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market? To the uninitiated the speculative features of the market have
often served to condemn it, and at times of speculative fever, or of
manipulation such as has occurred on one or two occasions, there has been
public agitation calling for legislation against dealing in futures. Yet
the New York Exchange performs a very definite and valuable service, and
its trading methods have served to stabilize the whole industry, and to
remove from it much of that very speculation which is frequently charged
against the Exchange itself.

The justification of the Exchange is found in the fact that the futures
contracts common on its floor afford the cotton merchant and manufacturer
a chance to insure themselves against losses occasioned by fluctuations
in the market. The method by which this is done is called hedging.

Why the Merchant
Must Hedge His Sales

For the cotton merchant, the situation as it develops is approximately
this: buying, as he must, all grades and quantities of cotton, he may
have an immediate market with the spinners whom he serves for only
certain of these grades, and thus may have left on his hands a large
supply of cotton of other grades which came to him in his purchases which
he has no call for at the time. These "overs" are subject to the risk of
a decline in value unless the merchant can find some way to protect
himself. Nor is this risk the only one run by the cotton merchant. The
spinners frequently contract for months ahead for the output of their
mills, and it is part of the merchant's task to see that the cotton is
available at a contract price when the spinners are in need of it. Such
contracts for future deliveries are not only common but customary. If it
were impossible for the spinner to make such contracts, it would, of
course, be impossible for the weaver to make future contracts for the
delivery of cloth. Such a condition unsettling the distributing markets,
would be intolerable. Hence, the necessity of future contracts between
merchants and spinners. The situation would otherwise be a very difficult
one for the merchant whose supply of cotton, and the price he must pay
for it, are subject to the vagaries of nature, which may grant a
bountiful crop one year, and a short and inferior one the next, with
consequent fluctuations in price sufficient not alone to wipe out his
profit but his capital as well.

The Hedge As a
Credit Transaction

Hedging, as has been said, affords the protection, against serious loss
which these varying conditions make probable.

"It may almost be said," observes Arthur R. Marsh, former President of
the New York Cotton Exchange, "that as the main business of banks today
is not dealing in money, but in credits, so the main business of the
cotton exchanges is now in credit transactions in cotton, toward which
the actual cotton 'on the spot' stands in much the same relation as the
money in the banks to the sum total of their transactions in credit. It
serves as a reserve at once for the satisfaction of unliquidated credit
balances and for the maintenance of sound credit values in all the credit

Elsewhere, Mr. Marsh describes the hedging process in these words: "A
hedge is the purchase or sale of contracts for one hundred or more bales
of cotton for future delivery, made not for the purpose of receiving or
delivering the actual cotton, but as an insurance against fluctuations in
the market that might unfavorably affect other ventures in which the
buyer or seller of the hedge is actually engaged."

[Illustration: _The floor of the New York Cotton Exchange_]

How Merchants Secure
Protection by Hedging

The cotton merchant, in making a hedge, would proceed in this fashion.
Having made an actual sale of cotton to a spinner for future delivery,
the price being fixed according to current quotations in New York for
deliveries to be made in the month specified in the contract, he would
buy futures for a corresponding amount of cotton on the New York Cotton

If the price of cotton should have advanced when the time for the
delivery of the actual cotton comes, he will be able to sell his futures
contract at a higher price, thus offsetting the loss sustained upon the
deal in actual cotton. Or, if he prefers, he may hold the "futures"
contract until its maturity and sell it at the then prevailing figure.
The first course would be the customary one for a bona-fide merchant,
whose sole concern is protecting himself against loss by fluctuations in

If, on the other hand, cotton should fall before the merchant bought to
fulfill his actual contract, he would make a profit upon his sales to the
spinner. He would, however, suffer a loss upon his futures contract, for
the seller would be able to purchase the cotton to fulfill the contract
at a lower point than the contract called for, and would consequently be
able to deliver to the merchant who made the hedge, cotton which the
latter would be forced to accept at a price higher than the then
prevailing one, and thus again the profit and loss would balance each
other. The usual custom is, not for the merchant to accept delivery, but
to pay over to the seller of the futures contract the difference between
the contract price and that prevailing. This would be just the difference
between his own purchasing and selling price in his actual dealing with
the spinner, and so would eliminate the profit, due to change in price,
made in that transaction. Thus, by the hedging process, the merchant
loses a possible profit on a falling market, but at the same time fails
to suffer a loss when the market is against him.

Hedging as Practiced
By Cotton Manufacturers

The manufacturer's hedging is necessarily somewhat different in practice,
though the same in principle. If he accepts orders for cloth requiring
more cotton than is being held in his warehouse, he may buy futures
contracts to the amount of the additional cotton he will need. Then in
the event that his actual purchase of cotton may be at a figure which
would tend to reduce or eliminate his profits on the sale of the cloth,
already fixed by contract, he may sell his futures contract at a
corresponding profit, thereby preventing loss. Should the price of cotton
fall in the interim, his profit on the sale of the cloth will be larger,
but the settlement of his futures contract will be expensive to the same
extent. Thus he sacrifices the chance of a greater possible profit in
order to be insured against loss.

[Illustration: _Compress bales bound for New Orleans_]

It is probably more common for the cotton merchant to hedge than for the
manufacturer to adopt that proceeding. The manufacturer, as a rule, has
been accustomed to buy his cotton during the buying season, that is, in
October, November, December, and January, and he makes his arrangements
with his selling agents on the basis of the price paid, trusting to his
own judgment, and the comparatively small fluctuations in the price of
cloth in normal times, to protect him against loss. It is usually
believed that the Southern mills, being newer, and frequently of a
different financial standing, have found it more desirable to have
recourse to this form of insurance than their older competitors in the
North. Then, too, the rapid development of the cotton warehousing system
has made it less necessary for the manufacturers to tie their money up in
great quantities of cotton, as they can buy when the market appears

Protection for Mills
Running for Stock

A very important point, however, and one which all manufacturers would do
well to consider carefully is the protection which a "futures" market
gives to a manufacturer making plain goods for stock, particularly on a
falling raw material market, which, of course, would also mean a falling
goods market. To stop the mill because values were falling would be
impossible without utter disorganization, and its attendant heavy loss,
while to keep on manufacturing stock goods with a certainty that they
would be worth less each succeeding month is a disheartening prospect for
the mill.

If, however, the manufacturer sells "futures" for the succeeding months
to the extent of the cotton which he would require each month to
manufacture the goods, he can run his machinery as usual and have a
perfectly free mind, as he has safeguarded himself against any loss due
to a falling value of the raw material. Suppose, for instance, the cotton
market fell off, say one cent a pound each month, with a corresponding
fall in the value of the woven goods. In such an event, the manufacturer
could, as each month arrived, buy a contract for an amount corresponding
to what he had sold, and at a proportionately less price, thus making a
profit on the "futures" which he had sold to an extent which would
correspond, approximately, to the smaller value which his manufactured
goods would then have in the market. Thus the profit on the one side
would take care of the loss on the other. If the market rose instead of
falling, he would make a loss in replacing his futures contract, but his
goods would then command a higher value, and again no loss would be

This method of hedging is the regular and standard practice of the
English cotton mills, and, of course, of many of our domestic mills, but
there are some manufacturers who, through their unfamiliarity with the
operations of the futures market, are quite unaware of the protection
which they thus have at hand.

The Responsiveness of
the Great Exchanges

The great exchanges, and the New York Exchange in particular, are thus
used by cotton merchants and manufacturers in every part of the world to
protect themselves in their buying and selling operations. The value of
middling cotton in New York is kept upon par with the value of the same
cotton in any growing or manufacturing point, such factors as freight,
insurance, brokerage, etc., being allowed for in the quoted price.
Quotations on the Liverpool Exchange are thus higher than quotations in
New York by the difference between the amount it costs to deliver cotton
in Liverpool and to deliver it in New York. Thus the merchant and
manufacturer is able to buy and sell hedge contracts on the New York
Exchange, knowing that operations at the New York price in New York are
on a parity with operations at the Liverpool price in Liverpool, or at
the Havre price in Havre. Thus the hedge contract which a Southern
merchant sells in Atlanta, through his broker on the New York Exchange,
may be bought by a spinner in Tokyo or Manchester, anxious to insure his
supply of cotton at a price which would make his contracts profitable.

In normal times the selling of merchants and the buying of manufacturing
engaged in actual and bona fide hedging transaction has been estimated by
competent authorities to make up fully seventy-five per cent. of the
trading done on the New York Exchange. The remaining twenty-five per
cent. may thus be attributed to speculative operations, that is
operations entered into by outsiders through brokers, on the chance of a
rise or a fall in the market. Nor is such speculation without its value.
It is the speculators, as a rule, who are the first to take advantage of
crop reports or weather conditions, or news likely to affect the market
favorably or unfavorably, and buy or sell as their judgment dictates.
Their operations serve to discount such changes to some extent, or at
least to make the breaks and rises more gradual than they would otherwise

In abnormal times, that is times of great scarcity and great demand, or
bumper crops and small demand, the speculative element plays a larger
part, for it is in such times that the greatest fluctuations in price
take place. Merchants or manufacturers holding hedging contracts are
under a greater incentive to buy or sell, as they see their opportunities
for profit growing greater or less, as the case may be, and in
consequence more contracts are made, and they pass from hand to hand with
greater rapidity, the gain or loss thus being distributed among a greater
number of persons than would otherwise be the case. It is the operations
of speculators, and the manipulation that once or twice during its
history has been possible by unscrupulous traders which has brought about
at such times public agitation for the abolition of the Exchange. Recent
changes in the form of the cotton contract have made it almost impossible
for such operations, if repeated, to be successful, and thus there is
little likelihood that the very important economic function of the
Exchange will be interfered with by legislation.


The Cloth Market

The output of the manufacturer finds its way to the ultimate consumer
through a variety of channels. What these are will depend upon the manner
in which the various mills are organized, and their respective policies
as to the marketing of their products. Some mills, usually very large
organizations, will have plants completely equipped, in every department,
spinning, weaving, dyeing, printing, finishing, etc., and will process
all of their goods themselves in every detail, offering them on the
market in their finished form. Some of these may make a wide variety of
fabrics suitable for one class of trade, or for many classes of trade,
while others will specialize on a few articles. A good many concerns that
are not of the largest size, but which confine their production to a few
articles, may also put the goods through every operation themselves.

Then there are a great number of cotton mills, many of them of very large
size, which do no weaving at all, but confine themselves to spinning,
finding a market for their yarns with the many weaving mills which have
no spinning plants.

Many Large Mills
Do No Finishing

Numerous mills, both large and small, manufacturing, principally, goods
of a staple grade, which may either be of fine or coarse character, sell
their entire product in the gray, or unfinished state, because they do
not wish to burden themselves with the task of putting the goods through
the various finishing treatments necessary to fit them for the market.
This method of disposing of the product appeals to many for it reduces
the manufacturing operations to the spinning of the yarn, and to the
weaving of the cloth. The owners or managers of the mills may have had no
experience outside of these branches, and if they themselves were to
attempt to finish, or "convert," the goods they would be entering strange

Whatever method of merchandising may be adopted, it is certainly obvious
that the product of large mills is so great that it must be disposed of
in a large way, and hence various channels of outlet have grown up to
satisfy the requirements of the case.

Dealing Direct With
Dry Goods Jobbers

A substantial portion of the output of the mills (but nothing like what
it was years ago, and it grows relatively smaller every year), is
disposed of directly to dry goods jobbing houses, and by them to retail
dealers, who sell it by the yard to the consumer. This practice was
formerly more widespread, but has diminished greatly in recent years. A
further enormous yardage passes eventually through the cutting-up houses,
which manufacture garments of every kind, from overalls to pajamas, or
from raincoats to shirts, and dispose of their products to distributors,
who eventually sell them to the public. Then there are retailers whose
requirements for goods of particular kinds are so considerable that their
orders are of sufficient magnitude to warrant the mills in dealing with
them direct.

Again, there are the great mail-order houses, with a gigantic annual
turnover, whose catalogues go to every part of the land, and which
handle great quantities of piece goods, as well as made-up garments, and
whose custom is eagerly sought for.

[Illustration: _Thousands of looms in a single room_]

Other mills make fabrics suitable for use in the military and naval
establishments of the country, and in other public channels, and which,
in selling these fabrics, will deal directly with the Government, or
indirectly through intermediaries.

In addition to these, and other domestic outlets, there is a great
quantity of goods produced for export, which are handled through houses
specially organized for that trade.

Merchandising by
Dry Goods Jobber

One of the oldest established agencies for handling mill products is the
dry goods jobber, and it is to be remarked that many large retail houses
do also a substantial jobbing business, though generally less so in
cottons than in other classes of fabrics. The jobber will buy finished
products from those mills which sell goods in that state, and will also
buy large amounts of gray goods. These he will sell principally to retail
distributors, but his transactions, in addition, will extend into a
multitude of channels, and, he will deal with small garment manufacturers
and makers of all kinds of wares, and will also sell considerable
quantities to the larger cutters when they are unable, for one reason or
another, to buy direct from the mills or from the converters. There are
also numerous small jobbing concerns which buy substantial quantities
from the larger jobbers as occasion may require.

One of the greatest avenues of outlet is through a class of dealers known
as converters, and there are converters operating in every kind of fabric
from cotton to silk. In the last forty or fifty years, this business has
developed into immense proportions, and the converter performs a real and
important service in the trade. He is intimately acquainted with the
needs of his customers, and possesses a fair knowledge of the kinds of
goods put out by the various mills and the different constructions in
which they are sold, and is well acquainted with all of the market
dyeing, finishing, bleaching, and printing concerns, having also a fair
understanding of the various treatments accorded to the goods. He buys
his goods in the gray from the mills, and sends them to the finishers,
printers, etc., to be treated, according to his instructions. By a
careful studying of the fabric constructions, and of the subsequent
treatments, he is able to create fabrics of a suitable and marketable
character, which are in some respects different from those offered by any
of his competitors, and which are brought out with an exact knowledge of
the requirements of the trade to which he is catering. He is able to make
a profit, and generally a very substantial one, by handling the goods in
this way.

Considerable capital is required by the converter, as goods bought in the
gray have to be paid for on practically a cash basis, and he may have to
carry them for a time before they are finally marketed. The converter
sells to the cutting-up houses, to jobbers, and to retailers, or, in
fact, to whatever trade he seeks. Large and profitable businesses have
thus been built up. Many converters have adopted their own distinctive
trade marks, and since the goods that they handle are known by these
trade marks, the identity of the mill which made them originally is often
entirely unknown to the ultimate consumer. The converter can give his
business to whatever mill, at the time, will give him the best value for
his money.

Jobbers Must Know
Status of Mills

These operations are facilitated by the services of another class of
intermediaries, the cloth brokers. If a buyer, whether he be retailer,
jobber, converter, or what not, wishes to secure goods of a certain kind,
he would have a very difficult task if he had to canvass the entire
market, and ascertain what was being offered. Hence he is likely to go to
the cloth brokers. They are in touch with all the principal manufacturing
sources of supply, and will have daily quotations of the offerings of the
different mills; he will know which mills are "sold up," and which are
open for business, and what class of goods they desire to sell.
Consequently the cloth brokers are in a position to offer to would-be
purchasers a wide variety of the different cloths which are available on
the market, and it is their business to buy from the mills as cheaply as
they can, and so get the best possible price for their customers. The
transactions are handled on a small commission, and the average buyer, in
many kinds of goods, is able to do much better by working through a
broker than by opening negotiations directly with the mill.

Most Mills Have
Offices in Chief Markets

Mills selling their products through brokers in this manner may, or may
not, have a representative stationed in the goods market, according to
circumstances. Mills, manufacturing a limited number of plain fabrics,
and which do not sell through brokers, may also be without
representatives in the primary goods market, and will dispose of their
product directly from the mills, partly by correspondence, and partly
through the efforts of their travelers. The great mass of the mills,
however, are regularly and efficiently represented in the great central
goods markets, principally New York, though also in Boston, Philadelphia,
Baltimore, and elsewhere, and their selling agencies are very highly
organized institutions.

These establishments which have sufficient capital to enable them to
finance themselves - with or without the assistance of regular bankers'
loans - may maintain their own selling offices, and market their product
in their own names directly to their customers. The amount of capital
required to handle a business in this way is proportionately very large,
for the concern must be able to keep itself sufficiently supplied with
raw materials, and then to carry the expenses as these materials pass
through the slow stages of manufacture until the goods are finally
finished, after which they may have to be kept in stock for a time until
the delivery dates, and then, after shipment, the accounts have to be
carried until the bills are paid, so that, from the time the manufacturer
pays for his raw material until he finally receives pay for his goods is
a very long period.

Loans Made Upon
Warehouse Receipts

The financing of a business conducted in this way can be assisted by
loans from warehouses upon stocks of raw material stored there, by bank
accommodation, and by facilities which certain banks give for the cashing
of a substantial percentage of those accounts on the books of the concern
which the customers have not discounted themselves. Also, in handling his
merchandise in this way, the manufacturer must have a thorough
understanding of the best means of marketing his product, and this care
of the selling end is, of course, an added burden upon his shoulders
which, in many cases, he may not feel competent to handle properly.

Therefore, the comparatively few concerns which do have sufficient
capital to sell directly, in addition to the many from great to small who
have not, will market their product through what are known as dry goods
commission houses, sometimes referred to as factors, and simply as
commercial bankers. The commission house system, as we have it here, does
not exist anywhere else, and its great growth in the United States has
been largely due to certain peculiarities in our banking methods, which
have prevented mills - even those with a reasonably sufficient supply of
capital - from obtaining the amount of direct banking accommodation
necessary for their needs.

The commission house, in its usual relations with its mills, undertakes
to conduct the sale of their products. Some commission agents insist upon
having the entire selling control of all of the goods the mill produces,
or at any rate, of all the goods of the kind which they are equipped to
sell. Others, again, will take over a partial selling control of the
product of a mill, and various lines of the same manufacturer may be
found offering through different channels. There are some obvious
disadvantages connected with this latter procedure.

If the mill is a very large one, the selling agent may handle no goods
except the product of that mill, but in the great majority of cases, the
factor will represent a considerable number of mills.

Immediately on receipt of the invoices of the goods consigned to the
selling agent, the mill can draw against them a percentage of their
value, previously agreed upon, usually about two-thirds of their net
selling price, and upon these loans interest at the rate of 6% is
charged. The difference between the rate at which the commission house
can borrow money, (in normal times perhaps 4 to 4-1/2%), and the 6% which

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Online LibraryGuaranty Trust Company of New YorkThe Fabric of Civilization → online text (page 3 of 7)