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 make future contracts for the delivery of cloth. Such a condition unsettling the distributing markets, would be intolerable. Hence, the necessity of future contracts between merchants and spinners. The situation would otherwise be a very difficult one for the merchant whose supply of cotton, and the price he must pay for it, are subject to the vagaries of nature, which may grant a bountiful crop one year, and a short and inferior one the next, with consequent fluctuations in price sufficient not alone to wipe out his profit but his capital as well. The Hedge As a Credit Transaction Hedging, as has been said, affords the protection, against serious loss which these varying conditions make probable. "It may almost be said," observes Arthur R. Marsh, former President of the New York Cotton Exchange, "that as the main business of banks today is not dealing in money, but in credits, so the main business of the cotton exchanges is now in credit transactions in cotton, toward which the actual cotton 'on the spot' stands in much the same relation as the money in the banks to the sum total of their transactions in credit. It serves as a reserve at once for the satisfaction of unliquidated credit balances and for the maintenance of sound credit values in all the credit operations." Elsewhere, Mr. Marsh describes the hedging process in these words: "A hedge is the purchase or sale of contracts for one hundred or more bales of cotton for future delivery, made not for the purpose of receiving or delivering the actual cotton, but as an insurance against fluctuations in the market that might unfavorably affect other ventures in which the buyer or seller of the hedge is actually engaged." [Illustration: _The floor of the New York Cotton Exchange_] How Merchants Secure Protection by Hedging