All Aboard the Grainy Train

From a muddy Chicago riverbank in 1849 to the trillion-dollar futures markets of today: the origin of futures contracts.

Chicago, October 1849

Walking along the Chicago River in the first week of October, the smell of corn was everywhere. It was harvest season, and the whole of Illinois’ corn was converging on this one muddy river. James Curtis, a grain merchant, arrived at the river bank each morning before dawn and moved between his storage units, checking what had arrived overnight.

This year the harvest was particularly plentiful and good-quality all around Illinois, driving prices per bushel 30% lower. After assessing the quality of each load, Curtis negotiated prices: “$1,200 for 3,000 bushels”, said the farmer. “Mine”, shouted Curtis. In the afternoon, he retreated to his office above the elevator, a small room that smelled of sawdust and ink, and read his correspondence. A letter from his agent Thomas Hale sat on his desk. Hale wrote that corn supply in Buffalo was becoming increasingly scarce as the Rochester mills were running at full capacity. If that rate of consumption continued through winter, stocks would be thin by March. He had also spoken to two of the Rochester mill buyers stationed in Buffalo, both of whom were looking to secure corn for the spring. One had indicated they could take a sizeable consignment with delivery in April, at the right price. Curtis then folded the letter, picked up his coat and walked to the Marine Bank on Lake Street.

The manager, a man named Graves, listened to everything without interrupting. At last, he asked how much more Curtis intended to purchase before the season closed: 30,000 bushels. There was a long pause in which the only sound was the distant noise of the river and the street below, and then Graves agreed to an extension of the credit lane at a 10% interest rate. Six weeks earlier, Curtis had sat across from Graves in that same office and asked for a credit line to buy corn for the season.

By late March, as the ice broke in the Chicago harbor, Curtis sent his first shipments east across Lake Michigan and wrote to Hale asking for a market update. The reply came two weeks later carrying unexpected news: Buffalo was softer than either of them had expected. As they did every spring, Chicago merchants had anxiously rushed their corn east the moment the harbor opened, after months of carrying costs and interest payments. While the Rochester mills were used to absorbing it, this year was different. The harvest in Ohio was so abundant that its corn had been moving east by road and canal all winter, so that by the time Curtis’ shipments started arriving, warehouses were already well-stocked. The season proceeded to register the lowest corn prices Buffalo had seen in years, and Curtis, along with many other Chicago merchants who had held corn through the winter, closed his books in June at a loss.

The grain trade in 1850 operated across hundreds of miles through multiple layers of intermediaries, with information moving by letter, and no mechanism to gage supply and demand across regions. The biggest issue Curtis faced was at what price corn would sell in spring. If he could agree on a selling price before the corn was bought, he wouldn’t be exposed to the Ohio harvest or any other external forces.

By September 1850, before the first wagon had appeared on the riverbank, Curtis instructed Hale to approach the Rochester mill buyers and find one willing to commit to a price for April delivery before the harvest began. Within a fortnight, Hale wrote back with terms from a mill owner named Aldrich: 20,000 bushels of corn at 40 cents a bushel, delivery in April. Curtis wrote back agreeing to the terms, folded the letter and walked to the Marine Bank. For the first time, the conversation with Graves was straightforward as he was asking to lend against corn already sold, to a buyer already named and at a price already fixed. Graves studied the letter, asked a few questions about Aldrich’s commercial reputation, and agreed to a larger and cheaper credit line than the previous year. Within a few years contracts of this kind were common enough that merchants were buying and selling them before delivery and a secondary market started to emerge.

The institution that would eventually transform these private bilateral agreements into standardized exchange-traded instruments had already been founded in April 1848 by 82 Chicago merchants. In its early years, the Board of Trade of the City of Chicago (CBOT) functioned mainly as a commercial association, a place where merchants gathered to resolve disputes, discuss harbor infrastructure, and agree on common practices. Through the 1850s, however, the CBOT laid the foundation for standardised contracts by establishing uniform grain grades — No. 1, No. 2, No. 3 — certified by exchange-appointed inspectors whose decisions were binding on all members. A contract was interchangeable with any other contract of the same specification and could be bought and sold between merchants who had never met. In February 1859, the Illinois legislature granted the CBOT a formal corporate charter, backing with law what had previously run on reputation and trust.

In May 1865, the CBOT became the first futures exchange by restricting trading to exchange members, standardizing every contract specification — lot sizes, grades, delivery months, delivery locations — and requiring both parties to post a margin deposit before a trade was valid. Before, to-arrive contracts were based on trust. If prices moved sharply against a seller between October and April, they had every incentive to default and accept the legal consequences which were slow, expensive, and uncertain. With the introduction of a margin deposit, the risk of either party defaulting was significantly reduced.

What emerged from those rule changes is what we now call a futures contract, in which the only variable left to negotiate was the price. Contracts could now change hands dozens of times before delivery, each buyer and seller transacting with the exchange. This resulted in the emergence of speculators, whose sole purpose was to profit from price changes and who would close out their positions prior to delivery. While speculators were viewed with deep suspicion, they were critical in providing liquidity. Every time a merchant like Curtis needed to sell a forward commitment, he needed someone willing to take the other side of the trade, and speculators did exactly that. By the 1870s, fewer than one in ten futures contracts resulted in actual physical delivery.

What followed was an expansion in scope that Curtis, standing on the riverbank in 1849, could not have imagined. Agricultural futures spread from corn and wheat to cotton, butter, and eggs before the end of the century. When the United States abandoned the gold standard in 1971 and currencies began to float, the Chicago Mercantile Exchange recognised that exchange rate risk was structurally identical to corn price risk and launched currency futures. Interest rate futures followed in 1975, while equity index futures in 1982. In 1981, Eurodollar futures became the first contract settled in cash rather than physical delivery, breaking the last remaining connection between a futures contract and any underlying. Today, futures contracts trade on most exchanges worldwide across asset classes ranging from crude oil and natural gas to government bonds and equity indices.

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