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How Bad Weather Built The ‘World’s Biggest Markets’

February 2, 2011

From NPR:

You can blame a lot of things on the weather — even the futures market.

Emily Lambert, author of The Futures: The Rise of the Speculator and the Origins of the World’s Biggest Markets, tells Weekends on All Things Considered host Guy Raz that it was Chicago’s cold winters that triggered the beginning of commodities trading. The futures market trades in abstract commodities rather than actual goods. For example, a contract might lock in the price for a quantity of corn to be delivered at a future date. Traders essentially make or lose money depending on how well they’ve predicted the price of corn on that date.

These days, the corn itself might not matter much in futures transactions, but in the beginning, it was all about hedging bets against bad weather, spoilage — or an accidental dump in the river.

In the mid-19th century, the Chicago River transported grain from Illinois farmers for sale in the city. It could be a slow trip fraught with hazards, Lambert says.

“The river would freeze up, and they couldn’t get their grain to Chicago, and there was a delay,” she says. “During that delay, there was the risk that the price of grain would fall.”

At the time, gambling was in style. That risk created an opportunity for speculators to make a hefty profit. “Chicago was a boom-and-bust kind of town,” Lambert says. “It was growing like mad. Basically, there were a lot of people in the city who were looking for opportunities and looking to make their fortunes — and looking to take risks.” [More]

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