Future contracts are absolutely legal in and of themselves. The sale of property, even tho the prop erty is not in the actual possession of the vendor at the time of sale, is in accordance with all legal re quirements. If, however, it was not the intention of the two parties to the contract to deliver or receive the commodities dealt in, but merely to adjust the dif ferences in the price by the exchange of sums, then the process is no longer held to be a business transac tion. It is in that case merely one form of gambling, and the courts, viewing it as such, declare it illegal and therefore null and void.
8. Warehouse receipts.—Because of the enormous volume of future trading that is done in both wheat and cotton, the question of the quality of the product delivered on a future contract is of the utmost im portance. Future contracts are satisfied by ware house receipts, which are statements issued by storage warehouse, or elevator companies, showing that a cer tain quantity of a commodity has been stored with them. These receipts must represent one or more basic or standard grades—"contract" grades, as they are commonly called.
The work of the elevators is an important part of the process whereby wheat becomes flour and bread, for here the vast quantities of grain are stored, and it is the elevator that to a large extent finances the purchase of grain from the farmer. There are coun try elevators and terminal elevators, the latter in cities like Minneapolis, Chicago, Duluth, Kansas City and St. Louis. First the grain passes thru a country elevator. Of these there are three kinds : (1) inde pendent, which are owned by local interests; (2) farmers', usually cooperative; (3) line, which are owned by corporations that have a system or chain of elevators extending thru several different states along the line of the railroad. The terminal elevators buy from the country elevators and from commission mer chants, and sell to the mills.
The warehouse, or elevator, receipts issued by these companies are what makes futures possible, for the care with which they are issued makes them not only easily negotiable, but readily available as collateral security for bank loans, since the bankers have the as surances of recognized companies that the specified commodity is on hand. If this were not so, it would be impossible to finance the crops, for the farmers re quire huge sums of cash every fall.
9. Inspection and grading.—Originally all wheat
and cotton was sold upon sight. In other words, the buyer, after examining the goods, would take them away. But in this country especially, such a system soon became cumbersome owing to the vast area on which these products were grown. Later, business was done by sample. Altho large quantities are still sold by sample on the produce exchanges, and still greater quantities outside the exchanges, the grain and cotton industries could not be conducted on the present vast scale without the use of the grading method, with its system of inspection, weighing, ware house receipts and state supervision. Certainly fu ture trading is entirely dependent upon these aids.
Inspection and grading on the produce exchanges correspond roughly to the engraving requirements on the stock exchange' s. In general, the object in any case is to separate grain and cotton into grades, and to make it possible for any one of several grades to serve as a contract which may be delivered upon the ex changes. The idea is, that, once inspection and grad ing has been properly attended to, any lot, rather than only a specific lot, will do. Of course, if each lot had to be viewed by both buyer and seller, it would be im possible to carry on future dealings on a large scale.
It is essential that a grade contain grain of as nearly uniform quality as possible, and that there should be a great deal of grain in each grade. Other wise corners will occur. If it is necessary to have many different grades, the problem of furnishing premiums for the better classes of grain, and discounts for the poorer, becomes a vexing question. The Du luth and Minneapolis markets are said to give the greatest satisfaction in this respect.
The inspection and grading system gives to grain and cotton much the same mobility that stocks pos sess. Of course it is this system that makes specula tion on a large scale possible. To abolish it would produce most serious consequences. Professor ver S. Huebner, in his "Agricultural Commerce," gives the following arguments in favor of this system: Tho much spot produce is sold by actual examination of the commodities, it is a common practice to buy and sell on the basis of samples, or a combination of samples and grades, and sometimes on the basis of grades exclusively. It greatly facilitates the quotation and publication of spot as well as of future prices.