ignores completely the reason for margin requirements for exchange trading. The primary purpose of margins is to protect the contracts entered into. Obviously, the commodity markets would be valueless unless contracts were protected. Toward this end, margins are raised as prices rise and the values of contracts entered into rise. They are reduced as prices fall and the margin needed to protect the contract declines.

The entire cotton industry, including the producers, opposes the authority over the exchanges which the Government seeks. To our way of thinking, this constitutes an almost irrefutable argument against the Government's proposal. If the cotton industry did not have faith in the exchanges and did not feel that they serve a useful purpose, the industry, or elements of the industry, would appear here before you in support of the administration's proposals.

It is significant, we think, that the support for this extension of authority over the exchanges comes, aside from Government witnesses, who must support the Government's program, from persons and groups who apparently know little about exchange operations. Without having studied the subject in detail, we would think it presumptuous to come before you with detailed recommendations about