Trading in Dreams

Trading in Dreams

Futures trading--that odd engine of global capitalism where traders speculate on everything from interest rates to the price of wheat--barely survived its birth, more than a century ago.

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THE SOURCE: “Contemplating Delivery: Futures Trading and the Problem of Commodity Exchange in the United States, 1875–1905” by Jonathan Ira Levy, in American Historical Review, April 2006.

Nothing epitomizes global capitalism more than the world’s burgeoning futures markets, where trillions of dollars ride on everything from tomorrow’s interest rates to next year’s price for a bushel of wheat. This trade in the ephemeral seems dubious to many people even today, and at its birth more than a century ago it seemed downright scandalous, requiring the help of a Harvard philosopher and the U.S. Supreme Court to ensure its survival in the United ­States.

Trade in commodity futures has a long history; it involves nothing more complex than signing a contract today to deliver wheat or some other commodity at a certain price in the future. In the 1870s, however, traders in the United States and abroad began using a technique called “setting off” that allowed contracts to be bought and sold even though no goods actually changed hands, notes Jonathan Ira Levy, a graduate student in history at the University of Chicago. In 1888, for example, American farmers produced 415 million bushels of wheat, but U.S. traders handled futures contracts for perhaps 25,000 trillion bushels. By then, the action had expanded from the trading pits of organized markets such as the Chicago Board of Trade to informal “bucket shops,” mostly in rural America, where ordinary folk could wager on movements in the big-city commodity ­markets.

Futures markets served an economic need. As the production and distribution of commodities such as corn and oil grew to national and international scale in the late 19th century, the need for new risk-management tools grew too. Futures allowed farmers and the many other players in the complex new marketplaces to protect themselves against price fluctuations and other risks. One midwestern grain elevator owner explained to a congressional committee in 1892 that he might have 100,000 bushels of wheat to sell on a day when buyers around the country demanded only 75,000. The ability to sell a futures contract for the 25,000 remaining bushels helped keep him afloat ­financially.

The title of those House hearings, “Fictitious Dealings in Agricultural Products,” gives a sense of the public reaction to the new futures trading. It wasn’t just that the exchanges encouraged ­speculation—­indeed, they couldn’t survive without ­it—­but that they trafficked in pure abstractions rather than actual goods. Agrarian populists in particular raged against the hocus-pocus of financial wizards who had the power to influence what prices midwestern farmers could get for their crops. But federal legislation that would have destroyed the pits was narrowly defeated in 1892. That left the matter in the hands of the ­courts.

Justice Oliver Wendell Holmes Jr. wrote the decisive opinion for the U.S. Supreme Court in 1905. Just a year before, his friend, the philosopher William James, had published a key essay in the evolution of pragmatist philosophical thought in which he argued that thoughts could be as “real” as things if they had consequences in the world. Earlier in his thinking, James had leaned on financial metaphors, noting that bank notes themselves have value chiefly because we believe they do. Without citing James, Holmes followed a similar line of thought in upholding organized futures markets: However incorporeal the contracts, the futures trade had positive practical consequences; “speculation of this kind by competent men is the ­self-­adjustment of society to the probable.” The casually operated bucket shops, however, were another matter, and the Court shut them ­down.

The American experience was atypical. As trade in commodities expanded during the late 19th century, futures markets sprang up in other countries, Levy notes, but most did not survive. Today, they are once again common in the devel­oped world, and many newly capitalist countries make it a high priority to create them. But without ade­quate regulatory mechanisms and ­customs—­or philosophers to justify their ­existence—­most have ­expired.

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