, the dealings which takes place in the Exchanges at
those points involve the actual transferring of cotton which is on hand,
or, at least, contracted for. The New York market deals preponderantly
in what are known as contracts for future delivery, or, in the language
of the Exchange, "futures." The Liverpool Cotton Market is both a great
"spot" cotton market, and a great "futures" market. The striking thing
about these "futures" contracts is that but few of them are fulfilled by
actual delivery.

The question then arises, what function is fulfilled by the New York
Exchange that it should have such an important place in the cotton
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