GRAIN TRAITORS
A History of the
US Futures Contract
By Joseph M. Santos
In Frank Norris’s 1903 classic, The Pit:
A Story of Chicago, cornering wheat on
the Chicago Board of Trade consumes
protagonist Curtis Jadwin. As the world’s
food supply hangs in the balance, Jadwin
buys enormous quantities of futures con-
tracts, a 19th-century financial innovation
that enables buyers and sellers to trade
Trading pit for buying and selling grain at the
Chicago Board of Trade, July 1907.
a quantity and grade of an underlying
asset—wheat, for example—at a specified
price and future date. True to the literary
Naturalism that The Pit exemplifies, the
inescapable and indifferent forces of capi-
talism ultimately breach Jadwin’s corner;
broken and impoverished, he leaves Chi-
cago to begin again farther west.
The Pit was published posthumously,
a year after Norris’s untimely passing at
age 32. The novel was to be the second
in a trilogy, Epic of the Wheat, in which
Norris was to chronicle production (The
Octopus, a Story of California [1901]),
24 FINANCIAL HISTORY | Fall 2018 | www.MoAF.org
distribution (The Pit: A Story of Chi-
cago [1903]) and consumption (The Wolf,
a Story of Europe). Born in Chicago in
1870, Norris came of age (in California)
when futures trading, and the corners it
allegedly provoked, stirred the imagina-
tions of Gilded-Age and Progressive-Era
Americans. Norris was no exception. His
inspiration for Curtis Jadwin was 28-year-
old Joseph Leiter, who failed spectacularly
to corner wheat on the Chicago Board of
Trade between 1897 and 1898.
Not surprising, perhaps, farmers were
deeply suspicious of futures trading, which
they equated to gambling—on grain, no less.
However, despite literary representations
and popular perceptions to the contrary,
futures trading well served the nation’s
grain trade, especially by the mid-19th cen-
tury, as agriculture moved from subsistence
to commercial production. Financing com-
mercial production, storage and transpor-
tation required a financial innovation that
enabled commercial interests to trade away
their price risk to those who preferred to
bear it. By the late 19th century, the futures
contract met this requirement.
In the early 19th century, short-term
sight drafts, written on the credit of mer-
chants, and consignment contracts, writ-
ten between commission agents and grain
dealers, were the instruments of grain-
trade finance. For example, an eastern
miller who required grain secured a mer-
chant’s line of credit in the form of 60- or
90-day sight drafts. Western commission
agents attached grain warehouse receipts
to these sight drafts and discounted them
locally for bank notes, which agents
advanced to grain dealers for a portion
of the grain’s market value at that time;
agents paid dealers the remainder when
the grain sold in eastern terminal markets.
This system worked well enough when
grain prices were mostly stable from har-
vest to consumption; however, such price
stability was rare. During credit crises,
hinterland banks often refused to discount
sight drafts, depriving the grain trade of
it precious credit. The problem was that
trading on consignment meant that com-
mercial interests could not trade away
price risk. Put differently, financial mar-
kets were incomplete; trades that would
suit hedgers and speculators alike did not
occur for lack of an appropriate market,
complete with an institutional framework
that sufficiently reduced transaction costs.
Following the Panic of 1857, “the credit