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
Cotton-Clearing house, Cotton
Bank and periodic settlement of “differ-
ences.”
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 × 10100d. on his old holding, and has to pay
5000 × 20200d. 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 £2. 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.
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
Origin of Liverpool Cotton Associa-
tion.
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.
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,
Publication of information relating to demand
and supply.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.”[1]
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”; Futures.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
- ↑ The Cotton Trade of Great Britain, by Thomas Ellison, p. 186.
