As previously stated the average grade is called "middling." Consequently if there is less foreign matter in the cotton than the average grade possesses, the name assigned is "good middling." On the other hand if a larger amount of dust or husk adheres, the cotton is classified as "low middling." The full grades, half grades and quarter grades are designed to carry out the refinement of classifications still further.
8. Cotton futures act.—For some time prior to the date upon which the cotton futures act became effec tive, February 18, 1915, the two great exchanges used different methods of determining the "differ ences." The New Orleans Exchange used the "com mercial" method and the New York Exchange the "fixed" method. The commercial method of deter mining differences has been clearly summarized by a leading authority: 1 The premiums and discounts allowed for better and poorer grades delivered on contract are fixed by the actual selling prices of the different grades that exist in the spot market at time of delivery.
This system of commercial differences was substantially the method employed by the New York Exchange in early days, but it was abandoned in 1888 for two reasons : first, the amount of actual cotton arriving at New York had be gun to decrease, owing to direct shipment to northern mills from the South, and to the development of cotton manu factories in the South itself, so that there was not enough spot cotton bought and sold in New York to afford sufficient basis for close determination of differences (a real difficulty, by the way) ; and second with the amounts of actual cotton, it became increasingly easy to manipulate the prices of the various grades, and hence the differences between grades. For these reasons the method of commercial differences was supplanted by that of fixed differences, whereby the premiums and discounts are fixed arbitrarily by a committee at stated intervals. At first the differences were adjusted once a month (for the nine most active cotton months), but in 1897, the meetings of the revision committee were limited to two a year. Except for a change to quarterly revisions, this method persisted until 1915 when it was prohibited by the United States Cotton Futures Act.
The method of fixed differences caused much dissatisfac tion. The United States Bureau of Corporations made a
careful study of the problem, and issued a comprehensive and conclusive report, in which it concluded that the present New York system of fixed differences is uneconomic, in defiance of natural law, unfair, and like all other attempts to defy nat ural law, results in such complex and devious effects that the 1 L. D. 1-1. Weld, The Marketing of Farm Products, pp. 331-333.
benefits of its transactions accrue only to a skilled few. It was found that the differences as established by the com mittee became out of line with the differences in the spot market, and that therefore some grades would be overvalued and some undervalued by the arbitrary values established by the committee. Whenever cotton was delivered on contract, the seller, having an option with regard to the grades to be delivered, naturally delivered such grades as were most over valued by the arbitrary differences. In other words, he de livered cotton which the revision committee said was worth ten and one-half cents in settlement of a contract, whereas the cotton was really worth only ten cents in the spot market. Buyers naturally tried to protect themselves by paying less for the future contract in the first place, with the general re sults that future prices were artificially depressed, this de pression caused confusion in all markets, and it largely de stroyed the value of the future market for hedging which is the principal value of a speculative market.
The United States Cotton Futures Act abolished the method of fixed differences by placing a prohibitive tax of two cents a pound on all future trades which did not comply with certain specifications, including the use of commercial differences instead of fixed differences. Realizing that the• spot transactions in any one market might not be of suf ficient volume to make possible an accurate determination of commercial differences, the law provides that in this event these differences shall be determined by the actual commercial differences on the sixth day prior to the date of delivery in the spot markets of not less than five places designated for the purpose from time to time by the Secretary of Agricul ture.