Days of Futures Past
On April 3 the Chicago Board of Trade (CBT) held its first official meeting in rented rooms over a flour store on a muddy, unpaved path called South Water Street. Although it would eventually become the country’s largest commodities exchange, the CBT started out as an ordinary chamber of commerce. Its twenty-five directors came from many fields, including a banker, a druggist, a tanner, a meat-packer, a grocer, and dealers in coal, hardware, and books.
Chicago’s businessmen had chosen a propitious time to form their organization. That same year the Illinois and Michigan Canal opened, linking the Great Lakes with the Mississippi River; the city’s first railroad, the Galena & Chicago Union, began construction; telegraph service arrived in Chicago; and the city saw its first steam-powered grain elevator and its first stockyards.
Despite all these advances, the CBT remained essentially a social club and talking shop through the mid-1850s. Since little money could be made there, few members bothered to attend its daily sessions, even when tempted with free ale, cheese, and crackers. Those who did show up mostly passed resolutions and squabbled inconclusively over such matters as whether a standard bushel of grain should be fifty-six or sixty pounds. But as Chicago’s shipping business continued to boom, particularly in grain, the CBT decided to impose some order on what was becoming a chaotic marketplace.
In the 184Os and 185Os Midwestern shopkeepers typically bought grain from nearby farmers and hauled it in sacks to a port city, such as Chicago or St. Louis. There they either sold the grain for cash or placed it with a consignment agent, who would take it to a major market city (often New Orleans) and sell it for a portion of the proceeds. Since grain varied widely in quality, purity, and cleanliness, buyers at every step had to inspect each individual lot or else rely on the seller’s honesty. The latter option often led to lawsuits. These bottlenecks made it hard to sell and resell bulk quantities, the essence of a modern commodities market.
In 1856 the CBT took a large step toward streamlining the grain trade by adopting uniform grading standards. Before, each dealer had either stored his grain separately or let the elevator owner combine it promiscuously with whatever other dealers brought in, taking his chances when he withdrew his share. Under the new system, when a dealer brought grain to an elevator, it was inspected and dumped into a common bin reserved for grain of the same grade. The owner was given a receipt for, say, a thousand bushels of No. 2 spring wheat. The CBT’s standards made these receipts universally accepted and freely tradeable. Businessmen thronged the exchange to buy and sell in huge amounts, and the board dropped its free lunch.
Once the CBT had switched from trading sacks of grain to trading receipts for grain, it did not take long to progress to the next step: trading abstract promises of grain. Members agreed to buy or sell a certain amount for a certain price at a specified later date, betting on the market to rise or fall in the meantime. When the contracts fell due, traders usually settled them in cash instead of actually delivering grain. Soon almost all of the CBT’s trade was in futures, and a colorful breed of speculators arose: hoarse, intense men who bought and sold thousands of tons of grain every day yet saw real farm produce only at the grocery store. Today the CBT and its upstart rival, the Chicago Mercantile Exchange, have expanded way beyond grain to trade futures in such things as interest rates, metals, and pork bellies —besides conducting a lucrative business slaughtering unwary lambs who invest in commodities unwisely.