Sunday, April 30, 2006 05/03/06-Commodity Futures

In today's excerpt, Oliver Wendell Holmes and the US Supreme Court decide the fate of commodity futures in the 1905 case Board of Trade v. Christie. The case was pivotal in the development of the radical notion that an idea is a legal entity in the same sense that a physical thing is--a development which has led to the huge, well established futures markets of contemporary finance. Farmers and commercial grain operators decried futures trading pits such as the one operated by the Chicago Board of Trade and protested that...

"the man who managed or sold or owned the immense fields of wheat has not as much to say with regard to the price of wheat as some young fellow who stands howling around the Chicago wheat pit. (Charles) Pillsbury indicted futures trading--a new form of trade in commodities, such as 'September wheat,' which had not yet been grown when it was sold...Notably, in the trading 'pits'--circumscribed spaces where buyers and sellers traded futures--commodities were exchanged without material things ever changing hands between buyer and seller...By 1890, futures trading had become the dominant mode of commodities exchange...

To critics, futures trading was 'unnatural,' 'deranged,' 'evil,' because it was detached from the 'selling of wheat actually in sight.' William F. Boyle of...the National Alliance of Farmers and Industrial Laborers said, 'Certainly no one can claim a right to sell that which he not only does not own, but never intends to acquire, and consequently never intends to deliver; for in that case he is selling that which nobody owns, and which, in the nature of things, has no real existence.'

...What made the courts tepid intervention noteworthy was that it distilled the fundamental conceptual problem of futures trading: were objects existing only in the minds of pit traders fictitious or as real as bushels of grain moving through the physical economy?

...It was, finally, Justice Oliver Wendell Holmes, Jr., who decided the legitimacy of futures trading. In 1905, Holmes delivered the majority opinion...which declared futures trading not only legal but also desirable."

Jonathan Ira Levy, 'Contemplating Delivery: Futures Trading and the Problem of Commodity Exchange in the United States. 1875-1905,' The American Historical Review, April 2006, pp. 307-322


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