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Mr. Brown. Without objection it will be included in the record, (The matter referred to is as follows:)

CONTROL OF MARGINS ON COMMODITY EXCHANGES-SPEECH OF Hon. FRED L.

CRAWFORD OF MICHIGAN IN THE HOUSE OF REPRESENTATIVES TUESDAY, APRIL 24, 1951

Mr. CRAWFORD. Mr. Speaker, sometime ago on the House foor, an exchange took place in which an attempt was made to fix party responsibility for the defeat of a provision in the original draft of the Defense Production Act which would have given the President the authority to fix margin requirements for trading on the commodity exchanges.

During that discussion, familiar charges were repeated about speculation on the commodity exchanges and the conclusion was drawn that this speculation was a factor in increasing commodity prices and the cost of living.

Without saying whether Democrats or Republicans were responsible for the defeat of the effort to increase the Government's authority over the commodity exchanges, I want to say that I supported the amendment to the Defense Production Act for deletion of the commodity exchange provision. I did so after considered judgment and I would do so again under similar circumstances.

Bear in mind please, that the proposal we are talking about was not a proposal to put the commodity exchanges out of business because of the speculation which takes place on them. Nobody, so far as I know, has said that the commodity exchanges should be closed. On the contrary, even the Department of Agriculture, which has been the principal proponent for control of margins for futures trading on the exchanges, agrees that the exchanges serve a useful purpose.

This is attested by many statements from Department officials. The question comes down to the advisability of giving the Government more power over the exchanges, including giving the Government the authority to raise margins, or lower margins, on the theory that speculation does have a vital influence upon commodity prices.

Chief Justice Taft, in delivering the opinion of the Supreme Court in the case of the United States v. The New York Coffee and Sugar Exchange, Inc. (263 U. S. 611) said:

"The usefulness and legality of sales for future delivery, and of furnishing an exchange where under well-defined limitations and the rules the business can be carried on, have been fully recognized by this Court.

Those who have studied the economic effect of such exchanges for contracts for future deliveries generally agree that they stabilize prices in the long run instead of promoting their fluctuation."

Like William Howard Taft, I maintain that the rise or fall of commodity prices, for any but very brief periods, simply reflects market conditions. In a free market, prices cannot but reflect supply and demand. The exchanges simply mirror these prices.

What then is the function of the commodity exchanges? They serve two primary purposes:

First, they show accurately what prices are from hour to hour and day to day.

Second, they serve as insurance for the elements of an industry which does not wish to speculate, but which wish to make their profits out of the services they perform.

The advantage of a place where anyone interested can readily obtain accurate and up-to-date information on commodity prices should not have to be spelled out.

If there is any question about the importance of this function of the exchanges, I refer you only to the recent experience on the cotton exchanges. The general ceiling price regulation, issued on January 26, resulted in the closing of the cotton exchanges until March 8. The cotton exchanges opened on March 8 following the issuance by OPS of specific price ceilings on upland cotton and a supplementary regulation which fixed ceilings for futures trading.

During the period from January 26 to March 8 the entire cotton trade was paralyzed. The general price ceiling was such that no one knew what the price of cotton was supposed to be. The producers of cotton could not sell their cotton; merchants could not quote prices to mills, nor mills to their purchasers. The holders of contracts on the exchanges could not fulfill their contracts. Everything was at a standstill until the exchanges opened.

The exchanges now are doing their best to function but, as the cotton industry informed OPS, it is difficult for any industry to function in a Government straitjacket. I am of the opinion that price ceilings on raw cotton and some other agricultural commodities will prove unworkable and eventually will be lifted.

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Meanwhile, the ceilings will have failed in their primary purpose of preventing inflation and much damage will have resulted to the industries affected.

It, however, is not my purpose today to discuss price ceilings on agricultural commodities. I intend to confine myself primarily to the proposal recently talked about on the House floor—the proposal to give the Government the authority to fix margins for trading on the exchanges, and to explain the reasons for my attitude.

As I have stated, the recent experience with the cotton exchanges has demonstrated the purpose which the exchanges serve as the authentic source of price information. Before leaving this point I would like also to state what happened in World War I. The cotton exchanges closed after war began and remained closed for several months. During this period, prices of cotton varied widely over the Cotton Belt. They even varied from locality to locality. With the exchanges closed, nobody knew what prices were.

Now let me return to the second of the primary purposes of a commodity market—to serve as insurance for the elements of the industry which does not wish to speculate.

Let me illustrate how this insurance works. It is called hedging. For example, a grain merchant buys wheat from producers and sells an equivalent amount of wheat in the futures market. When he sells the wheat he bought from farmers, he buys back his futures contract, thus closing out the transaction.

If the wheat he bought declines in price before he sells it, he loses on this transaction, but he gains an equivalent amount on his futures transactions.

Such an operation, simply stated, is hedging. The merchant referred to is protecting himself, through the medium of the market, from speculative risks in the market.

Since the merchant is protected, he can borrow from 80 to 85 percent of the value of his wheat from the banks at a comparatively low rate of interest. Similarly, the millers of flour protect themselves on their wheat stocks through hedging and consequently can finance their operations at a comparatively low cost. Other elements in the industry, including the producers, avail themselves of the insurance afforded by the exchanges.

Someone may say, however, as they have said many times in the past: “We do not wish to interfere with legitimate hedging. We want the legitimate operator to be protected. The villain we are after is the speculator."

That sounds good. It has the virtue of all flat and simple statements. Let us explore this matter somewhat further and see if we can drive out speculation and protect the man who simply wishes to hedge and protect himself.

How does commodity market operate? How does it afford the operator who wishes to hedge the protection he wants and which we wish to give him?

If a market is to afford this protection, someone must be available to buy and to sell whenever cotton, or grain, or any other commodity which is offered on an exchange. If a cotton merchant, for example, wishes to sell a futures contract, someone must be ready to buy it. If he wishes to buy a futures contract, someone must be ready to sell it.

If we drive out speculation, we are likely to destroy the commodity markets, The speculation in these markets enables the hedging operator to buy when he wishes to buy, or sell when he wishes. If these is no speculation in the market, hedging—which everyone wants to protect-would be impossible. Two persons, one wishing to sell and one wishing to buy, are necessary for a transaction on the futures exchanges. There is not enough so-called legitimate hedging on the futures exchanges for a commodity market to furnish price insurance for hedgers. Speculation in the market. means that at almost all times there are buyers and sellers in the market and that a transaction will be consummated in a matter of minutes.

We may sit in moral judgment on speculation on the exchanges, but I would like to point out that the element of speculation is present in almost every business transaction. If the Members of this House will reflect a moment, I am certain they can recollect some business transactions which they have entered into which were speculative. Almost every purchase of real estate, or any other investment, has a speculative character. I do not have to belabor this point. It is obvious.

I might also point out that many speculative exchange transactions are in reality investments and are long term in nature. If a man with money to invest thinks the price of wheat is going up, I see no reason why he should not buy wheat, either on the futures exchanges, or wheat from farmers. But that simply is a personal expression of opinion. I am not attempting to defend speculation as such on the exchanges. I am simply trying to point out the function which the speculation

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has in exchange operations, and that if we want the exchanges to exist there must be speculation.

The late Justice Oliver Wendell Holmes, one of the country's great jurists, said: “Speculation is the self-adjustment of society to the probable.

Its value is well known as a means of avoiding or mitigating catastrophes, equalizing prices, and providing for periods of want.

This, of course, does not dispose of the proposal that the Government be given power to regulate margins on the exchanges. The Government argues that it does not wish to stop speculation but to control it. There is no more effective instrument of control than the control of margins. If margins are increased substantially, the volume of trading, including speculation-and hedging-in a commodity, naturally will decline.

The whole question comes down as to which is to be the judge of the margin required for a futures transaction, the exchange or the Government?

Frankly, I am inclined to think that the exchange knows more about its own business than the Government. The Government's case is that speculation has been a sizable factor in the recent increase in commodity prices. I have seen no proof of this contention.

If we grant that speculation on the commodity exchanges is a big reason for the rise in farm prices, how do we account for the increase in other commodities not traded in on the exchanges?

Since Korea, farm prices have advanced about 21 percent, but the price of industrial raw materials—few of which are traded in on the exchanges—have advanced about 50 percent. Tin, which is not traded in on the exchanges, has risen about 138 percent; lead nearly 50 percent; aluminum 78 percent; chemicals about 27 percent; and textiles 32 percent. None of these are traded in on the exchanges.

If we single out exchange speculation as a major factor in price rises, how do we account for the far greater price increases in products not traded in on the exchanges?

Everyone knows, of course, that the rise in prices since Korea has been due to factors in no way connected with trading on the commodity exchanges. The exchanges simply reflect these conditions, just as the price for any commodity reflects the supply and demand for the commodity in the absence of a controlled market.

The effort made to connect price increases in food products with speculation on the exchanges also conveniently ignores some other factors.

For example, a great hullabaloo has been made about the price increases in cotton, to which I shall refer again later. But you are not told that the cotton in a shirt now selling for $3.50 to $4 probably did not bring the farmer more than 30 cents.

Nor do we hear that the corn in a can retailing for 19 or 20 cents brought less than 294 cents to the producer.

Onions which were selling in stores in November 1950 for 5.7 cents a pound had been sold by farmers for a little over 1 cent.

The wheat in a loaf of bread which sells for 15 or 16 cents brings farmers only about 233 cents.

Does speculation on the exchanges account for these spreads? I am not assailing the disparity between the price of the agricultural commodity and the finished product. Many factors account for this spread. I am simply reminding those who are aroused over food prices that they must look elsewhere than speculation for their scapegoat.

The Department of Agriculture has been the leader of those who have sought to extend controls over the commodity exchanges. Last year, while Congress was considering the Defense Production Act, the Department issued a number of statements connecting farm-price increases with speculation on the exchanges. But the Secretary of Agriculture, Charles F. Brannan, on February 9 issued a statement defending farm prices. He said:

"A number of recent public statements have created the impression that agricultural commodity prices are unreasonably or disproportionately high in relation to prices of other consumer goods or to wages or to the farmer's costs. This impression is not warranted by the facts."

The Secretary also said:

“Food is a better bargain for the average person today than in the prewar period.”

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I would like to quote another portion of the Secretary's statement:

"Prices of many manufactured items tend to rise because market supplies are being lowered in order to permit increased production of military goods. Most agricultural commodities, on the other hand, are available in record and nearrecord amounts, but demand is increasing as consumer incomes increase.

These considerations emphasize the importance of abundant production in the job of keeping prices of agricultural commodities at reasonable levels. On the other hand, it should not be taken for granted that agricultural production can be increased enough to meet all of the rising demands."

There is not one word in the statement about speculation on the commodity exchanges. As I stated, last year, when the Defense Production Act was being considered, the Department of Agriculture issued many statements which indicated that speculation was shooting farm prices upward. Some of these statements were misleading. For example, the Department compared the margins required for trading on the stock exchanges with the margins on the commodity exchanges. The inference was that high margins had not hurt the stock exchanges and would not harm the commodity exchanges.

The statement completely ignored the fundamental difference between the stock exchanges and the commodity exchanges. The stock exchanges do not furnish insurance for those who trade on them. You cannot hedge on a stock exchange.

Several months later we find the Department defending farm prices and in the statement by the Secretary there is not one word about speculation on the commodity exchanges.

Surely, if the Secretary really felt that speculation was a substantial factor in causing farm prices to rise, he would have again assailed gambling, and would have stated that if the additional authority sought over the exchanges had been granted, farm prices would have been lower.

Since the Korean War began, the price of cotton has advanced about 40 percent, or substantially more than the prices of most other farm commodities. But speculative interest in cotton has been substantially less through the period of price advances tha it was in 1949. Speculative int est on the New York Cotton Exchange during July 1950 was approximately 12 percent less than it was during October 1949. Speculative interest in cotton on the New York exchange has continued to decline during the period of cotton price advances. Now, with price ceilings on raw cotton the speculative interest in the market is negligibleyet spot cotton prices remain at the ceiling price.

Everyone familiar with cotton knows that the reasons for the rise in cotton prices is not speculation but has been due primarily to an extremely short crop in 1950, a crop less than 10,000,000 bales as compared to ordinary production of from 13,000,000 to 15,000,000 bales. An added factor, of course, has been the inflationary forces let loose by Korea and abetted by the monetary policy of the administration. Our currency is inflated and our dollar is worth less and less. But this fact, as plain as an elephant in a circus day parade, is ignored and we hear preorations that would lead one to believe that if only speculation on the commodity exchanges could be curbed all would be well. This attitude is ridiculous,

Almost all agricultural commodities traded in on the futures exchanges now are at parity levels, and are under price ceilings, or are close to parity levels.

The volume of speculative trading in the commodities which have reached price ceilings have followed the pattern established in cotton and has fallen sharply. But there have been no significant price declines in these commodities.

Even with the hysteria which attended the fighting in Korea and which resulted in the passage of the Defense Production Act, the Congress refused to approve the administration's proposal to include the authority to control margins for futures trading in the act.

The House rejected the proposal by a roll-call vote, 198 to 194. The Senate Banking and Currency Committee turned down the proposal in committee and it never came to a vote on the Senate floor. The proposal was rejected in spite of almost frantic attempts to include it in the law and despite the furore about prices which made it extremely difficult to legislate wisely and well.

During the discussion of this question last year it was made plain that the proposal to give the Government authority to regulate margins for futures trading is not new. The administration has recommended it on several previous occasions. The President recommended such action in 1947. The Joint Committee on the Economic Report of the Eightieth Congress considered the matter thoroughly and refused to approve the plan.

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Later in the same Congress, a bill, S. 1881, again proposed to give additional authority over the exchanges to the Secretary of Agriculture, including the authority to control margins.

This also was rejected after hearings by the Senate Agriculture Committee. Since that time many bills have been introduced in Congress proposing an extension of authority over the futures exchanges. The Senate and House Committees on Agriculture have studied these bills and have failed to report a single one favorably.

It is significant that the only committee, the House Committee on Banking and Currency, which has reported favorably a bill to give the Government the power to control the margins for futures trading, had held no hearings on the matter when it did so. Later, after the committee had an opportunity to examine the question, a move was made to reconsider the vote. The vote on this move, as I recall, was 12 to 12. In other words, the Committee on Banking and Currency failed by only one vote to reseind approval of the exchange section.

The proposal to control the margins for trading on the exchanges has been put forward during periods of rising prices and during periods of declining prices. If prices are declining, the argument is made that speculation is responsible; if prices are advancing, the argument is made that speculation on the exchanges is responsible.

What is the real reason for this stubborn insistence that the Government needs more power over the commodity exchanges-power above and beyond the ample authority over the exchanges which it already has? The real reason is the desire for an extension of Federal authority. This extension, unless it is absolutely necessary, is something which all of us should oppose.

The commodity exchanges are an integral part of the free-market system. If we give the Government additional authority over their operations, make no mistake about it, the power will be used to hamper the operation of the exchanges. Margins will be raised to high levels. Speculators will be driven out of the market. Hedging will be interfered with. The exchanges, eventually, could be forced out of business.

The exchanges, in my opinion, have done a good job of self-regulation. The margins required for trading are sufficient to protect the integrity of a contract on the exchanges. That is the real purpose for margins and there is no question of their adequacy in this respect. Nor is there evidence that the exchanges have not managed their own affairs in an orderly and sound way. Margins are raised as prices increase. If the exchanges are running their affairs satisfactorily--as they are-why should the Government step in? The disappearance of the exchanges will be another long step toward the destruction of the free economy.

The international situation has brought developments that make some controls necessary. All the more reasons to reject unnecessary controls.

Even though the exchanges today are in the strait-jacket of price controls, some people are not satisfied. If price controls should be lifted, they still want to maintain controls. So again the program to extend control over the futures markets is put forward and it is accompanied by the fanfare of propaganda-speculation, gambling, high prices. This propaganda has misled some Members of this House. They repeat the inflammatory statements, never stopping to look at the facts, or to examine the real motives behind the propaganda.

I say to you that we should be more vigilant than ever. To repeat, some controls are forced upon us by circumstances. This is all the more reason to fight as vigorously as we know how against unnecessary controls.

The plan to give the Government the power to control the margins used for futures trading on the commodity exchanges falls into the questionable and unnecessary category.

I am against such a proposal and will continue to be against it unless circumstances- which I do not foresee make it advisable.

Mr. Brown. We will now adjourn to convene tomorrow morning at 10 o'clock.

(Thereupon, at 4:46 p. m., the committee adjourned until tomorrow, Friday, June 1, 1951 at 10 a. m.)

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