ANTI-INFLATION PROGRAM AS RECOMMENDED IN THE PRESIDENT'S MESSAGE OF NOVEMBER 17, 1947

WEDNESDAY, DECEMBER 3, 1947

CONGRESS OF THE UNITED STATES,

JOINT COMMITTEE ON THE ECONOMIC REPORT,

Washington, D. C. The committee met at 10 a. m., pursuant to adjournment, in room 318, Senate Office Building, Senator Robert Taft (chairman) presiding.

Present: Senators Taft (chairman), Flanders, Watkins, O'Mahoney, Myers, and Representative Huber.

Senators Ecton, Baldwin, and Kem, and Representatives Horan and Poulson.

Also present: Charles O. Hardy, staff director; Fred E. Berquist, assistant staff director; and John W. Lehman, clerk.

The CHAIRMAN. The committee will be in order.

We will proceed with the first witness, Mr. Ferguson.

Mr. SLAUGHTER. Bearing in mind the Chair's admonition last night to avoid cumulative evidence, we have certainly tried to conform to the Chair's request. Mr. Ferguson's testimony may be in some parts a little cumulative, but he has come here to testify on margins, and he has prepared that subject particularly and since that is really the meat of this hearing, I do think that his paper will be of interest to the committee.

The CHAIRMAN. You may proceed.

STATEMENT OF E. S. FERGUSON, VICE PRESIDENT OF THE KELLOGG COMMISSION CO. OF MINNEAPOLIS, MINN.

Mr. FERGUSON. My name is E. S. Ferguson. I am vice president of Kellogg Commission Co. of Minneapolis, and have been actively engaged in the grain business for 43 years, 42 years with my present connection.

My own business, the business of the Kellogg Commission Co. is the handling of shipments of grain for country elevators, and the attention to the business of the country elevator in the terminal markets in Minneapolis and Duluth. In this business the futures trading system is vital, and we could not operate the business without it because we loan money for the purchase of grain to country elevators who, in turn, buy the farmers' crops as offered for cash only. If their grain were not hedged, my company could not loan money on it. Margins on trades for future delivery of grain have always been considered by the grain trade as an earnest money deposit and a protection to the commission merchant or broker who carries the trade

against customer's loss due to price change and a guaranty of perfor mance of contract. They are not a percentage of the purchase price Each trade involves a transaction by two parties, and the total of all sales of futures equals the total of all purchases. One cannot buy without another having sold.

At the rate currently in effect, 33% percent, the margin of $1 per bushel is exactly one-third of the purchase price at current levels. Each buyer and seller deposits $1 and there is held as security and protection against price change $2 on each $3 bushel of grain traded. Should the margins be increased to 100 percent, there would be $6 on deposit as security against $3 worth of grain.

As the contract will come to maturity within the course of a few months or a few weeks or even a few days, such excessive deposit is far beyond any probable need.

Under exchange regulations in effect at the time the Government decided to interfere with the margins, members required margins on speculative trades of 40 to 50 cents per bushel from each buyer and seller. That meant 80 cents to $1 per bushel on each transaction. The extent of that requirement was decided independently by the governing board of each exchange, representing the judgment of each board as to the amount reasonably necessary to protect the commission merchant, his customer, and the public against loss from price change.

I repeat that the margins fixed by the exchanges were not a percentage of nor a down payment on purchase prices, for obivously the seller who must put up the same margin as the buyer has no purchase price to pay. The factors considered in fixing minimum margins are: (a) Price level; (b) probable extent of fluctuation within a short period of time.

In weighing these probabilities account is taken of such factors as backlog of supply, its proximity to the place where it is wanted, transportation and storage facilities, weather, demand, both domestic and foreign, as well as the announcement or probabilities of change in Government programs at home and abroad, and effects of Government actions, as well as disasters visited by the hand of God.

Commission merchants who carry trades for customers have some leeway and can exact margins greater than the minimum requirements if they believe the individual situation warrants it. They are constantly on the alert to protect themselves against loss on such trades. As the price goes against the customer, the commission merchant calls for additional margins. When the customer is unable or unwilling to deposit additional margins, the carrier closes out the trade before margin exhaustion and pays to the customer the balance left from the deposit, after deducting the loss on his transaction.

To sum up the foregoing, then, the exchanges and their members conceive margins as a device for their protection against customer loss and the maintenance of solvency of the customer, the member and the exchange, plus assurance the contract will be performed. Grain exchanges and their members have always condemned and deplored the use of margins or any other device for the purpose of influencing prices. They have considered such practices not within the function of a market place, against the public interest, and in violation of law.

This brings us to consideration of whether some governmental agencies should be given authority to use the manipulation or regula

on of margins as a price-influencing device. We do not think such uthority should be given for we believe in a free economy in which rice is affected by supply and demand.

As there are proposals to give the Government power through gislation to regulate margins, let us examine the probable effect. Assuming that commodity exchanges, hedging facilities, and futures rade are desirable and are to be permitted to function as part of a ree economy, then they should not be obstructed nor restricted to he point where they cannot function properly and in a manner best alculated to serve the public and the grain industry from the farmer ll the way through to the baker.

High margin requirements discourage trading, drive traders with mall capital out of the market, and reduce the volume of trade. To serve the public, industry and producer efficiently the market must have a large volume of trade. A market in which there is a great number and volume of open trades and in which many buyers and sellers are constantly operating affords a buyer or seller the best opportunity to make the trades which he desires with least possible effect on prices from the impact of his bid or offer.

Obviously the higher the margins required the fewer buyers and sellers are able to meet the requirements, and the smaller the amount of possible undertakings. As the market thins out under the process of restrictive margining, the volume of open commitments is reduced, the number of bids and offers from risk takers is reduced, and the market is thus ultimately thinned down to the point where the impact of a large single sale, for instance by a farmer, elevator, or miller, or a large purchase, by a miller, Government agency, elevator, or baker, causes an immediate sharp price movement because takers for offerings are scarce or sellers cannot be found to meet bids.

Hedging sellers, such as farmers, country elevators, millers, and so forth, trade as their needs arise, and their offerings seldom coincide in time and quantity with the needs of hedging buyers, such as Government, terminals, mills, country elevators, and bakers. The risktaking speculators furnish the cushion against the impact of hedging trades, and competition among a large number of risk takers minimizes price fluctuation.

Absence of risk-taking traders from the market reduces efficiency of the market and if carried to complete elimination would practically abolish futures trading and hedging because of the impossibility of meshing hedging trades against each other in the quantity and at the time required. When a mill has sold flour and wants to buy wheat a speculator is necessary to fill the order, if there is not a farmer or an elevator offering his wheat at the time.

The Government recently has been a buyer of unprecedented quantities of grain over short periods of time. Such acquisition would have been impossible without a broad speculative and hedging market. Attempts to gather such quantities of grain by the primitive method of soliciting individual farmers would be so cumbersome as to be unworkable and would also be so disquieting as to drive the grain into hiding.

If we are to move our crops we must maintain liquid markets. They can be maintained only if those disposed to take the risks of price changes are allowed to trade freely. If their entry into or withdrawal from the market can be regulated by the caprice or whim.

of a Government official then the market can be closed or destroyed

the same way.

Speculation neither raises nor lowers the price. Prices fall when sufficient buyers are not on hand to keep them up. Prices rise when buyers want more grain than is available at a given level, and they bid more money to get it.

It must be apparent to this committee that the influences which have driven up grain prices are the same that have increased the prices of all other commodities, goods, and services, plus the added weight of Government buying for the emergency export program, and that the speculator who sells always eventually buys back, and the one who buys always later sells out.

In summation, margins are used and should be used for the guarantee of payment of the customer's loss through price change. Speculation neither raises nor lowers prices ultimately, but acts as a stabilizer in the market. The employment of high margins as a means of keeping prices down is futile for its only effect is to remove the temporary risk taker from the market and thus create a thin and inefficient market. The imposition of high margins eliminates speculative sellers as well as speculative buyers.

Control of margins by Government places in the hands of Government a weapon which can be used to undermine the all-important risk-bearing function of futures markets. Once this function is sufficiently crippled, the entire free market structure of grain marketing in this country collapses. The stage is then set for price fixing, ceilings, rationing, allocations, and inevitable regimentation all the way from the farmer's granary to the consumer's table.

The laws of supply and demand will continue to dictate prices as long as markets are free. When laws of supply and demand are set aside by fixing of prices, the black market takes over.

The CHAIRMAN. Mr. Ferguson, you have had actual experience with these markets. You have been dealing in grain during the last period?

Mr. FERGUSON. Forty-two years.

The CHAIRMAN. During the last few months?

Mr. FERGUSON. Yes, sir.

The CHAIRMAN. What has been your experience with the market before and after imposing the 33% percent margin?

Mr. FERGUSON. It has been very difficult since the imposition of the 33%-percent margin to get off a hedge quickly and at the price level existing when you go into the pit.

For instance, it is no trouble at all in times of liquid market to step into the wheat pit and buy 5,000 bushels of wheat, either at the current quotation or by bidding it up an eighth. But now since there are no speculative offers in the market, if you want to go into the market and buy 5,000 bushels of wheat, you may have to bid the market up as much as three-quarters of a cent a bushel. I have even seen it at times higher than that. That is because the market is thin. We have not yet seen the full impact of the 33%-percent requirement, because there were many open trades entered into before that 33% percent was fixed.

Those trades are still open, and we are trading in that reservoir or trading from that reservoir. When we get into the deferred months, July and September, if the 33% is still in force, we will have a market that is so thin as to be of questionable value.

I am not a speculator. As a matter of fact, being a member of the onduct committee in my market, I have taken an oath that I will not peculate in any of the commodities dealt on the exchange while I old that position.

The CHAIRMAN. Thank you very much, Mr. Ferguson.

Mr. SLAUGHTER. Mr. Chairman, while Mr. Sturtevant has a repared statement which we would like to incorporate, bearing in nind the chairman's request last night for brevity and to avoid epetition. He has boiled it down to a somewhat shorter version of it which he will use.

The CHAIRMAN. You may proceed, Mr. Sturtevant.

STATEMENT OF R. H. STURTEVANT, VICE PRESIDENT, HARTBARTLETT-STURTEVANT GRAIN CO., KANSAS CITY, MO.

Mr. STURTEVANT. My name is R. H. Sturtevant, of Kansas City, and I am in the grain business and am president of the Board of Trade of Kansas City, Mo.

I have prepared a statement dealing with the price of wheat, and I request that it be included in the record, but with your permission, I shall merely summarize this statement at this time. I have also prepared a chart that I think will be interesting to the members of the committee as it shows the various gyrations of the market since August 15. We will get to that a little later.

In the 8 years prior to 1945, wheat presented a troublesome surplus problem, but record exports in that year left a very small carry-over of 100,000,000 bushels into the 1946 crop. Although the crop of 1946 was a record breaker, record exports of some 400,000,000 bushels, together with domestic use, left a carry-over into the 1947 crop of only 84,000,000 bushels. This is the lowest in 20 years, with the exception of one which was 1937, and that I may say is a very dangerously low figure.

Fortunately, another record crop was produced in 1947, 1,406,000,000 bushels, which with the carry-over gave us a supply of about 1,500,000,000. Without large exports such a supply of wheat would be a very heavy weight on the market, and before the Government's export plans were announced, it was predicted that the price of wheat would fall to the loan level, the support price, and it did, indeed, get close to that figure. But when the export plans were disclosed, based on shipping 500,000,000 bushels abroad, it was then seen that there would be a very close adjustment between supply and demand. The Government figured that 250,000,000 bushels would be fed to livestock, and on that basis about 100,000,000 bushels would be reckoned as a carry-over into the 1948 crop.

The Department of Agriculture has expressed the opinion that not less than 275,000,000 bushels is a safe carry-over. If the Government miscalculated this amount to be fed, the carry-over could easily be much less than 100,000,000 bushels. The amount to be fed is a very uncertain factor. Last year the figure was 187,000,000 bushels, and the Government estimates 250,000,000 bushels for this year. The grain supply this year is 25,000,000 tons less than last year. Manifestly, a drain on the wheat supply, however calculated, will be so great that higher prices were inevitable.