Fundamental alterations have been made in the structure of the leading cotton markets, and in methods of buying and selling cotton, in the last hundred years. We shall not attempt to trace the changes as they appeared in every market Cotton market methods. of importance, but shall confine our attention to one only, and that perhaps the most important of all, namely, the market at Liverpool. This selection of one market for detailed examination does not rob our sketch of generality, as might at first be thought, since broadly the history of the development of one market is the history of the development of all, and on the whole the economic explanation of the evolution that has taken place may be universalized.

Cotton landed at the Port of Manchester since the Canal was opened.
(In thousand Bales.)
The season is from the 1st of September to the 31st of August each year.

Jan. 1894
to Aug.
31, 1894.		Season
1894-1895.		 Season
1895-1896.		Season
1896-1897.		 Season
1897-1898.		Season
1898-1899.
American 21 32 121 211 245 311
Egyptian 1.4 34 68 88 98 84
East Indian · · · · · · · · · · · ·
West African · · · · · · · · · · · ·
Total 22 66 189 299 344 395
Total American Crop* 7,549 9,901 7,157 8,757 11,199 11,274
Total Egyptian Crop (in
 bales of 7½ cantars)** 657 615 703 783 872 745
Season
1899-1900.		Season
1900-1901.		 Season
1901-1902.		Season
1902-1903.		 Season
1903-1904.		Season
1904-1905.
American 415 442 421 478  365 552 
Egyptian 136 107 125 145  148 183 
East Indian · · · · · · 2.5 6 1.3
West African · · · · · · · · · · .1
Total 551 549 546 626 519 736
Total American Crop* 9,436 10,383 10,680 11,011 13,565 10,727
Total Egyptian Crop (in
 bales of 7½ cantars)** 868 723 849 867 846 778
* Commercial crop.
** A cantar is 99.05 ℔ avoirdupois.

Originally cotton was imported by the Liverpool dealer as an agent for American firms or at his own risk, and then sold by private treaty, auction, or through brokers, to Manchester dealers, who retailed it to the spinners. Evolution of broking. This statement is, of course, only roughly correct. Some Manchester dealers imported themselves, and some spinners bought direct from Liverpool importers, but the rule was the arrangement first described. Early in the 19th century it became customary for Manchester dealers and Liverpool importers to carry on business with one another through representatives known as “buying” and “selling” brokers. About this time the broker of cotton only began to specialize from the ranks of the brokers who dealt in all kinds of colonial produce. Previously there had not been enough business done in cotton to make it worth any person’s while to devote himself to the buying and selling on commission of cotton only. The evolution of the distinct business of cotton broking is readily comprehensible when we remind ourselves that the requirements, as regards raw material, of all spinners are much alike generally, and that no spinner could afford to pay an expert to devote himself entirely to purchasing cotton for his mill.

So far change had been gradual, but the success of the Manchester and Liverpool railway undermined beyond repair the old system of doing business. Spinners could easily run over to Liverpool and buy their cotton from the large stocks displayed at that port. Before the railway was opened some spinners had been in the habit of making their purchases of raw material in Liverpool, but the great inconveniences of the journey, combined with less easy terms for payment than were usual in Manchester, prevented any great numbers from departing from the beaten track. Cotton dealers up to this time had regularly financed the spinners, who were frequently men of little capital, by allowing long credit, and had even employed them to spin on commission. As men of substance increased among the ranks of the spinners, the Manchester cotton dealers found it impossible to retard a movement set on foot by the prospects of such appreciable advantages. Ultimately many of the old Manchester cotton dealers became brokers for their old customers. In 1875 there were said to be upwards of 100 cotton dealers in Manchester, but from that time onward their members steadily declined. It is interesting to observe that a later development of transport between Manchester and Liverpool, namely, the Manchester Ship Canal, has drawn back into Manchester a part of the cotton market which was attracted from Manchester into Liverpool by the famous improvement in transport opened to the public three-quarters of a century ago.

The centralization of the cotton market in Liverpool fixed firmly the system of buying through brokers, for the Liverpool importer, or his broker, was in no sense a professional adviser to the spinners, informally pledged to advance the latter’s interests, as the old Manchester dealers had been. The system was rendered comparatively inexpensive by the drop in commissions from 1 to ½ % which had followed the adoption of selling by sample. This custom of buying and selling through brokers continued unshaken until the laying of the Atlantic cable tempted selling brokers occasionally, and even some buying brokers, to buy direct from American factors by telegraph and thus transform themselves into quasi-importers. The temptation was made the more difficult to resist by the development of “future” dealings. When the agents of the spinners, that is, the buying brokers, by becoming principals in some transactions, had acquired interests diametrically opposed to those of their customers, the consequent feeling of distrust among spinners gave birth to the Cotton Buying Company, which, constituted originally of twenty to thirty limited cotton-spinning companies, represents to-day nearly 6,000,000 spindles distributed among nearly one hundred firms. Its object was to squeeze out some middlemen and economize for its members on brokerage. This company, it is said, helped to attract the brokers back to the spinners, and an informal understanding was arrived at that the buying broker should not figure both as agent and principal in the same transaction.

By 1876 “forward” operations had become so vast and complicated that a cotton-clearing house had to be established to deal with the confusing networks of debits and credits created by them. Its principle was exactly Cotton-Clearing house, Cotton Bank and periodic settlement of “differences.” that of the clearing houses used by the railways and the banks, the cancellation of indebtedness and discharge simply of balances. The final settlement of a “future” contract involved usually a crowd of persons, and the passage of large sums of money backwards and forwards, so that the amount of cash required for circulation on the exchange became unreasonably excessive and an annoying waste of time was entailed. The cotton-clearing house substituted book-keeping for the bulk of these payments. The establishment of the Cotton Bank naturally followed. Now debts are discharged in the first instance by vouchers. Dealers pass their debit and credit vouchers into the Cotton Bank and pay or receive the balances which they owe or are entitled to. In order to protect dealers against the losses due to the insolvency of those with whom they have had transactions, weekly settlements on the exchange have been made compulsory; between brokers and their clients they are also usual. At the settlement, every member of the exchange receives the “differences” owing to him and pays those which he has incurred. Thus if a person holds futures for 10,000 bales which stood at 5.20 on the last settlement day and now stand at 5.30, and in the course of the previous week has sold 5000 bales of “futures” at 5.10, he receives 10,000 × 10⁄100d. on his old holding, and has to pay 5000 × 20⁄200d. on his sales, and therefore on balance neither receives nor pays. Differences may be very large sums. The unit of a “future” being 100 bales, an alteration in the price of cotton of .01d. causes a difference on each unit of £2. Periodic settlements are obviously periodic tests of the solvency of dealers. If the test of the settlement were not frequently applied, speculators who were unfortunate would be tempted to plunge deeper until finally some became insolvent for large sums. As it is, the speculator who has incurred losses beyond his means tends to be discovered before his creditors are heavily involved. Settlement days fall on Thursday, and the closing prices on the preceding Monday are taken as the basis of the settlement. From all differences interest at 5% is deducted for the time between settlement day and the tenth day of the second month on which the “future” elapses, since settlement terms mean that money is paid in instalments before it is actually due. To the admission of periodic settlements there was for a time vehement opposition on the ground that the door would be opened to gambling on “differences.” Hence at first, in 1882, they were used only by a section of the market constituted of members who had voluntarily agreed to do business with one another upon these terms alone. By 1884, however, the advantages of “settlement terms” became so evident that they were adopted by the Cotton Association, at first for fortnightly periods, with the saving clause originally that they should not be compulsory.

As soon as the clearing house was set up it became evident that “futures” were an impossibility away from it. At the same time “futures” were becoming an increasing necessity to importers, because through “futures” alone could they Origin of Liverpool Cotton Association. hedge on their purchases of cotton, or buy when the market seemed favourable, and they were not prepared to assume heavy risks. Now from the clearing house importers were rigorously excluded, and on invoking the aid of “futures,” therefore, they were penalized to the extent of double broker’s commission, one commission being charged on the sale of the “futures” and one on their purchase back. The importers, therefore, found it necessary to establish a club of their own, the Liverpool Cotton Exchange, which they as rigorously guarded against brokers. The split in the market so caused was so damaging to both parties that a satisfactory arrangement was eventually agreed upon, and both institutions were absorbed in the Liverpool Cotton Association.

A condition of specialist dealers working to the public service is that they should not act in the dark. They must watch demand, be able to form reasonable anticipations of its movements, and at the same time know the existing stocks of cotton, Publication of information relating to demand and supply. the sales taking place from day to day, and the best forecasts of the coming supplies. A man accustomed to devote the whole of his time to the study of demand and supply in relation to cotton, after some years of experience, will be qualified ordinarily to form fairly accurate judgments of the prices to be expected. His success depends upon his ability to interpret rightly the facts and intangible signs with which he is brought in contact. The information at the disposal of dealers has steadily enlarged in volume and improved in trustworthiness, though some of it is not yet invariably above suspicion, and the time elapsing between an event and the knowledge of it becoming common property has been reduced to a fraction of what it used to be, in consequence chiefly of the telegraph and cables. All sales that take place on the Exchange must be returned. Estimates are published of the area under cotton cultivation, and conditions of the American crop are issued by the American agricultural bureau at the beginning of the months of June, July, August, September and October of each year. To represent the standard of perfect healthiness and exemption from injury due to insects, or drought, or any other causes, one hundred is taken. The estimates for 1901 to 1905 are given, to illustrate their variations:—