Part 8

_Asia Minor._--Smyrna is the principal centre of cotton cultivation in this region. A native variety known as "Terli," and American cotton, are grown. The general conditions are favourable. According to the Liverpool _Cotton Gazette_, Asiatic Turkey produced in 1906 about 100,000 bales, and Persia about 47,000 bales. Cotton was formerly cultivated profitably in Palestine.

_Australasia._--The quantity of cotton now produced in Australasia is extremely small. Queensland, New South Wales and South Australia possess suitable climatic conditions, and in the first-named state the cotton has been grown on a commercial scale in past years, the crop in 1897 being about 450 bales. Considerable interest attaches to the "Caravonica" cotton raised in South Australia, which has been experimented with in Australia, Ceylon and elsewhere. It is probably a hybrid between Sea Island and rough Peruvian cotton, but lacks most of the essential features of Sea Island.

In _Fiji_ the cotton exported in the 'sixties and 'seventies was worth L93,000 annually; but the cultivation has been practically abandoned. In 1899 about 60 bales, and in 1900 about 6 bales, were exported. During 1901-1903 there were no exports of cotton, and in 1904 only 70 bales were sent out.

Into the _Society Islands_ Sea Island cotton was introduced about 1860-1870. Up to the year 1885 there was an average yearly export equivalent to about 2140 bales of 500 lb., after which date the export practically ceased. The industry has, however, been revived, and in 1906 over 100 bales, valued at L1052, were exported. (W. G. F.)

MARKETING AND SUPPLY

Moving the harvest to the ports.

In the days of slave-grown cotton, the American planters, being men of wealth farming on a large scale, consigned the bulk of their produce as a rule direct to the ports. Now, however, a large proportion of the crop is sold to local store-keepers who transfer it to exporting firms in neighbouring cities. The cultivators, whether owners of the plantations, as is usual in some districts, or tenants, as is customary in others, are financed as a rule by commission agents. The decline of "spot" sales at the ports, partly but not entirely in consequence of the appearance of the small cultivator, has proceeded steadily. Hammond[4] has constructed a table from information supplied by the secretaries of the cotton exchanges at New York, Charleston, Savannah, Mobile, New Orleans and Galveston, showing the sales of "spot" cotton at those ports for the twenty-two years between 1874-1875 and 1895-1896, and in all cases an absolute decline is evident. The receipts of cotton in the season 1904-1905 at the leading interior towns and ports of the United States are given below.

_Receipts of Cotton at 28 Interior Towns._ (In Thousand Statistical Bales of 500 lb. each.)

Brenham, Tex. 17 | Memphis, Tenn. 984 Dallas, Tex. 96 | Nashville, Tenn. 19 Shreveport, La. 256 | Selma, Ala. 126 Little Rock, Ark. 219 | Montgomery, Ala. 211 Helena, Ark. 91 | Eufaula, Ala. 29 Vicksburg, Miss. 100 | Columbus, Ga. 74 Columbus, Miss. 57 | Macon, Ga. 87 Natchez, Miss. 76 | Albany, Ga. 35 Atlanta, Ga. 134 | Houston, Tex. 2,423 Rome, Ga. 72 | Meridian, Miss. 133 Augusta, Ga 446 | Cincinnati, Ohio 167 Columbia, S.C. 68 | Yazoo City, Miss. 65 Newberry, S.C. 17 | ---- Charlotte, N.C. 21 | Total 6712 Raleigh, N. C. 19 | ----- St Louis, Mo. 672 | Crop. 13,565

_Receipts of Cotton at American Ports._ (In Thousand Statistical Bales of 500 lb. each.)

Galveston, Tex. 2,879 | Boston, Mass. 84 New Orleans, La. 2,690 | Philadelphia, Pa. 14 Mobile, Ala. 330 | Brunswick, Ga. 200 Savannah, Ga. 1,877 | Pensacola, Fla. 187 Charleston, S.C. 225 | Minor Ports 518 Wilmington, N.C. 375 | ------ Norfolk, Va. 820 | Total 10,295 Baltimore, Md. 62 | ------ New York 34 | Crop 13,565

Galveston and Savannah have risen considerably in relative importance of late years.

Ginning and packing.

Before the Civil War each planter would have his own gin-house. Now, however, ginning is a distinct business, and one gin will serve on an average about thirty farmers. Moveable gins were tried for a time in some places; they were dragged by traction engines from farm to farm, like threshing machines in parts of England, but the plan proved uneconomical because, among other reasons, farmers were not prepared to meet the cost of providing facilities for storing their cotton. In addition to the small country ginneries, large modern ginneries have now been set up in all the leading Southern market towns. The cotton is pressed locally and afterwards "compressed" into a very small compass. The bales are usually square, but cylindrical bales are becoming more common, though their cost is greater. In the latter, the cotton is arranged in the form of a rolled sheet or "lap." Owing to complaints of the careless packing of American cotton, attention has been devoted of late to the improvement of the square bale.

English ports of entry.

London used to be the chief cotton port of England, but Liverpool had assumed undisputed leadership before the 19th century began. Some arrivals have been diverted to Manchester since the opening of the Manchester ship canal; shipments through the canal from the 1st of September to the 30th of August in each year for the decade 1894-1895 to 1904-1905 are appended--six to eight times as much is still unloaded at Liverpool.

A Manchester cotton-importing company was recently formed for increasing deliveries direct to Manchester, and establishing a "spot" market there, an end to which the Manchester Cotton Association had directed its efforts for some time past. The latter association was established at the end of 1894, with a membership of 265, in the interests of those spinners who desired importations direct to Manchester. The objects of the association are officially stated to be: (1) to frame suitable and authoritative forms of contract, and to make rules and regulations for the proper conduct of the trade; (2) to supervise and facilitate the delivery of the importations of cotton at the Manchester docks to the various consignees; (3) to provide and maintain trustworthy standards of classification; (4) to procure and disseminate useful information on all subjects pertaining to the trade; (5) to act in concert with chambers of commerce and other bodies throughout the world for mutual protection; (6) to establish a market for cotton at Manchester. Spinning members preponderate, but almost all the Manchester cotton merchants and cotton brokers have also joined the association. The importance of the original spinners' representation on the association is shown by the fact that they worked over 14,000,000 spindles: in December 1905 the spindles represented by members had risen to nearly 20,000,000. Some 73,000 looms are also represented. As most of the Lancashire cotton mills lie far from Manchester, direct importations to that city do not usually dispense with a "handling," and frequently save little or nothing in freight rates, though in some cases the economy derived from direct importation is considerable. One gain accruing to Lancashire from the Canal, however, is that its competition has brought down railway rates.

Cotton market methods.

Fundamental alterations have been made in the structure of the leading cotton markets, and in methods of buying and selling cotton, in the last hundred years. We shall not attempt to trace the changes as they appeared in every market of importance, but shall confine our attention to one only, and that perhaps the most important of all, namely, the market at Liverpool. This selection of one market for detailed examination does not rob our sketch of generality, as might at first be thought, since broadly the history of the development of one market is the history of the development of all, and on the whole the economic explanation of the evolution that has taken place may be universalized.

_Cotton landed at the Port of Manchester since the Canal was opened._ (In thousand Bales.) The season is from the 1st of September to the 31st of August each year.

+----------------------------+---------+----------------------------------+ | |Jan. 1894| Season | | | +------+------+------+------+------+ | |to Aug. | 1894-| 1895-| 1896-| 1897-| 1898-| | |31, 1894.| 1895.| 1896.| 1897.| 1898.| 1899.| +----------------------------+---------+------+------+------+------+------+ |American | 21 | 32 | 121 | 211 | 245 | 311 | |Egyptian | 1.4 | 34 | 68 | 88 | 98 | 84 | |East Indian | .. | .. | .. | .. | .. | .. | |West African | .. | .. | .. | .. | .. | .. | | +---------+------+------+------+------+------+ | Total | 22 | 66 | 189 | 299 | 344| 395 | | +---------+------+------+------+------+------+ |Total American Crop* | 7,549 | 9,901| 7,157| 8,757|11,199|11,274| |Total Egyptian Crop (in | | | | | | | | bales of 7-1/2 cantars)** | 657 | 615| 703| 783| 872| 745| +----------------------------+---------+------+------+------+------+------+ | | Season | | +---------+------+------+------+------+------+ | | 1899- | 1900-| 1901-| 1902-| 1903-| 1904-| | | 1900. | 1901.| 1902.| 1903.| 1904.| 1905.| +----------------------------+---------+------+------+------+------+------+ |American | 415 | 442 | 421 | 478 | 365 | 552 | |Egyptian | 136 | 107 | 125 | 145 | 148 | 183 | |East Indian | .. | .. | .. | 2.5| 6 | 1.3| |West African | .. | .. | .. | .. | .. | .1| | +---------+------+------+------+------+------+ | Total | 551 | 549 | 546 | 626 | 519 | 736 | | +---------+------+------+------+------+------+ |Total American Crop* | 9,436 |10,383|10,680|11,011|13,565|10,727| |Total Egyptian Crop (in | | | | | | | | bales of 7-1/2 cantars)** | 868 | 723| 849| 867| 846| 778| -----------------------------+---------+------+------+------+------+------+ * Commercial crop. ** A cantar is 99.05 lb. avoirdupois.

Evolution of broking.

Originally cotton was imported by the Liverpool dealer as an agent for American firms or at his own risk, and then sold by private treaty, auction, or through brokers, to Manchester dealers, who retailed it to the spinners. This statement is, of course, only roughly correct. Some Manchester dealers imported themselves, and some spinners bought direct from Liverpool importers, but the rule was the arrangement first described. Early in the 19th century it became customary for Manchester dealers and Liverpool importers to carry on business with one another through representatives known as "buying" and "selling" brokers. About this time the broker of cotton only began to specialize from the ranks of the brokers who dealt in all kinds of colonial produce. Previously there had not been enough business done in cotton to make it worth any person's while to devote himself to the buying and selling on commission of cotton only. The evolution of the distinct business of cotton broking is readily comprehensible when we remind ourselves that the requirements, as regards raw material, of all spinners are much alike generally, and that no spinner could afford to pay an expert to devote himself entirely to purchasing cotton for his mill.

So far change had been gradual, but the success of the Manchester and Liverpool railway undermined beyond repair the old system of doing business. Spinners could easily run over to Liverpool and buy their cotton from the large stocks displayed at that port. Before the railway was opened some spinners had been in the habit of making their purchases of raw material in Liverpool, but the great inconveniences of the journey, combined with less easy terms for payment than were usual in Manchester, prevented any great numbers from departing from the beaten track. Cotton dealers up to this time had regularly financed the spinners, who were frequently men of little capital, by allowing long credit, and had even employed them to spin on commission. As men of substance increased among the ranks of the spinners, the Manchester cotton dealers found it impossible to retard a movement set on foot by the prospects of such appreciable advantages. Ultimately many of the old Manchester cotton dealers became brokers for their old customers. In 1875 there were said to be upwards of 100 cotton dealers in Manchester, but from that time onward their members steadily declined. It is interesting to observe that a later development of transport between Manchester and Liverpool, namely, the Manchester Ship Canal, has drawn back into Manchester a part of the cotton market which was attracted from Manchester into Liverpool by the famous improvement in transport opened to the public three-quarters of a century ago.

The centralization of the cotton market in Liverpool fixed firmly the system of buying through brokers, for the Liverpool importer, or his broker, was in no sense a professional adviser to the spinners, informally pledged to advance the latter's interests, as the old Manchester dealers had been. The system was rendered comparatively inexpensive by the drop in commissions from 1 to 1/2% which had followed the adoption of selling by sample. This custom of buying and selling through brokers continued unshaken until the laying of the Atlantic cable tempted selling brokers occasionally, and even some buying brokers, to buy direct from American factors by telegraph and thus transform themselves into quasi-importers. The temptation was made the more difficult to resist by the development of "future" dealings. When the agents of the spinners, that is, the buying brokers, by becoming principals in some transactions, had acquired interests diametrically opposed to those of their customers, the consequent feeling of distrust among spinners gave birth to the Cotton Buying Company, which, constituted originally of twenty to thirty limited cotton-spinning companies, represents to-day nearly 6,000,000 spindles distributed among nearly one hundred firms. Its object was to squeeze out some middlemen and economize for its members on brokerage. This company, it is said, helped to attract the brokers back to the spinners, and an informal understanding was arrived at that the buying broker should not figure both as agent and principal in the same transaction.

Cotton-Clearing house, Cotton Bank and periodic settlement of "differences."

By 1876 "forward" operations had become so vast and complicated that a cotton-clearing house had to be established to deal with the confusing networks of debits and credits created by them. Its principle was exactly that of the clearing houses used by the railways and the banks, the cancellation of indebtedness and discharge simply of balances. The final settlement of a "future" contract involved usually a crowd of persons, and the passage of large sums of money backwards and forwards, so that the amount of cash required for circulation on the exchange became unreasonably excessive and an annoying waste of time was entailed. The cotton-clearing house substituted book-keeping for the bulk of these payments. The establishment of the Cotton Bank naturally followed. Now debts are discharged in the first instance by vouchers. Dealers pass their debit and credit vouchers into the Cotton Bank and pay or receive the balances which they owe or are entitled to. In order to protect dealers against the losses due to the insolvency of those with whom they have had transactions, weekly settlements on the exchange have been made compulsory; between brokers and their clients they are also usual. At the settlement, every member of the exchange receives the "differences" owing to him and pays those which he has incurred. Thus if a person holds futures for 10,000 bales which stood at 5.20 on the last settlement day and now stand at 5.30, and in the course of the previous week has sold 5000 bales of "futures" at 5.10, he receives 10,000 X (10/100)d. on his old holding, and has to pay 5000 X (20/100)d. on his sales, and therefore on balance neither receives nor pays. Differences may be very large sums. The unit of a "future" being 100 bales, an alteration in the price of cotton of .01d. causes a difference on each unit of L2. Periodic settlements are obviously periodic tests of the solvency of dealers. If the test of the settlement were not frequently applied, speculators who were unfortunate would be tempted to plunge deeper until finally some became insolvent for large sums. As it is, the speculator who has incurred losses beyond his means tends to be discovered before his creditors are heavily involved. Settlement days fall on Thursday, and the closing prices on the preceding Monday are taken as the basis of the settlement. From all differences interest at 5% is deducted for the time between settlement day and the tenth day of the second month on which the "future" elapses, since settlement terms mean that money is paid in instalments before it is actually due. To the admission of periodic settlements there was for a time vehement opposition on the ground that the door would be opened to gambling on "differences." Hence at first, in 1882, they were used only by a section of the market constituted of members who had voluntarily agreed to do business with one another upon these terms alone. By 1884, however, the advantages of "settlement terms" became so evident that they were adopted by the Cotton Association, at first for fortnightly periods, with the saving clause originally that they should not be compulsory.

Origin of Liverpool Cotton Association.

As soon as the clearing house was set up it became evident that "futures" were an impossibility away from it. At the same time "futures" were becoming an increasing necessity to importers, because through "futures" alone could they hedge on their purchases of cotton, or buy when the market seemed favourable, and they were not prepared to assume heavy risks. Now from the clearing house importers were rigorously excluded, and on invoking the aid of "futures," therefore, they were penalized to the extent of double broker's commission, one commission being charged on the sale of the "futures" and one on their purchase back. The importers, therefore, found it necessary to establish a club of their own, the Liverpool Cotton Exchange, which they as rigorously guarded against brokers. The split in the market so caused was so damaging to both parties that a satisfactory arrangement was eventually agreed upon, and both institutions were absorbed in the Liverpool Cotton Association.

Publication of information relating to demand and supply.

A condition of specialist dealers working to the public service is that they should not act in the dark. They must watch demand, be able to form reasonable anticipations of its movements, and at the same time know the existing stocks of cotton, the sales taking place from day to day, and the best forecasts of the coming supplies. A man accustomed to devote the whole of his time to the study of demand and supply in relation to cotton, after some years of experience, will be qualified ordinarily to form fairly accurate judgments of the prices to be expected. His success depends upon his ability to interpret rightly the facts and intangible signs with which he is brought in contact. The information at the disposal of dealers has steadily enlarged in volume and improved in trustworthiness, though some of it is not yet invariably above suspicion, and the time elapsing between an event and the knowledge of it becoming common property has been reduced to a fraction of what it used to be, in consequence chiefly of the telegraph and cables. All sales that take place on the Exchange must be returned. Estimates are published of the area under cotton cultivation, and conditions of the American crop are issued by the American agricultural bureau at the beginning of the months of June, July, August, September and October of each year. To represent the standard of perfect healthiness and exemption from injury due to insects, or drought, or any other causes, one hundred is taken. The estimates for 1901 to 1905 are given, to illustrate their variations:--

+-------+----------+----------+----------+-----------+----------+ | Year. | June 1st.| July 1st.| Aug. 1st.| Sept. 1st.| Oct. 1st.| +-------+----------+----------+----------+-----------+----------+ | 1901 | 81.5 | 81.1 | 77.2 | 71.4 | 61.4 | | 1902 | 95.1 | 84.7 | 81.9 | 64.0 | 58.3 | | 1903 | 74.1 | 77.1 | 79.7 | 81.2 | 65.1 | | 1904 | 83 | 88 | 91.6 | 84.1 | 75.8 | | 1905 | 77.2 | 77 | 74.9 | 72.1 | 71.2 | +-------+----------+----------+----------+-----------+----------+

These estimates are the averages of separate estimates which are published for the states of North Carolina, South Carolina, Georgia, Florida, Alabama, Mississippi, Louisiana, Texas, Arkansas, Tennessee. The official figures are supplemented from time to time by numerous private forecasts, for instance those in "Neild's circular." Ellison, in his work on the cotton trade of Great Britain, traces in detail the increase in the volume of information collected and made public. At the close of the 18th century there was a tacit understanding among brokers to supply one another with information. There were no printed circulars, except the monthly prices current of all kinds of produce, but brokers used to send particulars of business done to their customers in letters. These letters were the origin of circulars. Messrs Ewart and Rutson pioneered in 1805 by issuing a weekly account of the sales and imports of cotton, and three years later three such circulars were on the market, though Hope's alone was confined to cotton. For the first associated circular of any importance, the market had to wait until 1832. The issue of this circular by subscribing firms, on the basis of

## particulars collected by brokers appointed at a weekly meeting, gave

rise in 1841 to the Cotton Brokers' Association, to which the development of the market by the systematizing of procedure is largely due. The rest of the tale may be told in Mr Ellison's own words:--

"Down to 1864 the leading firms continued to issue weekly market reports, but in that year the association commenced the publication of an associated circular. This was followed in the same year by the _Daily Table_ of sales and imports, which in 1874 was succeeded by the present more complete _Daily Circular_. To these publications were at various times added the annual report, issued in December, the American crop report, issued in September, and the daily advices by cable from America, issued every morning."[5]

Futures.

We shall now enter upon a detailed analysis of "forward" operations. The term "futures" is used broadly and narrowly: broadly it is a generic term denoting "futures" in the narrow sense, and also "options" and "straddles"; narrowly it implies merely contracts for future delivery at a price fixed in the present. Again we must distinguish between the "future" contracts for the delivery of a particular kind of cotton, which may be entered into by spinners and their brokers, and are real purchases in the sense that the spinners want delivery of the cotton referred to, and the "futures," which always relate to the same grade of cotton, and are drawn up according to certain forms and circulate on the exchange as media for the shifting of risks connected with purchase and sale. The latter are not "real" purchases in the sense given to that term above, but fictitious because delivery of the cotton is not desired. It will no doubt aid the understanding of the functions of the latter if some explanation is offered of the needs met by the former, which are sometimes known technically as "deferred deliveries."

The spinner's risks.