needs of producers were met by the wide
use of ‘to arrive’ contracts.” The buyer and
seller in a to-arrive contract agreed to a
price and quantity of a commodity for
future delivery. These bespoke contracts
were illiquid and carried counterparty
risk. Nevertheless, commercial interests
used them to lock in prices, potentially
securing credit more easily. To-arrive
contracts predate the mid-19th century.
Though, not until the 1850s did grain
elevators, railroads and a market made by
commodity exchanges catalyze the transi-
tion from to-arrive to futures contracts.
Grain elevators and railroads enabled
bulk grain to be stored and shipped. Prior
to these storage and transportation tech-
nologies, grain was branded according
to its producer and region. Of course,
bulk grain needed to be fungible. Com-
modity exchanges, including those in
Detroit (est. 1847); Buffalo, Cleveland and
Chicago (est. 1848); and Milwaukee (est.
1849), were well positioned to service this
need. Formed as commercial associations,
commodity exchanges became collection
points for grain, cotton and provisions,
which the exchanges inspected, graded
and, thus, standardized.
Soon thereafter, exchanges hosted trad-
ing in spot and forward markets. The
Board of Trade of the City of Chicago
(CBT) was the most important of these
exchanges. In its first decade, the CBT was
a place where members congregated to
discuss business concerns. Its first board
of directors represented shopkeepers as
much as grain merchants. However, in
1859, the Illinois legislature granted the
CBT a corporate charter that afforded
the exchange the authority of an admin-
istrative agency, one that executed and
enforced legislative and judicial functions,
including certifying grain and grain trades.
On March 27, 1863, the CBT adopted a
framework for trading forward contracts
on the exchange. Crucially, the framework
defined the terms of contract settlement,
the fundamental challenge associated with
a forward contract. Finding a counterparty
with whom to initiate a forward contract
was easy; finding the losing counterparty
with whom to settle a forward contract
was not. In any case, traders could not for-
mally settle forward contracts by offsetting
them on the exchange; though evidence of
a secondary market in forward contracts
suggests speculators were active in these
early derivative instruments.
Trading floor of the Chicago Board of Trade, 1997.
In May 1865, the CBT introduced trad-
ing in futures contracts. The contract
specifications essentially mirrored those of
common forward contracts that traded on
the exchange at that time; thus, the CBT
effectively converted select forward con-
tracts into futures contracts. Moreover,
the exchange permitted futures trading by
members only, set trading times, standard-
ized settlement protocols and required
traders to maintain margin accounts. By
the mid-1870s, the futures contract was a
principal feature of North American com-
modity marketing. America’s fascination
with open-outcry trading in the pit had
begun.
Futures contracts appeared on several
other commodity exchanges around the
same time. For example, futures contracts
derived from cotton appeared on the New
York Cotton Exchange around 1870 and
the New Orleans Cotton Exchange around
1882. Other examples of 19th-century
exchanges that made markets in futures
contracts include the Chicago Open Board
of Trade, the Duluth Board of Trade, the
Kansas City Board of Trade, the Mer-
chant’s Exchange of St. Louis, the Milwau-
kee Chamber of Commerce and the New
York Produce Exchange.
Early futures-trading volume was prob-
ably quite high, though a paucity of data
makes such a claim difficult to substan-
tiate. In the 1870s, the CBT revealed its
traders settled over 90% of contracts by
offsetting them rather than by delivering
grain as the terms of the initial contract
specified. According to Thomas Hierony-
mus, between 1884 and 1889, an annual
average of 24 billion bushels of grain-
futures traded on all US exchanges com-
bined, or about eight times the annual
average amount of grain marketed in
those years; the comparable multiple for,
say, 1966 to 1970, is four times.
In any case, most late 19th-century
futures exchanges lacked a clearinghouse,
a defining feature of a modern futures
market. A clearinghouse assumes the role
of counterparty to each side of every trade:
the clearinghouse buys each contract a
trader sells and sells each contract a trader
buys. Thus, the clearinghouse absorbs
counterparty risk, assuring a robust, liq-
uid futures market in which traders could
efficiently offset contracts. To ensure its
solvency, the clearinghouse reconciles (by
marking to market) all margin accounts
at the close of each day. Only as of 1925
did a complete clearinghouse facility serve
the CBT.
Of course, not everyone viewed futures
trading as progress. In particular, many
agrarians contended that futures traders
manipulated—and, on balance, reduced—
commodity prices. Federal and state leg-
islatures and courts often existentially
challenged this financial innovation. For
example, the so-called Anti-Option move-
ment fought to outlaw trading all manner
www.MoAF.org | Fall 2018 | FINANCIAL HISTORY 25