The United States Federal Government and the Making of Modern Futures Markets, 1920-1936 Rasheed KM Saleuddin Corpus Christi College September 2017 This dissertation is submitted for the degree of Doctor of Philosophy. i ii The Unites States Federal Government and the Making of Modern Futures Markets, 1920-36 Rasheed Saleuddin In 1921, 1924 and 1929-1934, markets for the future delivery of wheat went through periods of extreme volatility and/or significant depression, and in all three cases there were significant and long-lasting changes to both the institutional and regulatory framework of these Chicago- dominated grain markets. There was no real change after these key reforms until 1974, while indeed much of the original regulatory and market innovation remains. The result of the severe depression of 1921 was the Futures Trading Act of 1921. In 1924-25, the so-called ‘Cutten corner’ market turmoil was followed by three key institutional innovations brought about in 1926 by US federal government coercion of the grain futures trading industry in collusion with industry leaders. The Great Depression gave birth to the 1936 Commodity Exchange Act. This Act was based on research done by the government and/or with government-mandated evidence that essentially saw the small grain gambler as needing protection from the grain futures industry, and was pushed through by a coalition of farmers’ organisations and the agency responsible for the 1922 Act’s administration. The government demanded information that was begrudgingly provided, and the studies of this data formed the basis of a political and intellectual justification of the usefulness of futures markets to the marketing of farm products that influenced the Act of 1936 and – more importantly - continues to today. My key thesis is that government worked closely with the futures industry to the extent that the agency was captured by special interests for much of the interwar period, and I claim that government intervention was responsible for the essential changes that assured the dominance of futures markets, with the Chicago Board of Trade as their hub. The lasting institutions created in the 1920s and 1930s continue to immensely influence the financial markets of today, including being incorporated into the Dodd-Frank Act of 2010. My study differs from the accepted account that sees federal regulation as an irrational ‘populist’ attempt at controlling or even banning the markets, with the new institutions developed during the interwar period as the result of effective industry self-regulation in spite of state interference. The findings are based on a theory-driven reading of archives of the Chicago Board of Trade, its regulator the Grain Futures Administration, and the other key government agencies engaging with the grain trade, the USDA, the Federal Farm Board and the Federal Trade Commission. My approach differs from the accepted accounts in that it is based mostly on my archival work, including the newly reorganised (in 2014) Chicago Board of Trade archive, rather than on public sources such as Congressional hearings and newspaper stories. ii Declaration This dissertation is the result of my own work and includes nothing which is the outcome of work done in collaboration except as declared in the Preface and specified in the text. It is not substantially the same as any that I have submitted, or, is being concurrently submitted for a degree or diploma or other qualification at the University of Cambridge or any other University or similar institution except as declared in the Preface and specified in the text. I further state that no substantial part of my dissertation has already been submitted, or, is being concurrently submitted for any such degree, diploma or other qualification at the University of Cambridge or any other University or similar institution except as declared in the Preface and specified in the text. It does not exceed the prescribed word limit for the relevant Degree Committee. Acknowledgements So many people have had a hand in making this thesis better than it would otherwise have been that it is impossible to name them all. Generally, the best part of the project was being able to interact with the financial and economic history communities at Cambridge and elsewhere, and I am grateful for the friendships and professional relationships I have made along the way. The exceedingly high level of scholarship amongst my friends and colleagues at Cambridge inspired my own work. I’d like specifically to thank Duncan Needham for providing guidance and leadership to the entire financial history community at the Centre for Financial History at Darwin College. I’d like to thank my supervisor, D’Maris Coffman, of course, who was also the founder of the Centre previously mentioned. I’d also like to thank those who patiently read and provided often incredibly insightful comments on my thesis drafts: Craig McMahon, my wife Christine Chen and Michael Hunt. This work was researched while the author was a PhD Scholar funded by the Cambridge Endowment for Research in Finance, and thanks goes to Bart Lambrecht for his leadership there. This work is deeply archival, and I would like to specifically mention the responsiveness of Megan Keller at the CME Archive at the University of Illinois at Chicago and Pamela Anderson at the National Archives in Kansas City. There were also too many helpful archivists to name at places such as the National Archives at College Park, the National iii Agricultural Library, and the Columbia Center for Oral History. Additionally, librarians at the Robarts Library at the University of Toronto were helpful in guiding me to useful rare documents. I presented this work in early stages around the world, including Portland, Oregon, Lexington, Kentucky and Cambridge, and I would especially like to generally thank discussants and audiences for their useful comments and questions, especially Shane Hamilton of the University of York. Finally, though there are too many individuals who have helped or guided me over the years to thank individually, special mention needs to be made of J Barry Smith of York University, Martin Lodge of the London School of Economics and Tiago Mata of University College London. Thank you. iv Abbreviations 1921 Act – The Futures Trading Act of 1921. 42 Stat. 187 1922 Act – The Grain Futures Act of 1922. 42 Stat. 998, 7 U.S.C. § 1 AAA – Agricultural Adjustment Act ADM – Archer Daniels Midland AFBF – American Farm Board Federation AMA – Agricultural Marketing Act BAE – Bureau of Agricultural Economics BCC – Business Conduct Committee CBOE – Chicago Board Options Exchange CBOT – Chicago Board of Trade or Board of Trade at Chicago CEA – Commodity Exchange Act of 1936. 49 Stat. 1491 CFTC – Commodity Futures Trading Commission CME – Chicago Mercantile Exchange FFB – Federal Farm Board FINRA - Financial Industry Regulatory Authority FNG – Farmers’ National Grain Corporation FTC – Federal Trade Commission GCNA – Grain Committee on National Affairs GFA – Grain Futures Administration GFC – Grain Futures Commission ICC – Interstate Commerce Clause KBOT – Kansas City Board of Trade NIRA – National Industrial Recovery Act. 48 Stat. 195 USDA – United States Department of Agriculture v Table of Contents 1. The Coming of Age of the Modern Futures Markets and their Regulation. Page 1 2. Governance, Opportunities and Threats at the Chicago Board of Trade. Page 48 3. The Grain Futures Act of 1922 and the Dominance of the CBOT. Page 72 4. The Co-construction of Modern Futures Markets, 1923 to 1926. Page 121 5. The Grain Gambler and the Commodity Exchange Act of 1936. Page 178 6. The Causes and the Legacy of Interwar Futures Market Regulation. Page 228 Bibliography Page 240 vi Chapter One The Coming of Age of the Modern Futures Markets and their Regulation [I]t is not too much to say that free commodity markets […] are symbols of free societies […] State Socialism, whether Communist, Fascist, or Socialist, means the destruction of free markets and their replacement by governmental buying and selling monopolies […] Commodities exchanges are vital to the economic stability of a free society.1 1.1 Introduction: Crises and Regulatory Responses Futures trading came of age in the middle of the nineteenth century in many commercial hubs of the US, especially in the Midwestern city of Chicago.2 The exchange trading of contracts of specified quantities and qualities of a commodity to be delivered at some future date has since expanded to include most globally-traded commodities and, more importantly, currency, stock, bond and money markets. Such contracts are now ubiquitous in modern finance. In 2014, 21.87 billion futures and options contracts were traded on exchanges globally, for a dollar-equivalent volume of $50,000,000,000,000. In 1910, as in 1940, the Chicago Board of Trade (CBOT) was dominant, executing 80% to 85% of all futures contracts traded in the US.3 Chicago futures 1 Julius Baer and Olin Saxon, Commodity Exchanges and Futures Trading (New York: Harper and Brothers, 1949), p. xi. 2 For Dutch markets in the 16th century, see Milja Van Tielhof, The ‘Mother of All Trades’: The Baltic Grain Trade in Amsterdam from the Late Sixteenth to the Early Nineteenth Century (Leiden: Brill, 2002); Oskar Gelderblom and Joost Jonker, “Amsterdam as the Cradle of Modern Futures and Options Trading, 1550- 1650,” in The Origins of Value: The Financial Innovations that Created Modern Capital Markets, ed, William N. Goetzmann and Geert Rouwenhorst (New York, Oxford: Oxford University Press, 2005): 189-205. For Japan in the eighteenth century, see Shigeru Wakita, “Efficiency of the Dojima Rice Futures Market in Tokugawa-period Japan,” Journal of Banking and Finance, 25 (2001): 535-554. 3 Other commodity futures markets existed in other centres in the US. For example, wheat and most other grain futures were traded in other Midwestern cities such as Kansas City, and New York handled the 1 exchanges – with the CBOT now merged into its ex-rival, the Chicago Mercantile Exchange (CME), and the Chicago Board Options Exchange (CBOE) spun off into its own entity – continue to lead derivatives trading into the 21st century.