COTTON PRICES AND MARKETS 31 
ture under his authority as the administrator of the act. 19 In prac- 
tice the American exchanges use only one contract. It is known as 
section 5 contract, taking its name from section 5 of the United States 
cotton futures act. 
The contract is what is known as a " basis " contract. This means 
that one grade is specified in the contract of sale but that other grades 
may be tendered in settlement of it, provided the rules of the ex- 
change and the regulations of the Secretary of Agriculture are 
complied with. No grade may be specified as the basis grade for 
delivery that is not deliverable under the cotton futures act, and if 
no one of those deliverable is specified, the law provides that Mid- 
dling shall be deemed the basis grade. In actual practice all con- 
tracts are basis Middling contracts. 
The object of the basis contract is to give the seller every oppor- 
tunity to fulfill his obligations. The difficulties of performance are 
thought to lie particularly on his side. The seller is supposed to get 
no money value advantage out of it, and does not if the differences 
established for grade are truly commercial differences. In fact the 
seller is now forced to carry the risks incident to changes in the 
value between grades from the time he buys until the cotton is 
delivered. 
The future, or basis Middling, contract is essentially a merchant's 
contract in so far as delivery and receipt of spot cotton is concerned. 
The mill wishes a specific description of cotton, and it has no assur- 
ance of getting it if it buys cotton on a contract and takes delivery of 
the cotton. The merchant, on the other hand, can take delivery, sort 
the cotton, and subsequently deliver to the different mills the grades 
desired. This detracts neither from the value of the contract nor 
of the exchanges. It merely shows that they are doing a specialized 
type of business, which may be all the more valuable because of its 
specialization, if it is used to perform only the functions for which 
it is designed. 
In addition to the basis Middling contract, the law provides in 
section 10 of the act for a specific grade contract. This contract 
is never used, partly because the seller can not afford to take the risk, 
and partly because it is more satisfactory to buy specific grades in 
spot markets. 
Staple cotton may be delivered against a basis Middling contract, 
provided it is of a deliverable grade. According to rule 14 of the 
New Orleans Cotton Exchange 25 points premium may be allowed 
at the discretion of the appeal committee on classification for cotton 
not less than 1 T V inches in length. In New York no premium is 
allowed for staple. 
It is impracticable to execute the formal contract in the ring at 
the time the trade is made, so the rules provide that verbal agree- 
ments are deemed to imply all the provisions of the contract and 
shall have the same standing force and effect if notice of such con- 
tract shall have been given by either party during the day the con- 
tract was made. These verbal agreements are noted on a memor- 
andum slip or card, and later in the day signed by the contracting 
parties. The card is printed as a sale on one side and a purchase 
19 U. S. Dept. Agr. Service and Regulatory Announcements, Nos. 82 and 91. 
