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Contemplating Delivery: Futures Trading and the Problem of Commodity Exchange in the United States, 1875–1905
JONATHAN IRA LEVY
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Figure
1: Andrew J. Sawyer, a large-scale producer and
distributor of grain himself, was also an active
participant in the trading of commodity futures,
a new form of commerce in the late nineteenth century.
In the United States, futures trading evoked political
controversy relating to concerns about the very
reality of the economy itself. Sawyer, for instance,
bought and sold grain futures in Chicago, but never
delivered any of his grain there. Reprinted from
1891 Grain Dealers and Shippers Gazetteer,
63. Reproduced by permission of Pam Rietsch at www.MemorialLibrary.com,
housed at www.USGenNet.org,
a 501c3 host for historical and genealogical sites.
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These exchanges are cosmopolitan legislatures. Their enactments
are prices, and their jurisdiction extends beyond that of
Congress, Parliament, the Assembly, and the Reichstag.
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| Henry Demarest Lloyd (1883)
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If we are to understand the workings of the economic system
we must examine the meaning and significance of uncertainty;
and to this end some inquiry into the nature and function
of knowledge itself is necessary.
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| Frank H. Knight (1921)
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"I stood in the center of the wheat fields of North Dakota
where the wheat could be seen as far as the eye could reach, and
these wheat fields as they were turning yellow in the summer were
like the waves of the ocean." So began the testimony of Charles
Pillsbury, the largest commercial operator in grain in the United
States, before the United States House Committee on Agriculture's
1892 hearings Fictitious Dealings in Agricultural Products.
"I thought that the man who managed or sold or owned those immense
wheat fields has not as much to say with regard to the price of
the wheat that some young fellow who stands howling around the Chicago
wheat pit could actually sell in a day."
3
According to Pillsbury, the trading in the Chicago pit had lost
touch with the reality of the waving fields of wheat.
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Pillsbury indicted futures trading—a
new form of trade on future commodities, such as "September wheat,"
which had not yet been grown when it was sold. For centuries, merchants
had made contracts to deliver goods at some future date. Only in
the final three decades of the nineteenth century did there emerge
a professional class of merchants who traded commodities exclusively
as "futures" (also known as "options," "straddles," "scalps," "puts,"
and "calls"), which meant that no goods were ever delivered. Futures
traders dealt in conceptual entities as if they were corporeal goods—future
bales of cotton, future vats of lard. Notably, in the trading "pits"—circumscribed
spaces where buyers and sellers traded futures—commodities
were exchanged without material things ever changing hands between
buyer and seller. A quick snap of the fingers might consummate a
trade, and traders neither physically possessed nor even held legal
title to the goods in which they trafficked. By 1890, futures trading
had become the dominant mode of commodity exchange. To many who
testified before the House Committee, including Pillsbury, this
dynamic new system of "fictitious dealings" appeared illegitimate.
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After 1870, more than twenty trading
pits emerged across the United States. Others appeared in Canada,
Europe, and Latin America.
4
Termed "organized commodities exchanges" or "futures markets," these
pits set the prices for the primary products of the world. At the
same time, futures abstracted exchange from the space-time of the
physical economy—from the temporal rhythms and geographical
localities of production, distribution, and consumption. Transactions
at the New York Produce Exchange, for instance, often involved commodities
putatively to be harvested in North Dakota, bound for Minneapolis,
or perhaps Paris, but never New York—or perhaps never harvested
at all. Between 1885 and 1889, there were 8.
5
billion bushels of wheat futures contracts sold at the New York
exchange; only 162 million bushels, however, ever entered the city.5
The global economy took on a spatial and temporal configuration
that had been unimaginable decades before. It was not only in the
United States but also throughout Europe and in Latin America that
futures trading evoked political controversy, according to a 1908
congressional report.
6
Further complicating the matter, "bucket shops"—separate outfits
where anyone could wager on the rise and fall of prices at organized
exchanges—spread across the United States in the 1890s, grafting
themselves onto the network of organized futures markets. According
to one European authority, bucket shops were exclusively an American
phenomenon.
7
There were hundreds, if not thousands, of them in the U.S., rendering
the dilemma of commodity exchange palpable in even the smallest
of communities.
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For many Americans, futures were
an urgent public question. Did the pits, not to mention the bucket
shops, bear any relation to the wheat fields in North Dakota—to
the movement of real things through the economy? According to the
chairman of the House Agricultural Committee, the intent of the
1892 hearings on "fictitious dealings" was "to get the difference
... between an illegitimate and a legitimate sale."
8
The legal and political fate of futures would hinge on this difference.
What was legitimate exchange? That question resonated both inside
and outside the halls of Congress, commanding the attention of judges,
farmers, lawyers, merchants, novelists, social scientists, and journalists.
9
To critics, futures trading was "unnatural," "deranged," "evil,"
because it was detached from the "selling of wheat actually in sight."
10
In the end, however, the pits survived and the bucket shops perished.
Yet in other nations, futures markets perished.
11
The U.S. compromise—which condoned futures markets but abolished
bucket shops—rested upon a new legal doctrine: "contemplating
delivery." According to the courts, futures traders could deal in
conceptual entities so long as they "contemplated" corporeal goods
in their minds while doing so. The law thus put its imprimatur on
incorporeal exchange, blurring the line between thoughts and things.
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The urgency with which contemporaries
grappled with the problem of futures trading is not reflected in
historical scholarship. The few studies of futures focus exclusively
on the Chicago Board of Trade—its institutional development,
its appropriation of natural resources, and its campaign against
bucket shops.
12
The issues raised by the pits, however, surpassed the significance
of a single exchange, signaling a turning point in the history of
capitalist exchange relations. At stake were conflicts over political
economy and the cultural legitimacy of new forms of commodity exchange.
Similar conflicts have been addressed in landmark works on turn-of-the-century
agrarian protest, the corporate reconstruction of the U.S. economy
and society, the growing importance of Wall Street, and the ideological
significance of consumer capitalism.
13
Yet this scholarship takes no account of the problem of incorporeal
exchange posed by futures. The work of Fernand Braudel and others
has illuminated the development of financial instruments and moments
of speculative crisis in the early modern era; yet the fact that
futures trading posed a crisis in the late-nineteenth-century United
States has eluded historians.
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The crucial question is why commodity
exchange and the already abstract world of speculation had begun
to intertwine in such fundamentally new and disturbing ways. Addressing
this question requires locating futures within a longer history
of incorporeal exchange that reaches back to the advent of capitalism,
and underscoring how the mediating, abstracting qualities of capitalist
exchange disrupt received notions of time and space.
15
Because commodity exchange operated in a global context at the turn
of the twentieth century, the American scene had ramifications from
Liverpool to Buenos Aires—for the production, exchange, and
consumption of goods around the world. As the global economy in
our own time becomes increasingly dominated by financial transactions
modeled on futures, it becomes all the more important to examine
both the initial unease that met incorporeal commodity exchange
in the late nineteenth century and the contours of that economy's
triumph, at least in the United States, at the opening of the twentieth.
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Futures posed a problem at once economic,
legal, political, moral, and epistemological, involving the mechanics
and scope of futures trading, the courts' role in shaping public
debate over the practice, the protests that farmers mounted against
the pits, and the terms on which futures trading was legitimated.
The problem of the pits was, at bottom, a problem of knowledge.
At issue in the public debate over futures were concerns about the
very reality of the economy itself. In the words of critics, the
pits were a metaphysical economy, possessing "neither form, nor
substance, nor reality."
17
To the pits' champions, however, futures were not metaphysical at
all; they simply brought the blessings of finance—speculation,
hedging, risk management—to the backbone of the American economy.
Illuminating the intellectual stakes of immaterial commodity exchange
draws upon scholarship that addresses the growing concern with contingency
and probability in turn-of the-century American thought.
18
At stake, however, is not an episode in the history of philosophy
(the revolt against formalism and the rise of pragmatism), but rather
the epistemological dimensions of a crisis in political economy.
19
Yet to dwell on ideas is not to obscure what was palpably a contest
over socially meaningful power. For contemporaries, the two were
hardly distinct.
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It was, finally, Justice Oliver Wendell
Holmes, Jr., who decided the legitimacy of futures trading. In 1905,
Holmes delivered the majority opinion in the U.S. Supreme Court
case Board of Trade v. Christie, elaborating his own version
of "contemplating delivery," which declared futures trading not
only legal but also desirable.
20
Understanding how Holmes grappled with the philosophical issues
at stake entails addressing his intellectual milieu, one in which
the relationship between thoughts and things, present and future,
seemed especially pressing. That leads to the American philosopher
William James, Holmes's friend and fellow intellectual traveler,
whose thought further clarifies the novel epistemological logic
of futures. In the middle ground—between the farmer and the
philosopher—was Holmes.
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In the 1870s, traders developed a form of commodity exchange
that eliminated the need for a physical object of sale—the
method of "setting off." In the pits, a buyer and seller would enter
a contract on a given day, say May 1, for the delivery of a specified
quantity of a good, say 45,000 bushels of wheat, at a specified
price (the subsequent "contract price"), and at a specified future
date, say September 1. But they would not consummate the transaction
with physical delivery on the 1st of September: there was neither
a distribution of goods nor a transfer of title. Instead, dealers
in futures would execute contracts by "setting off" the price differential
between the original "contract price" and that day's "market price"
in the pit. And traders could "set off" any time before the putative
date of physical delivery—one week later, one day later, one
minute later. To "sell short" was to bargain that the market would
fall; to "go long" was to predict a rise.
21
Accordingly, contemporaries referred to futures contracts as "time
contracts" that dealt not in commodities but in imagined "differences."
22
In other words, this was not trade through geographic space, but
rather trade simply in increments of time—trade in objects
lacking material properties. Futures trading was therefore a labor
of continual abstraction.
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How did futures trading in imagined
goods correspond with the physical economy of goods? The enterprise
of one prominent dealer in futures, Andrew J. Sawyer, reveals the
mysteries of the pits, shedding light on both the inner workings
and the transformative economic implications of futures. Sawyer
testified before the House Committee on Agriculture in February
1892.
23
Called to explain how futures worked and well qualified to do so,
Sawyer resided in Minneapolis and was a member of the two Minnesota
exchanges—the Duluth Board of Trade and the Minneapolis Chamber
of Commerce—as well as the Chicago Board of Trade. In 1881,
he had been the first president of the Duluth Board of Trade. He
was also the proprietor of a 5,000-acre wheat farm in Minnesota,
and ran one of the largest grain elevator operations in the Northwest.
He had commission houses in Minneapolis, Duluth, and Buffalo, and
a broker who bought and sold for him on the New York Produce Exchange.
He conducted his banking in Boston. Sawyer's business ventures encompassed
all of the disparate aspects of commodity exchange—both the
incorporeal exchange of futures trading and the physical arena of
production and distribution—at a time of intensifying competition
between merchants on each side of the divide.
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Sawyer dealt exclusively in wheat,
the prototypical cash crop of the West.
24
Harvest season began in July, and when the crop was ready to move,
his 175 country elevators began to take in wheat from northwestern
farmers. Once Sawyer had purchased the wheat, it was destined for
either Duluth or Minneapolis. From Minneapolis, he sold to local
millers, or to commission merchants at the Chamber of Commerce.
Duluth, however, situated on Lake Superior, was an export market.
Sawyer telegraphed his agents in Chicago, New York, and Europe to
determine the going prices in a truly global market: Montreal, Liverpool,
Paris, Antwerp, Berlin, St. Petersburg, Calcutta, Winnipeg, and
Buenos Aires, among others, were all possible destinations for,
or competitors in, his product.
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Sawyer testified that futures markets
entered his business only when none of the "markets of the world"
could take his wheat. "Suppose we are handling 100,000 bushels a
day and we can sell in Minneapolis, Buffalo, Montreal, or New York
only 75,000 bushels a day ... We have then 25,000 bushels left on
our hands which we can not sell, there being no market for it."
Sawyer wanted to hold the 25,000 bushels back until the market became
liquid. And if six months later the price had plummeted even further,
he wanted to "protect" himself from such a decline. His solution
was to sell wheat for future delivery to buyers in the pit of the
Chicago Board of Trade. But Sawyer never delivered wheat to Chicago.
Instead, these sales were "set off" on or before the putative date
of delivery. If that day's "market price" was less than the original
"contract price," Sawyer had profited. He thus had working capital
to continue to store his wheat (or to produce more of it) while
holding it back from a declining market. If the "market price" was
greater than the original "contract price," Sawyer had lost. But
in that event, his losses would be offset by the actual sale of
his 25,000 bushels of wheat back in Minnesota. Sawyer used the board
to "insure" his wheat in storage—a form of hedging, or risk
management. Dematerialized by the pits, he used commodity exchanges
at the Chicago Board of Trade to finance his farming and distribution
of wheat in Minnesota. In February of 1892, Sawyer had 4 million
bushels of wheat stored in Minneapolis because of a tepid world
market, while selling 15 million bushels of wheat in futures to
Chicago.
26
He never delivered a speck of wheat to Chicago, although he performed
most of his commodity exchanges on the Chicago Board of Trade, because
the board had a class of pure speculators, the necessary attendant
of any financial market, who provided sufficient liquidity for the
volume of his futures transactions. In 1888, for instance, American
farmers harvested 415 million bushels of wheat. That year, one contemporary
estimated, there were some 25,000 trillion bushels of wheat sold
in futures contracts in the United States that were "set off," never
delivered.
27
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Sawyer's business grew out of a series
of innovations first combined in Chicago after the Civil War: agricultural
production was already thoroughly capitalistic; the railroad integrated
city and hinterland; the steam-power grading system of elevator
storage replaced selling by physical sample; the telegraph provided
near-instantaneous communication. By 1868, traders in the Chicago
pits had ceased to exchange physical commodities and had begun to
exchange "elevator receipts," which denoted title to a quantity
and "grade" of a physical commodity stored in the city's sprawling
network of elevators. Technically, each receipt could be taken out
from the pit and redeemed at an elevator. But this system still
had a lingering physical foundation: the actual presence of the
commodities transacted upon in Chicago.
28
At some point in the 1870s, Chicago traders stopped transferring
not only physical commodities, but elevator receipts as well. Other
exchanges followed a similar trajectory. The minutes of the Board
of Managers meeting at the New York Produce Exchange on April 5,
1877, reported a revision in a "Supplementary Rule," whereby "on
sales of graded grain, the tender of elevator receipts of the grade
sold, having a free delivery afloat, shall constitute a delivery
of the grain as between sellers and buyers." Six weeks later, the
New York exchange dispensed with the transfer of elevator receipts.
Futures trading came to Sawyer's Minnesota exchanges sometime in
the 1880s. The German scholar G. Rühland estimated that it
was in "1888 that the fictitious dealings in grain futures became
a complete uniform organization extending all over the world."
29
The speed and volume of transactions exploded, as futures were now
repeatedly bought, sold, and then "set off" in a dizzying cycle.
The Chicago wheat pit, which opened at 9:15
a.m.
, began to close at 1:15
p.m.
, and until 4:00
p.m.
a group of "settlement clerks" gathered to account for that day's
increasingly complex web of transactions. Provided with sufficient
capital liquidity and volatility in price, two members of the board
could now trade 1 million bushels of wheat back and forth to each
other a hundred times an hour, "setting off" each individual transaction.
Written contracts, in turn, became too cumbersome. Traders (by 1900
in Chicago, upward of 1,800 individuals) stalked the pits, instantly
consummating transactions on immaterial commodities with a knuckle
tap or a single chalk mark.
30
(See
Figure 2
.)
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Figure
2: "A flurry in wheat at the Chicago Board of Trade,"
1880. Reprinted from Harper's New Monthly Magazine,
October 1880, 725.
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By the late 1880s, the wheat belt
had spread west, and more bushels of wheat moved through Minneapolis,
and often Duluth, in a given year than through Chicago. (See
Table 1
.) Yet financial transactions in wheat remained rooted in the Chicago
pit. Futures had transformed the space-time of the economy. The
telegraph was a crucial innovation. Wiring his trades from his office
in Minneapolis, Sawyer never set foot in Chicago. The new system
spread from Chicago to the other new U.S. exchanges—from Baltimore
to San Francisco, and from New Orleans to Duluth. And futures encompassed
more than wheat; a profusion of goods—horses, mules, cows,
oxen, sheep, swine, pork, lard, beef, dairy, tallow, greases, barley,
hops, corn, oats, rye, flax seed, clover seed, hay, cotton, coffee,
straw, vegetable oils, butter, cheese, oil, gas, petroleum—entered
the new system of exchange.
31
By 1890, anyone with access to a broker on an organized commodities
exchange could sell, or buy, a product for future delivery, only
to "set off" the transaction at a profit or loss. Therefore, access
to the physical commodities themselves was no longer a prerequisite
for transacting upon them. Sawyer, in fact, had his own brokerage
business in Minnesota. (See Figure 1.)
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TABLE 1
Receipts of Wheat at Chicago, Duluth, and Minneapolis, 1880–1895,
in Bushels |
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1880 |
1885 |
1890 |
1895 |
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| Chicago Board of Trade |
23,541,607 |
18,909,717 |
14,248,770 |
20,637,642 |
| Duluth Board of Trade |
2,987,629 |
14,869,675 |
15,341,402 |
49,599,373 |
| Minneapolis Chamber of Commerce |
10,264,100* |
32,900,560 |
45,271,910 |
65,536,390 |
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| * Then the
Minneapolis Board of Trade |
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Sources
: Board of Trade of the City of Chicago, Twenty-fourth
Annual Report of the Trade and Commerce of Chicago for the
Year Ended December 31, 1881 (Chicago, 1882), 25; Board
of Trade, Twenty-eighth Annual Report (Chicago, 1886),
19; Board of Trade, The Thirty-third Annual Report
(Chicago, 1891), 155; Board of Trade, The Thirty-eighth
Annual Report (Chicago, 1896), 181; Board of Trade of
Minneapolis, Minnesota, Annual Report (Minneapolis,
1891), 43. |
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Abstract forms of capitalist exchange,
of course, were not born in the pits of the postbellum United States.
The transactional innovation of "setting off" had episodic precedents
in the early modern world. For instance, there was the Dutch tulip
mania of 1634–1635, when at one extraordinary moment, speculative
trading in the flower split off from the physical supply. Yet early
modern commodity markets ultimately still depended upon physical
delivery, without which they collapsed. In the nineteenth-century
securities market of New York City, brokers sometimes traded securities
for future delivery, and less commonly set them off.
32
But with the arrival of commodities futures in the 1870s, the seemingly
most solid had truly melted into air. A new class of speculators
emerged—"scalpers"; unlike Sawyer (the farmer/merchant/futures
trader), they practiced nothing but trading commodities extant only
in their minds, often on behalf of ordinary citizens. Scalpers never
delivered commodities. And in contrast to the financial transactions
of the English South Sea Bubble or of nineteenth-century Wall Street,
the supposed objects of exchange were not in paper stock certificates
little understood by laymen. To the contrary, futures traders trafficked
in the guts of the U.S. economy—agricultural production for
the world market, the food on supper tables. As a spatial and temporal
distinction emerged between the financial and distributional spheres
of commodity exchange, the space-time of an increasingly global
economy became fractured, recombined, and revolutionized by the
men of the pits. Futures laid bare and profoundly intensified powerful
but rarely visible tendencies of capitalism—abstracting, mediating,
dissolving received notions of time and space.
33
In the pits, speculative trade in incorporeal things stood newly
naked before the wider public.
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The wider public, in fact, were active
participants. The proliferation of "bucket shops" in the 1890s brought
futures to the masses. Bucket shops were separate places of business
from organized exchanges. Anyone could buy and sell futures at a
bucket shop; one did not have to pay for a membership, or act through
a broker who was a member, as in the pits. Transactions were between
the proprietor of the shop and his or her customer, and one could
deal in far less volume. Prices—mostly from commodity futures
markets, but also from stock markets—were continually wired
to the shops over the telegraph and marked on a giant blackboard.
Bucket-shop customers simply wagered on the rise and fall.
34
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Bucket-shop trading was a national
phenomenon at the close of the nineteenth century, existing in at
least thirty-three states, and in all regions.
35
Some shops were in large cities, perhaps appearing no different
from organized exchanges, and even had national clienteles; but
others were secretive, dimly lit, and seedy. (See
Figure 3
.) Bucket shops were always closing their doors under a cloud of
suspicion regarding their financial solvency, and the presence of
women in the shops was a common scandal.
36
(See
Figure 4
.) On the whole, bucket-shop trading was a rural phenomenon, centered
in the West and South. Shops were located, for example, in Grand
Forks, North Dakota; Elkhart, Indiana; Cumberland, Pennsylvania;
and Winnsboro, South Carolina.
37
Many big-city firms specialized in "bucket" orders from "country"
customers.
38
In 1895, the New York Times reported that one Chicago bucket-shop
firm had twenty-seven "country" branch offices in cities as far-flung
as Colfax, Iowa, and Boone, Nevada.
39
Bucket-shop trading was easy, according to one customer of "C.C.
Christie & Company" of Kansas City:
I went to the office of the Christie Company on the
morning of the 25th. I made two trades, one in May corn and one
in July oats. I stepped up to the counter to a man whom I since
know as Mason, and told him I wanted to buy a thousand bushels
of corn at 39 1/8 and a thousand July oats at 23 5/8. Mason glanced
up at the board and made out a ticket ... there was nothing else
said at the time the trade was opened.
40
That was how a great many ordinary Americans came in contact
with the novel and complex world of impalpable commodity exchange,
whose legitimacy hardly went uncontested.
41
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Figure
3: Inside a Chicago bucket shop, 1906. Reprinted from
the Chicago Daily News negatives collection, Chicago
History Museum, DN-0002971. Reproduced courtesy of
the Chicago History Museum.
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Figure
4: Women bucket-shop proprietors arrested during a
police raid in Chicago, 1906. Reprinted from the Chicago
Daily News negatives collection, Chicago History Museum,
DN-0050170. Reproduced courtesy of the Chicago History
Museum.
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Public scrutiny of futures trading began in courthouses
. Organized exchanges were private institutions incorporated under
state charters, each with rules governing members' transactions.
A trade required a formal contract sanctioned by the organization
wherein the language explicitly called for physical delivery.
42
Nowhere in the contract was the informal practice of "setting off"
acknowledged. (See
Figure 5
.) The Illinois State Supreme Court invented the doctrine of "contemplating
delivery" to test the legality of "setting off" in a series of cases
decided in September of 1875. Each case was a principal-agent dispute
between members of the Chicago Board of Trade who were trading futures
as brokers on behalf of nonmember principals. In Pickering v.
Cease (1875), for instance, Pickering was a member of the board
who sold corn short for Cease in the corn pit of the Chicago Board.
Pickering and Cease had a mutual understanding with their buyer
that no transfer of a physical commodity was ever to take place.
On the putative date of delivery, Pickering did "set off" the contract
in the pit, at a loss. Cease refused to compensate his broker. Pickering
sued Cease for recovery.
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Figure
5: Contract for future delivery at the New Orleans
Cotton Exchange, at its founding in 1879. From Julius
Aroni, Futures (New Orleans, La., 1882), 6.
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Cease argued that because no transfer
of a physical commodity ever occurred, no exchange ever really took
place—the trade was "fictitious," and Pickering could not
expect recovery.
43
Like so many defendants in this first round of cases, Cease was
simply avoiding payment. Litigants were a diverse group—farmers,
merchants, but also those with no prior experience in the grain
business, much less in futures trading. Yet they each cast their
lot in the new marketplace, lost, and then refused to pay the broker
who had granted them access. To mount a legal defense, each invoked
the long-standing principle—rooted in Anglo-American common
law—alluded to by Cease: the legitimate exchange of a commodity
required a foundation in the transfer of a corporeal good across
space, not an imaginary one through time.
44
Thus, the legal probity of futures trading confronted the court
with questions unmistakably epistemological in character.
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The Illinois court in Pickering
did not deny the legality of an executory contract, which required
some future action, such as the delivery of a commodity, for its
execution. The problem occurred when traders in the pits intended
all along to set off contracts, circumventing physical delivery.
Because no corporeal object of sale was existent to provide an objective
foundation for the exchange, the court held that "the alleged purchases
are purely fictitious," and thereby affirmed long-standing epistemological
assumptions as requisite to public welfare. "Such contracts are
void at common law, as being inhibited by a sound public morality."
45
The Illinois court, however, did not simply abolish futures trading
altogether. Rather, in a group of cases decided along with Pickering,
it formulated a judicial doctrine intended to balance "public morality"
with the "legitimate purpose of commerce."
46
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That was the doctrine of contemplating
delivery. First, the language of the contract had to call for physical
delivery. Furthermore, at least one party had, cognitively, to "contemplate
delivery" when entering the contract. If both parties foresaw
executing the contract only by "setting off," the transaction was
a "wagering contract," unenforceable by law. Thus, paradoxically,
so long as one trader contemplated the transfer of a corporeal object,
the contract could be legally "set off" instead. It was a peculiar
compromise, and crucial questions remained about the new doctrine's
application. Where should the court look to establish the original
intent to contemplate delivery?
47
Some courts said that the contract language calling for delivery
was adequate. Shortly after Pickering, the Illinois court
moved in this direction. Other state and federal courts invoked
the same doctrine but enforced stricter standards. Such courts struck
down agreements between brokers and their principals if the broker
"set off" the contract in the pits, and if it was evident that no
one could have reasonably contemplated the transfer of a physical
commodity—that is, if traders never possessed the physical
commodity, never intended to, and had no means to do so.
48
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After 1875, the doctrine of contemplating
delivery swiftly appeared in courthouses throughout the country,
as judges focused literally on the mindset of traders. The tide
moved against those brokers who had no resources, other than an
imaginative mind, to contemplate physical delivery.
49
The most powerful enunciation came from the Supreme Court of Wisconsin
in Barnard v. Backhaus (1881), a case involving the Milwaukee
Chamber of Commerce. The court announced its "manifest duty" to
"scrutinize closely these time contracts," to "determine whether
they were really intended by the parties to be what their language
imports—real contracts for the future sale and delivery of
grain." Furthermore, the court had to "go behind or outside the
words of the contract; to look into the facts and circumstances
which attended the making of it, in order to ascertain whether it
was intended as a bona fide purchase and sale of property." By this
standard, the court refused to acknowledge the existence of the
disputed transaction.
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The judiciary's regulatory reach
had clear limits. Courts heard only principal-agent disputes between
members of organized futures markets and nonmember principals. While
the practice of "setting off" in the pits was at issue insofar as
it affected brokers' contractual relations with their clients, controversies
did not arise among members of exchanges themselves.
51
The 1884 U.S. Supreme Court case Irwin v. Williar (1884)
was emblematic. In a dispute between a resident of Brazil, Indiana,
and a member of the Baltimore Corn and Flour Exchange, Justice Stanley
Matthews affirmed the strict standard of Barnard, but his
ruling did not extend to transactions between pit traders themselves.
After Irwin, the limits to the courts' doctrine became increasingly
evident, as organized futures markets flourished and expanded. What
made the courts' tepid intervention noteworthy was that it distilled
the fundamental conceptual problem of futures trading: were objects
existing only in the minds of pit traders fictitious or as real
as bushels of grain moving through the physical economy?
52
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That question—whether traders'
thoughts were tantamount to things—evoked rising controversy
outside the courts in the 1880s and 1890s. The litigation that generated
the doctrine of contemplating delivery involved no organized, collective
effort to contest futures.
53
However, farmers' organizations mounted just such a campaign, and
questioned as well the nature of economic reality. Agrarian vanguards
of the Populist revolt had already assaulted (with mixed results)
the constituent elements of the new system of commodity exchange—the
railroad conglomerates, the grading system, and the grain elevators—by
the time they turned a critical eye toward the pits in the late
1880s.
54
The 1891 meeting of the National Farmers' Alliance, which launched
the Populist Party, advocated banning futures trading.
55
In 1892, Congressman William Hatch of Missouri and Senator William
Washburn of Minnesota introduced bills that would tax futures trading
out of existence. The congressional hearings Fictitious Dealings
in Agricultural Products came in response to the Hatch bill.
56
Witnesses included representatives of the leading futures markets,
farmers' organizations, and "handler" merchants—millers, wholesalers,
retailers, and commission merchants, who, unlike pure speculators,
actually "handled" physical commodities and often sided with the
farmers. The very title Fictitious Dealings suggested the
contested legitimacy of a seemingly metaphysical economy; questions
of perception, cognition, the real versus the imaginary, dominated
the discussion.
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Preeminent during the hearings were
two interrelated questions: Was futures trading "fictitious" dealing
or "real" commerce? Was the practice of "setting off" a kind of
"real" work, or were dealers playing with "imagined differences"
in their own minds? "Settling on differences" was simply "not legitimate
trading," protested critics such as Wilbur F. Boyle of St. Louis,
a former judge employed by the National Alliance of Farmers and
Industrial Laborers. "Certainly no one can claim a right to sell
that which he not only does not own, but never intends to acquire,
and consequently never intends to deliver; for in that case he is
selling that which nobody owns, and which, in the nature of things,
has no real existence." For critics, commodity exchange should bear
no resemblance to the abstractions of finance capital, and precedents
from the world of stocks and bonds were dangerous. To C. Wood Davis,
a "handler" from Wichita, the dealer's "evil" was trading in "contracts
instead of commodities." J. H. Brigham, master of the National Grange,
criticized futures dealers for even attempting to price a commodity
prior to its material embodiment. "These men come into the market
and fix prices before there is a living soul who knows what the
supply is. They can not know that; they do not know it." Farmers
claimed that farm prices plummeted because futures dealers loaded
the market with products that were "fictitious," "unnatural," "fiat,"
"phantom," "air," and "wind." As one handler complained, "Mr. Sawyer
loads the market with double quantities of wheat, one being the
real grain shipped to and sold in New York and other Eastern markets,
and an equal quantity of phantom wheat sold in Chicago." The remedy
proposed by farmers and handlers was that traders must buy and sell
corporeal commodities that they possessed and meant to distribute—things,
as a Populist senator later stated, "actually in sight." That was
all it could mean to "contemplate delivery," which meant an end
to futures trading.
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More than falling prices were at
stake. The pits, where futures commodities were marketed without
the farmer's consent, had abrogated the independent producer's dominion
over his product, his right to negotiate the sale of his own property.
As Davis put it, Sawyer's sales "were sales of Minnesota wind instead
of Minnesota wheat, and yet help determine the price the Ohio farmer
shall receive for his wheat." A principle as "old as civilization"
was that the "the owner of property is the one who shall determine
its prices." Farmers (and handlers) wanted access to the forum where
commodity prices were determined; exclusion was a usurpation of
a long-held right. A Missouri handler in pork and beef went so far
as to avow, "the short seller to-day is the anarchist of America."
Many witnesses decried operations in the pits as a violation of
a protective tariff, with American farmers protected from Argentine
and Indian wheat but competing with Sawyer's "wind" wheat, and with
the pits representing something akin to a foreign country.
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Representatives of organized exchanges
responded that futures trading remained adequately rooted in the
physical economy and posed no peril to market laws. A Chicago dealer,
admitting that the volume of futures commodities dwarfed the actual
grain received in Chicago in 1891, nonetheless insisted that there
was a "legitimate basis all the time for our business." Others said
that only "real" events—the condition of the French crop,
the curtailing of Russian exports, or the weather in California—determined
futures prices, not whatever whims were in traders' minds. An extreme
version of "contemplating delivery" informed another line of argument.
The acting president of the Chicago Board of Trade declared that
"a sacred and exact observance of contracts is insisted upon" where
"actual delivery was contemplated." Here was a groundbreaking notion—that
"setting off" constituted a form of delivery as "real" and "legitimate"
as the physical distribution of a corporeal commodity. So when a
Michigan congressman described "setting off" as evidence that "there
is never any grain delivered" in the majority of commodity exchanges,
a New York futures dealer retorted, "I beg your pardon sir, it is
delivered." Two very different notions of what constituted actual
delivery, a "real" economy, were on the table.
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Yet dealers knew well that their
transactions were detached from the space-time of the physical economy.
They warned that if Congress eradicated futures in the United States,
the business would simply move to the other futures markets of the
world: Liverpool, Le Havre, Bremen, or perhaps elsewhere. Sawyer's
capital was mobile. Unlike his wheat, it could reach any marketplace
in the world through the telegraph. A New Orleans trader of cotton
futures was blunt: "The world is not going to cease trading and
speculating in the great staples in deference to any sentimental
idea, and if it can not be done in New York, New Orleans, Chicago,
Milwaukee, St. Louis, and San Francisco, it will be done where no
such absurd notions exist." Legislators could tax futures dealing
out of existence in the United States, but not the world over. As
another New Orleans cotton trader put it, "Would the members of
the British Parliament legislate their exchanges out of existence
to gratify the American Congress? I do not think it likely." In
that event, "People would transfer the operations immediately to
Europe."
60
The quandary presaged one apparent in current global political economy:
the regulatory capacity of state actors in a global economy that
transcends national borders.
61
In the end, the dealers' point was a simple one. Whether futures
trading took place in Chicago, San Francisco, or Buenos Aires, it
was of a piece with, subservient to, physical production, distribution,
and consumption. The objects of "setting off" were "real" because
futures trading was real work.
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But to producers and handlers, such
an abstract endeavor was not work; it was play. According to a St.
Louis handler, the dealer—like any other "gambler"—was
simply "living from the game." Likewise, a St. Louis merchant argued
that the dealer in imaginary sales simply "plays for the pleasure."
At issue was the meaning of mental labor. Politically adroit, producers
drew a line not between manual and mental labor, but between handlers
and dealers. J. H. Powers, president of the National Farmers' Alliance,
voiced the distinction at the 1891 alliance meeting, identifying
"two departments" of the nation's industry: "those that consist
principally of manual labor" and "those which depend for success
chiefly on systematic and continued mental training." No doubt "the
actual producer" was "the true worker." Yet among mental laborers,
some increased "the actual wealth of the world," and others did
not. At the 1892 hearings, farmers defined handlers as legitimate
mental workers, but not futures traders. Glorifying the economy
of corporeal goods, farmers and handlers denigrated futures trading
as a form of play that imagined differences between commodities
that did not exist.
62
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The dealers denied that their labor
was play; it was a "science," based on probability and statistics,
requiring "intelligence" and "great skill."
63
Above all, they claimed that futures amounted to "insurance."
64
By invoking insurance—which connoted sobriety, temperance,
and protection—the dealers shifted the debate from a zero-sum
game of wealth creation to the standard of utility. Through "hedging,"
dealers reiterated, speculation ultimately insured against giant
fluctuations in the market.
65
Sawyer described his Chicago futures trading as "protection" for
his Minnesota handling business, which "insures me against loss."
66
Certainly, some individuals did nothing but speculate for gain,
sometimes recklessly; still, they provided necessary liquidity so
that the market could smoothly signal forward prices to producers,
handlers, and, most of all, consumers.
67
Attuned to the fundamental principles of insurance, the shifting
and spreading of risk, some critics conceded that futures trading
offered protection, but only to speculators and large-scale proprietors.
"Should not the [American] farmer have that protection and insurance?"
C. Wood Davis asked. Futures shifted all the risks of worldwide
production and distribution to the American producer, he argued.
No sooner does the European buy a cargo of wheat or
cotton in India, Russia, or elsewhere than he sells a like quantity
"short" in New York and New Orleans through some commission house,
and in case the price goes down in consequence of these insuring
"short sales," on top of the enormous sales and offerings of the
"professional" American "short seller," the loss falls upon the
American farmer, while the British merchant has a profit on his
"short sales."
68
The key question, then, was insurance for whom? In a capitalist
economy—one that generated, and fed off, conditions of profound
uncertainty—risk-management institutions were critical, and
in a democracy, such institutions were subject to popular pressure.
Who would bear the risk burden generated by capitalistic production
for a global market?
69
Small producers could not do so alone, and late-nineteenth-century
futures markets were tools fit for large proprietors such as Sawyer,
or purely speculative dealers who could financially withstand the
recurrent bouts of speculative mania in the pits.
70
Many common farmers and handlers could not, and they were crowded
out of the market.
71
Accordingly, the desired risk-management institution for agrarian
radicals was not futures markets, but rather the state.
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The immediate goal of farmers and
handlers, however, was abolishing futures trading, which, they believed,
would restore their authority over their products, stem the fall
in commodity prices, and more equitably shift the risks endemic
to capitalism. They predicated their demands upon a market epistemology
that distinguished between a thought and a thing, which required
objective foundations for commodity exchange in a physical commodity.
Each alternative to futures proposed by farmers—a return to
sale by physical sample, cooperative marketing, and the infamous
"subtreasury plan"—was consistent with that epistemology.
73
The 1892 Hatch bill passed the House by a vote of 167–46 and
the Senate by a vote of 40–29. The opposition came from southern
senators, who claimed to support the bill's purpose but viewed its
tax-to-destroy method as an unconstitutional affront to states'
rights. When senators from the South successfully passed amendments
to the bill, the House had to vote again. But only a few days remained
in the 52nd Congress, the speaker had placed the bill far down in
the voting schedule, and a second House vote required a first vote
to suspend an obscure parliamentary rule. The vote was 172–124,
just short of the two-thirds requirement. Southern senators convinced
enough members of the House to sway the vote. The Hatch bill died,
and in the 1896 presidential election, the Populist revolt collapsed.
The pits were saved.
74
Some of the peculiar features of American politics—the regionalism
of the federal political structure and the high stakes of winner-take-all
presidential elections—coalesced to protect the pits. Yet
the underlying moral and conceptual problems remained unresolved
and returned to the courts.
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Here the bucket shops took center stage
. Even as farmers' protests against the pits intensified in the
late 1880s, the practice of bucket-shop trading grew more pervasive.
75
The organized futures exchanges thus confronted a new adversary,
although, unlike producers, the bucket-shop traders advocated a
form of commodity exchange not more but rather even less rooted
in the physical economy of goods. What level of abstraction from
the physical economy marked the threshold of illegitimacy? In 1905
that question came before the U.S. Supreme Court, the forum where
what the organized exchanges termed the "bucket shop war" finally
ended.
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During the 1892 hearings, futures
dealers had argued for a distinction between futures and bucket-shop
trading, predicated upon the "contemplation of delivery" in the
language of organized exchanges' contracts. Bucket-shop trades lacked
that formal provision. However tenuous the distinction, it was the
basis for the war between the pits and the bucket shops.
76
Futures traders attacked the shops as "gambling dens," while proprietors
of bucket shops responded that transactions in the shops were no
different from those in the pits. If bucket-shop trading was "gambling,"
then so was futures trading in the pits.
77
The organized exchanges had successfully warded off efforts to eradicate
futures trading; now they fought efforts to democratize it.
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Notably, farmers largely desisted
from criticizing bucket shops, perhaps because the shops had mostly
smaller customers. For small producers, bucket-shop trading may
well have performed a "hedging" function, enabling them to stay
afloat while they withheld goods from an illiquid market, thus preventing
them from having to sell out to large handlers who would then use
the pits for the same purpose.
78
One Cincinnati man wrote to the House Agricultural Committee, "It
is singular that the bucket shop, which is pointed out as the nearest
approach to gambling of all speculative operations[,] should be
by all odds the safest from danger to the citizen."
79
The worst of all worlds for the small farmer would be organized
futures markets without bucket shops.
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As bucket shops competed with organized
exchanges, futures traders campaigned to suppress them. "Bucket
shops had sprung up in nearly every town and city, and nearly all
the trade was done in bucket shops," the president of the Chicago
Board of Trade testified at the 1892 hearings. The Chicago Board
"was about stranded for want of business," as much "legitimate"
business had moved to the shops. And according to a New York trader,
"Formerly, the farmers and small dealers throughout the country
used to execute their orders on the exchanges of the country." But
"owing to the development of telegraphic facilities they began trading
through bucket shops, where no grain is received or delivered, or
can be." He insisted that "If you crush out the bucket shops, the
legitimate business of the country would be greatly benefited."
80
Conversely, bucket-shop proprietors maintained that their shops
did handle physical commodities—in Christie's case, more than
300,000 bushels of wheat annually.
81
In a world of abstract commodity transactions, the organized exchanges
ironically claimed that exchange should be restricted to specific
spaces—the trading floors in their pits. Thus the bucket-shop
war took shape: Did bucket-shop trades, like exchanges in the pits,
ostensibly correspond to corporeal goods? Or, as the agrarian radicals
claimed, were they both similarly detached from reality and
similarly illegitimate?
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Or, as some state legislatures maintained,
were bucket shops simply "gambling dens"? Complicating the conflict
between the pits and the bucket shops, states began passing "anti–bucket
shop" and "anti-option" laws. At times the laws targeted bucket
shops, at times all futures trading, and at times options trading.
82
Whereas futures were bilateral agreements requiring consummation
prior to or on the date of final delivery, "options" contracts gave
one party the "option" not to perform the transaction at all.
83
Members of organized exchanges publicly decried options as a form
of "gambling" no different from bucket-shop trading because the
language of options contracts did not require physical delivery.
Options were formally banned in the pit, but options trading was
common nonetheless—in the pits, on the street curbs, and after
the market closed in the exchange hall itself.
84
It fell to the courts to interpret the legislation—such as
the Illinois "anti-option" bill of 1887—according to the doctrine
of "contemplating delivery." The 1887 Illinois law condemned "pretended
buying and selling," defined as a trade with no "intention" of "delivering
the property sold."
85
For the courts, there were several alternatives: Abolish the bucket
shops? Abolish options trading? Abolish the pits? Abolish them all?
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The Chicago Board of Trade led the
fight against bucket shops.
86
For access to the board's prices (and thus their existence), bucket
shops were wholly dependent on telegraph companies. The board's
legal strategy was to block companies from distributing prices to
shops by claiming a property right in its prices. In 1889, the Illinois
Supreme Court ruled against the board's claim, furthering the spread
of bucket shops.
87
Finally, in 1899, the board and the Western Union telegraph company
entered into a contract prohibiting price distribution to institutions
identified by the board as bucket shops. C. C. Christie of the Christie
Grain & Stock Company of Kansas City filed suit against the Chicago
Board of Trade in February of 1900. Christie sought an injunction
against the contract between the board and Western Union for restraint
of trade.
88
The board sued Christie for employing spies in the pits to steal
quotations, a charge that Christie denied.
89
At one point, the state and federal litigation descending from Christie's
1900 lawsuit encompassed forty-six cases. Consolidated as Board
of Trade v. Christie, the conflict reached the U.S. Supreme
Court in April 1905.
90
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Christie's legal strategy highlighted
the abstractions of the pits and thereby challenged all American
futures trading. Citing the 1887 Illinois legislation, Christie
argued that it was, in fact, the Board of Trade that "kept the greatest
of bucket shops ... wherein is permitted the pretended buying and
selling of grain, etc., without any intention of receiving and paying
for the property so bought, or of delivering the property so sold."
91
If the Court accepted Christie's argument that traders in the pits
never intended to perform physical delivery, it would seemingly
have to either abolish or uphold both the shops and the pits. Christie
wagered on the latter. Initially, the plan worked. In the federal
trial court, explaining transactions in the pits, even the president
of the board admitted under oath that "98 per cent., according to
the weight of the testimony, are settled before the day of delivery
by the parties paying and receiving the difference between the contract
prices and the market prices"; and the Court expressly found that
"the greater part of the dealings in futures ... are bucket-shop
transactions, and that they are permitted ... in violation of the
laws of Illinois"—a finding upheld by the appellate court.
92
The pits' lawyers had argued fruitlessly that their clients "contemplated
delivery," whereas bucket-shop traders did not. But, as Christie
had countered, "It is difficult for the average man to understand
how the dealer who sells can make deliveries of, or how the dealer
who buys can receive, what does not exist."
93
Of course, the lower court decisions were equally damning of bucket
shops.
94
Christie, for his part, hoped the Supreme Court would acknowledge
that bucket-shop trades were also conducted for "hedging" purposes,
validating both the pits and the shops, and that the Illinois legislation
would be annulled.
95
Meanwhile, a day before the Court was to announce its decision,
the Chicago Board's lobbyists rushed a new anti–bucket shop/pro-futures
bill through the Illinois Assembly, but farmers' advocates killed
it. "Exciting scenes," reported the New York Times, "marked
the defeat of the bill." As the assembly speaker "rapped for order,"
board lobbyists, "who had crowded in the Chamber, were ejected from
the floor by the Sergeant at Arms."
96
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It thus fell, finally, to the Supreme
Court and to Justice Holmes to determine the fundamental legality
of futures.
97
Brusquely, Holmes resolved the question, upholding the legitimacy
of trading in things with no corporeal existence: "A set-off is,
in legal effect, a delivery." Thereafter, dealers in the pits called
Christie the "Magna Carta" of their trade. Holmes explicitly
acknowledged that at least three-quarters of all futures transactions
involved "no physical handing over of any grain," but merely the
practice of "setting off." Nevertheless, he ruled that setting off
and physical delivery were one and the same: "Set-off has all the
effects of delivery." Holmes's construction of contemplating delivery
adopted the position advanced by pit traders ever since 1875. He
held that the percentage of futures trades in which no physical
commodities exchanged hands did not matter whatsoever, which amounted
to condoning—once and for all—fictitious dealings in
agricultural products. But not all fictitious dealings. Holmes also
adopted the logic that distinguished between the pits and the shops,
thereby nullifying the shops. Whereas futures trading performed
the necessary labor of "hedging," bucket-shop trading was merely
"speculation entered into for its own sake." Holmes held that the
pits had a property right in their prices, and that in excluding
bucket shops from access to the pits' prices, they effectively put
them out of existence. (Armed with Christie, between May
and December of 1905 the Chicago Board of Trade would successfully
seek injunctions against 197 different bucket shops.)
98
(See
Figure 6
.) Of futures, Holmes wrote simply, "Speculation of this kind by
competent men is the self-adjustment of society to the probable."
99
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Figure
6: A crowd gathers outside a police raid of a Chicago
bucket shop, 1906. Reprinted from the Chicago Daily
News negatives collection, Chicago History Museum,
DN-0002973. Reproduced courtesy of the Chicago History
Museum.
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That terse statement drew the ire
of bucket-shop king C. C. Christie—the gist of a denunciation
of pit traders that he issued immediately after Holmes's ruling
came down: "I know now that this band of hypocrites are busy 'adjusting
society to the probable.'"
100
Christie pointed to a seeming double standard—pit trading
was competent social self-adjustment; bucket-shop trading was only
useless speculation. The phrase that Christie fastened onto was
indeed the pivot of Holmes's decision—one that spoke to a
transformation in the epistemological foundations for buying and
selling. Holmes validated the new speculation in immaterial commodities
as practiced in the pits, and the idea of "self-adjustment of society
to the probable" reflected his larger preoccupation with matters
of probability and risk, matters in the future.
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Years after Christie, Holmes
wrote a letter revealing the schoolboy origins of his philosophical
understanding of the contingent link between present and future.
"Chauncey Wright[,] a nearly forgotten philosopher of real merit,
taught me when young that I must not say necessary about
the universe, that we don't know whether anything is necessary or
not," Holmes recalled. "So that I describe myself as a bettabilitarian.
I believe that we can bet on the behavior of the universe
in its contract with us."
101
As a "bettabilitarian," Holmes had applied this way of thinking
to legal questions well before Christie. In 1881, in the
Common Law, he introduced the still novel legal argument
(through the example of a bale of cotton) that a contract was not
only a mutual exchange, but also an assumption of future risk—a
mix of contract with bet. "In the case of a binding
contract that it shall rain tomorrow, the immediate legal effect
of what the promissory does is, that he takes the risk of the event,
within certain defined limits, as between himself and the promise.
He does no more than when he promises to deliver a bale of cotton."
102
Already, decades before Christie, the import of futures contracts
had Holmes mulling over the legal implications of "the probable."
He did so again decisively in Christie in 1905: "Of course,
in a modern market, contracts are not confined to sales for immediate
delivery. People will endeavor to forecast the future, and to make
agreements according to their prophecy." Christie had strong
roots in a philosophical outlook that presupposed the inescapable
indeterminateness of the future.
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It was scarcely pure coincidence
that another Harvard student of Chauncey Wright's, Holmes's close
friend the philosopher William James, was mulling over some of the
same questions that surfaced in Christie. While the venue
was not the courtroom but rather the university, James, too, pondered
the meaning of contingency. By no means did Holmes and James agree
on everything—a point recognized in their own time, as well
as today.
103
Holmes, for one, believed that over the course of time, James had
softened from a "bettabilitarian" like himself to a wishful
thinker. In 1917, Holmes wrote a letter to the British political
theorist Harold Laski that wryly rendered James's view on free will:
"by yearning we can modify the multiplication table, which I doubt,"
and Holmes would later recall to Laski in 1927, "I once told Bill
James that his discourse on free will would please the ladies and
unitarian parsons."
104
But even the nub of their philosophical differences spoke to common
concerns. To Holmes, a bet against the multiplication tables was
foolhardy, yet he had only a better bet to place in its stead; for
Holmes, like James, believed that "probable truth" was the only
guide to human action. James, philosophically, and Holmes, jurisprudentially—each
dwelled upon, in Holmes's words, "the self-adjustment of society
to the probable" and, in James's words, "our relations with the
possible."
105
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So, too, where in Christie
Holmes addressed the relationship that futures created between thoughts
and things, James postulated that rethinking that very relationship
would bring the probable to the center of the discussion. Each dissented
from the distinction between thoughts and things, mind and reality,
preferring instead to address the consequences of present thoughts
in future action. The problem of commodity exchange, after all,
lay in the relationship between present transactions in thoughts
and putative future distributions in corporeal things, between the
seemingly metaphysical and the physical. Critics of futures said
that the distinction between thought and thing must hold: trading
in the pits violated the reality of bales of wheat. Pit traders
maintained that setting off and physical delivery equally verified
the reality of corporeal goods: futures trades were financial "hedges"
against future transactions that would involve physical commodities.
James's foundational 1904 essay "Does Consciousness Exist?" inquired,
"To begin with, are thoughts and things as heterogeneous
as is commonly said?" James answered no. The trick was not to get
thoughts and things to correspond to each other, but to understand
that each could be a portion of the same capacious reality. As James
argued of thoughts, "non-perceptual experiences have objectivity
as well as subjectivity."
106
James stopped inquiring about the supposed fixed realities (things)
that corresponded to thoughts. Rather, he turned to the consequences—in
a probable future—of those thoughts in action.
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That was the path Holmes followed
in Christie: What were the consequences of futures trading
in thoughts? On the score of setting off, Holmes remarked that monetarily,
"the result of actual delivery would be to leave the parties just
where they were before." For futures dealers, it did not matter
that no material commodities provided immediate objective foundations—which
was why "Set-off has all the effects of delivery."
107
And when William James went public with his new philosophy of pragmatism
in a series of lectures he began delivering in 1898, he relied heavily
on commercial metaphors, most pointedly on a metaphor of truth and
finance:
Truth lives, in fact, for the most part on a credit
system. Our thoughts and beliefs 'pass', so long as nothing challenges
them, just as bank-notes pass so long as nobody refuses them.
But this all points to direct face-to-face verifications somewhere,
without which the fabric of truth collapses like a financial
system with no cash-basis whatever. You accept my verification
of one thing, I yours of another. We trade on each other's
truth. But beliefs verified concretely by somebody are the
posts of the whole superstructure.
108
James might have had a futures trader in mind. The objective
foundation of each futures transaction was purely intersubjective.
Pit trades themselves did not actually require the transfer of physical
commodities; each alternative had the same consequence—dealers
"trade on each other's truth."
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James's metaphors speak to a further
consequence of trading in thoughts: Holmes's understanding of incorporeal
exchange as a method of financial hedging. "Hedging," Holmes explained
in Christie, "is a means by which collectors and exporters
of grain or other products ... secure themselves against the fluctuations
of the market by counter contracts for the purchase or sale, as
the case may be, of an equal quantity of the product, or of the
material of manufacture. It is none the less a serious business
contract for a legitimate and useful purpose that it may be offset
before the time of delivery in case delivery should not be needed
or desired." Holmes's explanation echoed Sawyer's 1892 description
of his business during the hearing on "fictitious dealings in agricultural
products." According to Holmes, hedging was the "speculation" cognizable
at law, and the consequence of hedging was the "self-adjustment
of society to the probable." In Holmes's interpretation, to contemplate
delivery was to hedge against the trade of a corporeal good somewhere
else, sometime in the future.
109
|
45
|
|
But not all speculation was hedging.
Holmes dismissed bucket-shop trading as "purchases made with the
understanding that the contract will be settled by paying the difference
between the contract and the market price at a certain time"—in
other words, "merely a speculation entered into for its own sake."
Conversely, pit trading was "purchases made merely with the expectation
that they will be satisfied by set-off," and fell into the category
of hedging, in which "the object was self-protection in business."
Holmes provided a test for coming to terms with the metaphysics
of incorporeal exchange, the abstractions of capitalist finance—to
extend in time and space the possible relation between thoughts
and things under the rubric of risk. Hedging supposedly kept the
world of immaterial trade in line with the physical economy. Bucket-shop
trading, Holmes decided, did not. Likewise, James held that the
truth process "points to direct face-to-face verifications somewhere,
without which the fabric of truth collapses like a financial system
with no cash-basis whatever," and that "beliefs verified concretely
by somebody are the posts of the whole superstructure."
110
In Christie, hedging had provided such verification for the
pits, but not for the bucket shops.
111
|
46
|
|
But the problem of verification—the
problem of commodity exchange—was at once epistemological
and political. No one—not Holmes, not even pit traders—argued
that all trades in the pits were intended as hedging transactions.
There were "scalpers," the pure speculators in incorporeal goods,
whose presence Holmes disapproved. But if scalpers could speculate
with no regard for corporeal goods, why could bucket-shop traders
not do the same thing? Furthermore, as C. C. Christie repeatedly
insisted, did small farmers not use bucket shops to hedge? Meanwhile,
agrarian radicals still wanted the government to subsidize a risk-management
institution other than futures markets. Nevertheless, after Christie,
pit traders engaged in even more extensive labors of abstraction,
although these did not become topics of urgent political dispute.
After 1905, the pits condoned options trading, a form of transaction
they had equated with bucket-shop trading prior to Christie.
Ultimately, Holmes had granted the pits a monopoly in all kinds
of futures trading, which would last for decades. Following the
deregulation of financial markets after the world economic crisis
of 1973, however, the organized futures markets of today—and
there are more of them daily—resemble more nearly the bucket
shops of yesterday.
112
|
47
|
|
No doubt the triumph of the pits
in 1905 was a political one, secured by those whom Holmes deemed
the "competent men" capable of trading thoughts as things, capable
of "contemplating delivery." Holmes expressed the emergence of a
new way of thinking about the contingent link between present and
future, but the problem of commodity exchange lay originally in
the simple fact that Andrew J. Sawyer had to get his wheat from
the fields of North Dakota, which were like the "waves of the ocean,"
to the mills on the other side of the Atlantic Ocean—hopefully
at a nice profit.
|
48
|
|
I wish to acknowledge Amy Dru Stanley, whose criticism and support
has benefited this article immeasurably. I also thank the members
of her 2004 seminar in U.S. cultural history at the University
of Chicago for making valuable comments on an early draft. I am
grateful for the suggestions of Thomas Adams, Jeff Charbeneau,
Kathy Conzen, Bernard Dubbeld, Michael Grossberg, Tom Holt, Tom
Kleven, Allison Leftkovitz, Marty Levy, Jim Livingston, Garrett
Long, Grant Madsen, Bill Novak, Betsy Levy Paluck, Steve Pincus,
Gautham Rao, Bill Sewell, James Vaughn, and the editors and anonymous
reviewers of the AHR.
Jonathan Ira Levy is a
Ph.D. candidate in history at the University of Chicago. His
dissertation is a study of capitalism, risk, and freedom in
the nineteenth-century United States.
Notes
1 Henry Demarest Lloyd,
"Making Bread Dear," North American Review, August 1883,
118.
2 Frank H. Knight,
Risk, Uncertainty, and Profit (1921; repr., Chicago, 1971),
199.
3 House Committee
on Agriculture, Fictitious Dealings in Agricultural Products:
Hearings on H.R. 392, 2699, and 3870, 52nd Cong., 3rd sess.,
1892, 186.
4 Between 1875 and
1905, organized commodities futures exchanges appear at the Chicago
Board of Trade, New York Produce Exchange, New York Cotton Exchange,
St. Louis Merchant's Exchange, Kansas City Board of Trade, Baltimore
Corn and Flour Exchange, Toledo Board of Trade, New Orleans Cotton
Exchange, Minneapolis Chamber of Commerce, Wichita Board of Trade,
San Francisco Chamber of Commerce, Galveston Cotton Exchange,
Detroit Board of Trade, Philadelphia Grain Exchange, Milwaukee
Chamber of Commerce, Duluth Board of Trade, Omaha Grain Exchange,
Seattle Grain Exchange, Portland Grain Exchange, New York Petroleum
Exchange, Bradford Petroleum Exchange, and Oil City Petroleum
Exchange. See Jerry W. Markhan, The History of Commodity Futures
Trading and Its Regulation (New York, 1987), 7, 8; S. S. Huebner,
"The Function of Produce Exchanges," in Emory R. Johnson, ed.,
American Produce Exchange Markets (Philadelphia, Pa., 1911),
2; Lloyd, "Making Bread Dear," 118; and Merrill A. Teague, "Bucket
Shop Sharks," Everybody's Magazine, 4 pts. (June–September
1906), pt. 1 (June), 723–725. On the European exchanges,
see G. Rühland, The Ruin of the World's Agriculture and
Trade: International Fictitious Dealings in "Futures" of Agricultural
Produce and Silver with Their Effect on Prices, trans. Charles
W. Smith (London, 1896), 60–61, and Fictitious Dealings,
101; on Canada, see Robert E. Ankli, "The Decline of the Winnipeg
Futures Market," Agricultural History 56, no. 2 (1982):
272–286; on Argentina (and the global spread of futures
trading in the twentieth century), see Secretariat of the United
Nations Conference on Trade and Development, Commodity Exchanges
around the World (Geneva: UNCTAD Secretariat, 2000), 6.
5 Fictitious Dealings,
48.
6 House Committee
on the District of Columbia, Prohibition of Bucketing and Bucket
Shopping, and Abolition of Bucket Shops, 60th Cong., 1st sess.,
H. Rep. 1387, 3. The countries were Argentina, Austria, Belgium,
Bulgaria, Denmark, Greece, Hungary, Italy, the Netherlands, Norway,
Portugal, Romania, Russia, Serbia, Spain, Sweden, and Switzerland.
See also Rühland, The Ruin of the World's Agriculture
and Trade, 61, which cited the 1894 U.S. congressional hearings
as a harbinger of 1896 German legislation restricting futures
trading on the Berlin Produce Exchange.
7 Rühland, The
Ruin of the World's Agriculture and Trade, 13.
8 Fictitious Dealings,
169.
9 The classic novel
is Frank Norris, The Pit: A Story of Chicago (New York,
1903). For social-scientific discussions, see Albert C. Stevens,
"'Futures' in the Wheat Market," Quarterly Journal of Economics
2, no. 1 (October 1887): 37–63, and Henry Crosby Emery,
Speculation on the Stock and Produce Exchanges of the United
States (New York, 1896). For only a few examples of print
journalism, see Van Buren Denslow, "Board of Trade Morality,"
North American Review, October 1883, 372–388; Richard
Wheatley, "The New York Produce Exchange," Harper's Monthly
Magazine, July 1886, 189–219; J. R. Dodge, "Discontent
of the Farmer," The Century, January 1892, 454; Egerton
R. Williams, "Thirty Years in the Grain Trade," North American
Review, July 1895, 24–35; and Charles Conant, "The Function
of the Stock and Produce Exchanges," Atlantic Monthly,
April 1903, 434.
10 For uses of these
terms, see, for instance, Fictitious Dealings, 244; Lyon
v. Culbertson, 83 Ill. 33 (1876); McGrew v. City Produce
Exchange, 85 Tenn. 572 (1886); and Senate Committee on Agriculture,
Subcommittee on Agricultural Depression, Agricultural Depression:
Causes and Remedies, 53rd Cong., 3rd sess., 1895, S. Rep.
787, 33.
11 On Canada, see
Ankli, "The Decline of the Winnipeg Futures Market," and on Argentina,
see United Nations Conference on Trade and Development, Overview
of the World's Commodities Exchanges, 2001 (Geneva: UNCTAD
Secretariat, 2001), 3.
12 On the Chicago
Board of Trade, see William Cronon, Nature's Metropolis: Chicago
and the Great West (New York, 1991); Jonathan Lurie, The
Chicago Board of Trade, 1859–1905: The Dynamics of
Self-Regulation (Urbana, Ill., 1979); and Ann Fabian, Card
Sharps, Dream Books, and Bucket Shops: Gambling in 19th Century
America (Ithaca, N.Y., 1990).
13 On agrarian revolt,
see Lawrence Goodwyn, Democratic Promise: The Populist Moment
in America (New York, 1976); on corporate reconstruction,
see Alfred D. Chandler, Jr., The Visible Hand: The Managerial
Revolution in American Business (Cambridge, Mass., 1980),
and Martin J. Sklar, The Corporate Reconstruction of American
Capitalism, 1890–1916: The Market, the Law, and Politics
(New York, 1988); on Wall Street, see Steve Fraser, Every Man
a Speculator: A History of Wall Street in American Life (New
York, 2005); on consumption, see William Leach, Land of Desire:
Merchants, Power, and the Rise of a New American Culture (New
York, 1994).
14 On the growth
of financial instruments in early modern Europe, see Fernand Braudel,
The Wheels of Commerce (Berkeley, Calif., 1992); Simon
Schama, The Embarrassment of Riches: An Interpretation of Dutch
Culture in the Golden Age (New York, 1987), 343–371;
and Stuart Banner, Anglo-American Securities Regulation: Cultural
and Political Roots, 1690–1860 (New York, 1998). On
the political significance of speculative finance in early national
America, see Stanley Elkins and Eric McKitrick, The Age of
Federalism: The Early American Republic, 1788–1800 (New
York, 1994).
15 An abstract,
mediated character is a feature of all capitalist exchange relations.
See Moishe Postone, Time, Labor, and Social Domination: A Reinterpretation
of Marx's Critical Theory (New York, 1996). On the tendency
of speculative finance, or "fictitious capital," to alter the
geographical and temporal bases of capitalist production and exchange,
see David Harvey, The Limits to Capital (New York, 1982).
16 For an overview
of contemporary finance capitalism, see David Held, ed., Global
Transformations: Politics, Economics, and Culture (Palo Alto,
Calif., 1999).
17 Fictitious
Dealings, 246.
18 See Louis Menand,
The Metaphysical Club (New York, 2001), and, especially
on the matter of probability, Ian Hacking, The Taming of Chance
(New York, 1990).
19 James Livingston
has noted an epistemological shift in the political economy and
culture of the U.S. during these years. His focus, however, is
the corporation and the construction of a new "social self." See
Livingston, Pragmatism and the Political Economy of Cultural
Revolution, 1850–1940 (Chapel Hill, N.C., 1997).
20 Board of Trade
v. Christie, 198 U.S. 236 (1905).
21 So, for example,
suppose that on May 1, trader A sold to trader B 45,000 bushels
of "September wheat" at $10 per bushel. Then, come September 1,
the price of "September wheat" fell to $8 per bushel. If need
be, trader A could have gone into the pit and purchased 45,000
bushels of "September wheat" from a third-party, trader C, at
$8 per bushel. Trader A would have delivered that contract to
trader B. Trader B would have paid trader A the "contract price"
of $10 per bushel, and so trader A, by this practice of "selling
short," would have profited $2 by a factor of 45,000 bushels,
or $90,000. If the price had instead risen to $12, trader B would
have stood to profit by $90,000 on his "long" position. Eventually,
traders dispensed with trader C altogether, and simply "set off"
on the difference between contract price and market price.
22 See, for one
example of "time contracts," Barnard v. Backhaus, 52 Wisc.
593 (1881), 599, and, for trading in "differences," Fictitious
Dealings, 202.
23 The description
of Sawyer's business throughout this section is taken from Fictitious
Dealings, 29–40, 64–71.
24 Approximately
70 percent of the acreage in Minnesota and the Dakotas in the
early 1890s was in wheat, and 85 percent of that wheat was exported.
See C. Knick Harley, "Transportation, the World Wheat Trade, and
the Kuznets Cycle, 1850–1913," Explorations in Economic
History 17, no. 3 (1980): 232.
25 Henry Demarest
Lloyd reported that at the New York Produce Exchange, orders were
received from London, Liverpool, Glasgow, Edinburgh, Dublin, Cork,
Bordeaux, Marseilles, Zurich, Le Havre, Antwerp, Amsterdam, Berlin,
and Hamburg. Lloyd, "Making Bread Dear," 121. On the formation
of a world market for agricultural products between 1876 and 1913,
see Ronald Findlay and Kevin H. O'Rourke, "Commodity Market Integration,
1500–2000," in Michael D. Bordo, Alan M. Taylor, and Jeffrey
G. Williamson, eds., Globalization in Historical Perspective
(Chicago, 2003), 41–43.
26 Fictitious
Dealings, 31, 37–38.
27 Any precise number
is an educated guess. Judge Wilbur F. Boyle of St. Louis calculated
that estimate. Boyle compiled the volume of futures trades from
all the U.S. exchanges. The only exchange that did not keep figures
was the Chicago Board of Trade, but Boyle computed a number for
Chicago by extrapolating from the volume of grain delivered to
Chicago and from the widespread belief that futures trading in
Chicago was "fifteen times" greater than in St. Louis. Fictitious
Dealings, 245. See also the very similar calculations of Rühland,
The Ruin of the World's Agriculture and Trade, 5.
28 See Cronon, Nature's
Metropolis, 97–148.
29 Minutes, April
5, 1877, Board of Managers, New York Produce Exchange, Archives
of the New York Historical Society; Rühland, The Ruin
of the World's Agriculture and Trade, 47. Yet even the greatest
nineteenth-century scholar of futures markets, Henry Crosby Emery,
admitted that "It is difficult to say how early dealings in 'futures'
in the United States began." Emery, Speculation, 40. But
the 1870s and early 1880s appear to be the likely period. Speculation
in the petroleum trade had begun in 1873. Even more indicative,
the first U.S. clearinghouse to "set off" multiple transactions
at once appeared in Chicago in 1884. The first clearinghouse in
produce was actually adopted in Liverpool in cotton in 1876. See
Emery, Speculation, 41, 69. Economist Jeffrey C. Williams
contends that futures trading, in effect, was present as early
as 1848. Williams, "The Origins of Futures Markets," Agricultural
History 56, no. 1 (1982): 306–316.
30 The organized
exchanges were tight-lipped about trading practices in the public
record, but fantastical descriptions of trading can be found in
legal testimony. See especially the testimony throughout in U.S.
Supreme Court Briefs and Records, no. 280, Board of Trade,
198 U.S. 236, which totals 1,562 pages. Also Fictitious Dealings,
and Emery, Speculation, 32–74.
31 For a listing
of commodities traded, see Board of Trade of the City of Chicago,
The Thirty-fifth Annual Report of the Trade and Commerce of
Chicago for the Year Ending December 31st, 1892 (Chicago,
1893), 2–249.
32 The Amsterdam
"Bourse" of the seventeenth-century Netherlands was described
by the Sephardic Jew Joseph de la Vega in his Confusion de
Confusiones of 1688. On the tulip mania, see Schama, The
Embarrassment of Riches, 343–371. Negotiable financial
instruments were not unfamiliar to early modern Britain, either,
but were mostly in the form of stocks and bonds, not commodities.
See Banner, Anglo-American Securities Regulation. On the
market in securities and bonds in antebellum New York, see Walter
Werner and Steven T. Smith, Wall Street (New York, 1991).
33 See Postone,
Time, Labor, and Social Domination, and Harvey, The
Limits to Capital.
34 For descriptions
of bucket shops, see Fictitious Dealings, 53–59,
94, 125, 152, 165, 175, 180, 187, 230, 246, 281, 305; John Hill,
Jr., Gold Bricks of Speculation (Chicago, 1904), 19–93;
Patton Thomas, "Bucket Shops in Speculation," Munsey's Magazine,
October 1900, 68–70; Teague, "Bucket Shop Sharks," pt. 1
(June), 723–725; pt. 2 (July), 33–43; pt. 3 (August),
245–254; pt. 4 (September), 398–408; C. C. Christie,
"Bucket Shop vs. the Board of Trade," Everybody's Magazine,
November 1906, 707–713; and Christie, Shall the Chicago
Board of Trade, Aided by the Kansas City Board of Trade, the Minneapolis
Chamber of Commerce and the New York Cotton Exchange, Be Allowed
to FORM A TRUST in the Great Agricultural Staples of the United
States? An Answer to Merrill A. Teague's Denunciation of Bucket-Shops
(Kansas City, 1906). The British traveler James Bryce noted in
1888 with reference to bucket-shopping in securities, "In many
country towns there are small offices, commonly called 'bucket
shops,'" whose clientele included "the whole community, not merely
city people but also store keepers ... even farmers, even domestic
servants." Bryce quoted in Werner Sombart, Why Is There No
Socialism in the United States? (White Plains, N.Y., 1976),
134. For the extant secondary literature on bucket shops, see
Cedric B. Cowing, Populists, Plungers, and Progressives: A
Social History of Stock and Commodity Speculation, 1890–1936
(Princeton, N.J., 1965), 25–74, and Fabian, Card Sharps.
At a typical bucket shop, customers placed a margin with the proprietor
of the shop to secure the transaction. If the market went in the
shop's favor, the transaction was closed out as soon as the fluctuation
equaled the margin. If the market went in the customer's favor,
he or she could close the transaction at will and collect the
difference. Most often it seems that customers wagered on rises,
leaving the shop owners in a perpetual short position. This might
account for the many closings of shops (if prices suddenly rose).
35 Legal cases are
the most effective register of the wide presence of bucket-shop
trading in commodities futures. See, in Alabama, Queen City
Stock & Grain Co. v. Cunningham, 29 So. 583 (1900); in Arkansas,
Fortenbury v. State, 1 S.W. 58 (1886); in Colorado, Pendleton
v. Smissaert, 29 P. 521 (Col. Ct. App. 1892); in Connecticut,
State v. Flint, 28 A. 28 (1893); in the District of Columbia,
Lappin v. District of Columbia, 22 App. D.C. 68 (D.C. Cir.
1903); in Georgia, Dancy v. Phelan, 10 S.E. 205 (1888);
in Indiana, Fleming v. Yost, 36 N.E. 705 (1894); in Iowa,
People's Savings Bank of Des Moines v. Gifford, 79 N.W.
63 (1899); in Kansas, Carey v. Myers, 141 P. 602 (1914);
in Kentucky, Smith v. Western Union Telegraph, 2 S.W. 483
(1887); in Louisiana, State ex. rel. v. Shakespeare, 6
So. 592 (1889); in Michigan, People v. Hess, 48 N.W. 181
(1891); in Minnesota and North Dakota, Merchants National Bank
of Grand Forks v. Sullivan, 65 N.W. 924 (1896); in Missouri,
State v. Crab, 26 S.W. 548 (1894); in Nebraska, Watte
v. Wickerman, 43 N.W. 249 (1889); in North Carolina, State
v. Clayton, 50 S.E. 866 (1905); in Ohio, Cone v. Bright,
68 N.E. 3 (1903); in Oregon, Mellott v. Downing, 64 P.
393 (1901); in Pennsylvania and Maryland, Baxter v. Deneen,
57 A. 601 (Md. Ct. App. 1903); in Tennessee, McGrew v. City
Produce Exchange, 4 S.W. 38 (1886); in Texas, Goldstein
v. the State, 36 S.W. 278 (Tex. Ct. Crim. App. 1896); in Utah,
Overholt v. Burbridge, 79 P. 561 (1905); and in Vermont,
State v. Corcoran, 50 A. 1110 (1901). Merrill Teague's
1905 exposéé of bucket-shop trading in Munsey's
listed bucket-shop firms in numerous cities and towns in the United
States. Teague, "Bucket Shop Sharks." State statutes confirm a
presence in California, West Virginia, New Hampshire, Wisconsin,
and Mississippi; see T. Henry Dewey, Legislation against Speculation
and Gambling in the Forms of Trade, Including "Futures," "Options,"
and "Short Sales" (New York, 1905), 13–14. The predominantly
rural state of West Virginia actually had legislation condoning
bucket shops.
36 For instance,
Teague, "Bucket Shop Sharks," pt. 2 (July), 41, and Sereno Pratt,
The Work of Wall Street (New York, 1903), 381.
37 Bucket shops
in the East, whose heyday appears to have been after 1900, tended
to deal more in stocks, while bucket shops in the West usually
dealt in grain futures, and those in the South in cotton futures.
38 Dewey, Legislation
against Speculation and Gambling, 7.
39 "Number of Bucket
Shops Closed," New York Times, March 28, 1895.
40 Quoted in Hill,
Gold Bricks, 54.
41 It is also how
a great many Americans came in contact with speculative financial
trading. On the lack of popular participation in formal securities
markets until the 1920s, see Fraser, Every Man a Speculator,
389, 391.
42 For the example
of the Chicago Board of Trade's regulation of itself, see Lurie,
The Chicago Board of Trade, 23–52.
43 Pickering
v. Cease, 79 Ill. 328 (1875), 329.
44 On the common
law of contract and wagering, see Roy Kreitner, "Speculations
on Contract, or How Contract Law Stopped Worrying and Learned
to Love Risk," Columbia Law Review 100, no. 4 (May 2000):
1096.
45 Pickering,
79 Ill., 329. On "executory contracts," see Morton J. Horwitz,
The Transformation of American Law, 1780–1860 (Cambridge,
Mass., 1977), 160–210. The court here was seemingly drawing
upon notions of the "general welfare" explicated in William Novak,
The People's Welfare: Law and Regulation in Nineteenth-Century
America (Chapel Hill, N.C., 1996).
46 Pixley v.
Boynton, 79 Ill. 351, 353.
47 On the problem
of establishing intent, see Julius Aroni, Futures (New
Orleans, La., 1882); T. Henry Dewey, A Treatise on Contracts
for Future Delivery and Commercial Wagers, Including "Options,"
"Futures," and "Short Sales" (New York, 1886); Morton John
Stevenson, "Gambling Contracts," Michigan Law Journal 35
(1897): 35–40; and Reitner, "Speculations on Contract,"
1105.
48 The case in which
the Illinois court developed the doctrine of contemplating delivery
and moved away from Pickering was Pixley, 79 Ill.,
351. See also Wolcott v. Heath, 78 Ill. 433 (1875); Sandborn
v. Benedict, 78 Ill. 309 (1875); and Lyon v. Culbertson,
83 Ill. 33 (1876).
49 Prior to 1884,
courts that interpreted traders' trading intentions as favorable
to their interests included, in a Missouri federal appeals court,
Williams v. Tidemann, 6 Mo. App. 269 (Mo. Ct. App., 1878);
in New York, Kingsbury v. Kirwan, 77 N.Y. 612 (N.Y. Ct.
App., 1879); and in Michigan, Gregory v. Wendell, 40 Mich.
432 (1879). Striking down futures trading for not adequately contemplating
delivery were, in Nebraska, Rudolf v. Winters, 7 Neb. 125
(1878); in Kentucky, Wallace v. Taggart, 14 Bush 727 (Ken.
Ct. App., 1879); and, once again, in Illinois, Tenney v. Foote,
4 Ill. App. 594 (Ill. Ct. App., 1879), and Beveridge v. Hewitt,
8 Ill. App. 467 (Ill. Ct. App., 1881); in Alabama, Hawley v.
Bibb, 69 Ala. 52 (1881); in Iowa, Melchert v. American
Union Telegraph Co., 11 F. 193 (Cr. Ct., 1882); and in Kansas,
Cobb v. Prell, 15 F. 774 (Cr. Ct., 1883).
50 Barnard,
53 Wis., 600.
51 Not coincidentally,
the organized exchanges found it in their own interest to keep
members' disputes out of the court. For the example of the Chicago
Board of Trade, see Lurie, The Chicago Board of Trade,
23–52.
52 Irwin v. Williar,
110 U.S. 499 (1884). Post-Irwin decisions unfavorable to
brokers were, in Indiana, Whitesides v. Hunt, 97 Ind. 191
(1884); in Illinois, Pearce v. Foote, 113 Ill. 228 (1885);
in Missouri, Crawford v. Spencer, 4 S.W. 713 (1887); the
Supreme Court decision Embrey v. Jemison, 131 U.S. 336
(1889); in Ohio, Kahn v. Walton, 20 N.E. 203 (1889), and
Lester v. Buel, 30 N.E. 821 (1892); in Iowa, First National
Bank of Creston v. Carrole, 45 N.W. 304 (1890); in Maryland,
Billingslea v. Smith, 26 A. 1077 (Md. Ct. App., 1893);
in Missouri, Connor v. Black, 24 S.W. 184 (1893); and in
Tennessee, McGrew v. City Produce Exchange, 4 S.W. 38 (1886).
53 In response to
farmers' agitation, a few state legislatures passed laws purportedly
banning futures trading in the 1880s. Yet state courts often interpreted
them according to their own, more lenient standard of "contemplating
delivery," effectively nullifying their intent. On state laws,
Dewey, Legislation against Speculation and Gambling, 13,
14, and Carl Parker, "Governmental Regulation in Produce Markets,"
in Johnson, American Produce Exchange Markets, 126–155.
For an example of state courts' nullifying the intent of the law
through invoking "contemplating delivery" by fiat, see Fortenbury
v. State, 1 S.W. 58 (1886). A process similar to what occurred
in Arkansas took place in Illinois; see Dewey, A Treatise on
Contracts, 104.
54 See, for one
example of agitation against futures by state farmers' organizations,
Sawyer's home state of Minnesota, The Minnesota State Farmers'
Alliance: Constitution and By-laws, Declaration of Principles,
Resolutions, Officials, Etc. (St. Paul, Minn., 1890), 15.
55 The ban in the
Omaha platform was the culmination of previous national alliance
meetings that had also condemned futures. See Proceedings of
the Annual Session of the Farmers and Laborers Union of America
at St. Louis, Mo., December 3 to 7, 1889 (Washington, D.C.,
1890), 51; Proceedings of the Annual Session of the Farmers
and Industrial Union at Ocala, Florida, December 2 to 8, 1890
(Washington, D.C., 1891), 33; and Proceedings of the National
Farmers' Alliance Eleventh Annual Meeting, Omaha, Nebraska, January
27, 28, and 29, 1891 (Des Moines, Iowa, 1891), 5.
56 The Senate held
hearings as well. Representatives of the exchanges reiterated
these themes before the Senate. See Dealings in "Options" and
"Futures": Protests, Memorials and Arguments against Bills Introduced
in the Fifty-second Congress, Issued by the New York Cotton Exchange,
New Orleans Cotton Exchange, Board of Trade of the City of Chicago,
New York Produce Exchange (New York, 1892), 1–135.
57 Fictitious
Dealings, 235, 282, 260, 268, 190; Senate Committee on Agriculture,
Agricultural Depression, 33.
58 Fictitious
Dealings, 282, 297, 48. Charles Pillsbury also leveled the
"anarchist" accusations; ibid., 207. On violating the protective
tariff, see ibid., 246, 296.
59 Ibid., 22, 157,
124. John W. Labouisse of the New Orleans Cotton Exchange and
Dennison Smith of the Toledo Board of Trade made arguments similar
to Kneeland's, finding no epistemological distinction to be made
between physical delivery and "setting off." Ibid., 98, 224.
60 Ibid., 129, 101.
61 See Held, Global
Transformations, 182.
62 Fictitious
Dealings, 53, 150; Proceedings of the National Farmers'
Alliance Eleventh Annual Meeting, 1. On the issue of play,
see also Fictitious Dealings, 202, 210, 311, 330, and Lloyd,
"Making Bread Dear," 119.
63 On futures trading
as "intelligent," and thus real work, see Fictitious Dealings,
122, 158, and Denslow, "Board of Trade Morality," 375–376.
64 On the professionalization
of speculation in general, see also Fabian, Card Sharps,
188, 191, 195; Cowing, Populists, Plungers, and Progressives,
28–30; and Fraser, Every Man a Speculator, 251. The
insurance argument mirrored many of the same defenses of "speculation"
that appeared in academic circles and the popular press at this
time. See Denslow, "Board of Trade Morality," 377; Charles A.
Conant, "The Uses of Speculation," The Forum, August 1901,
712; Emery, Speculation, 100; Emery, "The Place of the
Speculator in the Theory of Distribution," Publications of
the American Economic Association 1, no. 1 (Feb. 1900): 103–122;
"The Value of Speculation," Wall Street Journal, April
13, 1903; and Arthur T. Hadley, Economics: An Account of the
Relations between Private Property and Public Welfare (New
York, 1904), 122.
65 On the insurance
of "society" as a whole, see Fictitious Dealings, 139,
215, 227.
66 Ibid., 67.
67 Futures dealers
often interjected "consumers" as a class that distribution should
be subservient to over producers. Ibid., 21, 284.
68 Ibid., 289.
69 Others have commented
on farmers' political responses to high-risk-bearing agriculture,
although without focusing on the equity of futures markets as
a risk-management institution. See Ann Mayhew, "A Reappraisal
of the Causes of Farm Protest in the United States, 1870–1900,"
Journal of Economic History 32 (1972): 464–476, and,
for the original outlines of the argument, Douglass North, Growth
and Welfare in the American Past (Englewood Cliffs, N.J.,
1966).
70 Farmers' marketing
cooperatives were one alternative, but they struggled on account
of deficiencies in liquid capital. The testimony of agrarian leader
Charles Macune mentioned the lingering practice of sale by physical
sample; Fictitious Dealings, 252–255. On the cooperative
movement, see, for example, in Sawyer's home state of Minnesota,
Steven Keillor, Cooperative Commonwealth: Co-ops in Rural Minnesota,
1859–1939 (St. Paul, Minn., 2003).
71 The added problem,
besides the lack of a hedging mechanism, was the lack of funds
for storage. In other words, small farmers were left with a one-month
period to sell to the likes of Sawyer, who could then store the
grain while purchasing a futures contract to hedge against it
until the market rose.
72 Under the Populists'
"subtreasury plan," the government would provide warehouses and
financial incentives for farmers to hold back their products from
a depressed market, in effect internalizing risk on behalf of
the farmer. See Macune's testimony in Fictitious Dealings,
252–255. In the twentieth century, farmers successfully
lobbied for policies that involved greater state involvement in
agricultural marketing. See Elizabeth Sanders, Roots of Reform:
Farmers, Workers, and the American State, 1877–1917
(Chicago, 1999).
73 See Macune's
testimony in Fictitious Dealings, 252–255.
74 On the Hatch
bill vote, see Cowing, Populists, Plungers, and Progressives,
18–22. The last hurrah in Congress for agrarian radicals
critical of futures was the report on agricultural depression
issued by Populist senator William A. Peffer. See Senate Committee
on Agriculture, Agricultural Depression, 33. But see also
the 1901 report of Congress's Industrial Commission, which included
critical passages of speculation in futures. U.S. Industrial Commission,
Report of the Industrial Commission on the Distribution of
Farm Products (Washington, D.C., 1901), 189–225.
75 For instance,
in his exposé of bucket-shop trading in Everybody's Magazine
in 1906, Merrill Teague estimated that the number of bucket shops
increased from hundreds in the 1890s to easily thousands by the
turn of the century. Teague, "Bucket Shop Sharks," pt. 4 (September),
407.
76 For examples
of dealers' critiques of bucket shops, see Fictitious Dealings,
176, 125, 180, 206. Many "handlers" characterized bucket shops
and boards of trade as similarly illegitimate. According to Charles
Pillsbury, "in the bucket shop perhaps 99 per cent of the trading
is illegitimate," whereas in the pits, "90 per cent is illegitimate."
Pillsbury, in Fictitious Dealings, 187.
77 See Christie,
Shall the Chicago Board of Trade ... Be Allowed?, 14.
78 Historians of
bucket shops, such as Ann Fabian and Jonathan Lurie, tend to agree
with the Chicago Board of Trade that bucket-shop trading was an
immoral, unproductive form of gambling, whereas I argue that farmers
most likely sensed their risk-management functions. See Fabian,
Card Sharps, 150–203, and Lurie, The Chicago Board
of Trade, 75–103, 168–199.
79 Fictitious
Dealings, 305.
80 Ibid., 125, 175.
Davis accused organized exchanges of leveling the gambling charge
at bucket shops for reasons of pure self-interest; ibid., 281.
81 Christie, Shall
the Chicago Board of Trade ... Be Allowed?, 38.
82 Agrarian radicals,
whose real target was the pits, moved such laws through state
capitals. Later, toward the turn of the century, precocious progressive
reforms supported bills that supposedly attacked the "vice" of
gambling in bucket shops, or of "options" in the pits. See Fabian,
Card Sharps, 150–203. Illinois, Missouri, and Ohio
were the states with laws explicitly banning "options." The anti–bucket
shop laws of other states could have been interpreted to encompass
options as well. See Dewey, Legislation against Speculation
and Gambling, 13–14, for a compendium of these laws,
which covered some twenty-one states and the Indian territory.
See also Parker, "Governmental Regulation in Produce Markets."
83 The distinctions
between an option and a future were inordinately confusing to
contemporaries. On the floor of the U.S. Congress in 1894, an
attempt to define an "option" brought down laughter from the body.
See Anti-Option Legislation: Paternal Interference with Business,
Speech of Hon. John De Witt Warner of New York in the House of
Representatives, Monday, June 18, 1894 (Washington, D.C.,
1894), 6.
84 On the presence
of options trading among members of organized exchanges, acknowledged
by representatives of the exchanges, see Fictitious Dealings,
95, 167, 175, 182, 221, 245. See also Dewey, A Treatise on
Contracts, 89. When the Chicago Board of Trade began its battle
against the bucket shops, the exchange cracked down on options
trading. Apparently, options sales were then wired to the Milwaukee
Chamber of Commerce, where turn-of-the-century observers began
citing a Milwaukee market for Chicago options. Legal trading in
options would come first to Milwaukee in 1902. See "The Exchanges
of Minneapolis, Duluth, Kansas City, Mo., Omaha, Buffalo, Philadelphia,
Milwaukee and Toledo," in Johnson, American Produce Exchange
Markets, 251.
85 Quoted in Dewey,
Legislation against Speculation and Gambling, 52.
86 It is a testament
to the bucket shops' competitive strength that the organized exchanges,
in great peril to their legal existence, pursued these disputes,
especially after 1892. The Chicago Board led the campaign probably
because it was the largest speculative market (with New York a
solid second), both for hedging purchases and for what can only
be described as gambling.
87 New York and
Chicago Grain and Stock Exchange v. Chicago Board of Trade,
19 N.E. 855 (1889).
88 Christie's charge
was threefold: the board was a monopolistic trust in violation
of the federal Sherman Anti-Trust Act; the board's prices were
infected with illegal conduct and so could be carried off by anyone;
and the board's prices were cloaked with a public use, and should
not be withheld from the citizenry. Board of Trade, 198
U.S., 236–246.
89 See Teague, "Bucket
Shop Sharks," pt. 2 (July), 40, and Christie, "Bucket Shop vs.
the Board of Trade," 713.
90 The nuances of
the "bucket-shop war" narrative are necessarily truncated in my
account. For a fuller treatment, see Lurie, The Chicago Board
of Trade, 75–105, 168–199, and Fabian, Card
Sharps, 153–203. Board of Trade, 198 U.S., 236.
91 Board of Trade,
198 U.S., 246.
92 Board of Trade
v. O'Dell Commission, 115 F. 574 (Ct. App., 1902), 587, 588.
See also Christie v. Board of Trade 125 F. 161 (Ct. App.,
1903), and Board of Trade v. Donovan, 121 F. 1012 (Ct.
App., 1902).
93 Christie, "Bucket
Shop vs. the Board of Trade," 710.
94 "When this species
of gambling on the commercial and stock exchanges of the country
ceases," that same district court held, "the bucket shops will
disappear, and not before." Board of Trade v. O'Dell Commission,
115 F., 588.
95 Christie, Shall
the Chicago Board of Trade ... Be Allowed?, 22.
96 In an all-night
session, the bill lost, 73–63. "Kills Board of Trade Bill,"
New York Times, May 8, 1905.
97 On the widespread
legal doctrinal influence of Christie, see "Nature and
Validity of 'Hedging' Transactions on the Commodity Market," American
Law Reports 20 (1920): 1422; "Validity of Transactions in
Futures," American Law Reports 83 (1933): 522; J. C. McMath,
"Puts and Calls and Board of Trade of Chicago," Central Law
Journal 99 (April 1926): 114–115, J. C. Judson, "Validity
of Transactions on the Board of Trade," Illinois Law Review
19 (April 1925): 644–658; and Edwin Patterson, "Hedging
and Wagering on Produce Exchanges," Yale Law Journal 40,
no. 6 (April 1931): 843–884. At the time, Christie
was widely cited and extracted in a variety of academic, periodical,
and print publications. See, for example, A. F. Lindley, "Essentials
of an Effective Futures Market," Journal of Farm Economics
19, no. 1 (February 1937): 321–330; George F. Stone, "Board
of Trade of the City of Chicago," Annals of the American Academy
of Political and Social Science 38, no. 2 (September 1911):
189–205; and Teague, "Bucket Shop Sharks," pt. 4 (September),
408. For the immediate response, see "Sounds the Doom of Bucket
Shops," Chicago Daily Tribune, May 9, 1905; "A Judicial
Vindication," Chicago Daily Tribune, May 10, 1905; "Speculation
According to the Supreme Court," Wall Street Journal, May
10, 1905; and "Justice Holmes Defends Board of Trade Speculation—Its
Dealings Are Not Mere Wagers," Washington Post, May 9,
1905.
98 Board of Trade
of the City of Chicago, The Forty-eighth Annual Report of the
Trade and Commerce of Chicago for the Year Ended December 31st,
1905 (Chicago, 1906), xlix–li.
99 Board of Trade,
198 U.S., 246–249.
100 Christie,
Shall the Chicago Board of Trade ... Be Allowed?, 24.
101 Oliver Wendell
Holmes, Jr., to Frederick Pollock, August 30, 1929, in Mark DeWolfe
Howe, ed., Holmes-Pollock Letters: The Correspondence of Mr.
Justice Holmes and Sir Frederick Pollock, 1874–1932
(Cambridge, Mass., 1941), 2: 252.
102 Oliver Wendell
Holmes, Jr., The Common Law (Boston, 1881), 300.
103 For a recent
restatement of some of the distinctions that should be made between
Holmes's and James's thought, see David A. Hollinger, "The 'Tough-Minded'
Justice Holmes, Jewish Intellectuals, and the Making of an American
Icon," in Hollinger, Science, Jews, and Secular Culture: Studies
in Mid-Twentieth-Century American Intellectual History (Princeton,
N.J., 1998), 44.
104 Oliver Wendell
Holmes, Jr., to Harold Laski, March 29, 1917, in Mark DeWolfe
Howe, ed., Holmes-Laski Letters: The Correspondence of Mr.
Justice Holmes and Harold J. Laski, 1916–1935 (Cambridge,
Mass., 1963), 1: 70; Holmes to Laski, January 28, 1927, ibid.,
2: 917.
105 William James,
Pragmatism: A New Name for Some Old Ways of Thinking (Boston,
1907), 113. In Pragmatism and Political Economy, 158–224,
James Livingston first demonstrated that the original pragmatists
grasped the epistemological possibilities residing in the radical
contingency of the credit economy—"the future tense of money"—created
by corporate capitalism. The foundational work of scholarship
linking the thought of James and Holmes is still Morton White,
Social Thought in America: The Revolt against Formalism
(New York, 1949), which argues that the two shared a "revolt against
formalism." See also Morton J. Horwitz, The Transformation
of American Law, 1870–1960: The Crisis of Legal Orthodoxy
(New York, 1994), 454–463, and Menand, Metaphysical Club,
409–433. Others have commented on the triumph of probability
and its ideological consequences in this period. See Hacking,
The Taming of Chance, which focuses on another American
pragmatist, Charles Peirce, and Jackson Lears, Something for
Nothing: Luck in America (New York, 2003), 187–227,
which posits an incomplete victory for a culture of corporate
control over a William Jamesian culture of chance.
106 William James,
Essays in Radical Empiricism (New York, 1912), 28, 16–17.
First published as William James, "Does Consciousness Exist?"
Journal of Philosophy, Psychology, and Scientific Methods
1 (1904): 477–491.
107 Board of
Trade, 198 U.S., 249.
108 James, Pragmatism,
80; emphasis added.
109 Board of
Trade, 198 U.S., 250.
110 James, Pragmatism,
80
111 Board of
Trade, 198 U.S., 250.
112 See Markhan,
The History of Commodity Futures Trading; "The Frontline
of Futures: Eurex Attacks, Chicago's Exchanges Defend Themselves,"
The Economist, November 13, 2003.
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