Anthony J. Pennings, PhD


America’s Financial Futures History

Posted on | January 2, 2016 | No Comments

In his book, Nature’s Metropolis, (1991) William Cronen discussed the rise of Chicago as a central entrepot in the formation of American West. The city was strategically located between the western prairies and northern timberlands and with access routes by river and the Great Lakes. As a dynamic supplier of the nation’s food and lumber resources, Chicago was ideally suited to become the port city for the circulation of the West’s great natural bounty. Located on the shore of Lake Michigan, “Chicago stood in the borderland between the western prairies and eastern oak-history forests, and the lake gave it access to the white pines and other coniferous trees of the north woods. Grasslands and hardwoods and softwood forests were all within reach.”[1] With the westward expansion of agricultural settlements throughout the 19th century, farmers started to look for markets to sell their non-subsistence beef, pork, and wheat supplies. Likewise, they were attracted to the big city to buy northeastern industrial goods at lower prices.

By the 1880s, Chicago enthusiasts were soon making comparisons with Rome, noting however, that while “all roads lead to Rome;” Chicago would become “the Rome of the railroads.” The famous city got its start after 1833, when the local Indian tribes were forced to sign away the last of their legal rights to the area and the construction of the Erie Canal meant a new waterway to New York and the East Coast. It prospered through the Civil War where it played a key role in supplying the North with foodstuffs and other resources from the western frontier. Into the next century, Chicago would continue to grow into the central node of a vast trading network of nature’s bounty, what would generically be called “commodities.”

The “commodity” emerged as an abstract term to refer to items such as grains, meat products, and even metals that are bought and sold in a market environment. Commodities also came to be sold in “futures”, a legal contract specifying the change of ownership at a future time and at a set price. Bakeries in the East, for example, could lock in prices for future wheat deliveries. Key developments in the emergence of commodity trading were the notions of grading and interchangeability. To the extent that products could be separated into different qualities, they could be grouped together according to a set standard and they could then be sold anonymously.

While technological innovations such as the railroad and the steamship would dramatically increase the efficiency of transporting goods, the development of Chicago’s famed exchanges would facilitate their allocation. The Chicago Board of Trade was started in 1848 as a private organization to boost the commercial opportunities of the city, but would soon play a crucial part in the development of a centralized site for the Midwest’s earthly gifts. It was the Crimean War a few years later that spurred the necessity for such a commodities market. As the demand for wheat sales doubled and tripled, the CBOT prospered, and membership increased proportionally.

In 1856, the Chicago Board of Trade made the “momentous decision to designate three categories of wheat in the city – white winter wheat, red winter wheat, and spring wheat – and to set standards of quality for each.”[2] The significance of the action was that it separated ownership from a specific quantity of grain. As farmers brought their produce to the market, the elevator operator could mix it with similar grains and the owner could be given a certificate of ownership of an equal quantity of similarly graded grain. Instead of loading grain in individual sacks, it could be shipped in railroad cars and stored in silos. The grain elevators were a major technological development that increased Chicago’s efficiency in coordinating the movements and sales of its grains.

The Board was still having problems with farmers selling damp, dirty, low-quality and mixed grains, so it instituted additional variations. By 1860, the Chicago Board of Trade had more than ten distinctions for grain and its right to impose such standards was written into Illinois law making it a “quasi-judicial entity with substantial legal powers to regulate the city’s trade.”[3]

During this same time period, the telegraph was spreading its metallic tentacles throughout the country, providing speedy access to news and price information. The western end of the transcontinental link was built in 1861, connecting Chicago with cities like Des Moines, Omaha, Kearney, Fort Laramie, Salt Lake City, Carson City, Sacramento, and on to San Francisco.[4] The western link quickly expanded to other cities and connected Chicago with farmers, lumberjacks, prospectors and ranchers eager to bring their goods to market. News of western harvests often triggered major price changes as it was transmitted rapidly between cities. News of droughts, European battles, and grain shortages brought nearly instant price changes in Chicago. Newspapers were a major beneficiary of the electric links as they printed major news stories as well as price information coming over the telegraph. The telegraph quickly made the Chicago Board of Trade a major world center for grain sales and linked it with a network of cities such as Buffalo, Montreal, New York, and Oswego that facilitated the trade of grains and other commodities.

The telegraph also instituted the futures market in the US. As trust in the grade system sanctioned by the Chicago Board of Trade grew, confidence in the quality of the anonymous, interchangeable commodity also increased. The telegraph allowed for one of earliest e-commerce transactions to regularly occur. The “to arrive” contract specified the delivery of a specified amount of grain to a buyer, most often in an eastern city. The railroad and the steamboat made it easier to guarantee such a delivery and the guarantees also provided a needed source of cash for the Western farmers and their agents. These contracts could be used as collateral to borrow money from banks. While the “to arrive” contracts had seen moderate use previously, the telegraph (along with the grading system) accelerated their use. Along with the traditional market in grain elevator receipts, a new market in contracts for the future delivery of grain products emerged. Because they followed the basic rules of the Board, they could be traded. “This meant that futures contracts–like the elevator receipts on which they depended—were essentially interchangeable, and could be bought and sold quite independently of the physical grain that might or might not be moving through the city.”[5]

During the 1860s, the futures market became institutionalized at the Chicago Board of Trade. The Civil War helped facilitate Chicago’s futures markets as such commodities as oats and pork were in high demand by the Union Army. After the war, European immigration increased substantially in the eastern cities, further increasing the demand for western food and lumber commodities. Bakers and butchers needed a stable flow of ingredients and product. The new market for futures contracts transferred risk from those who could ill-afford it, the bread-bakers and cookie-makers, to those that wanted to speculate on those risks.

In 1871, Chicago suffered from a devastating fire, but the city came back stronger than ever. By 1875, the market for grain futures reached $2 billion, while the grain cash business was estimated at the lesser $200 million.[6] Abstract commodity exchange had surpassed the market of “real” goods. “To arrive” contracts facilitated by telegraph in combination with elevator receipts had made Chicago as the futures capital of the world.

In 1874, the precursor to the Chicago Mercantile Exchange was formed. Called the Chicago Produce Exchange, it focused on farm goods such as butter, eggs, and poultry. In 1919, at the end of World War I, the Chicago Produce Exchange changed its name to the Chicago Mercantile Exchange (CME). It later expanded to trade frozen pork bellies as well as live hog and live pigs in the 1960s. The CME expanded yet again to include lean hogs and fluid milk, but its most important innovations came a decade later in the financial field.


[1] Quote on Chicago’s strategic location from Nature’s Metropolis, (1991) William Cronen, p. 25.
[2] Chicago Board of Trade’s momentous decision from William Cronen Nature’s Metropolis, (1991), p. 116.
[3] Additional information on the Chicago Board of Trade William Cronen Nature’s Metropolis, (1991), p. 118-119.
[4] Transcontinental link cities from Lewis Coe’s (1993) The Telegraph. London: McFarland & Co. p. 44.
[5] Quote on futures interchangeability from William Cronen Nature’s Metropolis, (1991), p. 125.
[6] Estimates of the grain and futures markets from William Cronen Nature’s Metropolis, (1991), p. 126.



AnthonybwAnthony J. Pennings, PhD is Professor and Associate Chair of the Department of Technology and Society, State University of New York, Korea. Before joining SUNY, he taught at Hannam University in South Korea and from 2002-2012 was on the faculty of New York University. Previously, he taught at St. Edwards University in Austin, Texas, Marist College, and Victoria University in New Zealand. During the 1990s he was also a Fellow at the East-West Center in Honolulu, Hawaii.


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