Jonathan Ira Levy | Contemplating Delivery: Futures Trading and the Problem of Commodity Exchange in the United States, 1875–1905 | The American Historical Review, 111.2

Contemplating Delivery: Futures Trading and the Problem of Commodity Exchange in the United States, 1875–1905

JONATHAN IRA LEVY

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.

These exchanges are cosmopolitan legislatures. Their enactments are prices, and their jurisdiction extends beyond that of Congress, Parliament, the Assembly, and the Reichstag.

Henry Demarest Lloyd (1883) ¹

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.

Frank H. Knight (1921) ²

"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.

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.

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.

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.

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. ¹⁴

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. ¹⁶

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.

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.

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.

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.

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. ²⁵

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

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 .)

Figure 2: "A flurry in wheat at the Chicago Board of Trade," 1880. Reprinted from Harper's New Monthly Magazine, October 1880, 725.

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.)

TABLE 1 Receipts of Wheat at Chicago, Duluth, and Minneapolis, 1880–1895, in Bushels

	1880	1885	1890	1895

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

* Then the Minneapolis Board of Trade
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.

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.

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

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

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.

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.

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.

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.

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.

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

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

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. ⁵⁰

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

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.

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. ⁵⁷

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. ⁵⁸

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. ⁵⁹

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.

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

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. ⁷²

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.

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.

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.

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.

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?

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?

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

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

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

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.

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.

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.

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

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.

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