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The New York Cotton Exchange and the Development of the Cotton Futures Market

Published online by Cambridge University Press:  11 June 2012

Kenneth J. Lipartito
Kenneth J. Lipartito
Affiliation:
Doctoral Candidate, The Johns Hopkins University
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Abstract

The development of a national market was one of the key features of the nineteenth-century economy. In this process, innumerable institutions played a role, some large and well-known, others neither so large, nor quite so well-known, at least to the public at large. One such organization was the New York Cotton Exchange. It evolved in the aftermath of the Civil War, and over the years grew from an informal, even ad hoc organization into a formalized institution that served both public and private functions. This article by Mr. Lipartito explores the development of the Exchange and its place in the shifting national market for cotton.

Type
Research Article
Information
Business History Review , Volume 57 , Issue 1 , Spring 1983 , pp. 50 - 72
Copyright
Copyright © The President and Fellows of Harvard College 1983

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References

1 Bruchey, Stuart, The Roots of American Economic Growth, (New York, 1965)Google Scholar; Chandler, Alfred D. Jr, The Visible Hand, (Cambridge, Mass., 1977)Google Scholar; Taylor, George Rogers, The Transportation Revolution, (New York, 1951).Google Scholar

2 McCurdy, Charles, “American Law and the Marketing Structure of the Large Corporation,” Journal of Economic History, 38 (September 1978), 631–650CrossRefGoogle Scholar; Chandler, The Visible Hand, 224–35, 240–81.

3 Dumbell, Stanley, “The Origins of Cotton Futures,” Economic History, 1 (May 1927), 259–67Google Scholar; Leverich and Sons, Wastebook, New York Historical Society, 1864–68 passim. The Leverich records in these years cite several innovative futures-type contracts. These years were unusual for the cotton trade, however; so it is difficult to generalize from these records. The attempts to use a futures-type contract to protect against price fluctuations does reveal the needs of the post-war cotton market and the attempts at an innovative response which were taking place. For those unfamiliar, hedging is the offsetting of risks. A cotton merchant would buy a futures contract if he had cotton to sell at a future date. Because the contract was for a set price, he would be protected against unexpected changes in the market. Thus if the price of cotton fell, his losses on his inventories would be offset by his gains in the futures market.

4 Woodman, Harold, King Cotton and his Retainers: Financing and Marketing the Cotton Crop of the South, (Lexington, Ky., 1968), chapter 6Google Scholar; Chandler, The Visible Hand, 211–212; Woodman, King Cotton and his Retainers, 273–75; Baer, Julius and Woodruff, George, Commodity Exchanges, (New York, 1929), 83–122Google Scholar; United States House of Representatives, Report on the Internal Trade of the United States, (Washington, D.C., 1881).Google Scholar 46th Congress, 3rd session, 187. The telegraph and transcontinental cable linked Liverpool, New York, and New Orleans in a financial chain. Much hedging and futures trading was done on the Liverpool Exchange, since the majority of the United States' cotton crop was exported to Europe. In America, the New York Cotton Exchange became the center of domestic futures trading, though it initially borrowed some of the basic techniques from Great Britain. For more on the international side of the cotton futures trade, see Bouilly, Robert, The Development of American Cotton Exchanges, 1870–1916, unpublished doctoral dissertation, (University of Missouri, 1975), 369–72.Google Scholar

5 Chandler, The Visible Hand, 211–12; Ransome, Rodger and Sutch, Richard, One Kind of Freedom, (Cambridge, Mass., 1977), 106–125.Google Scholar

6 Robert Bouilly notes that financial instability and disputes over margins may have been initial reasons for organizing the New York Cotton Exchange. See Bouilly, The Development of American Cotton Exchanges, 49. More generally, the institutionalization of futures trading was one more step in the long process of separating futures trading from the actual exchange of cotton. Under the Exchange the futures price became a readily identifiable entity, distinct from the spot price of cotton. It reflected guesses about future market conditions, not current market conditions, as the spot price did.

7 Baer and Woodruff, Commodity Exchanges, see chapters VII, XII; The numerous uses of futures trading are also discussed in Peterson, Arthur, “Futures trading with Particular Reference to Agricultural Commodities,” and Heubner, S.S., “The Functions of Produce Exchanges,” The Annals of the American Academy of Political and Social Science, 38 (September 1911), 68: 319–353.Google Scholar

8 New York Cotton Exchange, Charter bylaws and rules [hereinafter cited as NYBR] (New York, 1906), Act of Incorporation, sect. 3. (Reprint of original Charter of 1871). The role of such economic motivations is discussed in Davis, Lance and North, Douglass, Institutional Change in American Economic Development (New York, 1971).CrossRefGoogle Scholar

9 The New York Cotton Exchange, Annual Reports, 1871–1914; NYBR, 1900, section 30, title III; Lurie, Jonathan, The Chicago Board of Trade (Urbana, 1978), 31–35.Google Scholar Lurie tells a similar story for the Chicago Board of Trade.

10 New York Cotton Exchange, Minutes of the Board of Managers, [hereafter cited as BMM], 1874, 247–48; Lurie, Chicago Board of Trade, 51.

11 BMM (1874), 121; BMM (1874) 86–88; BMM (1874), 164.

12 Lurie, Chicago Board of Trade, 66–72.

13 BMM (1874), 111; BMM (1873), 385; BMM (1876), 216; BMM (1881), 275. In 1876 and 1881 two other rulings tightened control. The first offered a reward to members who reported rule violations; the second proclaimed that no notice be taken publicly of sales made contrary to rules, thus preventing them from affecting the futures market. The fight over these and other such rules indicates that there were probably splits between members over policy. But I have little evidence on them and I am more interested in the institution's actions as a whole.

14 BMM (1885), 227, BMM (1885), 31.

15 BMM (1896), 181. Both graders and inspectors salaries and the Inspection Fund were paid out of revenues collected from the inspection service charges to members. NYBR, 1906, section 87. This rule prohibited the Exchange from committing its resources to a liability which had no definite limit or termination.

16 BMM (1871), 28–29; BMM (1873), 342. Before the actual battle over the Commission Laws, the Exchange fought for control in a different way. It attempted to limit access to the trading pit by designating the men who could and could not act as a member's clerk or representative. The managers feared if they did not retain the right to make this choice unwanted speculators and non-members might gainaccess to futures trading. This might have diluted the Exchange's authority.

17 The laws followed a serpentine course to enactment. Proposals to limit competition and institute minimum rates were countered by conservative opposition which tried to keep the institution on its original, restricted course. BMM (1871), 172; BMM (1882), 12.

18 BMM (1884), 286; BMM (1893), 68; BMM (1896), 60; BMM (1896), 105. Non-resident members, those not having permanent offices within New York City, had to pay slightly higher rates than resident members.

19 Working, Holbrook, “Futures Trading and Hedging,” American Economic Review 43 (September 1953), 314–343.Google Scholar Pit scalpers were small-time dealers who traded on minute price variations between markets. Because they did not attempt to hold contracts for more than one trading period, they made hundreds of transactions each day. Paying non-member rates would have wiped out the small profit margins on which their business rested. Robert Bouilly notes that the Commission Laws battle may have involved an attempt to extend memberships and open up the trade. He is correct in that the Laws allowed non-New York residents to join the Exchange and created new memberships for purchase. But as the battle over discrimination against non-resident members indicates, the attempt to open up the Exchange faced strong opposition from a majority with opposite intentions. Overall, the thrust of the Laws was to raise rates, limit membership sales, and close off access. See Bouilly, The Development of American Cotton Exchanges, 370–72.

20 The Exchange wrote to A. Brittin, president of the New Orleans Cotton Exchange, asking that he go along with New York's attempt to raise brokeragerates. Brittin happily complied. The Commission Laws, in creating a new professional class, may have also opened up new tensions and conflicts within the Exchange.

21 United States Congress, Committee on Agriculture and Forestry, Conditions of Cotton Growers, 53rd Congress, 3rd session, (Washington, D.C. 1895)Google Scholar; New York Times, December 20, 1880, p. 4.

22 The Southern Mercury, April 28, 1895; April 28, 1898; March 12, 1892; United States Senate, Bills and Resolutions, 52nd Congress, 1st session, H.R. 969 (Washington, D.C., 1892), 2, 6.Google Scholar

23 The Populists failed to make common cause with the socialist movement, depite the agrarian party's ignominious defeat in 1896 and its subsequent repudiation of Democratic fusion. See Montgomery, David, “On Goodwyn's Populists,” Marxist Perspectives, I (Spring 1978), 162–78.Google Scholar The Populists also had aconservative streak, as their dedication to capitalism and private property indicates. The farmers were not very effective political agitators. Only South Carolina passed an anti-futures bill. For an account of the cotton exchanges' political fight against their critics, see Bouilly, The Development of American Cotton Exchanges, 375–80; United States Congress, Committee on Agriculture and Forestry, Conditions of Cotton Growers, 50; Report of the Commissioner of Corporations on Cotton Exchanges, Part I (Washington, D.C, 1908), 14; United States Congress, Conditions of Cotton Growers, 441, 452.

24 A difference is the price ratio between the basis grade, middling cotton, and all other grades of cotton. Thus, good ordinary quality cotton might be ⅞ middling, or worth ⅞ the price of middling cotton when delivered in fulfillment of a futures contract. A hedge is only safe when the ratio between the spot and futures price is stable. See Working, “Futures Trading and Hedging.” The origins of the fixed differences system remain somewhat obscure. According to Bouilly, it evolved in the 1870s when the Exchange established a Committee on Quotations to set the official daily futures market price quotations for each grade of cotton. This was necessary because of the low volume of trade in some grades in New York. A committee system was used because it allowed less manipulation by individual members who wanted to set higher or lower ratios to suit their own needs. Toward the end of the nineteenth century the Exchange confronted the limits of its administrative power as the fixed differences, set at more and more distant intervals to prevent manipulation, undermined the market. See Bouilly, The Development of American Cotton Exchanges 357–63.

25 Members of this organization included Amoskeage, Lyman, Parkhill and Wampanoag Mills. Theophious Parsons to David Houstan, October 27, 1913, National Archives, Washington, D.C. [hereafter cited as NA], Record group 16 [hereafter RG], United States Department of Agriculture, Office of the Secretary of Agriculture [hereafter cited as USDA SA].

26 United States Department of Agriculture, Bureau of Agricultural Economics [hereafter USDA BAE], Project Files, January 1, 1908, April 12, 1912, NA, RG 83; Charles Brand to the Executive Committee of the American Thread Company, 1914, NA, RG 83, USDA BAE. It is also important to realize that the long secular decline in cotton prices and the difficult times southern cotton farmers had experienced raised cries of over production in the South. Anything which shifted supply and demand conditions unfavorably for the farmers, as the price depressions brought on by the fixed differences might, could only increase farmers' frustration. See Wright, Gavin, The Political Economy of the Cotton South, (New York, 1978), 181–182Google Scholar; Report of the Commissioner of Corporations on Cotton Exchanges, Parti, 336–357; BMM (1903), 167.; BMM, “Report of the minority…,” 1903, 390.

27 BMM. James Bloss to the Board of Managers, 1896, 68; Report of the Commissioner of Corporations, Part I, 283–285.

28 For an overview of the bucket shop wars, see Lurie, The Chicago Board of Trade, 75–105; BMM (1903), 338. Bouilly points out that corners were frequent problems for exchanges in the nineteenth and twentieth centuries. The organizations fought to control them, but they were expected. That the Sully episode stands out is an indication of the magnitude of the problem and the Exchange's sense of a loss of control. Bouilly, The Development of American Cotton Exchanges, 33.

29 BMM (1893),398; BMM (1893), 388.

30 Lurie, The Chicago Board of Trade, 193–197.

31 BMM (1903), 387–398. The southern warehouse plan did not cause a conflict between the managers and members. As already noted, control was fluid and open in the Exchange. Some managers opposed the plan, and even its supporters appreciated their opponents' argument. The conflict was between those who feared a violation of tradition and those who feared government reprisal. Bouilly agrees that the declining spot market was crucial in this. He also agrees that the fixed differences attracted low-quality cotton to New York, supporting the spot market. My information indicates that the fixed differences were a part of a deliberate and conscious policy which resulted from the squeeze of a legal threat and unrestrained cornering. See Bouilly, The Development of American Cotton Exchanges, 357–363.

32 BMM (1903), 387–398.

33 Other interests were important in bringing about the law. Farmers who feared futures trading were of course in favor of the Act. But so were southern cotton exchanges. Because they lacked the problem of a declining spot market, they did not need a fixed differences system. Moreover, they were jealous of New York's preeminent position. This allowed them to be more “socially responsible” and to support the law. Bouilly, The Development of American Cotton Exchanges, 448–451.

34 United States Cotton Futures Act, Statutes at Large, (Washington, D.C., 1916)Google Scholar; United States Department of Agriculture, Rules and Regulations of the Secretary of Agriculture under the Cotton Futures Act, (Washington, D.C., 1914)Google Scholar, Agriculture Department Circular 46. The role of fixed differences in bringing about this legislation is actually somewhat complicated. The system was of course abhorrent to the Department of Agriculture and the cotton spinners. And it did disrupt the futures market to the detriment of all who used it. But it also confirmed the worst fears of farmers who claimed that the futures market depressed prices and was controlled by men, not the laws of supply and demand. As R. Bouilly notes, the Exchange only exacerbated the problem by responding to public outcry with the haughty claim that it had no public or semi-public obligations to fulfill. Bouilly also recognizes the cotton spinners as an important voice in the call for reform, but he fails to appreciate how they allied with the Department of Agriculture in this. See Bouilly, The Development of American Cotton Exchanges, 424–426.

35 Letters and memos between the Department of Agriculture and Congress indicate that the government agency fought hard to amend the original bill and to broaden its own power. See USDA SA, 1914–1916, NA, RG 16. Nothing in the legislation prevented individual states from banning futures trading, but the Act clearly shows that the federal government's position had shifted from trying to destroy to trying to regulate the practice. Cotton World, December 18, 1915.

36 George McFadden to A.F. Lever, February 16, 1915, USDA BAE, NA, RG 83; George McFadden to David Houstan, 1914, USDA SA, NA, RG 16. Another important issue between the government and the Exchange was the desire of the latter to have the Secretary of Agriculture arbitrate all disputes and to take over responsibility for settling grading controversies. David Houstan was reluctant to assume so much responsibility, but his subordinates pressed him to agree. Charles Brand to David Houstan, 1914, USDA SA, NA, RG 16.

37 Herman, Wolfe & Company to David Houstan, Dec. 5, 1915, USDA BAE, NA, RG 83. Charles Brand pointed out to the Cotton Futures Act's sponsor A.F. Lever that “there had arisen a public demand for the abolition of all cotton exchanges.” Members of the Exchange must have been aware of this threat also; Charles Brand to A.F. Lever, May 25, 1914, USDA BAE, NA, RG 83. The reformers tried to make it seem as though the spot and futures prices could be made to move in perfect harmony. This would only be possible in a world of perfect information and perfect foreknowledge. David Houstan to A.F. Lever, March 28, 1914, USDA BAE, NA, RG 83.

38 The terms “private” and “public” are perhaps not precise enough to express what I mean. Intentions were private in that they were aimed at either personal or corporate gain. The Exchange's reduction of “private” manipulation was not a public action; it was a change from personal private gain to general or corporate private gain, in accord with business ethics, not political principle.

39 According to Robert Bouilly, the New York Cotton Exchange was unwilling to reform. This is too harsh. It tried to reform but failed because it could not overcome its traditional private conception of its role. It was, however, under very real pressures from the courts, the decline of the spot trade, and the growth of unchecked manipulative speculation, Its failure to solve these problems did not stem so much from its lack of a social conscience as from the limits of its purely private power in the state of the American economy at that time. See Bouilly, The Development of American Cotton Exchanges.