The Futures: The Rise of the Speculator and the Origins of the World?s Biggest Markets

Published by EH.NET (June 2011)

Emily Lambert, The Futures: The Rise of the Speculator and the Origins of the World?s Biggest Markets. New York: Basic Books, 2010. xiv + 226 pp. $27 (hardcover), ISBN: 978-0-465-01843-7.

Reviewed for EH.Net by Joseph M. Santos, Department of Economics, South Dakota State University.

In The Futures, Emily Lambert, a senior writer for Forbes, highlights some of the personalities, commodities, and controversies that catalyzed and shaped the growth of futures trading in Chicago and, to a lesser extent, elsewhere.? The author describes how agricultural marketing evolved and then focuses on events surrounding the Chicago Board of Trade and the Chicago Mercantile Exchange after the Second World War.? (The two exchanges merged in 2006 to form the CME Group.)

Many EH.Net subscribers are familiar with the broad history of events that inform this book.? In essence, commodity futures trading in North America was spurred by the Illinois-Michigan Canal (1848), the growth of Lake Michigan commerce that followed, and a confluence of innovations, including grain elevators, railroads, grain exchanges, and forward contracts.? The canal allowed farmers in the hinterlands along the Illinois River to ship grain to Lake Michigan dealers, who sent much of it to Chicago.? Elevators and the railroad facilitated high-volume grain storage and shipment, respectively.? Meanwhile commodity exchanges, spawned from boards of trade along Lakes Erie, Michigan, and St. Clair, established a system of staple grades, standards, and inspections that rendered grain fungible and so made possible organized trading in spot and forward markets (Baer and Saxon 1949, p. 10, Chandler 1977, p. 211).? The Board of Trade of the City of Chicago was established in 1848.? In March, 1863 it adopted its first rules and procedures for trading in forward contracts and in May, 1865 it transformed actively traded and largely homogeneous forward contracts into futures contracts (Hieronymus 1977, p. 76).? Futures trading ripened in the 1860s, by which time the Board was the premier organized grain exchange.? The Chicago Mercantile Exchange — then, the Chicago Produce Exchange — was established in 1874.? Since then, futures trading has grown enormously, while the public?s perception of its legitimacy and their calls to proscribe or, at the very least, more-heavily regulate it have waxed and waned.

Lambert writes to entertain as much as to inform a general audience.? As such, she loosely chronicles this history in several well-told stories about unfailingly colorful individuals who created, marketed, and/or manipulated contracts that derived from fifteen commodities and financial assets; Lambert devotes a chapter to each of these.? For example, in chapter one (titled, ?Grain?), the reader meets Joseph Leiter, who nearly cornered the Chicago wheat market in the early winter of 1897.? Leiter?s efforts failed when Philip Armour, determined to thwart the corner, hired ice-breaking ships and tugboats to ensure timely passage of wheat from Minnesota (through Duluth harbor and the Soo Canals) to Chicago.? The Leiter episode inspired Frank Norris?s classic, The Pit (1903), in which the protagonist, Curtis Jadwin, is ruined by his need to corner the Chicago wheat market.? In chapter four (titled, ?Onions?), the reader meets Vincent Kosuga and Sam Siegel, who cornered the Chicago onion market in the fall of 1955 –when the two owned 98 percent of the onions in Chicago — and, then, sold their positions en masse.? Onion prices and farm incomes collapsed.? Politicians including Michigan Congressman Gerald Ford argued to ban futures trading in onions; the Onion Futures Act of 1958 ultimately did.? The Chicago Mercantile Exchange responded with a new contract derived from a slab of uncured hog meat; yes, pork-belly futures are the unintended consequence of regulation.? And, in chapter seven (titled, ?Currencies?), the reader meets Leo Malamed, a lawyer who became a member of the Chicago Mercantile Exchange in 1954, and its chairman in 1969.? In 1972, the Mercantile Exchange introduced futures contracts on currencies — an innovation that failed to take flight at the New York Produce Exchange, where such contracts first appeared two years earlier.? The result was the Mercantile Exchange?s International Monetary Market (IMM) — so called because Malamed believed it ?sounded grand? and disassociated the new currency pits with those of, say, pork bellies (p. 79).? Milton Friedman famously endorsed the IMM; and Paul Samuelson famously criticized it.? In any case, the timing proved perfect: Bretton Woods ended in 1971, the dollar essentially floated freely thereafter, and trading in currency futures thickened tremendously.

In other chapters, Lambert chronicles in similar fashion the evolution of futures contracts on soybeans, eggs, cattle, oil, carbon, and stock indices; interest-rate futures contracts on (Ginnie-Mae) mortgages, Treasury bonds, and Eurodollars; and options contracts on stocks.? Moreover, throughout the book, Lambert profiles Chicago?s trading culture, which she describes as entrepreneurial, risk loving, clubby, male dominated, reckless (to a point), selfish (in the pits), and dynamic — the cultural profile of a business that she concludes, ?balance[s] individual freedoms with an unlikely social responsibility? (p. 201).? Hence, like so many courts, legislatures, and economic historians before her, Lambert essentially maintains that futures markets improve welfare, though she does not substantiate this claim.? Moreover, Lambert infers from the recent financial crisis, to which futures exchanges were seemingly immune, a strong case for more exchange-based trading, complete with daily (mark-to-market) clearing mechanisms and other such rules of the game.

The Futures entertains readers with stories about the evolution of futures exchanges in Chicago, and it encourages them to consider the constructive role that these institutions have played in our financial system.? It is neither a primer nor a rigorous economic history.? Hence, the book will probably appeal most to readers who are familiar with the practical aspects of the business.? Newcomers to futures trading might wish for more detailed explanations about each of these contracts, including how traders value, settle, and clear them; and how hedgers use them to mitigate their exposure to market risk.? Meanwhile, economic historians might wish for more evidence, backed by a more extensive bibliography, to support and expand upon the interesting twists and turns that make up this very readable book.

References:

Baer, J. B., and O. G. Saxon. (1949) Commodity Exchanges and Futures Trading: Principles and Operating Methods. New York: Harper & Brothers.

Boyle, J. E. (1920) Speculation and the Chicago Board of Trade. New York: The MacMillan Company.

Chandler, A. D. (1977) The Visible Hand: The Managerial Revolution in American Business. Cambridge, Mass.: Belknap Press.

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

Rothstein, M. (1982) ?Frank Norris and Popular Perceptions of the Market,? Agricultural History, 56, 50-66.

Joseph M. Santos (joseph.santos@sdstate.edu) is Professor of Economics at South Dakota State University, where he teaches courses in macroeconomics and monetary policy.? His study of contemporary Canadian and U.S. monetary policy frameworks, ?What?s So Special about Inflation Targeting? A Comparative Analysis of Canadian and U.S. Monetary Policy? is forthcoming in the American Review of Canadian Studies.

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