6S 
merchantable and for which correct differences can most nearly be 
obtained. 
The system of commercial differences as provided for under the 
cotton futures act, which has always been used by New Orleans, 
forces the risk due to changes in relative value of different grades 
on the dealers in spot cotton rather than on the dealers in contracts 
for future delivery. Thus the cotton merchant who buys Low Mid- 
dling in September at 50 "off," which is the commercial difference 
at that time, and hedges it in December, may find it 500 " off " at 
the time of delivery. On the other hand, should the merchant sell 
a mill Low Middling at 50 " off " and buy a contract to cover on 
that basis, and the difference widens to 500, he may make an extra 
profit of 450 points either in the resale of his futures or in the pur- 
chase of the spot cotton. Trading in grades better than Middling- 
present similar problems. 
A system of fixed differences was used in the settlement of New 
York contracts prior to the enactment of the cotton futures act. The 
differences were, in fact, forecasted commercial differences which 
were to apply for a stated length of time. They were made in Sep- 
tember to apply to the settlement of contracts until November, when 
it was thought that the grade of the crop was fairly well established. 
At that time the differences were fixed to apply until the next Sep- 
tember. The system was devised to avoid the mistakes and difficul- 
ties of changing differences each day. Theoretically it had a number 
of advantages. It was an attempt to throw the risk of changes in 
the value of different grades on the speculator. A buyer of spot 
cotton who hedges it within the prevailing difference period had as 
near a perfect hedge as is possible to obtain. If he bought low grades 
in September at, say, 50 "off," and rains in October drove the com- 
mercial difference to 100 " off," he would not lose the 50 points on 
the low grades, as is the case under the present s}^stem, because he 
could deliver them against contract. This method of fixing dif- 
ferences tended to force the delivery on contract of cotton for which 
there was no commercial demand; for the overpriced grades would 
tend to be delivered against contracts. 
Fixed differences were legislated out of existence in the United 
States in 1914, because of their effect on the price-making function 
of the exchange. The least-desired cotton deliverable in the market 
tended to set the price of contracts. If there was an active demand, 
spots would not be depressed to the same extent as futures, but de- 
mand was not always brisk. The great majority of buyers, and 
especially farmers, were unable to understand the complicated price 
relationship, and thus were unable to make proper allowance for 
depression due to the overvaluation of certain deliverable grades. 
This multiplied the chances of buying cotton for less than its true 
value. 
The extent of the influence of fixed difference on the price of spot 
cotton depended on general market conditions and the nature of the 
spot contract. Spot cotton for immediate delivery or at a fixed 
price for forward delivery was likely to sell for about its commercial 
value. On the other hand, if a merchant sold for forward delivery 
based on some future month, and protected himself by buying a 
future contract as a protection until he could buy the cotton, he had 
