Manipulation at the Board

Policing the Board throughout the interwar period was almost always a thankless task. Before 1920, the executive was vigilant for any transgressions of federal laws by members, specifically against hoarding. Consequently, CBOT president LF Gates would write letters of admonishment to members who appeared to be attempting a corner, or even simply having large positions in

Generally on self-regulation, see Bronwen Morgan, and Karen Yeung, An Introduction to Law and Regulation (Cambridge: Cambridge University Press, 2007).

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either direction, even if they used hedging as their ‘official’ justification.²³ Pushback was

common, however, and a letter from miller member Ralston Purina caused Gates to climb down and apologise thus, ‘we shall from time to time make mistakes no doubt’.²⁴

CH Taylor wrote in 1917 that the CBOT ‘is not composed of saints exclusively nor of sinners’²⁵, yet the directorate often turned a blind eye to manipulation, thereby encouraging the ‘sinners’. As Leon Kendall wrote in his 1956 doctoral thesis:

The historical record demonstrates that (a) Board members frequently rejected anti

manipulation rules by large majorities; (b) during those brief periods when anti-manipulation rules were in effect, the CBOT directors and arbitration committees did not use them to impose penalties on cornerers, and the exchange's decision makers seldom employed emergency measures to counteract squeezes; [and] (c) rent-seeking activities were rife when the Board's directors attempted to enforce anticorner rules.²⁶

Some traders were of the opinion that corners actually enhanced speculative business and so were to be welcomed by those who earned their daily bread from speculative trading by the unsophisticated ‘public’. For instance, former president Griffin stated, ‘[T]o be perfectly frank about it, I think these occasional congestions add to the attractiveness of the market to the public […] Like the congestion we had in 1921, I think that stimulated the trade, not discouraged it’.²⁷

‘Congestion’ was a euphemism often employed in lieu of corner or squeeze.

Ignoring evidence to the contrary, the exchanges argued that their rules prevented any

manipulation and, furthermore, provided for the most efficient markets possible for marketing and hedging. Unfortunately, effective enforcement was hampered by; (i) very vague rules, (ii) a lack of enough information to identify illegality, and (iii) a willful blindness on the part of

‘friends’ on the key committees. The rules were difficult to enforce, especially on powerful and truculent members. Additionally, even the committees, the directorate and the executive often

23 Letter, Gates to Veninga-Smith Grain Co, 29 January 1920. CME III.ss1.6.

24 CME III.ss1.6, letter from WK Woods vice president of Ralston Purina to Gates, president, 30 January 1920. CME III.ss1.6, letter to WK Woods from Gates, 1 February 1920.

25 Charles H. Taylor, History of the Board of Trade of the City of Chicago. vol. 1 (Chicago: Robert O. Law, 1917), pp. 5-6.

26 Stephen Craig Pirrong, “Self-regulation of Commodity Exchanges: The Case of Market Manipulation,”

Journal of Law and Economics, 38 (1995): 141-206, p. 169.

27 US Federal Trade Commission. Report on the Methods and Operations of Grain Exporters, 1922 (Washington.

Government Printing Office: 1922), p. 16.

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did not understand the rules and relied on counsel for interpretations.²⁸ Worse still, some rules did not in fact operate as intended.²⁹ Such observations were made by Lurie and Taylor regarding the lack of actions taken in the public interest during the 19^th century by the Board directorate.³⁰ Members tended to push the ethical envelope in, for example, their solicitation of clients. James E Bennett’s company, for example, was taken to task by the Board executive for posting an aggressive wire, advertising easy profit on a low margin.³¹ In response, Bennett blamed the Board operators for making the error.³²

The problem with the price action of 1921 and 1922 is that it made hedging very difficult and often dangerous.³³ HJ Loman, an academic who later wrote on the futures market in the Annals of 1931, did not believe the hedging justification for futures markets could be used under the current market conditions. He did not think that hedging was as widespread as was reported, nor that speculators really carried the burden of the producers, as was often asserted.³⁴ The reality was far removed from the theory. Not only disinterested academics but also active users of the futures markets, such as the large milling companies Ralston Purina and Pillsbury, complained to their Congressmen, the Secretary of Agriculture, the US President and the press, stating that hedging was not possible in such volatile markets. These interests could not operate in such volatile markets, blaming irrational price action on over-speculation on the long side.³⁵ While the politically powerful milling interests were lobbying, mostly in private, the public sphere abounded

28 Letter, J Mauff to H Robbins, 8 December 1921. CME III.2.641.3.

29 Ibid.

30 Jonathan Lurie, The Chicago Board of Trade, 1859-1905: The Dynamics of Self Regulation (Chicago: University of Illinois Press, 1979). Charles H. Taylor, History of the Board of Trade of the City of Chicago, vol. 1 (Chicago:

Robert O. Law, 1917), pp. 5-6.

31 Letter, James E Bennett to LF Gates, 10 August 1920. CME III.ss1.6.

32 Ibid.

33 Letters, HJ Loman to J Mauff, 17 March and 29 March 1921. CME III.2.640.1.

34 H.J. Loman, “Commodity Exchange Clearing Systems,” The Annals of the American Academy of Political and Social Science, 155 (1931): 100-109.

35 Letter, Barnes to Fred Uhlmann, 24 December 1929, CME III.13.34; Letter, FG Winter to Carey, 9 May 1925. CME III.18.2; Letter, Carey to Mr. Sidney C. Anderson, Millers National Federation, 8 May 1925.

CME III.ss1.9; Letter, Jardine to Arthur Capper, 31 March 1925; National Archives and Records Administration, Kansas City, Record Group 180. Archival Research Catalogue Identification number 4731930 (hereafter NARA/KC), File number, Box 12, 14-6.

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with tales of boom to bust futures markets, especially in 1922 as well as following the so-called

‘Cutten Corner’ in 1925.

The CBOT executive knew that manipulation was a problem even as they were denying it: Gates wrote confidentially to Griffin to ‘see that July deliveries do not give occasion to stir up the animals here to embarrass the situation. Situation last few days of May gave them all sorts of ammunition’.³⁶ The end result of the lack of Board consensus on the necessity of eliminating manipulation was that little if anything was accomplished until at least the middle of the 1920s, even if many at the Board, including hedgers, felt that the markets were not efficient enough to be useful. However, certain powerful members chose to ignore the fact that the lack of action threatened the Board’s monopoly and could have inhibited its future growth.