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The Trading World of Asia and the English East India Company, 1660-1760

Author(s):Chaudhuri, K. N.
Reviewer(s):Hejeebu, Santhi

Project 2000: Significant Works in Twentieth-Century Economic History

K. N. Chaudhuri, The Trading World of Asia and the English East India Company, 1660-1760. Cambridge: Cambridge University Press, 1978.

Review essay by Santhi Hejeebu, Department of Economics, University of Iowa.

Asia in the Making of the K. N. Chaudhuri’s East India Company, 1660-1760

The Trading World of Asia and the English East India Company reveals the monumental importance a single, long-lived organization can have on world history. Between 1600 and 1858 the East India Company operated mostly as a commercial enterprise, but in its last century it also became a territorial ruler. Chaudhuri’s book covers the long era of the Company’s commercial maturity, 1660-1760. The East India Company’s goals were simple: buy low in the East and sell high in the West. At its most basic level the Company was a great shipping concern that rented its fleets and owned its cargos of pepper, textiles, coffee, and tea. The Company straddled the major trading centers of Asia and the British capital, bringing together the talents of artisan-cultivators and the tastes of final consumers.

Mainstream economic history is still coming to grips with the importance of Asia and the history of economic growth outside of European frames of references. Through the lens of a single organization one sees the effects of monetary expansion (American silver) on trade flows and the development of bureaucratic multinational machinery. One also observes the unfolding of colonial conquest and the peculiar results that emerge when market power is wedded with political power. The Honourable Company has beguiled writers since the eighteenth century and the secondary literature alone would constitute a considerable library. But no future investigator of the East India Company or its complicated legacy will be able to progress far without engaging Chaudhuri’s “magisterial” (Raychaudhuri 1980, 433) Trading World of Asia.

Chaudhuri was the first to analyze the Company as a principally commercial enterprise. He first trained as a classicist and commands Sanskrit, Latin, and Greek, plus four European and at least two South Asian languages. His linguistic prowess made accessible to him the records of all the major European groups who traded with South Asia. In shifting to the early modern period, Chaudhuri displayed his distinct mathematical bent and brought a new formalism to the topic.

Trading World of Asia places Chaudhuri in the tradition of W.R. Scott (1910), the distinguished analyst of English chartered companies of the seventeenth century (1). It has been said that Chaudhuri did for the East India Company what Kristoff Glamann did for the Dutch East India Company (VOC), Ralph Davies for the Royal African Company, and E.E. Rich for the Hudson’s Bay Company — that he performed the role of Company historian, defender and critic. Chaudhuri’s authority, like those of the other Company historians, rests on his command of the source material. The sheer magnitude of the East India Company materials makes its comprehensive history extraordinarily difficult to achieve. Furthermore Chaudhuri brings to the subject an intimate knowledge of the regions in which the trade goods were acquired. He understood his Asian input markets — their language, history, and customs — better than historians of other chartered companies understood their overseas markets. His analytic approach, his enormous devotion to the sources, and his understanding of the very different societies joined by trade make the Trading World of Asia a most remarkable achievement.

The book’s objectives are threefold: 1. to reconstruct “the Company’s own history for the period from 1660-1760” 2. to analyze “the economic life of those countries in Asia where the Company had established trading relations” and 3. “to discover through the records and the activities of the East India Company the general problems of long-distance trade in pre-Industrial Revolution societies” (p. xv-xvi).

As Company history, Trading World of Asia provided a fresh perspective. In contrast to earlier treatments that emphasized the Company’s role as a vehicle for British imperial aims (2), Trading World of Asia gazed unflinchingly at the structure of the Company’s organization and its decision-making process — at home and abroad. Using a systems analysis approach, Chaudhuri tells how the firm worked. Tasks were divided among seven committees that reported to the Court of Directors. The Court was made up of 24 directors who were elected annually by the General Court of Proprietors. He explains the specialized duties of the committees in London and the Presidency-factory system in place across Asia.

For each institutional unit within the firm, Chaudhuri identifies its access to information and its generation of specific decision-variables. He also identifies the time lags involved between one “subsystem” of the Company and another. For example, to decide how much bullion was required to fill the current order lists, the Directors would need to know the amount of cash reserves on hand at the Presidencies. Delays in receiving such information would likely result in an over or under allocation of funds, implying less or more reliance on Indian capital markets. The Directors would face this problem year in and year out. The recurrent nature of the problem would over time encourage them to establish decision-rules for minimizing the discrepancy. Institutionally this would link transactions in the Treasure Committee with those in Asian Presidencies and ultimately with those in the Accountant General’s Department. In terms of Chaudhuri’s model, this would illustrate the interaction between subsystem I (London) and subsystem II (Asia) and then between subsystem II (Asia) and subsystem III (London). By mapping decision-variables and information flows to specific units, Chaudhuri formalizes the management structure into a “trading model.” The technique gives him a global view of the Company’s operations and leads him to conclude that “the economic success of the East India Company was in large measure the result of a systematic process of decision-making, communication, and control.” (p. 33).

The Company history extends through a description of the pattern of commercial settlements in Asia as Chaudhuri describes the various methods of acquiring goods. In Bengal a system of brokers and middlemen was used to contract textile production, while in China goods were purchased onboard ships commanded by supercargoes. He provides quantitative analysis on the long-term fluctuations in the volume of imports and exports and in the “terms-of-trade.” He describes the politics of foreign trade in Mughal India, the Company’s pursuit of trading privileges and the private trade of the Company’s servants. The shipping schedule, the export of treasure — nearly every aspect of trade with Asia is addressed. As Company history, the work is “detailed and definitive” (Prakash 1980, 139).

The second objective is more ambitious than the first. Chaudhuri hoped to analyze the economies of Asia that traded with the Company. This would include the “Arab world, the Persian Empire, the Mughal dominions, South East Asia, and China” (p. 55). Given the heterogeneity of these economies and the constraints of space, it is not surprising that his discussion is truncated to the specific markets in which the Company operated. His subsequent works Trade and Civilization in the Indian Ocean (1985) and Asia before Europe (1990) however are not Company-centric and greatly illuminate the study of comparative Asian history.

Still Trading World of Asia makes important contributions in specific areas of Asian economic history, namely in dispelling the van Leur thesis and in the study of the Indian textile industry in the seventeenth and eighteenth centuries. In his 1955 classic Indonesian Trade and Society, J.C. van Leur characterized the Asian merchants as peddlers and Asian trading ports as overburdened with a multiplicity of currency, weights, measures, and customs. The overall picture is one of small-scale traders eking out a living in the face of crippling transactions costs. Van Leur’s thesis went unchallenged for decades and was crucial to Niels Steensgaard’s 1973 study of the decline of the trans-Eurasian caravan trade.

Chaudhuri contextualizes van Leur’s argument. He shows how the peddler characterization depends on a selective use of Dutch sources, the diary of a single Armenian merchant, and a handful of travelers’ accounts. Chaudhuri counters that the type of Indian merchant most often discussed in Dutch and English company sources resembles “the Indian equivalent of the Medici family, or Fuggers, and the Tripps” (p. 138). As for the nature of Asian trade centers, Chaudhuri points out that a multiplicity of weights, measures, and regulations was common in European cities as well. More importantly, Chaudhuri argues that however large the European companies were relative to their Asian counterparts, they were never substantial enough to “command the market” (p. 139) without resort to violence. Later substantiated by empirical research, Chaudhuri’s argument did much to undermine the then prevalent misconceptions about the nature of Asian merchants communities (3).

A second major contribution to Asian economic history is the astute analysis of the Indian textile industry of the period. Chaudhuri describes the four major regions of India (Punjab, Gujarat, Coromandel Coast, and Bengal) that specialized in the production of cloth for export. He explores the organization of the industry, including the very high degree of specialization of labor and the role of merchants in financing the different stages of production and marketing the finished products. He also explains the juridical tradition that gave rise to the system of commercial advances common in the period. After exploring the cost structure of handicraft production he considers the impact of European purchases of textiles on the wages of weavers. The a priori expectation that wages would rise in the face of growing international demand is complicated by the fact the sources speak almost categorically of the impoverished state of the weaver. The discussion of Indian textile producers raises, if not fully answers, many important questions. Finally, he addresses the issue of technological stagnation. Indian textile output increased over the eighteenth century not by process innovation but by the expansion of the labor force (and implicitly the replication of specialized human capital). Chaudhuri argues that workmen in India lacked economic incentives to shift to capital-intensive techniques so long as the appropriation of producer surplus remained acute. He writes, “Specialization had gone so far that it would have required very great incentives to induce such men to change their production methods and habits drastically” (p. 275). Morris Morris described Chaudhuri’s “analysis of production and marketing activities in Asia,” as “by far the best available” (1980, 390).

The third objective of the book is to identify the “general problems of long-distance trade in pre-Industrial Revolution societies” (p. xvi). Chaudhuri does this by exploring the role of the monsoon winds and the techniques used to minimize shipping expenses (pp. 71-4, 193, 201-2, 330) and by examining the persistent communication and control problems within the Company (pp. 32-3, 74-7, 208-213, 298-9, 302). The problem of forecasting future demand and determining which commodities in what quantities should be ordered(pp. 278-81, 299-305, 331-2) would also fall under the rubric of “general problems of long-distance trade.” Unfortunately, Chaudhuri does not bring these and other recurrent challenges under a single heading. They jointly constitute one of the unifying themes of the book, yet the problems are scattered across many chapters, in many differing contexts. This is a weakness in the organization of the theme and not in the sophistication with which Chaudhuri handles it. A careful reader will find all the elements there.

As Chaudhuri admits, his method of analysis can be disorienting. “The methodology adopted was exceptionally complex, though not by itself but because of its combinations. It is easier to say what the book is not than to say what the book is. It is not true narrative history. It is not pure economic analysis, nor is it economic history in the conventional sense” (Chaudhuri 1983, 10). He uses neoclassical economic analysis and yet borrows insights from Polanyi and Marx. The influence of Braudel, quite marked in Chaudhuri’s later works, can be traced here. Trading World of Asia situates the Company primarily in terms of its economic activities (the markets which it engaged). It also emphasizes the physical or geographic space (the Asian littoral) and the cultural space (the language, customs, and mentalit? of the directors, their agents, Asian merchants, and even the Mughal aristocracy) the Company occupied. To this Chaudhuri reiterates the importance of time, investment cycles, monsoon season, harvest season, and the arrival and departure of ships. His ability to discern almost at once the many dimensions of cross-cultural, transcontinental exchange makes the Trading World of Asia a methodological hybrid.

Systems analysis receives prominent attention. He writes of the Company as a trading system, one in which the decision-rules employed by management can be mapped to a sequence of physical inputs and outputs, suggesting the Company operated like an engine. Systems analysis enables him to test statistically a series of hypotheses, such as “average costs are a decreasing function of the volume of trade, the cost price of goods, and of time, with an associated level of fixed costs” (p. 486).

The approach looks rather alien to those who learned industrial organization from Tirole (1989) or Stigler (1968) a generation earlier. It is not typically taught in economics or in history departments though it is widely used in information systems management and environmental engineering. System analysis requires the investigator to redefine structural and functional relationships on a firm-by-firm basis. What surprises (and annoys) the economist is the absence of a theory of the firm. The cost functions in Appendix 3 are hypotheses relating costs to accounting and physical variables. They do not imbibe the idea that costs functions arise from production functions and must include opportunity costs.

Can systems theory be useful to economic history? Certainly. It requires a much lower level of abstraction than conventional microeconomics and can be particularly useful when a researcher needs to make a detailed plan of a complex organization. This is precisely the sense in which computing professionals in the business world use the theory. The emphasis on information flows and functional relations across different subsystems can help organize data-gathering efforts. And this is precisely how the theory was useful to Chaudhuri. Chaudhuri (1983, 14) writes, “The historical material was collected and analysed with very strict adherence to the concept of the model. The exposition was then ‘translated’ into the idiom of historians.” The gargantuan task of synthesizing the thousands of volumes of records pertaining to the Company over the period indeed required a coherent approach embedded in a structural model of the Company’s various operations.

The drawback to systems theory is that it is a static model of the organization and it therefore offers no guidance on how to ask the deeper questions about efficiency or organizational change. Writes Chaudhuri, “For a model cannot without destroying itself take account of the passage of time which affects its structural boundaries and parameters” (p. 41). Theories of institutional change are of fundamental concern and those that are not amenable to changes over time appear to have little explanatory power. Thus while useful as an organizing heuristic, systems analysis seems rather unlikely to yield insights regarding organizational change.

Beyond systems analysis and econometric estimation, much of the book uses a traditional narrative approach. His presentation of the Company’s overall financial position, for example, is alive with illustrative examples, contextualized by contemporary opinion, and balanced by principles of modern accounting. One reviewer considered such treatment as “a model of how “Old” and “New” methods of economic history can be fruitfully combined” (Ambirajan 1981, 79). Chaudhuri’s six chapters on individual commodities also move smoothly between general and specific, between theory and evidence. One of the book’s “special virtues,” as Curtin (1980, 508) rightly says is “the way in which [Chaudhuri] maintains a counterpoint between central aggregates and the intimate detail.”

The most long-lasting contribution of the book is the stunning amount of quantitative data on commodities and specie flows between Britain and Asia. Appendix 5 provides the annual time series for nearly a dozen commodities originating from six locations — representing a fraction of the 400 tables originally produced. Chaudhuri’s research involved tracking more than 91 different textiles, 7 types of tea, and 30 other commodities imported into London. On the export side, he followed the course of 12 products plus treasure. By following the order lists and invoices of literally every Company ship between 1660 and 1760, he and his assistants made available data that had been scattered across hundreds of volumes of financial records and thousands of volumes of correspondence. Clive Dewey wrote that Trading World of Asia “represented the work of a lifetime, not only — or even mainly — in the sense that it took a significant proportion of [the author’s] working life to write, but in the sense that such a book is only likely to be written once in a lifetime” (Chaudhuri 1983, 11). Ten productive years of archival work (involving English, French, Dutch, Belgain sources) went in to the production of Trading World of Asia and that staggering effort alone will ensure its longevity.

The book influenced numerous literatures within economics and history. Chaudhuri’s emphasis on the efficiency of the East India Company resonates in the literature on the origins of the multinational organization and on the character of the English chartered companies. While Chaudhuri used systems theory, others (Anderson et. al. 1983 and Carlos and Nicholas, 1988) have employed transactions cost analysis, agency theory, and Chandlerian analysis of firm structure to argue that the East India Company was an organizational innovation on par with a modern multinational firm such as General Motors. They emphasize the efficacy of the firm’s internal operations as its main commercial legacy. They de-emphasize the firm’s imperial legacy. Other studies by contrast have highlighted the significance of “merchant empires” to European expansion. These works have also drawn on Chaudhuri’s insights.

The contribution of Trading World of Asia to the study of the foreign impact on the Indian economy has also been fruitful. Most notably, Chaudhuri’s argument that India’s, and in particular Bengal’s, textile production increased through an expansion of employment has resulted in several important monographs. Om Prakash (1985) builds directly on the claim by asking how much did Bengal’s employment rise as a result of European demand for textiles. His qualified answer: about 10%. Numerous studies have focused on the economic dislocation experienced by weavers and other groups connected with the Company’s trade. From the perspective of the Mughal ruling classes it was certainly difficult, if not impossible, to separate the Company’s commercial purposes from its political ones. For example, in dealing with Asian powers, the Company, Chaudhuri explains, had every incentive to present itself as having the delegated power of the British Crown. In the Indian economy, the East India Company employees insisted on special treatment and trading privileges.

This brings us back to indigenous commerce. Chaudhuri effectively utilizes European archival sources to discern the contours of Asian trades and traders. In this way Trading World of Asia contributed to the growth of Indian Ocean studies such as Das Gupta and Pearson (1987) in which the European chartered companies are viewed as one among many participants in the emporia trade. Chaudhuri’s later books (Trade and Civilization and Asia before Europe) take a long view of the structure of Indian Ocean commerce and the merchants involved. These works have helped replace Van Leur’s peddler paradigm with a fuller identification and appreciation of diasporic communities, about the ways community norms mitigate problems of long-distance trade, and about the comparative advantage of family firms (Levi, forthcoming). Rather than an ill-informed, itinerant peddler, the early Asian trader is now recognized as a “portfolio capitalist” (Subrahmanyam, 1990) enjoying political and social along with spatial mobility. By bringing to the foreground the Asian commercial milieu Chaudhuri helped initiate new literatures in Asian history.

For the range and importance of its findings, its unique method, and its empirical bounty, Trading World of Asia deserved the unanimous praise it received upon publication in 1978. For those same reasons and for its lasting impact on economic history, Trading World of Asia certainly deserves its present distinction — one of the most significant works of the twentieth century (4).


1. Philip Curtin (1980, 507) remarked, “Chaudhuri intended from the beginning to present a case study of a large, bureaucratic, pre-industrial trading firm as a contribution to the history of European business institutions in general.”

2. See for example The Cambridge History of India, Volume V (1922), Bal Krishna, Commercial Relations between India and England (1924), and S. Bhattacharya, The East India Company and the Economy of Bengal (1954).

3. My “Market Power and the English East India Company in Bengal” presented at the 1995 SSHA Conference estimates the residual supply curves faced by the Company in the cotton textile, raw silk, and saltpeter markets. In the first two markets, the firm faced high elasticities of supply suggesting little price-setting ability. The findings are consistent with Chaudhuri’s position that the East India Company was not large enough to determine input prices.

4. Before his recent retirement, Chaudhuri was affiliated with the European University Institute. The bulk of his career, however, was at the School of Oriental and Asian Studies, University of London.


Gary Anderson, Robert McCormick and Robert Tollison. 1983. “The Economic Organization of the English East India Company,” Journal of Economic Behavior and Organization. 4 (4): 221-238.

Ann Carlos and Nicholas, Stephen. 1988. “‘Giants of an Earlier Capitalism’: The Chartered Trading Companies as Modern Multinationals,” Business History Review. 62 (Autumn): 398-419.

K. N. Chaudhuri. 1978. The Trading World of Asia and the English East India Company, 1660-1760. Cambridge: Cambridge University Press. K. N. Chaudhuri. 1983. “The Trading World of Asia and the English East India Company, 1660-1760: A review of reviews.” South Asia Research (London) 3 (1) (May): 10-17.

K. N. Chaudhuri. 1985. Trade and Civilization in the Indian Ocean: An Economic History from the Rise of Islam to 1750. Cambridge: Cambridge University Press.

K. N. Chaudhuri. 1989/90. “Indian History and the Indian Ocean (Professor K. N. Chaudhuri Interviewed by Ranabir Chakrabarti).” Calcutta Historical Journal. 14 (1-2) (Jul 1989-Jun 1990): 78-83.

K. N. Chaudhuri. 1990. Asia before Europe: Economy and civilisation of the Indian Ocean from the Rise of Islam to 1750. Cambridge: Cambridge University Press.

Ashin Das Gupta and M. N. Pearson, editors. 1987. India and the Indian Ocean. Calcutta: Oxford University Press.

J. C. van Leur. 1955. Indonesian Trade and Society: Essays in Asian Social and Economic History. The Hague: W. Van Hoeve.

Scott Levi. Forthcoming. The Indian Diaspora in Central Asia and its Trade, 1550-1900. Leiden: E.J. Brill.

Om Prakash. 1985. Dutch East India Company and the Economy of Bengal, 1630-1720. Princeton: Princeton University Press.

W. R. Scott. 1910. Constitution and Finance of English, Scottish and Irish Joint-Stock Companies to 1720, 3 vols. Cambridge: Cambridge University Press.

Niels Steensgaard. 1973. Carracks, Caravans and Companies: the Structural Crisis in the European-Asian Trade in the Early Seventeenth Century. Lund: Studentlitteratur.

George Stigler. 1968. Organization of Industry. Chicago: University of Chicago Press.

Sanjay Subrahmanyam. 1990. Merchants, Markets, and the State in Early Modern India. Delhi: Oxford University Press.

Jean Tirole. 1989. Theory of Industrial Organization. Cambridge: MIT Press.

Reviews of The Trading World of Asia:

S. Ambirajan. 1981. Australian Economic History Review. XXI (1) (March): 77-79.

Philip D. Curtin. 1980. Journal of Modern History. 52 (3) (September): 506-508.

Morris D. Morris. 1980. Journal of Asian Studies. 39 (2) (February): 388-390.

Om Prakash. 1980. Indian Economic and Social History Review. XVII (I) (January-March):139-142.

T. Raychaudhuri. 1980. Economic Journal. 90 (358) (June): 433-435.

Henry G. Roseveare. 1980. “The East India Trade.” Journal of Imperial and Commonwealth History. VIII (2) (January): 131-134.


Subject(s):International and Domestic Trade and Relations
Geographic Area(s):Asia
Time Period(s):18th Century

The Making of a World Trading Power: The European Economic Community (EEC) in the GATT Kennedy Round Negotiations (1963-67)

Author(s):Coppolaro, Lucia
Reviewer(s):Maneschi, Andrea

Published by EH.Net (November 2015)

Lucia Coppolaro, The Making of a World Trading Power: The European Economic Community (EEC) in the GATT Kennedy Round Negotiations (1963-67). Farnham, UK: Ashgate, 2013. xvii + 237 pp. $135 (hardcover), ISBN: 978-1-4094-3375-0.

Reviewed for EH.Net by Andrea Maneschi, Department of Economics, Vanderbilt University.

This book is a valuable addition to the economic, political and historical literature on the evolution of the European Economic Community (EEC), and how it affected — and was affected by — the contentious Kennedy Round of negotiations that took place in Geneva under the aegis of the General Agreement on Tariffs and Trade (GATT) between 1963 and 1967. Lucia Coppolaro wrote it as part of a postdoctoral program at the Institute of Social Sciences of the University of Lisbon. Her painstaking research into an important episode of European economic history is based partly on the archives of GATT; the European Union and its institutions, particularly the Council of Ministers and the European Commission; American, British, French and German archives; and interviews with officials and politicians who participated in the Kennedy Round.

As Coppolaro notes, President John Kennedy proposed this GATT Round, later named after him, partly in response to the creation of the EEC. Its member countries were still learning how to interact with each other, and the world at large, in their decade-old customs union. The EEC then consisted of France, the Federal Republic of Germany, Italy, Belgium, Luxembourg, and the Netherlands, known as “the Six.” In addition to eliminating tariffs on each other and creating a Common External Tariff, their attention was focused on the difficult task of devising a Common Agricultural Policy (CAP), a vital component of their union. Hence two sets of negotiations took place concurrently: among the EEC member countries, and within the GATT itself. The other members of the GATT viewed the EEC with some suspicion because of the opportunities for trade diversion that their customs union might engender, when EEC countries shifted their import purchases from cheaper world suppliers to their EEC partner countries. The CAP gave the EEC a great bargaining advantage in the GATT, since its proposals (once reached after much arduous intra-EEC bargaining) could not be modified, and the U.S. did not wish to challenge the CAP.

Kennedy’s initiative forced the EEC to take the important steps of formulating a common commercial policy, and anticipating the creation of the CAP in order to participate from a position of strength in a possible liberalization of agricultural trade in the GATT. While learning to organize trade among themselves, the Six were under pressure to limit trade diversion from their trade partners in America, the Commonwealth countries, the European Free Trade Association, their former colonies, and other less developed countries (LDCs). In addition, they were faced with the United Kingdom’s application to join the EEC, which again complicated their task.

Coppolaro focuses on three main issues: the thorny bargaining among the Six, as they sought to establish a common position in the Geneva negotiations; the roles of the six member states and of the EEC institutions (primarily the European Commission and the Council of Ministers of the EEC) in formulating a common position in Brussels and conducting negotiations in Geneva with other GATT countries; and the impact that the evolving EEC played in the GATT negotiations and their final outcome.

The European Commission achieved an increasingly important role in the EEC’s trade policymaking. Coppolaro describes how the policies of the EEC member states interwove with those of the EEC’s Council of Ministers, which was subject to the interests of its member states, and of the supranational European Commission. Social scientists have debated whether the Council or the Commission was the more powerful of the two. The Commission was subject to a strict oversight by the six member states from 1963 to early 1967. Coppolaro convincingly argues that, in the concluding phase of the Kennedy Round, the Commission gained new capacities and much greater discretion, and ended up as a strong and independent agency.

The creation and evolution of the EEC and its CAP played important roles in the GATT negotiations and their final outcome. The dramatic events in the history of the EEC’s trade policy that Coppolaro describes include the “Chicken War,” a commercial war that broke out in 1962 between the EEC and the United States over American chicken exports. It was concluded in 1963 just as the Kennedy Round talks were starting, with the U.S. imposing retaliatory duties on EEC exports. This first test of the acceptability of the CAP by the EEC’s trade partners showed how seriously the EEC intended to defend its CAP. Another crisis became known as the “Empty Chair Crisis,” when France in 1965 withdrew from the Council of Ministers, causing the Kennedy Round negotiations to grind temporarily to a halt.

International trade economists have long debated whether preferential trade agreements such as the European Union or NAFTA are stepping stones or stumbling blocks toward the multilateral liberalization of global trade achieved in successive GATT negotiating rounds. Coppolaro argues that the EEC acted as a stepping stone to liberalization with regard to industrial products, where its industries could compete advantageously with those of its GATT partners. With regard to agriculture the EEC was instead a stumbling block, since it was so busy setting up its own CAP that it did not wish to explore the possibility of trade gains for its own farm exports in the GATT round, and instead favored protection.

Negotiations among GATT members, and among the EEC member states, during the Kennedy Round were motivated by neomercantilism, not by a free trade ideology based on the advantages of mutual specialization. Coppolaro repeatedly points out that the GATT, including the Six EEC countries, worked “like a bazaar.” To obtain trade concessions from other countries, member countries needed to grant them reciprocal favors on a pragmatic basis. An important exception to this self-serving behavior was that of the United States until the conclusion of the Kennedy Round. After the success of the Marshall Plan, the U.S. strongly supported the creation and further development of the EEC, first under the Eisenhower administration and then under Kennedy’s, despite the fact that the CAP ran counter to the interests of American farm exporters. As Coppolaro puts it, “The CAP was considered the price the United States had to pay for European integration.” She argues that the U.S. was the only true leader in promoting GATT rounds and upholding worldwide integration, a role that the EEC never wished to claim. However, the GATT acted like a “rich-man’s club” vis-a-vis the LDCs, since it failed to liberalize trade in the commodities (such as textiles and farm products) of greatest interest to them. To the LDCs’ dismay, the EEC became a major exporter of agricultural products thanks to its CAP.

The EEC turned out to be a primary beneficiary of the Kennedy Round, since the GATT negotiations forced it to make the compromises necessary to become a trading bloc with common commercial and agricultural policies, which converted it (as the “European Union”) into a trading power comparable to the United States in international economic clout and geopolitical importance.

Andrea Maneschi is the author of Comparative Advantage in International Trade: A Historical Perspective (1998) and of articles on David Ricardo’s trade theory.

Copyright (c) 2015 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (November 2015). All EH.Net reviews are archived at

Subject(s):International and Domestic Trade and Relations
Geographic Area(s):General, International, or Comparative
North America
Time Period(s):20th Century: WWII and post-WWII

Oceans of Grain: How American Wheat Remade the World

Author(s):Nelson, Scott Reynolds
Reviewer(s):Sharp, Paul

Published by EH.Net (August 2022).

Scott Reynolds Nelson. Oceans of Grain: How American Wheat Remade the World. New York: Basic Books, 2022. 368 pp. $32 (hardback), ISBN 978-1541646469.

Reviewed for EH.Net by Paul Sharp, University of Southern Denmark, CAGE, CEPR


The title of this book is somewhat misleading. When I received it for review, I expected another US-centric account of how America made the world what it is today. I was therefore somewhat surprised to begin reading, and found that a large part concerns Russia, Turkey, and Ukraine. In fact, reading this book while at the same time witnessing the horrors coming out of Ukraine made an impression, as I will come back to at the end of this review. The author, Scott Reynolds Nelson, is the UGA Athletics Association Professor of the Humanities at the University of Georgia. He has won both academic and literary awards for his writing. It is therefore no surprise that this book is an excellent read. Nelson has the historian’s enviable skill (which many of us from the more economics side of economic history could surely learn from) of making serious analysis come to life through vivid descriptions of people and places. You will most likely come out of reading this book far more knowledgeable than when you started, whether or not you believe the central hypothesis.

Nelson presents a bold theory of what made the modern world. Where Jared Diamond saw “Guns, Germs, and Steel”, Nelson sees the perhaps somewhat less sexy trinity of mold, futures contracts, and dynamite. The potato blight, phytophthora infestans, of the 1840s forced open European markets for grain. The American Civil War led to financial innovations in how grain was traded; and dynamite, invented in Germany in 1867, transformed geography as new deep-water ports were created, and canals and railroads connected continents. In other words, policy, finance, and technology created the globalized world. This is not really news to the economic historian, but Nelson puts it within a framework inspired by the Russian Marxist, activist, and grain trader, Alexander Lvovich Parvus (born Israel Lazarevich Gelfand or Helphand). He postulated the role that “invisible lines,” the “Black Paths” of grain trading routes, have played for the making and breaking of empires, which he argued exist to control and extract rents from them. Rosa Luxembourg was to take his “invisible lines” to create a new way of understanding trade which we now call world systems theory. But Parvus’ influence went far beyond theory. He was able to convince Lenin of the power of these lines and that revolution in Russia was possible.

The introduction provides a great summary of Nelson’s hypothesis. His 2012 book A Nation of Deadbeats: An Uncommon History of America’s Financial Disasters (Knopf) explained that financial panics had much to do with drastic changes in commodity prices. Accordingly, the story here starts in Odesa, Ukraine, which he visited in 2011 to research international financial crises. Nelson sees connections between booms and busts in the wheat market for everything from the French Revolution to the Arab Spring. He notes parallels between different settings based on connections to wheat. For example, Ukraine has some of the richest soil in the world, and it was captured by Russia in 1768 under Catherine II. At the same time, he notes, similar expansionism was going on in the Americas. Then, the French Revolution (over the price of bread, of course, as Nelson notes), and the French and Napoleonic Wars led to Odesa becoming a grain-exporting boomtown. European landlords in turn faced Ricardo’s paradox, as rents dropped as food became cheap. The initial response was protectionist barriers to trade, but then a water mold caused the potato harvest to fail, and European trade opened following 1846.

This, Nelson explains, led to century-long contest between Russia and America to feed Europe’s working class. In the 1860s both empires ended serfdom and slavery respectively. America then gained the upper hand, when the Union Army during the Civil War created futures contracts that allowed grain to be bought and sold without the costly and time intensive process of pricing based on samples. This, combined with the transatlantic telegraph, steam shipping, and the new opportunities brought by dynamite, led to what Kevin H. O’Rourke has termed the “Grain Invasion.” European prices fell, and the ships which brought grain returned with migrants to the New World. As European workers in cities became better off, Odesa, and other grain exporting regions, faced ruin, and the combination of the agrarian crisis and the bursting of estate bubbles ushered in what was known as the Great Depression until the 1930s. The powerful agricultural Austro-Hungarian and Ottoman Empires declined. Russia, for its part, responded in 1884 with state-supported railroads and a plan to plant grain in Siberia and Central Asia. This brought in capital from largely French investors, but Russia’s expansionary plans were checked when it lost in war to the Japanese Empire in 1905. Then, in 1914 Russia’s anxiety that Turkey might halt Russian grain shipments on the Black Seas helped start World War I: “a war over nothing less than foreign bread.” Thus, as Parvus, who grew up in Odesa during the 1873 crisis and coined the term “Agrarian Crisis” in 1895, claimed, the paths of grain made and destroyed empires.

Chapter 1 covers an impressive span of time, 10,000-800 BC and explains the origin of the “black paths” that so fascinated Parvus. Ancient oxen trails connected the Ukrainian plains with the Black Sea ports. Geographers and historians have claimed that these paths, and the trading cities known as emporia (themselves the source of the word “empire”) were created by empires, which in turn were defined by their control of trade lines. Folklore, backed up by new archaeological evidence suggests a far more ancient origin. The first wheat “farmers” might have been travelers or traders, who after decades of migration remained at way stations which formed the first settled communities. Empires then emerged based on establishing protection rackets along the pathways, and in a few generations imposed formal imperial rule. Thus, empires imposed a tax on the black paths, but so too did disease, and the rise and fall of both determined the volume of trade. Nelson explains that historically bread was extremely expensive, involving three stages: 1) planting and harvesting; 2) storing and shipping to the bread eaters, in the emporium; and 3) producing flour, mixing with yeast and water, and baking, which took place in the cities. For at least fifty centuries considerable human labor was devoted to the second stage, and empires emerged to engross and centralize it.

Chapter 2 covers 800 BC-AD 1758. Nelson explains how Byzantium enforced a monopoly control of the Bosporus Strait and the Dardanelles. Constantinople rose and fell as the black paths expanded and contracted, but grain emporia were nodes for infection, and the Plague of Justinian in 541 ended the ancient world. With depopulation, important knowledge about the storage of grain was lost, and its rediscovery centuries later was to play an important part for making long distance trade possible. Constantinople became increasingly dependent on Slavic peoples, and as the grain flowed in, Byzantian culture and the Orthodox religion flowed back. In medieval western Europe, which was often cut off from trade with the East after 542, serfdom arose to compensate for the loss of trade, and control of mill and bakery meant control of people. Nelson is brilliant at finding anecdotes to illustrate the centrality of grain for understanding the world. Thus, the word lord comes from an old word meaning loaf-ward, and the word lady from loaf-kneader, although one wonders if similar etymologies exist for the same words in different languages.

The years 541-1100 were the age of robber barons, for example the Hanseatic League. Absolutist states emerged to break their monopoly, and in 1453 the Byzantine Empire, increasingly starved of grain, collapsed and the Turks took over. A long struggle then emerged with Russia, which wanted to take Constantinople to monopolize the Bosporus themselves. Thus “… at its deepest level an empire may be a monopolizer of food along ancient grain pathways that it never fully understands. Empires survive only as long as they control the sources of food needed to feed soldiers and citizens; they fund themselves by taxing those who sell it.” This is further explored in Chapter 3, covering 1760-1844, where it is explained how Catherine II, inspired by the physiocrats, believed that grain exports properly managed could be the source of an empire’s wealth. To this end she transformed serfdom into something more akin to New World slavery, and enacted extensive military and fiscal reforms. She then set about seizing land where wheat could grow, although she never managed to capture Constantinople. But as the Ottoman Empire shrank, in part due to a less sophisticated grain-tax system, European princes tore grain-producing Poland to pieces to appease Catherine. Moreover, as with US expansion, thousands of native peoples were persuaded to ally with Russia in order to dispossess others. Having taken Ukraine, Catherine founded Odessa (renamed in Ukrainian as Odesa) as a free port, and invited in foreigners to farm land as she aimed to feed Europe and thus make Russia rich. Meanwhile the United States, before the Civil War, offered no real competition. The American port cities were not “visionary physiocratic cities” but “simple adjuncts to plantation slave regimes” where landowners blocked foreign imports. However, the French rediscovered Roman techniques of grain storage, allowing for silos and American “elevators”, thus making long-distance trade increasingly feasible. Trade remained protected, however, and to an extreme degree following the Napoleonic Wars.

Chapter 4 provides the first of Nelson’s trinity of explanations. Barriers to trade crumbled with the failure of the potato crop in the 1840s. As trade expanded, bread replaced potatoes and living standards surged, although health often suffered as Europeans preferred highly processed white bread. Thus emerged what Parvus described as the European consumption-accumulation city. Labor and capital accumulated where food was cheapest and the cities with the deepest docks thrived. Prosperity allowed workers to save, freeing up capital for industrialization. Nelson explains, “European industrialization and urbanization had little in the way of European roots. It was fueled by foreign food.” Chapter 5 demonstrates how the conflict between the Russian and Ottoman Empires came to a head with the Crimean War 1853-56 which saw Russia fail to capture Constantinople, in part because France and Britain feared a Russian monopoly on the Black Sea. This was a humiliating defeat, but also left the Ottoman Empire in heavy debt to Britain and France. Serfdom was abolished in Russia in order to expand grain production, leaving former serfs heavily indebted, but with land, and new political structures, the mir and the zemstvo, were implemented to govern these areas.

A different story played out in the United States, where slavery was abolished around the same time, but land was not redistributed, part of the origins of inequality in the US today. At the same time, the US expanded grain production into the interior using Black Sea varieties of wheat, and the Republican Party campaigned against slavery based on a belief in physiocratic expansion, and a desire for incentives to put family laborers onto wheat farms. Migrants purchased land along new railroads whose monopoly power they came to hate. Then in Chapter 6 Nelson gives the second part of his explanation. The Civil War created a necessity for breaking the power of merchants to supply food for the army, and this was done with a novel financial innovation. Bills of exchange were divided into hundreds of enforceable contracts, which would be called futures contracts, obviating the necessity for buying and selling based on a sample. Although in 1863 only the US Army was using this, with the introduction of the Transatlantic telegraph trade became completely reorganized. Ships could take the place of storage facilitates, redirected at port to wherever the grain was needed. America could now compete with Russia.

The final part of Nelson’s trinity is presented in Chapter 7, appropriately entitled “Boom.” Trade costs were again slashed with the invention of dynamite, which allowed railroads to run through mountains, canals, such as the Suez Canal, to link continents, and for the creation of new deep ports. The increased trade came with additional innovations such as grading, specialized insurance, and Hungarian milling techniques. As the price of food plummeted, workers found more time to educate and organize themselves, as Chapter 8 explains. New economic theories, including Marx’s, emerged to calculate the causes and limits of the new agricultural plenty. Much of the remainder of the book explains Parvus’ contribution to socialist theory and his direct influence on the course of events during his life, including the emergence of the Young Turks and the revolutions in Russia. He argued that although cheap grain benefited everyone, the main threat to the world was the alliance between capitalists and empire which would lead to imperialism, and pointless and costly wars. Agricultural empires such as the Ottoman and Austro-Hungarian empires suffered, while other empires gorged on cheap grain and became great powers. The US share of the grain trade declined as increasing shares of its production went to feed its own large cities. New conflicts emerged as others sought to capitalize on the demand from elsewhere, as Turkey again became a key battleground. World War I itself was “a World War over bread” with for example the closing of the Bosporus and Dardanelles Straits a key event. As Russia starved, revolutions eventually toppled the old Tsarist regime, and the Soviet Union, by quickly incorporating grain producing areas in Ukraine for example, took its place.

One is left with the feeling that we should be surprised about the importance of wheat for world history, which the layperson might indeed be. But from the perspective of an economic historian, one cannot really argue that wheat has been underappreciated. My own PhD thesis, from 2009, was entitled “Wheat, Globalization and Economic History,” and my career as a researcher began with reading the great works by Fairlie, Harley, Williamson, O’Rourke, Jacks, Brunt, and of course my own former supervisor, K.G. Persson (some references are given below). Certainly, there are many more I have forgotten to mention. One could argue that Russia’s role in this story is underexplored, with a few notable exceptions such as Goodwin and Grennes (1998), but more and more scholars are working on Russian economic history these days, so this will improve. Other large countries such as China and India take up relatively little space in Nelson’s account, while references to Parvus alone take up half a page in the index. One can of course argue against the somewhat physiocratic idea of the world where everything starts with the soil. In history this might have been truer, but Engel’s Law and technological progress have changed that, present concerns about food supplies notwithstanding. Regarding the first globalization, Nelson explains that economists and contemporaries have emphasized the importance of the elimination of tariffs, the introduction of the gold standard, and steamships. But, he believes, they have missed the ecological and political background: how the potato famine opened trade, dynamite opened ports, and futures markets increased liquidity. This is a powerful and convincing argument, but this is not a quantitative study. The only graph is of imports of wheat and flour into UK, but this only goes back to 1820. Before this, he explains in an appendix, there was a lot of smuggling and the data is underreported, meaning that historians have overstated the role of cotton and understate wheat.

Given my geographical location and research interests I am looking for Scandinavian connections everywhere, and I apologize for that! But it might be mentioned that, although Nelson dedicates the book to his maternal grandmother and explains that his grandparents left Sweden in 1887, the book somewhat neglects Europe outside Russia and Turkey (and indeed the world beyond), despite the obvious point that dynamite was invented in Germany by a Swede. Copenhagen’s role as a major Baltic trading hub is mentioned in passing, but the somewhat famous Danish exception during the backlash against the American grain invasion before the First World War deserves at least a sentence. Sticking to free trade, Denmark imported cheap grain, which helped feed a booming Danish industry in butter, bacon, and eggs, allowing this small country to feed the large industrializing cities of northern England. Danish exports were to play a crucial role in establishing industrialized dairying around the world, including the United States and Russia. Food is after all not only grain, particularly not as countries become richer. On a more trivial note, at one point the Danish ruler of England, King Canute, is described as a “legendary fool,” but as a historical figure he arguably was neither legendary (although the famous story about him might be) nor foolish for trying to demonstrate the limits of his power and in the process getting his feet wet.

Nelson is not afraid of using dramatic language to demonstrate the relevance of his work for the present, for example in chapter 14: “Now, just as ten thousand years ago, producers and consumers are bound together in a common world ecology that viruses, empires, and states have only ridden upon, bits of foam on a vast, invisible deep.” But sometimes he over-eggs the pudding, such as in the conclusion: “Whether to regard empires as symbiotes or parasites depends on one’s perspective. I tend to see empires as parasites, but one could make the argument that imperially sponsored universities… try to prevent starvation… in ways that promote ‘growth’ inside the empire. Physics, biology, chemistry, economics, and history are all, in their way, data-processing systems for empires hoping to keep their subjects – us – alive so that they can rule another day.” I like to believe that knowledge creation has value beyond allowing our present rulers to survive.

In sum, I would certainly recommend reading this book. I learned a great deal, and his thesis is fascinating and provocative. Moreover, it is a highly engaging read. But be prepared to feel somewhat unsettled as well. Nelson chillingly concludes that “modern Russia’s relative weakness as a great power now (in 2021) may still ultimately depend on its separation from Ukraine… Ukraine has always been the greatest prize, as Catherine the Great well knew.” Economists and economic historians are always being asked to provide policy implications of their work these days. Here is one that President Putin seems to have taken to heart.


Brunt, L. (2004). Nature or Nurture? Explaining English Wheat Yields in the Industrial Revolution, c. 1770. Journal of Economic History, 64(1), 193-225.

Fairlie, S. (1969). “The Corn Laws and British Wheat Production, 1829-76.” Economic History Review, 22(1), 88-116.

Goodwin, B. K., & Grennes, T. J. (1998). “Tsarist Russia and the World Wheat Market.” Explorations in Economic History, 35(4), 405-430.

Harley, C. K. (1978). “Western Settlement and the Price of Wheat, 1872–1913.” Journal of Economic History, 38(4), 865-878.

O’Rourke, K. H. (1997). The European Grain Invasion, 1870–1913.” Journal of Economic History, 57(4), 775-801.

O’Rourke, K. H., and Williamson, J. G. (2001). Globalization and History: The Evolution of a Nineteenth-Century Atlantic Economy. Cambridge, MA: MIT Press.

Olmstead, A. L., & Rhode, P. W. (2002). “The Red Queen and the Hard Reds: Productivity Growth in American Wheat, 1800–1940.” Journal of Economic History, 62(4), 929-966.

Persson, K. G. (1999). Grain Markets in Europe, 1500–1900: Integration and Deregulation. Cambridge, UK: Cambridge University Press.


Paul Sharp is professor of economics at the University of Southern Denmark, where he heads the Historical Economics and Development Group (HEDG). He is the author, with Karl Gunnar Persson, of An Economic History of Europe: Knowledge, Institutions and Growth, 600 to the Present (Cambridge University Press, 2015) and, with Markus Lampe, of A Land of Milk and Butter: How Elites Created the Modern Danish Dairy Industry (University of Chicago Press, 2018).

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Subject(s):Agriculture, Natural Resources, and Extractive Industries
Economywide Country Studies and Comparative History
International and Domestic Trade and Relations
Geographic Area(s):General, International, or Comparative
North America
Time Period(s):General or Comparative

The Story of Silver: How the White Metal Shaped America and the Modern World

Author(s):Silber, William L.
Reviewer(s):Richardson, Gary

Published by EH.Net (January 2020)

William L. Silber, The Story of Silver: How the White Metal Shaped America and the Modern World. Princeton: Princeton University Press, 2019. xx + 340 pp. $30 (cloth), ISBN: 978-0-691-17538-6.

Reviewed for EH.Net by Gary Richardson, Department of Economics, University of California at Irvine.


Silver’s “power to provoke passion and fury in the American heartland” should have convinced the Warren Commission to investigate whether John F. Kennedy was assassinated “for downgrading the silver subsidy” (p. 104). This provocative point and a series of stories about the precious metal appear in William Silber’s The Story of Silver: How the White Metal Shaped America and the Modern World.

Silber’s book on silver is entertaining and enlightening. It is published by a university press and has the apparatus of a technical tome, including 64 pages of footnotes and nine pages of bibliography. It should, however, appeal to a wide audience, including anyone interested in American or financial history or who likes to read a well-written story. Silber is an amazing architect of palatable prose. He grabs readers’ attention and keeps them turning pages by incessantly inserting intriguing anecdotes and amusing asides.

Silver’s story is worth telling. The white metal serves as a store of value and means of payment. It has important uses in electronics, photography, housewares, and jewelry. Silver coins and bullion formed the monetary foundation for many regions of the world, including Europe from the fifteenth through eighteenth centuries and China and the Middle East well into the twentieth century. Debates about silver’s monetary use played a large role in the history of the United States, beginning before the founding of the republic and continuing through Great Depression. Silber’s book focuses on the U.S. experience.

The first tenth of the text takes the tale from Alexander Hamilton through William Jennings Bryan. As the first Secretary of Treasury, Hamilton took the lead among the Founding Fathers constructing the U.S. monetary system. He established a bimetallic standard, in which gold and silver served as legal tender. He hoped both gold and silver would circulate. The latter’s abundance would promote economic growth and price stability, in an era when scarcity of coins often generated deflation. Increases in the mint price of the yellow metal, Gresham’s law, the Coinage Act of 1873, and the Gold Standard Act of 1900, however, meant that gold served as the medium of exchange in America throughout the nineteenth century and twentieth centuries.

William Jennings Bryan was the most famous of the politicians who urged returning to a bimetallic standard. Byran represented the mass of Americans living west of the Mississippi, who believed that more circulating currency would bring higher prices for crops, livestock, and farmland, helping them to pay the mortgages on their farms and machinery. Bryan’s “Cross of Gold” speech at the Democratic convention in July 1896 asserted that free coinage of silver would promote prosperity for the common man and free the U.S. from subservience to the gold-standard nations in Europe.

Silber’s concise coverage of nineteenth-century American monetary history is fun to read. I have decided to assign these chapters to the undergraduates in my class on American monetary history, because many of them refuse to read boring books on the topic. Silber’s treatment covers key historical points, clearly explains the forces underlying the monetary system, and rivets readers’ attention. The material is not novel and requires some caveats that I will discuss later, but nothing this entertaining has been written on the topic since Frank Baum penned The Wizard of Oz as a monetary allegory.

The second storyline spans Chapters 4 through 8, or about one-fifth of the book. It involves China, Japan, and the Roosevelt administration’s monetary policies. The historical information in these chapters is novel. You will not find the story told completely, or at all, in books and articles about this era or in widely used textbooks on American history. The story is also important, because it illuminates a clear case where political institutions set up long ago profoundly influenced world events in ways which could not have been anticipated at the moment of creation.

Franklin Roosevelt became president during the depths of the Great Depression. The economy had collapsed because a shortage of money lowered prices, raised interest rates, bankrupted households and firms, and dislocated industry and trade. Roosevelt campaigned on a promise to raise prices back to the level they had been before the onset of the contraction. To fulfill his promise, Roosevelt needed to resuscitate the banking system and expand the money supply, which would, in turn, raise prices, lower interest rates, encourage consumption, and increase investment. Roosevelt’s efforts focused on the financial system, the Federal Reserve, and the gold standard. Silber’s depiction of these events resembles that in standard history textbooks, although he keeps his account lively by gossiping about the personal lives of the protagonists. Roosevelt, for example, after being stricken with polio in 1921 and withdrawing from public life to battle the disease, failed at “a number of business ventures during the 1920s, but the outcomes were as predictable as if a crown prince were running a flea market. FDR’s misadventures included investing in a fleet of blimps to fly passengers from New York to Chicago, introducing vending machines that dispensed premoistened postage stamps, trading in the German mark, and trying to corner the live lobster market. His losses in lobsters should have restrained his foray into manipulating the silver market after he was elected president in 1932, but he never made the connection” (p. 39). In my opinion, self-adhesive stamps were actually a good idea, although perhaps ahead of their time. Given the difficulties of devising glue with suitable properties, the United States Postal Service introduced the its first successful self-adhesive stamp in 1989.

During Roosevelt’s race to resuscitate the American economy, silver was a sideshow. Roosevelt signed the Silver Purchase Act, which authorized the Treasury to buy huge quantities of the metal at gradually increasing prices, and then to use that silver to back currency in circulation. These purchases may have marginally increased the money supply but were not necessary for resuscitating the monetary system. Reforming the gold standard and rescuing the banking system accomplished that task. Silver purchases were, however, necessary to convince senators from Western, silver-mining states to support Roosevelt’s political program. These senators had political influence in Washington, where they chaired key Congressional subcommittees and controlled votes needed to pass the New Deal through Congress.

High school and college history textbooks mention Roosevelt’s silver policies in passing, if at all. The same is true for most scholarship on the subject. Silber shows that this minor event in America played a central role in world affairs and had a huge impact on the lives of one-quarter of humanity. Silver was the foundation of China’s monetary system. China’s currency was backed by silver, not gold as in most of the rest of the world. America’s campaign of massive silver purchases raised the price of silver on the world market. Silver’s skyrocketing price deflated China’s economy. High silver prices encouraged investors to withdraw silver from Chinese banks and sell it in London. China’s money supply declined, as did prices and incomes. Rising silver prices also increased the value of China’s currency, the yuan, in foreign exchange markets, which reduced China’s exports to the rest of the world where currency was not based on a silver standard.

The silver shock put China in desperate straits. China’s economy could not bear the strain from the silver drain. China’s central bank and financial system lacked the skills and knowledge to alleviate the affliction. China’s economic depression deepened. Unrest spread. China’s central government was already fighting on several fronts. A communist insurrection festered in the hinterland. Regional warlords sought to increase their authority at the expense of the national government. Japanese armies, which already occupied north-eastern China, renewed their advances in coastal, central, and southern China.

The Roosevelt administration was warned that its silver policies, which were put in place to purchase the allegiance of a few senators from silver-mining states and to appeal to Democratic voters who still believed in the mythical powers of silver touted by turn of the century populists such as William Jennings Bryan, would weaken China and facilitate Japan’s expansion. Domestic politics, however, overrode international possibilities. China’s weakened condition encouraged Japanese aggression. To protect China, the Roosevelt administration eventually embargoed shipments of oil and other raw materials destined for Japan. To break the embargo, Japan attacked Pearl Harbor, the Philippines, and United States and Allied possessions throughout the Pacific. Japan’s offensive brought the United States into World War II and eventually brought the Communist Party to power in China. This important and insightful story is the heart of Silber’s book. It should be more widely known and taught. The book convinced me that I should include this information in courses that I teach on economic history.

The next chapter discusses silver’s use during World War II. The take-away point is that silver conducts electricity well. The United States had lots of silver stockpiled at the United States Military Academy at West Point, New York. The Treasury lent much of this metal to the Manhattan District of the Corps of Engineers to help produce atomic bombs. So, Roosevelt’s silver purchase policies, which induced silver to flow from Beijing to New York and London, weakened China, and facilitated Japan’s expansion in Asia, also helped the United States build Little Boy and Fat Man, the atomic bombs dropped on Hiroshima and Nagasaki, which convinced Japan to withdraw its troops from China and surrender to the Allied coalition.

After the book discusses the demonetization of silver during the Kennedy administration and the role this had in the Kennedy assassination, the tone changes. The book stops discussing silver’s use as a means of payment and begins discussing its use as a speculative asset. A lot of information is packed in this portion of the text, which spans about forty percent of the book. These chapters describe how commodity markets function and the strategies of famous men who speculated in silver. They also provide investment advice.

A focus is the Hunt brothers, some of the richest men in America, who tried and failed to get even richer by cornering the market for silver. Another notable character is the investment sage from Omaha, Warren Buffett. These chapters are entertaining mainly for their gossip about and character studies of famous and infamous investors. These chapters remind me of the novel Crazy Rich Asians, but the cast of characters is a bunch of rich white men with colorful backstories, profligate tastes, and more greed than good sense (with the exception of Warren Buffett, who just has good sense). Another apt comparison would be the television franchise Real Housewives, but with a focus on rich husbands, their over-the-top investment antics, and their conspicuous consumption.

Overall, the book is entertaining, contains novel insights, and is well researched. I will recommend it to friends and assign portions to my undergraduate students. My students may need guidance, however, on how to interpret portions of the text. The book is filled with metaphors, analogies, funny phrases, wry humor, and outlandish conjectures. Silber writes, for example, that the tension leading to the duel between Aaron Burr and Alexander Hamilton “probably” began because one studied at the College of New Jersey, now Princeton University, and the other studied at King’s College, now Columbia University, making them “natural Ivy League rival[s].” When I read this, I understood it was a joke. Respected biographies of Burr and Hamilton do not indicate that college rivalries played a role in their animosity. Silber’s version of events could not be true, literally, since the Ivy League’s existence (and the use of the term) began in the twentieth century. An undergraduate with less knowledge of American history, however, might miss the humor, believe the statement, and remember it, because readers tend to remember the provocative over the mundane.

A similar danger lies in the hook that reels readers into the Kennedy chapter. I mentioned it at the beginning of this review: “the theory that Kennedy was murdered because he demonetized silver.” The chapter begins and ends with the theory. The last two sentences are: “However, murder for the sake of silver dollars seems excessive, a primitive response to a commercial conflict, perhaps understandable in the more violent nineteenth century but inconsistent with the more civilized twentieth. Or not?” (p. 118). Or not what, I wonder. The only place in this universe where the silver-policies-killed-Kennedy conspiracy theory exists is in the eleventh chapter of this book. The book cites no historical evidence of the idea. A footnote indicates the Warren Commission did not mention the theory among its catalogue of rumors, contentions, claims about, and potential causes of Kennedy’s assassination. The purpose of this provocative claim is to raise eyebrows and increase readership. It serves that purpose well, because it is not just untrue but absurd.

I worry, however, that readers who do not get the humor might take this claim seriously, particularly given its prominence and repetition in an academic book written by a famous scholar. We live in a world where conspiracy theories flourish. Fiction spreads faster than fact. The book contains numerous claims like the Kennedy conspiracy theory that could be misconstrued. As a reviewer (and a professor who will assign part of this text to his students), I want to give readers simple rules that will help them separate fact from fiction. I derive the rules from two observations. One, the author knows what is true and what is not. He indicates spuriousness with adverbs expressing uncertainty, such as perhaps, probably, and possibly. So, readers should be skeptical of all claims in sentences with adverbs like that. These claims are often false. Two, the author keeps readers’ attention by constructing paragraphs whose last sentences are intriguing and provocative. So, readers should also be wary of claims in the last sentences of paragraphs. They are often hyperboles or embellishments open to misinterpretation. Overall, readers should realize that when the last or second-to-last sentence in a paragraph contains an adverb expressing uncertainty, then the conjectures or claims in those sentences have no basis in fact. Ignore these sentences, I will instruct my students. Cross them out.

With that minor caution in mind, Silber’s book is insightful and enjoyable. It deserves to be widely read, particularly the chapters on Roosevelt’s silver policies and their impact on China. These chapters raise questions about the nature of the United States and why our political system at times pursues policies that benefit small groups of our citizens at the expense of not just the rest of our nation but the rest of the world.

Gary Richardson is the author (with Mark Carlson and Kris Mitchener) of “Arresting Banking Panics: Federal Reserve Liquidity Provision and the Forgotten Panic of 1929,” Journal of Political Economy.

This review was originally published in Regulation, Summer 2019.

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):General, International, or Comparative
North America
Time Period(s):18th Century
19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

Conflict and Commerce in Maritime East Asia: The Zheng Family and the Shaping of the Modern World, c. 1620-1720

Author(s):Hang, Xing
Reviewer(s):Gipouloux, François

Published by EH.Net (November 2017)

Xing Hang, Conflict and Commerce in Maritime East Asia: The Zheng Family and the Shaping of the Modern World, c. 1620-1720. New York: Cambridge University Press, 2017. xii + 332 pp. $100 (hardback), ISBN: 978-1-107-12184-3.

Reviewed for EH.Net by François Gipouloux, CNRS, Ecole des Hautes Etudes en Sciences Sociales.

This book by Xing Hang (assistant professor of history at Brandeis University) follows the trends of recent scholarship on maritime history. (For example, Li Kangying on Ming maritime policy, Zhao Gang on Qing relations with the seas, David Dahpon Ho on the Qing maritime frontier and Tonio Andrade on Taiwan). It is also a brilliant addition to prior work by John Wills, Patrizia Carioti on Zheng Chenggong, as well as Paola Calanca on smugglers and pirates on the Fujian coast.

The book is a contribution to the economic history of an empire’s periphery (China’s south-eastern coast and Taiwan), but at the same time offers a thoughtful view of the diplomatic and military aspects of the Ming-Qing transition. The book also covers the background of the world’s first globalization: how China interacted with other polities, how the Zhengs were able to challenge the financial power of great actors like the Dutch East India Company (VOC), and how the East Asian region began to integrate into a nascent world system.

Conflict and Commerce in Maritime East Asia is an enjoyable read. It covers four generations of the Zheng family, roughly from the early sixteenth century through to the fall of Taiwan to the Qing, in 1683. The book is divided into eight chapters. Three appendixes provide a wide range of quantitative data regarding the volume of the overseas trade managed by the Zheng clan. Appendix 3, in particular, includes very detailed figures of Zheng trade at Nagasaki, which surpassed VOC trade during the 1650-1662 period.

Hang has tapped into a large number of sources, ranging from memoirs, Zheng documents from private collections and Qing archives, along with Dutch, English, Japanese, Korean and Spanish historical records, and inscriptions collected during field work in Fujian. The merit of Hang’s work is that he gathers together a large number of previously disconnected elements in Chinese and Western scholarship, including intra-Asiatic economic changes, military issues, ideological frameworks and business techniques, and he has thus drawn a very complete picture of an autonomous polity, at the periphery of the Chinese empire during the Ming-Qing transition. This was an exuberant periphery, which grew swiftly within the context of the conflict between Ming loyalists and Qing conquerors.

In seventeenth century East Asia, there occurred simultaneously a great, structured expansion of foreign powers and a transition in China’s role in international trade. Hang guides us through a changing geopolitical environment in which the collapse of the southern Ming imposed a complete redirection of economic flows with the emergence of the Indian subcontinent as a prominent silk producer. The Zheng trading organization proved well adapted to the change China underwent in the 1650s, moving from a producer of luxury goods to an importer and processor of raw materials and setting up of a circuit involving Indian textiles and Southeast Asian raw materials in exchange for Japanese silver and Chinese gold.

For a readership focusing on economic history, Chapter 3, “Between Trade and Legitimacy,” is certainly the most thought provoking. The Zheng family amassed huge amounts of wealth that were managed by several firms operating deep in Qing controlled territory, They were able to procure silk, porcelain and other luxury products for the Xiamen warehouse, and reported to their headquarters in Hangzhou from their branches in Suzhou, Nanjing and even Beijing. These firms also served as centers for gathering intelligence on Qing military operations. The “five mountains firms” were also able to supervise the construction of commercial and military seagoing junks. Their operating area was divided, as it was during the Ming Dynasty, into Eastern and Western oceans. Official merchants (guan shang) worked under the Zheng family according to a sophisticated hierarchy consisting of, on the one hand, adopted sons of the clan’s relatives and military commanders and, on the other hand, independent merchants linked to the clan by long-term debts contracted by borrowing capital or ships to trade on behalf of the Zheng organization.

Hang claims that in the 1650s, the Zheng trading network bore all the characteristics of a maritime empire, within the limits of an intra-Asiatic area, stretching from the markets in Japan (Nagasaki), Dutch Taiwan (VOC) and Manila, with extensions to Vietnam and Ayuttaya (Siam), where they dealt with Muslim traders from Bengal and the Coromandel Coast. Within the framework of the limited autonomy of cities or territories in Asia and the impossibility for patrician communities to formalize their own legal arrangements, the patron-client relationship was the cornerstone of any successful and long-lasting business operation in China. The Zheng were no exception. Until his death in 1662, Koxinga adhered to this pattern and reshaped the framework of international relationships and rudimentary bureaucracy of the Ming Dynasty.

The pervasive role that Confucian orthodoxy and filial piety played in this arduous attempt to restore Ming legitimacy is aptly emphasized in this book. What is also striking is the economic contribution of “ideological purity” combined with hard economic realities. However, outright loyalty to the Ming Dynasty did not prevent the Zhengs from protecting their own interests. Hang also carefully analyses the merchants’ double allegiance to the Zheng clan and to European traders and the way they served as channels for communication between them. In the late 1660s, rivalry with the Dutch over silk escalated in Japan and, although merchants could trade freely in the areas under his control, Zheng Jing maintained a strict monopoly on strategic goods (silk, deerskins and sugar).

How should we interpret the integration of the first global network of trade, which brought together the demand for China’s silk and high quality goods with an insatiable thirst for silver? From Zheng Zhilong to Zheng Chenggong, the activities of the trading network evolved from a centralized piratical organization to an informal state. At the time he was consolidating his power (1650), Koxinga possessed several hundred war junks and was able to mobilize 40,000 soldiers. At the same time, he envisioned the highest possible autonomy and sought to establish control over the three south-eastern provinces of Zhejiang, Fujian and Guangdong, as well as a 13,000 km long coastline in exchange for his support of Ming restoration. Xing Hang vividly describes the long process of negotiations between the Zheng clan and the Qing, which started as early as 1653 and continued, with interspersed episodes of war, diplomacy and neutrality, until the final conquest of Taiwan in 1683.

Xing Hang’s book documents in detail the extent of Zheng Chenggong’s power at sea. He was able to set up an efficient maritime blockade on Luzon and Dutch Taiwan until the Governor General of Manila gave in and submitted. The Dutch in Taiwan were pressured to soften their position. On the mainland, Koxinga was also able to launch a military expedition (although ultimately defeated), with over a thousand junks and 100,000 soldiers, into the Yangzi River delta. Even after his unsuccessful attack on Nanjing in 1659, Koxinga still maintained control over China’s coastline, from Zhejiang to Fujian.

On the diplomatic front, Zheng Chenggong made several attempts to convince the bakufu to support his military efforts against the Qing. Koxinga’s grand military strategy was two-fold. First of all, he sought to seize the resource rich Yangzi River delta in order to solve his organization’s needs for food and supplies and, at the same time, to take control of primary production of silk and other luxuries. Secondly, he planned an invasion of Dutch Taiwan and Spanish controlled Manila (in 1670 and 1672). The invasion of Taiwan was a consequence of Koxinga’s defeat at Nanking. The takeover of Manila, although poorly defended, never occurred. This overseas expansion, if it had been successful, would have led to the foundation of a maritime China encompassing a huge trading network stretching from Japan to Southeast Asia and able to defy the continental Qing Empire.

Another merit of this book is that it sheds new light on Koxinga’s son, Zheng Jing and on how he achieved, within two decades, the Zheng organization’s transformation into a viable territorial state, with the creation of a sophisticated administration, the rationalization of the kinship networks of southern Fujian and a greater economic diversification. This efficient policy attracted refugees reduced to starvation by the Qing coastal evacuation policy. Xing Hang meticulously describes the power game which led to the ascendancy of Zheng Jing and the diplomatic and military interaction between the VOC, Shi Lang (the former commander who defected to the Qing in 1651 and head of the Qing naval command), and Japan, whose neutral stance adopted in the 1660s complicated the consolidation of the position of Ming loyalists.

The final reason for the Zheng’s failure lies more in the growing competitiveness from the Bengal and Indonesian-based Dutch, a rising East India Company and Southeast Asian trading networks to which the Zheng organisation began to lose market shares, rather than in Qing military offensives and blockades against the island of Taiwan.

François Gipouloux, Emeritus Research Director, National Centre for Scientific Research (CNRS), China, Korea, Japan Research Centre, Ecole des Hautes Etudes en Sciences Sociales, Paris, is the coordinator of the International Research Network The Globalisation’s Origins and the Great Divergence: Trading Networks and the Trajectory of Economic Institutions — Europe-Asia, 1500-2000. He is the author of The Asian Mediterranean: Port Cities and Trading Networks in China, Japan and Southeast Asia, 13th-21st century, Edward Elgar, 2011.

Copyright (c) 2017 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (November 2017). All EH.Net reviews are archived at

Subject(s):International and Domestic Trade and Relations
Geographic Area(s):Asia
Time Period(s):17th Century
18th Century

Globalized Fruit, Local Entrepreneurs: How One Banana Exporting Country Achieved Worldwide Reach

Author(s):Southgate, Douglas
Roberts, Lois
Reviewer(s):Wiley, James

Published by EH.Net (October 2016)

Douglas Southgate and Lois Roberts, Globalized Fruit, Local Entrepreneurs: How One Banana Exporting Country Achieved Worldwide Reach. Philadelphia: University of Pennsylvania Press, 2016. viii + 219 pp. $60 (hardcover), ISBN: 978-0-8122-4807-4.

Reviewed for EH.Net by James Wiley, Department of Global Studies and Geography, Hofstra University.

Douglas Southgate, an emeritus professor of agricultural, environmental, and developmental economics at Ohio State University, and Lois Roberts, a former instructor of Latin American history and culture at the Naval Postgraduate School in Monterrey, California, waste no time in defining the purpose of their volume. In its introduction, they criticize the many previous academic books on the western hemisphere’s banana industries for their failure to distinguish the Ecuadorean model from those practiced to its north, especially in Central America. Instead, they suggest, Ecuador’s experience with that very important fruit is usually casually lumped together with those of other countries whose industries were dominated by one or another of the major U.S.-based fruit multinationals. They argue that Ecuador does not fit that model — that its banana industry has focused primarily upon independent growers. In this, they immediately carve out a niche missing in the literature that they wish to fulfill.

Why so much concern over the banana, a question often asked of those who do research into this industry? The banana is the world’s most important traded fresh fruit and vegetable (FFV) commodity by volume and ranks fifth among all traded agricultural goods after wheat, corn, soybeans, and barley. In tropical zones around the globe, hundreds of thousands of people earn their living in the industry, with several million others indirectly employed in the various ancillary activities that serve the industry and its workers. It is an industry whose growth could not have occurred until the development of refrigeration technologies during the 1870s, making it possible to transport such a highly perishable fruit over great distances. The banana trade increased dramatically around the turn of the last century, particularly after the creation of the United Fruit Company (today’s Chiquita), referred to throughout the book as El Pulpo, the Octopus, the name commonly used in the region during the heyday of the Banana Empire.

With their goal clearly established, the authors begin by offering a very abbreviated history of the banana industry elsewhere in the western hemisphere. Perhaps most significant among the characteristics of the early years of the industry was the evolution of the system of vertical integration by El Pulpo and its competitors where they existed. This was necessary to coordinate the various stages of an industry in which the timing was of the utmost importance. Thus, the ability of one firm, through a variety of subsidiaries, to control production (usually in the form of monoculture plantations), the harvest, transport to local ports in the growing regions, shipping to consuming  countries (mostly in temperate regions), and internal transport there to reach widely dispersed retail outlets is absolutely essential to having the fruit arrive to its ultimate consumers in edible form. This array of activities lies beyond the capacity of small-to-medium banana growers to accomplish, creating openings for large multinational corporations.

After offering this basic understanding of the requirements of bananas, the authors proceed to develop an historical geographic profile of the industry in Ecuador from its origins, paying particular attention to those factors that distinguish it from those in neighboring countries. This effort covers multiple chapters and represents both the greatest strength of the book and its primary contribution to the body of literature on FFV commodities. Foremost among Ecuador’s distinctive characteristics is the prior existence of an important port city, Guayaquil (now the country’s largest city). Guayaquil has played a significant role from the colonial period on and, in the process, fostered the development of entrepreneurial skills of many of its residents. These were largely in place by the time bananas became a major export commodity for the country in the 1950s. The city spawned several entrepreneurs who would be instrumental in the development of the banana industry. The most notable among these was Luis Noboa. His story, recounted at length throughout the book, was a classic rags-to-riches tale of a driven man who became Ecuador’s wealthiest man and whose firm ultimately became its largest banana trading company (and the fourth largest in the world). The Central American exporting countries did not have anything or anyone to equal these advantages, rendering them much more dependent upon the major fruit transnationals than was necessary in Ecuador. The existence of such a city was also a critical factor behind the absence in Ecuador of the kind of banana monopolies that existed to its north. From its inception, the Ecuadorean banana industry was characterized by multiple firms and numerous growers, a situation that was advanced by proactive government policy, one of the few instances in the book when government activity was presented in a positive light. While foreign corporations including El Pulpo did operate there, they were never able to achieve the dominance than characterized their operations in Central America.

Ecuador’s many assets for having a successful industry are also identified. It has optimal soils for growing the fruit, an appropriate and relatively storm-free climate (bananas are easily damaged by strong winds), and an ample labor force already living in the lowland regions that would become the country’s banana zones. In addition, it had just experienced the failure of its prior primary export crop, cacao, adding some urgency to the interest in switching to bananas on the part of many farmers.

Another unique dimension of the Ecuadorean industry is its relatively late beginning. The country’s location on the west coast of South America had been the biggest deterrent to the successful export of the fruit prior to 1914 when the Panama Canal opened. While Colombia and Central American exporters all had Caribbean coasts through which their exports could pass, Ecuador’s trading links to Europe and most of North America involved an arduous voyage around the southern tip of the continent. The canal alleviated that necessity and, while adding on the expense of the canal toll, it allowed Ecuadorean bananas to be competitive in foreign markets. The country first attempted to develop a banana export industry in the 1930s but the Great Depression and the ensuing world war caused major reductions in global demand for the fruit. Instead, the industry got its real start in the late 1940s and took off during the first half of the following decade when Ecuador became the world’s leading exporter of the fruit, a position it continues to occupy. The late start actually worked to its benefit as it was able to learn from the problems confronted by its competitors in the region to its north. That helped both its entrepreneurs and its government make better choices, while also taking advantage of the U.S. Consent Decree of 1958, an anti-monopoly measure that required United Fruit to divest many of its landholdings in Latin America.

The volume has two, related, areas of weakness. Its analyses of government policies both in Ecuador and elsewhere were not balanced. A very clear bias exists, particularly in the latter chapters, in favor of neoliberal policies (a term that the authors unabashedly criticized as favored by “Latin American leftists” though its use extends beyond that) and against the efforts of any left-of-center governments. Related to this, the other weakness involve the unbalanced analyses of Latin America’s stages of economic nationalism (a term that does not even appear in the book) and the contemporary stage of globalization and neoliberalism. The former is criticized for its principal development strategy, Import Substitution Industrialization (ISI). While that strategy did certainly create several problems, it was also responsible for more positive results, including the first real industrialization of the region, the enhanced abilities of governments (especially in Central America) to confront the large multinational fruit companies, the sizeable expansion of what had been just a fledgling middle class, and the urbanization and modernization of many regions within each country. The treatment of the current stage is quite positive by comparison, with no mention of how Ecuador’s banana industry is often criticized abroad, including by many foreign governments, for having “won” the “race to the bottom” through achieving its competitive advantage by paying the lowest wages in the industry. A more balanced approach to these subjects would have enhanced the book significantly.

Overall, the volume represents a worthwhile contribution to the literature. It addresses the need for a comprehensive treatment of the world’s largest banana producer. As writers of books about individual commodities know, it is often impossible for authors to investigate all of the national industries, but it is surprising that Ecuador has not received greater attention. With this work, Southgate and Roberts have helped to fill this gap.

James Wiley has authored several articles and one book on the banana industry, focusing upon the so-called banana war of the 1990s and the early 2000s involving Latin America, the Caribbean, the European Union, and the United States. His book The Banana: Empires, Trade Wars, and Globalization was published by the University of Nebraska Press in 2008.

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Subject(s):Business History
International and Domestic Trade and Relations
Geographic Area(s):Latin America, incl. Mexico and the Caribbean
Time Period(s):19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

The World’s First Stock Exchange

Author(s):Petram, Lodewijk
Reviewer(s):Michie, Ranald

Published by EH.Net (December 2015)

Lodewijk Petram, The World’s First Stock Exchange.  New York: Columbia University Press, 2014. vi + 296 pp. $30 (cloth), ISBN: 978-0-231-16378-1.

Reviewed for EH.Net by Ranald Michie, Department of History, Durham University.

The subject of this book is the world’s first stock exchange, which the author locates in Amsterdam in the seventeenth century. As becomes apparent in the text (pp. 181-82), no stock exchange was formed in Amsterdam at that time. The Amsterdam Stock Exchange Association was not established until 1876 and it did not occupy its own building until 1913. Both these events were long after stock exchanges had been founded in numerous other cities in the world, such as London and New York. What the author confuses is trading in corporate stocks and a stock exchange.  The former is a market whereas the latter is an institution. This difference matters because of the important contribution that rules and regulations make to reducing counterparty risk, eliminating price manipulation, addressing trading abuses and ensuring the permanence and continuity of opportunities to buy and sell.  That leads to a question that this book does not answer. Why was a stock exchange not formed in Amsterdam in the seventeenth century given the early start that was made there in establishing a market for stocks and the need to respond to all the problems it led to for those involved?  Clues are provided in the text to such a question but it remains unanswered because it is not asked.

The failure of the author to distinguish between a market and an exchange, and then discuss why the former did not lead to the latter in seventeenth century Amsterdam, is a pity because the book contains much of interest and relevance. The material that the author uses is largely that generated by disputes between those involved in this early stock market whether they were investors, brokers or dealers. Using this legal material provides a great deal of depth to an understanding of this early stock market but the overall result is rather episodic. Lacking the material produced by an institution such as a stock exchange, as there was none, there is no sense of development. Instead, there are a series of glimpses into a world in which the owning, buying and selling of corporate stocks gradually emerged from the shadows and took on a tangible form. The way this is presented is at variance with normal academic practice. Despite being based on a Ph.D. the focus is on telling a story based on the life and times of individuals, and extrapolating far beyond the evidence gleaned from the court records and business papers available. This makes the book very readable but at the expense of analysis and explanation.

Central to the narrative is the VOC (the Dutch East India Company), as it was the shares issued by it which provide the material out of which the early stock market in Amsterdam grew. As a trading company sending ships to Asia, its business prospects were highly uncertain, being exposed to the vagaries of weather and war as well as those of long-distance commerce, making its dividends a great unknown until formally declared by the directors.  At times large dividends were declared while at others none resulted, while payment could be in anything from commodities like cloves, government bonds, or actual money. It was this uncertainty that generated a great deal of market activity as it attracted speculative interest, driven by news and rumors, as well as those looking for a permanent investment, willing to accept both losses and profits over the long run.

In turn the very volatility associated with VOC stock gave it a liquidity that attracted another class of investor. These were people, such as the merchants, with temporarily idle funds who looked for a suitable investment while waiting better paying opportunities. The stock market that developed in seventeenth century delivered this. Increasingly it became possible to trade in VOC shares not only for immediate delivery but also forward, providing opportunities for those with spare funds to employ them in this market or those in need of such fund to access them. Contributing enormously to the operation of this market was the use of options and the appearance of a growing number of brokers and dealers, as these provided those trading in VOC shares with a continuous market and ways of either increasing or reducing the risks that they took. These developments are expertly documented in this book and the reader is provided with a wealth of evidence detailing the way the market operated in the seventeenth century. That makes the book an invaluable addition to the literature on the history of securities markets.

The conclusion reached by the author is a rather negative one as he says little of value about the developments that took place in share trading in Amsterdam in the eighteenth century. The stock market was confined to the shares of one company, the VOC, with only one other being formed, the Dutch West India Company (WIC), which was not a success. In addition, the interpretation presented here focuses on the speculative element of share trading, which is inevitable given the material that is relied on. Disputes were usually generated when one party to a deal looking for a way of reneging on it when the outcome meant a large loss for himself. What is lost in this approach is the connections between the market in VOC shares and the wider money market and the complex world of international payments. There are hints of these connections in the book but they are not taken up. Reflecting the weakness of this element of the book is the lack of understanding of the developments being made in the rival stock market in London from 1694 with the formation of the Bank of England, as its shares could provide the depth and breadth that those of the VOC lacked, as it was a proxy for the debt of the UK government.

Ranald Michie is author of The London Stock Exchange: A History (1999) and The Global Securities Market: A History (2006), both published by Oxford University Press. He is currently completing a book entitled British Banking: Continuity and Change since 1694, also for Oxford University Press.  He recently retired from Durham University as emeritus professor and is currently teaching at Newcastle University Business School.

Copyright (c) 2015 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ( Published by EH.Net (December 2015). All EH.Net reviews are archived at

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):Europe
Time Period(s):17th Century

U.S. Economy in World War I

Hugh Rockoff, Rutgers University

Although the United States was actively involved in World War I for only nineteen months, from April 1917 to November 1918, the mobilization of the economy was extraordinary. (See the chronology at the end for key dates). Over four million Americans served in the armed forces, and the U.S. economy turned out a vast supply of raw materials and munitions. The war in Europe, of course, began long before the United States entered. On June 28, 1914 in Sarajevo Gavrilo Princip, a young Serbian revolutionary, shot and killed Austrian Archduke Franz Ferdinand and his wife Sophie. A few months later the great powers of Europe were at war.

Many Europeans entered the war thinking that victory would come easily. Few had the understanding shown by a 26 year-old conservative Member of Parliament, Winston Churchill, in 1901. “I have frequently been astonished to hear with what composure and how glibly Members, and even Ministers, talk of a European War.” He went on to point out that in the past European wars had been fought by small professional armies, but in the future huge populations would be involved, and he predicted that a European war would end “in the ruin of the vanquished and the scarcely less fatal commercial dislocation and exhaustion of the conquerors.”[1]

Reasons for U.S. Entry into the War

Once the war began, however, it became clear that Churchill was right. By the time the United States entered the war Americans knew that the price of victory would be high. What, then, impelled the United States to enter? What role did economic forces play? One factor was simply that Americans generally – some ethnic minorities were exceptions – felt stronger ties to Britain and France than to Germany and Austria. By 1917 it was clear that Britain and France were nearing exhaustion, and there was considerable sentiment in the United States for saving our traditional allies.

The insistence of the United States on her trading rights was also important. Soon after the war began Britain, France, and their allies set up a naval blockade of Germany and Austria. Even food was contraband. The Wilson Administration complained bitterly that the blockade violated international law. U.S. firms took to using European neutrals, such as Sweden, as intermediaries. Surely, the Americans argued, international law protected the right of one neutral to trade with another. Britain and France responded by extending the blockade to include the Baltic neutrals. The situation was similar to the difficulties the United States experienced during the Napoleonic wars, which drove the United States into a quasi-war against France, and to war against Britain.

Ultimately, however, it was not the conventional surface vessels used by Britain and France to enforce its blockade that enraged American opinion, but rather submarines used by Germany. When the British (who provided most of the blockading ships) intercepted an American ship, the ship was escorted into a British port, the crew was well treated, and there was a chance of damage payments if it turned out that the interception was a mistake. The situation was very different when the Germans turned to submarine warfare. German submarines attacked without warning, and passengers had little chance of to save themselves. To many Americans this was a brutal violation of the laws of war. The Germans felt they had to use submarines because their surface fleet was too small to defeat the British navy let alone establish an effective counter-blockade.

The first submarine attack to inflame American opinion was the sinking of the Lusitania in May 1915. The Lusitania left New York with a cargo of passengers and freight, including war goods. When the ship was sunk over 1150 passengers were lost including 115 Americans. In the months that followed further sinkings brought more angry warnings from President Wilson. For a time the Germans gave way and agreed to warn American ships before sinking them and to save their passengers. In February 1917, however, the Germans renewed unrestricted submarine warfare in an attempt to starve Britain into submission. The loss of several U.S. ships was a key factor in President Wilson’s decision to break diplomatic relations with Germany and to seek a declaration of war.

U.S. Entry into the War and the Costs of Lost Trade

From a crude dollar-and-cents point of view it is hard to justify the war based on the trade lost to the United States. U.S. exports to Europe rose from $1.479 billion dollars in 1913 to $4.062 billion in 1917. Suppose that the United States had stayed out of the war, and that as a result all trade with Europe was cut off. Suppose further, that the resources that would have been used to produce exports for Europe were able to produce only half as much value when reallocated to other purposes such as producing goods for the domestic market or exports for non-European countries. Then the loss of output in 1917 would have been $2.031 billion per year. This was about 3.7 percent of GNP in 1917, and only about 6.3 percent of the total U.S. cost of the war.[2]

On March 21, 1918 the Germans launched a massive offensive on the Somme battlefield and successfully broke through the Allied lines. In May and early June, after U.S. entry into the war, the Germans followed up with fresh attacks that brought them within fifty miles of Paris. Although a small number of Americans participated it was mainly the old war: the Germans against the British and the French. The arrival of large numbers of Americans, however, rapidly changed the course of the war. The turning point was the Second Battle of the Marne fought between July 18 and August 6. The Allies, bolstered by significant numbers of Americans, halted the German offensive.

The initiative now passed to the Allies. They drove the Germans back in a series of attacks in which American troops played an increasingly important role. The first distinctively American offensive was the battle of the St. Mihiel Salient fought from September 12 to September 16, 1918; over half a million U.S. troops participated. The last major offensive of the war, the Meuse-Argonne offensive, was launched on September 26, with British, French, and American forces attacking the Germans on a broad front. The Germans now realized that their military situation was deteriorating rapidly, and that they would have to agree to end to the fighting. The Armistice occurred on November 11, 1918 – at the eleventh hour, of the eleventh day, of the eleventh month.

Mobilizing the Economy

The first and most important mobilization decision was the size of the army. When the United States entered the war, the army stood at 200,000, hardly enough to have a decisive impact in Europe. However, on May 18, 1917 a draft was imposed and the numbers were increased rapidly. Initially, the expectation was that the United States would mobilize an army of one million. The number, however, would go much higher. Overall some 4,791,172 Americans would serve in World War I. Some 2,084,000 would reach France, and 1,390,000 would see active combat.

Once the size of the Army had been determined, the demands on the economy became obvious, although the means to satisfy them did not: food and clothing, guns and ammunition, places to train, and the means of transport. The Navy also had to be expanded to protect American shipping and the troop transports. Contracts immediately began flowing from the Army and Navy to the private sector. The result, of course, was a rapid increase in federal spending from $477 million in 1916 to a peak of $8,450 million in 1918. (See Table 1 below for this and other data on the war effort.) The latter figure amounted to over 12 percent of GNP, and that amount excludes spending by other wartime agencies and spending by allies, much of which was financed by U.S. loans.

Table 1
Selected Economic Variables, 1916-1920
1916 1917 1918 1919 1920
1. Industrial production (1916 =100) 100 132 139 137 108
2. Revenues of the federal government (millions of dollars) $930 2,373 4,388 5,889 6,110
3. Expenditures of the federal government (millions of dollars) $1,333 7,316 15,585 12,425 5,710
4. Army and Navy spending (millions of dollars) $477 3,383 8,580 6,685 2,063
5. Stock of money, M2 (billions of dollars) $20.7 24.3 26.2 30.7 35.1
6. GNP deflator (1916 =100) 100 120 141 160 185
7. Gross National Product (GNP) (billions of dollars) $46.0 55.1 69.7 77.2 87.2
8. Real GNP (billions of 1916 dollars) $46.0 46.0 49.6 48.1 47.1
9. Average annual earnings per full-time manufacturing employee (1916 dollars) $751 748 802 813 828
10. Total labor force (millions) 40.1 41.5 44.0 42.3 41.5
11. Military personnel (millions) .174 .835 2.968 1.266 .353
Sources by row:

1. Miron and Romer (1990, table 2).

2-3. U.S. Bureau of the Census (1975), series Y352 and Y457.

4. U.S. Bureau of the Census (1975), series Y458 and Y459. The estimates are the average for fiscal year t and fiscal year t+1.

5. Friedman and Schwartz (1970, table 1, June dates).

6-8. Balke and Gordon (1989, table 10, pp. 84-85).The original series were in 1982 dollars.

9. U.S. Bureau of the Census (1975), series D740.

10-11. Kendrick (1961, table A-VI, p. 306; table A-X, p. 312).

Although the Army would number in the millions, raising these numbers did not prove to be an unmanageable burden for the U.S economy. The total labor force rose from about 40 million in 1916 to 44 million in 1918. This increase allowed the United States to field a large military while still increasing the labor force in the nonfarm private sector from 27.8 million in 1916 to 28.6 million in 1918. Real wages rose in the industrial sector during the war, perhaps by six or seven percent, and this increase combined with the ease of finding work was sufficient to draw many additional workers into the labor force.[3] Many of the men drafted into the armed forces were leaving school and would have been entering the labor force for the first time in any case. The farm labor force did drop slightly from 10.5 million in 1916 to 10.3 million workers in 1918, but farming included many low-productivity workers and farm output on the whole was sustained. Indeed, the all-important category of food grains showed strong increases in 1918 and 1919.

Figure 1 shows production of steel ingots and “total industrial production” – an index of steel, copper, rubber, petroleum, and so on – monthly from January 1914 through 1920.[4] It is evident that the United States built up its capacity to turn out these basic raw materials during the years of U.S. neutrality when Britain and France were its buying supplies and the United States was beginning its own tentative build up. The United States then simply maintained the output of these materials during the years of active U.S. involvement and concentrated on turning these materials into munitions.[5]

Figure 1

Steel Ingots and Total Industrial Production, 1914-1920

Prices on the New York Stock Exchange, shown in Figure 2, provide some insight into what investors thought about the strength of the economy during the war era. The upper line shows the Standard and Poor’s/Cowles Commission Index. The lower line shows the “real” price of stocks – the nominal index divided by the consumer price index. When the war broke out the New York Stock Exchange was closed to prevent panic selling. There are no prices for the New York Stock Exchange, although a lively “curb market” did develop. After the market reopened it rose as investors realized that the United States would profit as a neutral. The market then began a long slide that began when tensions between the United States and Germany rose at the end of 1916 and continued after the United States entered the war. A second, less rise began in the spring of 1918 when an Allied victory began to seem possible. The increase continued and gathered momentum after the Armistice. In real terms, however, as shown by the lower line in the figure, the rise in the stock market was not sufficient to offset the rise in consumer prices. At times one hears that war is good for the stock market, but the figures for World War I, as the figures for other wars, tell a more complex story.[6]

Figure 2

The Stock Market, 1913-1920

Table 2 shows the amounts of some of the key munitions produced during the war. During and after the war critics complained that the mobilization was too slow. American troops, for example, often went into battle with French artillery, clearly evidence, the critics implied, of incompetence somewhere in the supply chain. It does take time, however, to convert existing factories or build new ones and to work out the details of the production and distribution process. The last column of Table 2 shows peak monthly production, usually October 1918, at an annual rate. It is obvious that by the end of the war the United States was beginning to achieve the “production miracle” that occurred in World War II. When Franklin Roosevelt called for 50,000 planes in World War II, his demand was seen as an astounding exercise in bravado. Yet when we look at the last column of the table we see that the United States was hitting this level of production for Liberty engines by the end World War I. There were efforts during the war to coordinate Allied production. To some extent this was tried – the United States produced much of the smokeless powder used by the Allies – but it was always clear that the United States wanted its own army equipped with its own munitions.

Table 2
Production of Selected Munitions in World War I
Munition Total Production Peak monthly production at an annual rate
Rifles 3,550,000 3,252,000
Machine guns 226,557 420,000
Artillery units 3,077 4,920
Smokeless powder (pounds) 632,504,000 n.a.
Toxic Gas (tons) 10,817 32,712
De Haviland-4 bombers 3,227 13,200
Liberty airplane engines 13,574 46,200
Source: Ayres (1919, passim)

Financing the War

Where did the money come from to buy all these munitions? Then as now there were, the experts agreed, three basic ways to raise the money: (1) raising taxes, (2) borrowing from the public, and (3) printing money. In the Civil War the government had had simply printed the famous greenbacks. In World War I it was possible to “print money” in a more roundabout way. The government could sell a bond to the newly created Federal Reserve. The Federal Reserve would pay for it by creating a deposit account for the government, which the government could then draw upon to pay its expenses. If the government first sold the bond to the general public, the process of money creation would be even more roundabout. In the end the result would be much the same as if the government had simply printed greenbacks: the government would be paying for the war with newly created money. The experts gave little consideration to printing money. The reason may be that the gold standard was sacrosanct. A financial policy that would cause inflation and drive the United States off the gold standard was not to be taken seriously. Some economists may have known the history of the greenbacks of the Civil War and the inflation they had caused.

The real choice appeared to be between raising taxes and borrowing from the public. Most economists of the World War I era believed that raising taxes was best. Here they were following a tradition that stretched back to Adam Smith who argued that it was necessary to raise taxes in order to communicate the true cost of war to the public. During the war Oliver Morton Sprague, one of the leading economists of the day, offered another reason for avoiding borrowing. It was unfair, Sprague argued, to draft men into the armed forces and then expect them to come home and pay higher taxes to fund the interest and principal on war bonds. Most men of affairs, however, thought that some balance would have to be struck between taxes and borrowing. Treasury Secretary William Gibbs McAdoo thought that financing about 50 percent from taxes and 50 percent from bonds would be about right. Financing more from taxes, especially progressive taxes, would frighten the wealthier classes and undermine their support for the war.

In October 1917 Congress responded to the call for higher taxes with the War Revenue Act. This act increased the personal and corporate income tax rates and established new excise, excess-profit, and luxury taxes. The tax rate for an income of $10,000 with four exemptions (about $140,000 in 2003 dollars) went from 1.2 percent in 1916 to 7.8 percent. For incomes of $1,000,000 the rate went from 10.3 percent in 1916 to 70.3 percent in 1918. These increase in taxes and the increase in nominal income raised revenues from $930 million in 1916 to $4,388 million in 1918. Federal expenditures, however, increased from $1,333 million in 1916 to $15,585 million in 1918. A huge gap had opened up that would have to be closed by borrowing.

Short-term borrowing was undertaken as a stopgap. To reduce the pressure on the Treasury and the danger of a surge in short-term rates, however, it was necessary to issue long-term bonds, so the Treasury created the famous Liberty Bonds. The first issue was a thirty-year bond bearing a 3.5% coupon callable after fifteen years. There were three subsequent issues of Liberty Bonds, and one of shorter-term Victory Bonds after the Armistice. In all, the sale of these bonds raised over $20 billion dollars for the war effort.

In order to strengthen the market for Liberty Bonds, Secretary McAdoo launched a series of nationwide campaigns. Huge rallies were held in which famous actors, such as Charlie Chaplin, urged the crowds to buy Liberty Bonds. The government also enlisted famous artists to draw posters urging people to purchase the bonds. One of these posters, which are widely sought by collectors, is shown below.

But Mother Had Done Nothing Wrong, Had She, Daddy?

Louis Raemaekers. After a Zeppelin Raid in London: “But Mother Had Done Nothing Wrong, Had She, Daddy?” Prevent this in New York: Invest in Liberty Bonds. 19″ x 12.” From the Rutgers University Library Collection of Liberty Bond Posters.

Although the campaigns may have improved the morale of both the armed forces and the people at home, how much the campaigns contributed to expanding the market for the bonds is an open question. The bonds were tax-exempt – the exact degree of exemption varied from issue to issue – and this undoubtedly made them attractive to investors in high tax brackets. Indeed, the Treasury was criticized for imposing high marginal taxes with one hand, and then creating a loophole with the other. The Federal Reserve also bought many of the bonds creating new money. Some of this new “highpowered money” augmented the reserves of the commercial banks which allowed them to buy bonds or to finance their purchase by private citizens. Thus, directly or indirectly, a good deal of the support for the bond market was the result of money creation rather than savings by the general public.

Table 3 provides a rough breakdown of the means used to finance the war. Of the total cost of the war, about 22 percent was financed by taxes and from 20 to 25 percent by printing money, which meant that from 53 to 58 percent was financed through the bond issues.

Table 3
Financing World War I, March 1917-May 1919
Source of finance Billions of Dollars Percent (M2) Percent (M4)
Taxation and nontax receipts 7.3 22 22
Borrowing from the public 24 58 53
Direct money creation 1.6 5 5
Indirect money creation (M2) 4.8 15
Indirect money creation (M4) 6.6 20
Total cost of the war 32.9 100 100
Note: Direct money creation is the increase in the stock of high-powered money net of the increase in monetary gold. Indirect money creation is the increase in monetary liabilities not matched by the increase in high-powered money.

Source: Friedman and Schwartz (1963, 221)

Heavy reliance on the Federal Reserve meant, of course, that the stock of money increased rapidly. As shown in Table 1, the stock of money rose from $20.7 billion in 1916 to $35.1 billion in 1920, about 70 percent. The price level (GDP deflator) increased 85 percent over the same period.

The Government’s Role in Mobilization

Once the contracts for munitions were issued and the money began flowing, the government might have relied on the price system to allocate resources. This was the policy followed during the Civil War. For a number of reasons, however, the government attempted to manage the allocation of resources from Washington. For one thing, the Wilson administration, reflecting the Progressive wing of the Democratic Party, was suspicious of the market, and doubted its ability to work quickly and efficiently, and to protect the average person against profiteering. Another factor was simply that the European belligerents had adopted wide-ranging economic controls and it made sense for the United States, a latecomer, to follow suit.

A wide variety of agencies were created to control the economy during the mobilization. A look at four of the most important – (1) the Food Administration, (2) the Fuel Administration, (3) the Railroad Administration, and (4) the War Industries Board – will suggest the extent to which the United States turned away from its traditional reliance on the market. Unfortunately, space precludes a review of many of the other agencies such as the War Shipping Board, which built noncombatant ships, the War Labor Board, which attempted to settle labor disputes, and the New Issues Committee, which vetted private issues of stocks and bonds.

Food Administration

The Food Administration was created by the Lever Food and Fuel Act in August 1917. Herbert Hoover, who had already won international fame as a relief administrator in China and Europe, was appointed to head it. The mission of the Food Administration was to stimulate the production of food and assure a fair distribution among American civilians, the armed forces, and the Allies, and at a fair price. The Food Administration did not attempt to set maximum prices at retail or (with the exception of sugar) to ration food. The Act itself set what then was a high minimum price for wheat – the key grain in international markets – at the farm gate, although the price would eventually go higher. The markups of processors and distributors were controlled by licensing them and threatening to take their licenses away if they did not cooperate. The Food Administration then attempted control prices and quantities at retail through calls for voluntary cooperation. Millers were encouraged to tie the sale of wheat flour to the sale of less desirable flours – corn meal, potato flour, and so on – thus making a virtue out of a practice that would have been regarded as a disreputable evasion of formal price ceilings. Bakers were encouraged to bake “Victory bread,” which included a wheat-flour substitute. Finally, Hoover urged Americans to curtail their consumption of the most valuable foodstuffs: there were, for example, Meatless Mondays and Wheatless Wednesdays.

Fuel Administration

The Fuel Administration was created under the same Act as the Food Administration. Harry Garfield, the son of President James Garfield, and the President of Williams College, was appointed to head it. Its main problem was controlling the price and distribution of bituminous coal. In the winter of 1918 a variety of factors combined to cause a severe coal shortage that forced school and factory closures. The Fuel Administration set the price of coal at the mines and the margins of dealers, mediated disputes in the coalfields, and worked with the Railroad Administration (described below) to reduce long hauls of coal.

Railroad Administration

The Wilson Administration nationalized the railroads and put them under the control of the Railroad Administration in December of 1917, in response to severe congestion in the railway network that was holding up the movement of war goods and coal. Wilson’s energetic Secretary of the Treasury (and son-in-law), William Gibbs McAdoo, was appointed to head it. The railroads would remain under government control for another 26 months. There has been considerable controversy over how well the system worked under federal control. Defenders of the takeover point out that the congestion was relieved and that policies that increased standardization and eliminated unnecessary competition were put in place. Critics of the takeover point to the large deficit that was incurred, nearly $1.7 billion, and to the deterioration of the capital stock of the industry. William J. Cunningham’s (1921) two papers in the Quarterly Journal of Economics, although written shortly after the event, still provide one of the most detailed and fair-minded treatments of the Railroad Administration.

War Industries Board

The most important federal agency, at least in terms of the scope of its mission, was the War Industries Board. The Board was established in July of 1917. Its purpose was no less than to assure the full mobilization of the nation’s resources for the purpose of winning the war. Initially the Board relied on persuasion to make its orders effective, but rising criticism of the pace of mobilization, and the problems with coal and transport in the winter of 1918, led to a strengthening of its role. In March 1918 the Board was reorganized, and Wilson placed Bernard Baruch, a Wall Street investor, in charge. Baruch installed a “priorities system” to determine the order in which contracts could be filled by manufacturers. Contracts rated AA by the War Industries Board had to be filled before contracts rated A, and so on. Although much hailed at the time, this system proved inadequate when tried in World War II. The War Industries Board also set prices of industrial products such as iron and steel, coke, rubber, and so on. This was handled by the Board’s independent Price Fixing Committee.

It is tempting to look at these experiments for clues on how the economy would perform under various forms of economic control. It is important, however, to keep in mind that these were very brief experiments. When the war ended in November 1918 most of the agencies immediately wound up their activities. Only the Railroad Administration and the War Shipping Board continued to operate. The War Industries Board, for example, was in operation only for a total of sixteen months; Bernard Baruch’s tenure was only eight months. Obviously only limited conclusions can be drawn from these experiments.

Costs of the War

The human and economic costs of the war were substantial. The death rate was high: 48,909 members of the armed forces died in battle, and 63,523 died from disease. Many of those who died from disease, perhaps 40,000, died from pneumonia during the influenza-pneumonia epidemic that hit at the end of the war. Some 230,074 members of the armed forces suffered nonmortal wounds.

John Maurice Clark provided what is still the most detailed and thoughtful estimate of the cost of the war; a total amount of about $32 billion. Clark tried to estimate what an economist would call the resource cost of the war. For that reason he included actual federal government spending on the Army and Navy, the amount of foreign obligations, and the difference between what government employees could earn in the private sector and what they actually earned. He excluded interest on the national debt and part of the subsidies paid to the Railroad Administration because he thought they were transfers. His estimate of $32 billion amounted to about 46 percent of GNP in 1918.

Long-run Economic Consequences

The war left a number of economic legacies. Here we will briefly describe three of the most important.

The finances of the federal government were permanently altered by the war. It is true that the tax increases put in place during the war were scaled back during the 1920s by successive Republican administrations. Tax rates, however, had to remain higher than before the war to pay for higher expenditures due mainly to interest on the national debt and veterans benefits.

The international economic position of the United States was permanently altered by the war. The United States had long been a debtor country. The United States emerged from the war, however, as a net creditor. The turnaround was dramatic. In 1914 U.S investments abroad amounted to $5.0 billion, while total foreign investments in the United States amounted to $7.2 billion. Americans were net debtors to the tune of $2.2 billion. By 1919 U.S investments abroad had risen to $9.7 billion, while total foreign investments in the United States had fallen to $3.3 billion: Americans were net creditors to the tune of $6.4 billion.[7] Before the war the center of the world capital market was London, and the Bank of England was the world’s most important financial institution; after the war leadership shifted to New York, and the role of the Federal Reserve was enhanced.

The management of the war economy by a phalanx of Federal agencies persuaded many Americans that the government could play an important positive role in the economy. This lesson remained dormant during the 1920s, but came to life when the United States faced the Great Depression. Both the general idea of fighting the Depression by creating federal agencies and many of the specific agencies and programs reflected precedents set in Word War I. The Civilian Conservation Corps, a Depression era agency that hired young men to work on conservation projects, for example, attempted to achieve the benefits of military training in a civilian setting. The National Industrial Recovery Act reflected ideas Bernard Baruch developed at the War Industries Board, and the Agricultural Adjustment Administration hearkened back to the Food Administration. Ideas about the appropriate role of the federal government in the economy, in other words, may have been the most important economic legacy of American involvement in World War I.

Chronology of World War I
June Archduke Franz Ferdinand is shot.
August Beginning of the war.
May Sinking of the Lusitania. War talk begins in the United States.
June National Defense Act expands the Army
February Germany renews unrestricted submarine warfare.
U.S.S. Housatonic sunk.
U.S. breaks diplomatic relations with Germany
April U.S. declares war.
May Selective Service Act
June First Liberty Loan
July War Industries Board
August Lever Food and Fuel Control Act
October War Revenue Act
November Second Liberty Loan
December Railroads are nationalized.
January Maximum prices for steel
March Bernard Baruch heads the War Industries Board
Germans begin massive offensive on the western front
May Third Liberty Loan
First independent action by the American Expeditionary Force
June Battle of Belleau Wood – the first sizable U.S. action
July Second Battle of the Marne – German offensive stopped
September 900,000 Americans in the Battle of Meuse-Argonne
October Fourth Liberty Loan
November Armistice

References and Suggestions for Further Reading

Ayres, Leonard P. The War with Germany: A Statistical Summary. Washington DC: Government Printing Office. 1919.

Balke, Nathan S. and Robert J. Gordon. “The Estimation of Prewar Gross National Product: Methodology and New Evidence.” Journal of Political Economy 97, no. 1 (1989): 38-92.

Clark, John Maurice. “The Basis of War-Time Collectivism.” American Economic Review 7 (1917): 772-790.

Clark, John Maurice. The Cost of the World War to the American People. New Haven: Yale University Press for the Carnegie Endowment for International Peace, 1931.

Cuff, Robert D. The War Industries Board: Business-Government Relations during World War I. Baltimore: Johns Hopkins University Press, 1973.

Cunningham, William J. “The Railroads under Government Operation. I: The Period to the Close of 1918.” Quarterly Journal of Economics 35, no. 2 (1921): 288-340. “II: From January 1, 1919, to March 1, 1920.” Quarterly Journal of Economics 36, no. 1. (1921): 30-71.

Friedman, Milton, and Anna J. Schwartz. A Monetary History of the United States, 1867-1960. Princeton: Princeton University Press, 1963.

Friedman, Milton, and Anna J. Schwartz. Monetary Statistics of the United States: Estimates, Sources, and Methods. New York: Columbia University Press, 1970.

Gilbert, Martin. The First World War: A Complete History. New York: Henry Holt, 1994.

Kendrick, John W. Productivity Trends in the United States. Princeton: Princeton University Press, 1961.

Koistinen, Paul A. C. Mobilizing for Modern War: The Political Economy of American Warfare, 1865-1919. Lawrence, KS: University Press of Kansas, 1997.

Miron, Jeffrey A. and Christina D. Romer. “A New Monthly Index of Industrial Production, 1884-1940.” Journal of Economic History 50, no. 2 (1990): 321-37.

Rockoff, Hugh. Drastic Measures: A History of Wage and Price Controls in the United States. New York: Cambridge University Press, 1984.

Rockoff, Hugh. “Until It’s Over, Over There: The U.S. Economy in World War I.” National Bureau of Economic Research, Working Paper w10580, 2004.

U.S. Bureau of the Census. Historical Statistics of the United States, Colonial Times to 1970, Bicentennial Edition. Washington, DC: Government Printing Office, 1975.


[1] Quoted in Gilbert (1994, 3).

[2] U.S. exports to Europe are from U.S. Bureau of the Census (1975), series U324.

[3] Real wages in manufacturing were computed by dividing “Hourly Earnings in Manufacturing Industries” by the Consumer Price Index (U.S. Bureau of the Census 1975, series D766 and E135).

[4] Steel ingots are from the National Bureau of Economic Research, macrohistory database, series m01135a, Total Industrial Production is from Miron and Romer (1990), Table 2.

[5] The sharp and temporary drop in the winter of 1918 was due to a shortage of coal.

[6] The chart shows end-of-month values of the S&P/Cowles Composite Stock Index, from Global Financial Data: To get real prices I divided this index by monthly values of the United States Consumer Price Index for all items. This is available as series 04128 in the National Bureau of Economic Research Macro-Data Base available at

[7] U.S. investments abroad (U.S. Bureau of the Census 1975, series U26); Foreign investments in the U.S. (U.S.

Citation: Rockoff, Hugh. “US Economy in World War I”. EH.Net Encyclopedia, edited by Robert Whaples. February 10, 2008. URL

A History of Futures Trading in the United States

Joseph Santos, South Dakota State University

Many contemporary [nineteenth century] critics were suspicious of a form of business in which one man sold what he did not own to another who did not want it… Morton Rothstein (1966)

Anatomy of a Futures Market

The Futures Contract

A futures contract is a standardized agreement between a buyer and a seller to exchange an amount and grade of an item at a specific price and future date. The item or underlying asset may be an agricultural commodity, a metal, mineral or energy commodity, a financial instrument or a foreign currency. Because futures contracts are derived from these underlying assets, they belong to a family of financial instruments called derivatives.

Traders buy and sell futures contracts on an exchange – a marketplace that is operated by a voluntary association of members. The exchange provides buyers and sellers the infrastructure (trading pits or their electronic equivalent), legal framework (trading rules, arbitration mechanisms), contract specifications (grades, standards, time and method of delivery, terms of payment) and clearing mechanisms (see section titled The Clearinghouse) necessary to facilitate futures trading. Only exchange members are allowed to trade on the exchange. Nonmembers trade through commission merchants – exchange members who service nonmember trades and accounts for a fee.

The September 2004 light sweet crude oil contract is an example of a petroleum (mineral) future. It trades on the New York Mercantile exchange (NYM). The contract is standardized – every one is an agreement to trade 1,000 barrels of grade light sweet crude in September, on a day of the seller’s choosing. As of May 25, 2004 the contract sold for $40,120=$40.12x1000 and debits Member S’s margin account the same amount.

The Clearinghouse

The clearinghouse is the counterparty to every trade – its members buy every contract that traders sell on the exchange and sell every contract that traders buy on the exchange. Absent a clearinghouse, traders would interact directly, and this would introduce two problems. First, traders. concerns about their counterparty’s credibility would impede trading. For example, Trader A might refuse to sell to Trader B, who is supposedly untrustworthy.

Second, traders would lose track of their counterparties. This would occur because traders typically settle their contractual obligations by offset – traders buy/sell the contracts that they sold/bought earlier. For example, Trader A sells a contract to Trader B, who sells a contract to Trader C to offset her position, and so on.

The clearinghouse eliminates both of these problems. First, it is a guarantor of all trades. If a trader defaults on a futures contract, the clearinghouse absorbs the loss. Second, clearinghouse members, and not outside traders, reconcile offsets at the end of trading each day. Margin accounts and a process called marking-to-market all but assure the clearinghouse’s solvency.

A margin account is a balance that a trader maintains with a commission merchant in order to offset the trader’s daily unrealized loses in the futures markets. Commission merchants also maintain margins with clearinghouse members, who maintain them with the clearinghouse. The margin account begins as an initial lump sum deposit, or original margin.

To understand the mechanics and merits of marking-to-market, consider that the values of the long and short positions of an existing futures contract change daily, even though futures trading is a zero-sum game – a buyer’s gain/loss equals a seller’s loss/gain. So, the clearinghouse breaks even on every trade, while its individual members. positions change in value daily.

With this in mind, suppose Trader B buys a 5,000 bushel soybean contract for $9.70 from Trader S. Technically, Trader B buys the contract from Clearinghouse Member S and Trader S sells the contract to Clearinghouse Member B. Now, suppose that at the end of the day the contract is priced at $9.71. That evening the clearinghouse marks-to-market each member’s account. That is to say, the clearinghouse credits Member B’s margin account $50 and debits Member S’s margin account the same amount.

Member B is now in a position to draw on the clearinghouse $50, while Member S must pay the clearinghouse a $50 variation margin – incremental margin equal to the difference between a contract’s price and its current market value. In turn, clearinghouse members debit and credit accordingly the margin accounts of their commission merchants, who do the same to the margin accounts of their clients (i.e., traders). This iterative process all but assures the clearinghouse a sound financial footing. In the unlikely event that a trader defaults, the clearinghouse closes out the position and loses, at most, the trader’s one day loss.

Active Futures Markets

Futures exchanges create futures contracts. And, because futures exchanges compete for traders, they must create contracts that appeal to the financial community. For example, the New York Mercantile Exchange created its light sweet crude oil contract in order to fill an unexploited niche in the financial marketplace.

Not all contracts are successful and those that are may, at times, be inactive – the contract exists, but traders are not trading it. For example, of all contracts introduced by U.S. exchanges between 1960 and 1977, only 32% traded in 1980 (Stein 1986, 7). Consequently, entire exchanges can become active – e.g., the New York Futures Exchange opened in 1980 – or inactive – e.g., the New Orleans Exchange closed in 1983 (Leuthold 1989, 18). Government price supports or other such regulation can also render trading inactive (see Carlton 1984, 245).

Futures contracts succeed or fail for many reasons, but successful contracts do share certain basic characteristics (see for example, Baer and Saxon 1949, 110-25; Hieronymus 1977, 19-22). To wit, the underlying asset is homogeneous, reasonably durable, and standardized (easily describable); its supply and demand is ample, its price is unfettered, and all relevant information is available to all traders. For example, futures contracts have never derived from, say, artwork (heterogeneous and not standardized) or rent-controlled housing rights (supply, and hence price is fettered by regulation).

Purposes and Functions

Futures markets have three fundamental purposes. The first is to enable hedgers to shift price risk – asset price volatility – to speculators in return for basis risk – changes in the difference between a futures price and the cash, or current spot price of the underlying asset. Because basis risk is typically less than asset price risk, the financial community views hedging as a form of risk management and speculating as a form of risk taking.

Generally speaking, to hedge is to take opposing positions in the futures and cash markets. Hedgers include (but are not restricted to) farmers, feedlot operators, grain elevator operators, merchants, millers, utilities, export and import firms, refiners, lenders, and hedge fund managers (see Peck 1985, 13-21). Meanwhile, to speculate is to take a position in the futures market with no counter-position in the cash market. Speculators may not be affiliated with the underlying cash markets.

To demonstrate how a hedge works, assume Hedger A buys, or longs, 5,000 bushels of corn, which is currently worth $2.40 per bushel, or $12,000=$2.40×5000; the date is May 1st and Hedger A wishes to preserve the value of his corn inventory until he sells it on June 1st. To do so, he takes a position in the futures market that is exactly opposite his position in the spot – current cash – market. For example, Hedger A sells, or shorts, a July futures contract for 5,000 bushels of corn at a price of $2.50 per bushel; put differently, Hedger A commits to sell in July 5,000 bushels of corn for $12,500=$2.50×5000. Recall that to sell (buy) a futures contract means to commit to sell (buy) an amount and grade of an item at a specific price and future date.

Absent basis risk, Hedger A’s spot and futures markets positions will preserve the value of the 5,000 bushels of corn that he owns, because a fall in the spot price of corn will be matched penny for penny by a fall in the futures price of corn. For example, suppose that by June 1st the spot price of corn has fallen five cents to $2.35 per bushel. Absent basis risk, the July futures price of corn has also fallen five cents to $2.45 per bushel.

So, on June 1st, Hedger A sells his 5,000 bushels of corn and loses $250=($2.35-$2.40)x5000 in the spot market. At the same time, he buys a July futures contract for 5,000 bushels of corn and gains $250=($2.50-$2.45)x5000 in the futures market. Notice, because Hedger A has both sold and bought a July futures contract for 5,000 bushels of corn, he has offset his commitment in the futures market.

This example of a textbook hedge – one that eliminates price risk entirely – is instructive but it is also a bit misleading because: basis risk exists; hedgers may choose to hedge more or less than 100% of their cash positions; and hedgers may cross hedge – trade futures contracts whose underlying assets are not the same as the assets that the hedger owns. So, in reality hedgers cannot immunize entirely their cash positions from market fluctuations and in some cases they may not wish to do so. Again, the purpose of a hedge is not to avoid risk, but rather to manage or even profit from it.

The second fundamental purpose of a futures market is to facilitate firms’ acquisitions of operating capital – short term loans that finance firms’ purchases of intermediate goods such as inventories of grain or petroleum. For example, lenders are relatively more likely to finance, at or near prime lending rates, hedged (versus non-hedged) inventories. The futures contact is an efficient form of collateral because it costs only a fraction of the inventory’s value, or the margin on a short position in the futures market.

Speculators make the hedge possible because they absorb the inventory’s price risk; for example, the ultimate counterparty to the inventory dealer’s short position is a speculator. In the absence of futures markets, hedgers could only engage in forward contracts – unique agreements between private parties, who operate independently of an exchange or clearinghouse. Hence, the collateral value of a forward contract is less than that of a futures contract.3

The third fundamental purpose of a futures market is to provide information to decision makers regarding the market’s expectations of future economic events. So long as a futures market is efficient – the market forms expectations by taking into proper consideration all available information – its forecasts of future economic events are relatively more reliable than an individual’s. Forecast errors are expensive, and well informed, highly competitive, profit-seeking traders have a relatively greater incentive to minimize them.

The Evolution of Futures Trading in the U.S.

Early Nineteenth Century Grain Production and Marketing

Into the early nineteenth century, the vast majority of American grains – wheat, corn, barley, rye and oats – were produced throughout the hinterlands of the United States by producers who acted primarily as subsistence farmers – agricultural producers whose primary objective was to feed themselves and their families. Although many of these farmers sold their surplus production on the market, most lacked access to large markets, as well as the incentive, affordable labor supply, and myriad technologies necessary to practice commercial agriculture – the large scale production and marketing of surplus agricultural commodities.

At this time, the principal trade route to the Atlantic seaboard was by river through New Orleans4; though the South was also home to terminal markets – markets of final destination – for corn, provisions and flour. Smaller local grain markets existed along the tributaries of the Ohio and Mississippi Rivers and east-west overland routes. The latter were used primarily to transport manufactured (high valued and nonperishable) goods west.

Most farmers, and particularly those in the East North Central States – the region consisting today of Illinois, Indiana, Michigan, Ohio and Wisconsin – could not ship bulk grains to market profitably (Clark 1966, 4, 15).5 Instead, most converted grains into relatively high value flour, livestock, provisions and whiskies or malt liquors and shipped them south or, in the case of livestock, drove them east (14).6 Oats traded locally, if at all; their low value-to-weight ratios made their shipment, in bulk or otherwise, prohibitive (15n).

The Great Lakes provided a natural water route east to Buffalo but, in order to ship grain this way, producers in the interior East North Central region needed local ports to receive their production. Although the Erie Canal connected Lake Erie to the port of New York by 1825, water routes that connected local interior ports throughout northern Ohio to the Canal were not operational prior to the mid-1830s. Indeed, initially the Erie aided the development of the Old Northwest, not because it facilitated eastward grain shipments, but rather because it allowed immigrants and manufactured goods easy access to the West (Clark 1966, 53).

By 1835 the mouths of rivers and streams throughout the East North Central States had become the hubs, or port cities, from which farmers shipped grain east via the Erie. By this time, shippers could also opt to go south on the Ohio River and then upriver to Pittsburgh and ultimately to Philadelphia, or north on the Ohio Canal to Cleveland, Buffalo and ultimately, via the Welland Canal, to Lake Ontario and Montreal (19).

By 1836 shippers carried more grain north on the Great Lakes and through Buffalo, than south on the Mississippi through New Orleans (Odle 1964, 441). Though, as late as 1840 Ohio was the only state/region who participated significantly in the Great Lakes trade. Illinois, Indiana, Michigan, and the region of modern day Wisconsin either produced for their respective local markets or relied upon Southern demand. As of 1837 only 4,107 residents populated the “village” of Chicago, which became an official city in that year (Hieronymus 1977, 72).7

Antebellum Grain Trade Finance in the Old Northwest

Before the mid-1860s, a network of banks, grain dealers, merchants, millers and commission houses – buying and selling agents located in the central commodity markets – employed an acceptance system to finance the U.S. grain trade (see Clark 1966, 119; Odle 1964, 442). For example, a miller who required grain would instruct an agent in, say, New York to establish, on the miller’s behalf, a line of credit with a merchant there. The merchant extended this line of credit in the form of sight drafts, which the merchant made payable, in sixty or ninety days, up to the amount of the line of credit.

With this credit line established, commission agents in the hinterland would arrange with grain dealers to acquire the necessary grain. The commission agent would obtain warehouse receipts – dealer certified negotiable titles to specific lots and quantities of grain in store – from dealers, attach these to drafts that he drew on the merchant’s line of credit, and discount these drafts at his local bank in return for banknotes; the local bank would forward these drafts on to the New York merchant’s bank for redemption. The commission agents would use these banknotes to advance – lend – grain dealers roughly three quarters of the current market value of the grain. The commission agent would pay dealers the remainder (minus finance and commission fees) when the grain was finally sold in the East. That is, commission agents and grain dealers entered into consignment contracts.

Unfortunately, this approach linked banks, grain dealers, merchants, millers and commission agents such that the “entire procedure was attended by considerable risk and speculation, which was assumed by both the consignee and consignor” (Clark 1966, 120). The system was reasonably adequate if grain prices went unchanged between the time the miller procured the credit and the time the grain (bulk or converted) was sold in the East, but this was rarely the case. The fundamental problem with this system of finance was that commission agents were effectively asking banks to lend them money to purchase as yet unsold grain. To be sure, this inadequacy was most apparent during financial panics, when many banks refused to discount these drafts (Odle 1964, 447).

Grain Trade Finance in Transition: Forward Contracts and Commodity Exchanges

In 1848 the Illinois-Michigan Canal connected the Illinois River to Lake Michigan. The canal enabled farmers in the hinterlands along the Illinois River to ship their produce to merchants located along the river. These merchants accumulated, stored and then shipped grain to Chicago, Milwaukee and Racine. At first, shippers tagged deliverables according to producer and region, while purchasers inspected and chose these tagged bundles upon delivery. Commercial activity at the three grain ports grew throughout the 1850s. Chicago emerged as a dominant grain (primarily corn) hub later that decade (Pierce 1957, 66).8

Amidst this growth of Lake Michigan commerce, a confluence of innovations transformed the grain trade and its method of finance. By the 1840s, grain elevators and railroads facilitated high volume grain storage and shipment, respectively. Consequently, country merchants and their Chicago counterparts required greater financing in order to store and ship this higher volume of grain.9 And, high volume grain storage and shipment required that inventoried grains be fungible – of such a nature that one part or quantity could be replaced by another equal part or quantity in the satisfaction of an obligation. For example, because a bushel of grade No. 2 Spring Wheat was fungible, its price did not depend on whether it came from Farmer A, Farmer B, Grain Elevator C, or Train Car D.

Merchants could secure these larger loans more easily and at relatively lower rates if they obtained firm price and quantity commitments from their buyers. So, merchants began to engage in forward (not futures) contracts. According to Hieronymus (1977), the first such “time contract” on record was made on March 13, 1851. It specified that 3,000 bushels of corn were to be delivered to Chicago in June at a price of one cent below the March 13th cash market price (74).10

Meanwhile, commodity exchanges serviced the trade’s need for fungible grain. In the 1840s and 1850s these exchanges emerged as associations for dealing with local issues such as harbor infrastructure and commercial arbitration (e.g., Detroit in 1847, Buffalo, Cleveland and Chicago in 1848 and Milwaukee in 1849) (see Odle 1964). By the 1850s they established a system of staple grades, standards and inspections, all of which rendered inventory grain fungible (Baer and Saxon 1949, 10; Chandler 1977, 211). As collection points for grain, cotton, and provisions, they weighed, inspected and classified commodity shipments that passed from west to east. They also facilitated organized trading in spot and forward markets (Chandler 1977, 211; Odle 1964, 439).11

The largest and most prominent of these exchanges was the Board of Trade of the City of Chicago, a grain and provisions exchange established in 1848 by a State of Illinois corporate charter (Boyle 1920, 38; Lurie 1979, 27); the exchange is known today as the Chicago Board of Trade (CBT). For at least its first decade, the CBT functioned as a meeting place for merchants to resolve contract disputes and discuss commercial matters of mutual concern. Participation was part-time at best. The Board’s first directorate of 25 members included “a druggist, a bookseller, a tanner, a grocer, a coal dealer, a hardware merchant, and a banker” and attendance was often encouraged by free lunches (Lurie 1979, 25).

However, in 1859 the CBT became a state- (of Illinois) chartered private association. As such, the exchange requested and received from the Illinois legislature sanction to establish rules “for the management of their business and the mode in which it shall be transacted, as they may think proper;” to arbitrate over and settle disputes with the authority as “if it were a judgment rendered in the Circuit Court;” and to inspect, weigh and certify grain and grain trades such that these certifications would be binding upon all CBT members (Lurie 1979, 27).

Nineteenth Century Futures Trading

By the 1850s traders sold and resold forward contracts prior to actual delivery (Hieronymus 1977, 75). A trader could not offset, in the futures market sense of the term, a forward contact. Nonetheless, the existence of a secondary market – market for extant, as opposed to newly issued securities – in forward contracts suggests, if nothing else, speculators were active in these early time contracts.

On March 27, 1863, the Chicago Board of Trade adopted its first rules and procedures for trade in forwards on the exchange (Hieronymus 1977, 76). The rules addressed contract settlement, which was (and still is) the fundamental challenge associated with a forward contract – finding a trader who was willing to take a position in a forward contract was relatively easy to do; finding that trader at the time of contract settlement was not.

The CBT began to transform actively traded and reasonably homogeneous forward contracts into futures contracts in May, 1865. At this time, the CBT: restricted trade in time contracts to exchange members; standardized contract specifications; required traders to deposit margins; and specified formally contract settlement, including payments and deliveries, and grievance procedures (Hieronymus 1977, 76).

The inception of organized futures trading is difficult to date. This is due, in part, to semantic ambiguities – e.g., was a “to arrive” contract a forward contract or a futures contract or neither? However, most grain trade historians agree that storage (grain elevators), shipment (railroad), and communication (telegraph) technologies, a system of staple grades and standards, and the impetus to speculation provided by the Crimean and U.S. Civil Wars enabled futures trading to ripen by about 1874, at which time the CBT was the U.S.’s premier organized commodities (grain and provisions) futures exchange (Baer and Saxon 1949, 87; Chandler 1977, 212; CBT 1936, 18; Clark 1966, 120; Dies 1925, 15; Hoffman 1932, 29; Irwin 1954, 77, 82; Rothstein 1966, 67).

Nonetheless, futures exchanges in the mid-1870s lacked modern clearinghouses, with which most exchanges began to experiment only in the mid-1880s. For example, the CBT’s clearinghouse got its start in 1884, and a complete and mandatory clearing system was in place at the CBT by 1925 (Hoffman 1932, 199; Williams 1982, 306). The earliest formal clearing and offset procedures were established by the Minneapolis Grain Exchange in 1891 (Peck 1985, 6).

Even so, rudiments of a clearing system – one that freed traders from dealing directly with one another – were in place by the 1870s (Hoffman 1920, 189). That is to say, brokers assumed the counter-position to every trade, much as clearinghouse members would do decades later. Brokers settled offsets between one another, though in the absence of a formal clearing procedure these settlements were difficult to accomplish.

Direct settlements were simple enough. Here, two brokers would settle in cash their offsetting positions between one another only. Nonetheless, direct settlements were relatively uncommon because offsetting purchases and sales between brokers rarely balanced with respect to quantity. For example, B1 might buy a 5,000 bushel corn future from B2, who then might buy a 6,000 bushel corn future from B1; in this example, 1,000 bushels of corn remain unsettled between B1 and B2. Of course, the two brokers could offset the remaining 1,000 bushel contract if B2 sold a 1,000 bushel corn future to B1. But what if B2 had already sold a 1,000 bushel corn future to B3, who had sold a 1,000 bushel corn future to B1? In this case, each broker’s net futures market position is offset, but all three must meet in order to settle their respective positions. Brokers referred to such a meeting as a ring settlement. Finally, if, in this example, B1 and B3 did not have positions with each other, B2 could settle her position if she transferred her commitment (which she has with B1) to B3. Brokers referred to this method as a transfer settlement. In either ring or transfer settlements, brokers had to find other brokers who held and wished to settle open counter-positions. Often brokers used runners to search literally the offices and corridors for the requisite counter-parties (see Hoffman 1932, 185-200).

Finally, the transformation in Chicago grain markets from forward to futures trading occurred almost simultaneously in New York cotton markets. Forward contracts for cotton traded in New York (and Liverpool, England) by the 1850s. And, like Chicago, organized trading in cotton futures began on the New York Cotton Exchange in about 1870; rules and procedures formalized the practice in 1872. Futures trading on the New Orleans Cotton Exchange began around 1882 (Hieronymus 1977, 77).

Other successful nineteenth century futures exchanges include the New York Produce Exchange, the Milwaukee Chamber of Commerce, the Merchant’s Exchange of St. Louis, the Chicago Open Board of Trade, the Duluth Board of Trade, and the Kansas City Board of Trade (Hoffman 1920, 33; see Peck 1985, 9).

Early Futures Market Performance


Data on grain futures volume prior to the 1880s are not available (Hoffman 1932, 30). Though in the 1870s “[CBT] officials openly admitted that there was no actual delivery of grain in more than ninety percent of contracts” (Lurie 1979, 59). Indeed, Chart 1 demonstrates that trading was relatively voluminous in the nineteenth century.

An annual average of 23,600 million bushels of grain futures traded between 1884 and 1888, or eight times the annual average amount of crops produced during that period. By comparison, an annual average of 25,803 million bushels of grain futures traded between 1966 and 1970, or four times the annual average amount of crops produced during that period. In 2002, futures volume outnumbered crop production by a factor of eleven.

The comparable data for cotton futures are presented in Chart 2. Again here, trading in the nineteenth century was significant. To wit, by 1879 futures volume had outnumbered production by a factor of five, and by 1896 this factor had reached eight.

Price of Storage

Nineteenth century observers of early U.S. futures markets either credited them for stabilizing food prices, or discredited them for wagering on, and intensifying, the economic hardships of Americans (Baer and Saxon 1949, 12-20, 56; Chandler 1977, 212; Ferris 1988, 88; Hoffman 1932, 5; Lurie 1979, 53, 115). To be sure, the performance of early futures markets remains relatively unexplored. The extant research on the subject has generally examined this performance in the context of two perspectives on the theory of efficiency: the price of storage and futures price efficiency more generally.

Holbrook Working pioneered research into the price of storage – the relationship, at a point in time, between prices (of storable agricultural commodities) applicable to different future dates (Working 1949, 1254).12 For example, what is the relationship between the current spot price of wheat and the current September 2004 futures price of wheat? Or, what is the relationship between the current September 2004 futures price of wheat and the current May 2005 futures price of wheat?

Working reasoned that these prices could not differ because of events that were expected to occur between these dates. For example, if the May 2004 wheat futures price is less than the September 2004 price, this cannot be due to, say, the expectation of a small harvest between May 2004 and September 2004. On the contrary, traders should factor such an expectation into both May and September prices. And, assuming that they do, then this difference can only reflect the cost of carrying – storing – these commodities over time.13 Though this strict interpretation has since been modified somewhat (see Peck 1985, 44).

So, for example, the September 2004 price equals the May 2004 price plus the cost of storing wheat between May 2004 and September 2004. If the difference between these prices is greater or less than the cost of storage, and the market is efficient, arbitrage will bring the difference back to the cost of storage – e.g., if the difference in prices exceeds the cost of storage, then traders can profit if they buy the May 2004 contract, sell the September 2004 contract, take delivery in May and store the wheat until September. Working (1953) demonstrated empirically that the theory of the price of storage could explain quite satisfactorily these inter-temporal differences in wheat futures prices at the CBT as early as the late 1880s (Working 1953, 556).

Futures Price Efficiency

Many contemporary economists tend to focus on futures price efficiency more generally (for example, Beck 1994; Kahl and Tomek 1986; Kofi 1973; McKenzie, et al. 2002; Tomek and Gray, 1970). That is to say, do futures prices shadow consistently (but not necessarily equal) traders’ rational expectations of future spot prices? Here, the research focuses on the relationship between, say, the cash price of wheat in September 2004 and the September 2004 futures price of wheat quoted two months earlier in July 2004.

Figure 1illustrates the behavior of corn futures prices and their corresponding spot prices between 1877 and 1890. The data consist of the average month t futures price in the last full week of month t-2 and the average cash price in the first full week of month t.

The futures price and its corresponding spot price need not be equal; futures price efficiency does not mean that the futures market is clairvoyant. But, a difference between the two series should exist only because of an unpredictable forecast error and a risk premium – futures prices may be, say, consistently below the expected future spot price if long speculators require an inducement, or premium, to enter the futures market. Recent work finds strong evidence that these early corn (and corresponding wheat) futures prices are, in the long run, efficient estimates of their underlying spot prices (Santos 2002, 35). Although these results and Working’s empirical studies on the price of storage support, to some extent, the notion that early U.S. futures markets were efficient, this question remains largely unexplored by economic historians.

The Struggle for Legitimacy

Nineteenth century America was both fascinated and appalled by futures trading. This is apparent from the litigation and many public debates surrounding its legitimacy (Baer and Saxon 1949, 55; Buck 1913, 131, 271; Hoffman 1932, 29, 351; Irwin 1954, 80; Lurie 1979, 53, 106). Many agricultural producers, the lay community and, at times, legislatures and the courts, believed trading in futures was tantamount to gambling. The difference between the latter and speculating, which required the purchase or sale of a futures contract but not the shipment or delivery of the commodity, was ostensibly lost on most Americans (Baer and Saxon 1949, 56; Ferris 1988, 88; Hoffman 1932, 5; Lurie 1979, 53, 115).

Many Americans believed that futures traders frequently manipulated prices. From the end of the Civil War until 1879 alone, corners – control of enough of the available supply of a commodity to manipulate its price – allegedly occurred with varying degrees of success in wheat (1868, 1871, 1878/9), corn (1868), oats (1868, 1871, 1874), rye (1868) and pork (1868) (Boyle 1920, 64-65). This manipulation continued throughout the century and culminated in the Three Big Corners – the Hutchinson (1888), the Leiter (1898), and the Patten (1909). The Patten corner was later debunked (Boyle 1920, 67-74), while the Leiter corner was the inspiration for Frank Norris’s classic The Pit: A Story of Chicago (Norris 1903; Rothstein 1982, 60).14 In any case, reports of market corners on America’s early futures exchanges were likely exaggerated (Boyle 1920, 62-74; Hieronymus 1977, 84), as were their long term effects on prices and hence consumer welfare (Rothstein 1982, 60).

By 1892 thousands of petitions to Congress called for the prohibition of “speculative gambling in grain” (Lurie, 1979, 109). And, attacks from state legislatures were seemingly unrelenting: in 1812 a New York act made short sales illegal (the act was repealed in 1858); in 1841 a Pennsylvania law made short sales, where the position was not covered in five days, a misdemeanor (the law was repealed in 1862); in 1882 an Ohio law and a similar one in Illinois tried unsuccessfully to restrict cash settlement of futures contracts; in 1867 the Illinois constitution forbade dealing in futures contracts (this was repealed by 1869); in 1879 California’s constitution invalidated futures contracts (this was effectively repealed in 1908); and, in 1882, 1883 and 1885, Mississippi, Arkansas, and Texas, respectively, passed laws that equated futures trading with gambling, thus making the former a misdemeanor (Peterson 1933, 68-69).

Two nineteenth century challenges to futures trading are particularly noteworthy. The first was the so-called Anti-Option movement. According to Lurie (1979), the movement was fueled by agrarians and their sympathizers in Congress who wanted to end what they perceived as wanton speculative abuses in futures trading (109). Although options were (are) not futures contracts, and were nonetheless already outlawed on most exchanges by the 1890s, the legislation did not distinguish between the two instruments and effectively sought to outlaw both (Lurie 1979, 109).

In 1890 the Butterworth Anti-Option Bill was introduced in Congress but never came to a vote. However, in 1892 the Hatch (and Washburn) Anti-Option bills passed both houses of Congress, and failed only on technicalities during reconciliation between the two houses. Had either bill become law, it would have effectively ended options and futures trading in the United States (Lurie 1979, 110).

A second notable challenge was the bucket shop controversy, which challenged the legitimacy of the CBT in particular. A bucket shop was essentially an association of gamblers who met outside the CBT and wagered on the direction of futures prices. These associations had legitimate-sounding names such as the Christie Grain and Stock Company and the Public Grain Exchange. To most Americans, these “exchanges” were no less legitimate than the CBT. That some CBT members were guilty of “bucket shopping” only made matters worse!

The bucket shop controversy was protracted and colorful (see Lurie 1979, 138-167). Between 1884 and 1887 Illinois, Iowa, Missouri and Ohio passed anti-bucket shop laws (Lurie 1979, 95). The CBT believed these laws entitled them to restrict bucket shops access to CBT price quotes, without which the bucket shops could not exist. Bucket shops argued that they were competing exchanges, and hence immune to extant anti-bucket shop laws. As such, they sued the CBT for access to these price quotes.15

The two sides and the telegraph companies fought in the courts for decades over access to these price quotes; the CBT’s very survival hung in the balance. After roughly twenty years of litigation, the Supreme Court of the U.S. effectively ruled in favor of the Chicago Board of Trade and against bucket shops (Board of Trade of the City of Chicago v. Christie Grain & Stock Co., 198 U.S. 236, 25 Sup. Ct. (1905)). Bucket shops disappeared completely by 1915 (Hieronymus 1977, 90).


The anti-option movement, the bucket shop controversy and the American public’s discontent with speculation masks an ironic reality of futures trading: it escaped government regulation until after the First World War; though early exchanges did practice self-regulation or administrative law.16 The absence of any formal governmental oversight was due in large part to two factors. First, prior to 1895, the opposition tried unsuccessfully to outlaw rather than regulate futures trading. Second, strong agricultural commodity prices between 1895 and 1920 weakened the opposition, who blamed futures markets for low agricultural commodity prices (Hieronymus 1977, 313).

Grain prices fell significantly by the end of the First World War, and opposition to futures trading grew once again (Hieronymus 1977, 313). In 1922 the U.S. Congress enacted the Grain Futures Act, which required exchanges to be licensed, limited market manipulation and publicized trading information (Leuthold 1989, 369).17 However, regulators could rarely enforce the act because it enabled them to discipline exchanges, rather than individual traders. To discipline an exchange was essentially to suspend it, a punishment unfit (too harsh) for most exchange-related infractions.

The Commodity Exchange Act of 1936 enabled the government to deal directly with traders rather than exchanges. It established the Commodity Exchange Authority (CEA), a bureau of the U.S. Department of Agriculture, to monitor and investigate trading activities and prosecute price manipulation as a criminal offense. The act also: limited speculators’ trading activities and the sizes of their positions; regulated futures commission merchants; banned options trading on domestic agricultural commodities; and restricted futures trading – designated which commodities were to be traded on which licensed exchanges (see Hieronymus 1977; Leuthold, et al. 1989).

Although Congress amended the Commodity Exchange Act in 1968 in order to increase the regulatory powers of the Commodity Exchange Authority, the latter was ill-equipped to handle the explosive growth in futures trading in the 1960s and 1970s. So, in 1974 Congress passed the Commodity Futures Trading Act, which created far-reaching federal oversight of U.S. futures trading and established the Commodity Futures Trading Commission (CFTC).

Like the futures legislation before it, the Commodity Futures Trading Act seeks “to ensure proper execution of customer orders and to prevent unlawful manipulation, price distortion, fraud, cheating, fictitious trades, and misuse of customer funds” (Leuthold, et al. 1989, 34). Unlike the CEA, the CFTC was given broad regulator powers over all futures trading and related exchange activities throughout the U.S. The CFTC oversees and approves modifications to extant contracts and the creation and introduction of new contracts. The CFTC consists of five presidential appointees who are confirmed by the U.S. Senate.

The Futures Trading Act of 1982 amended the Commodity Futures Trading Act of 1974. The 1982 act legalized options trading on agricultural commodities and identified more clearly the jurisdictions of the CFTC and Securities and Exchange Commission (SEC). The regulatory overlap between the two organizations arose because of the explosive popularity during the 1970s of financial futures contracts. Today, the CFTC regulates all futures contracts and options on futures contracts traded on U.S. futures exchanges; the SEC regulates all financial instrument cash markets as well as all other options markets.

Finally, in 2000 Congress passed the Commodity Futures Modernization Act, which reauthorized the Commodity Futures Trading Commission for five years and repealed an 18-year old ban on trading single stock futures. The bill also sought to increase competition and “reduce systematic risk in markets for futures and over-the-counter derivatives” (H.R. 5660, 106th Congress 2nd Session).

Modern Futures Markets

The growth in futures trading has been explosive in recent years (Chart 3).

Futures trading extended beyond physical commodities in the 1970s and 1980s – currency futures in 1972; interest rate futures in 1975; and stock index futures in 1982 (Silber 1985, 83). The enormous growth of financial futures at this time was likely because of the breakdown of the Bretton Woods exchange rate regime, which essentially fixed the relative values of industrial economies’ exchange rates to the American dollar (see Bordo and Eichengreen 1993), and relatively high inflation from the late 1960s to the early 1980s. Flexible exchange rates and inflation introduced, respectively, exchange and interest rate risks, which hedgers sought to mitigate through the use of financial futures. Finally, although futures contracts on agricultural commodities remain popular, financial futures and options dominate trading today. Trading volume in metals, minerals and energy remains relatively small.

Trading volume in agricultural futures contracts first dropped below 50% in 1982. By 1985 this volume had dropped to less than one fourth all trading. In the same year the volume of futures trading in the U.S. Treasury bond contract alone exceeded trading volume in all agricultural commodities combined (Leuthold et al. 1989, 2). Today exchanges in the U.S. actively trade contracts on several underlying assets (Table 1). These range from the traditional – e.g., agriculture and metals – to the truly innovative – e.g. the weather. The latter’s payoff varies with the number of degree-days by which the temperature in a particular region deviates from 65 degrees Fahrenheit.

Table 1: Select Futures Contracts Traded as of 2002

Agriculture Currencies Equity Indexes Interest Rates Metals & Energy
Corn British pound S&P 500 index Eurodollars Copper
Oats Canadian dollar Dow Jones Industrials Euroyen Aluminum
Soybeans Japanese yen S&P Midcap 400 Euro-denominated bond Gold
Soybean meal Euro Nasdaq 100 Euroswiss Platinum
Soybean oil Swiss franc NYSE index Sterling Palladium
Wheat Australian dollar Russell 2000 index British gov. bond (gilt) Silver
Barley Mexican peso Nikkei 225 German gov. bond Crude oil
Flaxseed Brazilian real FTSE index Italian gov. bond Heating oil
Canola CAC-40 Canadian gov. bond Gas oil
Rye DAX-30 Treasury bonds Natural gas
Cattle All ordinary Treasury notes Gasoline
Hogs Toronto 35 Treasury bills Propane
Pork bellies Dow Jones Euro STOXX 50 LIBOR CRB index
Cocoa EURIBOR Electricity
Coffee Municipal bond index Weather
Cotton Federal funds rate
Milk Bankers’ acceptance
Orange juice

Source: Bodie, Kane and Marcus (2005), p. 796.

Table 2 provides a list of today’s major futures exchanges.

Table 2: Select Futures Exchanges as of 2002

Exchange Exchange
Chicago Board of Trade CBT Montreal Exchange ME
Chicago Mercantile Exchange CME Minneapolis Grain Exchange MPLS
Coffee, Sugar & Cocoa Exchange, New York CSCE Unit of Euronext.liffe NQLX
COMEX, a division of the NYME CMX New York Cotton Exchange NYCE
European Exchange EUREX New York Futures Exchange NYFE
Financial Exchange, a division of the NYCE FINEX New York Mercantile Exchange NYME
International Petroleum Exchange IPE OneChicago ONE
Kansas City Board of Trade KC Sydney Futures Exchange SFE
London International Financial Futures Exchange LIFFE Singapore Exchange Ltd. SGX
Marche a Terme International de France MATIF

Source: Wall Street Journal, 5/12/2004, C16.

Modern trading differs from its nineteenth century counterpart in other respects as well. First, the popularity of open outcry trading is waning. For example, today the CBT executes roughly half of all trades electronically. And, electronic trading is the rule, rather than the exception throughout Europe. Second, today roughly 99% of all futures contracts are settled prior to maturity. Third, in 1982 the Commodity Futures Trading Commission approved cash settlement – delivery that takes the form of a cash balance – on financial index and Eurodollar futures, whose underlying assets are not deliverable, as well as on several non-financial contracts including lean hog, feeder cattle and weather (Carlton 1984, 253). And finally, on Dec. 6, 2002, the Chicago Mercantile Exchange became the first publicly traded financial exchange in the U.S.

References and Further Reading

Baer, Julius B. and Olin. G. Saxon. Commodity Exchanges and Futures Trading. New York: Harper & Brothers, 1949.

Bodie, Zvi, Alex Kane and Alan J. Marcus. Investments. New York: McGraw-Hill/Irwin, 2005.

Bordo, Michael D. and Barry Eichengreen, editors. A Retrospective on the Bretton Woods System: Lessons for International Monetary Reform. Chicago: University of Chicago Press, 1993.

Boyle, James. E. Speculation and the Chicago Board of Trade. New York: MacMillan Company, 1920.

Buck, Solon. J. The Granger Movement: A Study of Agricultural Organization and Its Political,

Carlton, Dennis W. “Futures Markets: Their Purpose, Their History, Their Growth, Their Successes and Failures.” Journal of Futures Markets 4, no. 3 (1984): 237-271.

Chicago Board of Trade Bulletin. The Development of the Chicago Board of Trade. Chicago: Chicago Board of Trade, 1936.

Chandler, Alfred. D. The Visible Hand: The Managerial Revolution in American Business. Cambridge: Harvard University Press, 1977.

Clark, John. G. The Grain Trade in the Old Northwest. Urbana: University of Illinois Press, 1966.

Commodity Futures Trading Commission. Annual Report. Washington, D.C. 2003.

Dies, Edward. J. The Wheat Pit. Chicago: The Argyle Press, 1925.

Ferris, William. G. The Grain Traders: The Story of the Chicago Board of Trade. East Lansing, MI: Michigan State University Press, 1988.

Hieronymus, Thomas A. Economics of Futures Trading for Commercial and Personal Profit. New York: Commodity Research Bureau, Inc., 1977.

Hoffman, George W. Futures Trading upon Organized Commodity Markets in the United States. Philadelphia: University of Pennsylvania Press, 1932.

Irwin, Harold. S. Evolution of Futures Trading. Madison, WI: Mimir Publishers, Inc., 1954

Leuthold, Raymond M., Joan C. Junkus and Jean E. Cordier. The Theory and Practice of Futures Markets. Champaign, IL: Stipes Publishing L.L.C., 1989.

Lurie, Jonathan. The Chicago Board of Trade 1859-1905. Urbana: University of Illinois Press, 1979.

National Agricultural Statistics Service. “Historical Track Records.” Agricultural Statistics Board, U.S. Department of Agriculture, Washington, D.C. April 2004.

Norris, Frank. The Pit: A Story of Chicago. New York, NY: Penguin Group, 1903.

Odle, Thomas. “Entrepreneurial Cooperation on the Great Lakes: The Origin of the Methods of American Grain Marketing.” Business History Review 38, (1964): 439-55.

Peck, Anne E., editor. Futures Markets: Their Economic Role. Washington D.C.: American Enterprise Institute for Public Policy Research, 1985.

Peterson, Arthur G. “Futures Trading with Particular Reference to Agricultural Commodities.” Agricultural History 8, (1933): 68-80.

Pierce, Bessie L. A History of Chicago: Volume III, the Rise of a Modern City. New York: Alfred A. Knopf, 1957.

Rothstein, Morton. “The International Market for Agricultural Commodities, 1850-1873.” In Economic Change in the Civil War Era, edited by David. T. Gilchrist and W. David Lewis, 62-71. Greenville DE: Eleutherian Mills-Hagley Foundation, 1966.

Rothstein, Morton. “Frank Norris and Popular Perceptions of the Market.” Agricultural History 56, (1982): 50-66.

Santos, Joseph. “Did Futures Markets Stabilize U.S. Grain Prices?” Journal of Agricultural Economics 53, no. 1 (2002): 25-36.

Silber, William L. “The Economic Role of Financial Futures.” In Futures Markets: Their Economic Role, edited by Anne E. Peck, 83-114. Washington D.C.: American Enterprise Institute for Public Policy Research, 1985.

Stein, Jerome L. The Economics of Futures Markets. Oxford: Basil Blackwell Ltd, 1986.

Taylor, Charles. H. History of the Board of Trade of the City of Chicago. Chicago: R. O. Law, 1917.

Werner, Walter and Steven T. Smith. Wall Street. New York: Columbia University Press, 1991.

Williams, Jeffrey C. “The Origin of Futures Markets.” Agricultural History 56, (1982): 306-16.

Working, Holbrook. “The Theory of the Price of Storage.” American Economic Review 39, (1949): 1254-62.

Working, Holbrook. “Hedging Reconsidered.” Journal of Farm Economics 35, (1953): 544-61.

1 The clearinghouse is typically a corporation owned by a subset of exchange members. For details regarding the clearing arrangements of a specific exchange, go to and click on “Clearing Organizations.”

2 The vast majority of contracts are offset. Outright delivery occurs when the buyer receives from, or the seller “delivers” to the exchange a title of ownership, and not the actual commodity or financial security – the urban legend of the trader who neglected to settle his long position and consequently “woke up one morning to find several car loads of a commodity dumped on his front yard” is indeed apocryphal (Hieronymus 1977, 37)!

3 Nevertheless, forward contracts remain popular today (see Peck 1985, 9-12).

4 The importance of New Orleans as a point of departure for U.S. grain and provisions prior to the Civil War is unquestionable. According to Clark (1966), “New Orleans was the leading export center in the nation in terms of dollar volume of domestic exports, except for 1847 and a few years during the 1850s, when New York’s domestic exports exceeded those of the Crescent City” (36).

5 This area was responsible for roughly half of U.S. wheat production and a third of U.S. corn production just prior to 1860. Southern planters dominated corn output during the early to mid- 1800s.

6 Millers milled wheat into flour; pork producers fed corn to pigs, which producers slaughtered for provisions; distillers and brewers converted rye and barley into whiskey and malt liquors, respectively; and ranchers fed grains and grasses to cattle, which were then driven to eastern markets.

7 Significant advances in transportation made the grain trade’s eastward expansion possible, but the strong and growing demand for grain in the East made the trade profitable. The growth in domestic grain demand during the early to mid-nineteenth century reflected the strong growth in eastern urban populations. Between 1820 and 1860, the populations of Baltimore, Boston, New York and Philadelphia increased by over 500% (Clark 1966, 54). Moreover, as the 1840’s approached, foreign demand for U.S. grain grew. Between 1845 and 1847, U.S. exports of wheat and flour rose from 6.3 million bushels to 26.3 million bushels and corn exports grew from 840,000 bushels to 16.3 million bushels (Clark 1966, 55).

8 Wheat production was shifting to the trans-Mississippi West, which produced 65% of the nation’s wheat by 1899 and 90% by 1909, and railroads based in the Lake Michigan port cities intercepted the Mississippi River trade that would otherwise have headed to St. Louis (Clark 1966, 95). Lake Michigan port cities also benefited from a growing concentration of corn production in the West North Central region – Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota and South Dakota, which by 1899 produced 40% percent of the country’s corn (Clark 1966, 4).

9 Corn had to be dried immediately after it was harvested and could only be shipped profitably by water to Chicago, but only after rivers and lakes had thawed; so, country merchants stored large quantities of corn. On the other hand, wheat was more valuable relative to its weight, and it could be shipped to Chicago by rail or road immediately after it was harvested; so, Chicago merchants stored large quantities of wheat.

10 This is consistent with Odle (1964), who adds that “the creators of the new system of marketing [forward contracts] were the grain merchants of the Great Lakes” (439). However, Williams (1982) presents evidence of such contracts between Buffalo and New York City as early as 1847 (309). To be sure, Williams proffers an intriguing case that forward and, in effect, future trading was active and quite sophisticated throughout New York by the late 1840s. Moreover, he argues that this trading grew not out of activity in Chicago, whose trading activities were quite primitive at this early date, but rather trading in London and ultimately Amsterdam. Indeed, “time bargains” were common in London and New York securities markets in the mid- and late 1700s, respectively. A time bargain was essentially a cash-settled financial forward contract that was unenforceable by law, and as such “each party was forced to rely on the integrity and credit of the other” (Werner and Smith 1991, 31). According to Werner and Smith, “time bargains prevailed on Wall Street until 1840, and were gradually replaced by margin trading by 1860” (68). They add that, “margin trading … had an advantage over time bargains, in which there was little protection against default beyond the word of another broker. Time bargains also technically violated the law as wagering contracts; margin trading did not” (135). Between 1818 and 1840 these contracts comprised anywhere from 0.7% (49-day average in 1830) to 34.6% (78-day average in 1819) of daily exchange volume on the New York Stock & Exchange Board (Werner and Smith 1991, 174).

11 Of course, forward markets could and indeed did exist in the absence of both grading standards and formal exchanges, though to what extent they existed is unclear (see Williams 1982).

12 In the parlance of modern financial futures, the term cost of carry is used instead of the term storage. For example, the cost of carrying a bond is comprised of the cost of acquiring and holding (or storing) it until delivery minus the return earned during the carry period.

13 More specifically, the price of storage is comprised of three components: (1) physical costs such as warehouse and insurance; (2) financial costs such as borrowing rates of interest; and (3) the convenience yield – the return that the merchant, who stores the commodity, derives from maintaining an inventory in the commodity. The marginal costs of (1) and (2) are increasing functions of the amount stored; the more the merchant stores, the greater the marginal costs of warehouse use, insurance and financing. Whereas the marginal benefit of (3) is a decreasing function of the amount stored; put differently, the smaller the merchant’s inventory, the more valuable each additional unit of inventory becomes. Working used this convenience yield to explain a negative price of storage – the nearby contract is priced higher than the faraway contract; an event that is likely to occur when supplies are exceptionally low. In this instance, there is little for inventory dealers to store. Hence, dealers face extremely low physical and financial storage costs, but extremely high convenience yields. The price of storage turns negative; essentially, inventory dealers are willing to pay to store the commodity.

14 Norris’ protagonist, Curtis Jadwin, is a wheat speculator emotionally consumed and ultimately destroyed, while the welfare of producers and consumers hang in the balance, when a nineteenth century CBT wheat futures corner backfires on him.

15 One particularly colorful incident in the controversy came when the Supreme Court of Illinois ruled that the CBT had to either make price quotes public or restrict access to everyone. When the Board opted for the latter, it found it needed to “prevent its members from running (often literally) between the [CBT and a bucket shop next door], but with minimal success. Board officials at first tried to lock the doors to the exchange…However, after one member literally battered down the door to the east side of the building, the directors abandoned this policy as impracticable if not destructive” (Lurie 1979, 140).

16 Administrative law is “a body of rules and doctrines which deals with the powers and actions of administrative agencies” that are organizations other than the judiciary or legislature. These organizations affect the rights of private parties “through either adjudication, rulemaking, investigating, prosecuting, negotiating, settling, or informally acting” (Lurie 1979, 9).

17 In 1921 Congress passed The Futures Trading Act, which was declared unconstitutional.

Citation: Santos, Joseph. “A History of Futures Trading in the United States”. EH.Net Encyclopedia, edited by Robert Whaples. March 16, 2008. URL

Debt and Slavery in the Mediterranean and Atlantic Worlds

Reviewer(s):Engerman, Stanley L.

Published by EH.Net (October 2013)

Gwyn Campbell and Alessandro Stanziani, editors, Debt and Slavery in the Mediterranean and Atlantic Worlds. London: Pickering & Chatto, 2013. xiv + 185 pp. $99 (hardcover), ISBN: 978-1-84893-374-3.

Reviewed for EH.Net by Stanley L. Engerman, Department of Economics, University of Rochester.

Debt and Slavery in the Mediterranean and Atlantic Worlds contains nine essays plus a long introduction by the co-editors, dealing with topics related to the importance of debt in leading to enslavement in many places over a long period of time. The period covered ranges from about 300 B.C. (Early Rome) to 1956 (Anglo-Egyptian Sudan), and covers various nations of the world in Europe, Asia, and Africa.

The editors introduction discusses the various types of slavery and the meaning of enslavement. While they consider most slaves to be the result of wartime capture, they point to the relative importance (though few numerical estimates are given) of slavery resulting from the failure to pay debt in full, which permits the creditor to enslave the debtor, presumably for life. They note the occasional practice of self-enslavement for debt and sale of children (p. 13), but little attention is given to its major role in times of subsistence crises. They distinguish, as do several of the authors, between pawnship (the provision of collateral for loans) and debt slavery, although they indicate that these categories are often difficult to distinguish ? and while pawnship may lead to slavery in some times and places, at other times and places it does not.

Marc Kleijwegt’s chapter on early Rome focuses on Moses Finley’s contention that chattel slavery began in Rome only after 326 B.C., with the abolition of the nexum as a form of temporary bondage, requiring its replacement by a different form of coerced labor. Kleijwegt argues, against Finley, that chattel slavery in Rome had begun earlier, and that debt enslavement did not end in 326 B.C., so that while some aspects of the arguments made by Finley did take place, these changes were less dramatic and sharp than Finley argued, and that this complicates the belief in an abrupt transition from debt bondage to chattel slavery? (p. 37).

In the most wide-ranging essay in terms of time and location, Alessandro Stanziani deals with enslavement for debt and by war captivity in several Mediterranean and Central Asian states as well as in Russia, China, and India. In some cases these were suppliers of slaves, and in others users of slaves.? In most cases, although debt slavery was important, war captives played a dominant role (p. 48), reflecting the political instability and military operations that characterized these areas.

Michael Ferguson details the Ottoman Empire state-initiated emancipations, mainly of African slaves from the third quarter of the nineteenth century. These may have been a minority of emancipations, but state-initiated emancipation generally led to keeping ex-slaves under state protection, where they often served in the military, or performed agricultural work. Two essays on debt slavery and pawnship, by Paul Lovejoy in West Africa and Olatunji Ojo on the Yoruba, focus on the distinctions and similarities between pawnship and slavery. Pawnship, a form of providing an individual as security for debt, did not necessarily lead to slavery, although there were important legal changes over time and its conditions varied from place to place. In West Africa, as elsewhere, most slaves were the result of violence, including kidnapping, not debt. The same was apparently the case among the Yoruba, where many slaves were also the result of violence, not debt. Most pawns who were to become slaves were women and children, “whereas adult males” were more likely to be taken in combat? (p. 90).

In an update of his classic article of some forty years ago, in “The Africanization of the Work Force in English America,” Russell R. Menard analyzes the transition from the debts entered into by indentured labor, mainly from England, to the growth in the importance of African slaves in the colonial Chesapeake and in Barbados. Based on the detailed work of Lorena Walsh and John C. Coombs in pointing to the differences in the types of tobacco produced in different parts of the Chesapeake, Menard argues for a shift in chronology and explanation from his earlier arguments. In regard to Barbados, he argues that the transition to slavery had begun prior to the sugar revolution, based on other export crops, although sugar greatly accelerated the growth in slavery.

In an attempt to link the development of commerce and credit in various parts of Europe, the Americas, and Africa to the role of slavery and the slave trade, Joseph Miller describes the role of European states and merchants in obtaining and shifting specie and funds in trading with Africa and elsewhere.? While this commercialization did benefit the Europeans, he argues that its effect upon African societies and economies was negative, leading to more militarization and the need to provide slaves to pay for the debts accumulated.

Henrique Espada Lima presents a detailed examination of various forms of coerced labor in Brazil in the nineteenth century, including some labor based on voluntary immigration from Portugal and the Azores.? There were provisions made for self-purchase by slaves, making for a conversion of slavery into debt, and thus having slaves pay financial compensation to their former owners (p. 131). Slavery finally ended in Brazil in 1888, 17 years after passage of the so-called law of the free womb, with no compensation paid to either slaves or slave owners. According to Steven Serels, it was debt, not taxation, which led to the increased labor force participation in cotton production in the Anglo-Egyptian Sudan between 1898 and the coming of independence in 1956. This debt influenced both laborers and tenants, and bound these cultivators to the land and prevented them from regaining their lost independence? (p. 142) over the first half of the twentieth century.

All the essays are based upon extensive primary and secondary research, are clearly presented, and are quite useful additions to understanding the historical meaning of slavery, serfdom, pawnship, and different forms of coerced labor. As with such a diverse set of essays, there are differences in the caliber of the argument and in the authors? perceived importance of the role of debt slavery in different times and places. Nevertheless, the great value of this collection is to indicate the widespread frequency and social importance of this particular form of enslavement.

Stanley Engerman is co-author (with Kenneth Sokoloff) of Economic Development in the Americas since 1500: Endowments and Institutions, Cambridge University Press, 2012.

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Subject(s):Servitude and Slavery
Geographic Area(s):General, International, or Comparative
Time Period(s):General or Comparative