Streetwise Professor

September 18, 2013

There is Nothing New Under the Sun, Warehouse Games Edition

Filed under: Civil War,Commodities,Economics,Exchanges,History,Politics,Regulation — The Professor @ 7:12 pm

I am working on a project about the economics of commodity trading firms.  One of the interesting questions is what physical assets commodity trading firms own.  In my research on this question, in an attempt to get some historical context, I turned to the excellent Federal Trade Commission Report on the Grain Trade, a five volume study released in the early-20s.  (There is reputedly a sixth volume on manipulation which I and others-Jerry Markham, for one-have feverishly searched for without luck.)   This is truly an excellent piece of work.  Many of the analyses are off, but as a detailed portrait of the grain trade in the 1900-1920 period, it cannot be beat.  Unfortunately, there is nothing comparable for other time periods.

In perusing Volume I, on country grain marketing, I came across this choice quote from the president of the CBOT in 1887:

The alliance between railroads and elevators has resulted in reaching out after millions of bushels not naturally tributary [to Chicago] and when gathered here preventing it by such tricks of the trade as you are familiar with from ever getting away again as long as storage can be collected on it.

. . . .

The grain bought elsewhere by warehouse proprietors is promptly sold to you here on future delivery, which, however, you can only get on payment of such premiums as the urgency of demand may enable them to exact.

. . . .

While the elevator proprietors are willing to pay 1 cent per bushel more for grain to “go into store” in their own warehouses than the market price of the same grain in store . . . is conclusive that the first storage charge is not legitimate, and also that the subsequent terms of storage are unduly profitable.

Replace “grain” with “aluminum”, and you could run this as a news story in 2013.  Goldman’s operations at Metro are almost identical to the operations of the warehousemen in Chicago that President Wright fulminated about 126 years ago.

The FTC study also notes that shuttling grain between warehouses was a part of the game more than a century ago.  It quotes Taylor’s magesterial history of the CBOT, describing an event from 1896:

The Armour Elevator Co. was charged with having transferred 1,200,000 bushels of wheat from one part of the north side system to another, without inspection, on such dates that the receipts resulting therefrom were just regular on the delivery day, May 1.

And not a bankster in sight.  (It is an interesting coincidence that 1896 was the year Goldman-Sachs was invited to join the NYSE.)

The morals of the story.  First, the ability to play warehouse games is inherent to the business of public warehousing of commodities. Second, banks are not uniquely susceptible to playing those games: when conditions are right, whoever owns the warehouses can play the games.  Third, systems of self-regulation are often incapable of addressing these problems.

On the last point, it is important to remember that the seminal case in the history of regulation in the United States, Munn v. Illinois, grew out of the warehousing battles in Chicago during the Civil War and its immediate aftermath.  The Supreme Court decided that the State of Illinois had the power to regulate grain warehouses, and this decision provided the basis for subsequent exercise of regulatory powers by states and the Federal government.

In other words, what is old is new again.  Journalists and regulators and legislators act as if the kinds of games played today are somehow new and unique.  They aren’t.  The commodities business hasn’t changed that much in a century and a half.  The things that were good, bad, and ugly in 1869 are around today, and will be around in 2069 and 2169.

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May 3, 2013

Chancellorsville

Filed under: Civil War,History,Military — The Professor @ 5:20 pm

Today is the sesquicentennial of the 3d day of the Battle of Chancellorsville.  Jackson’s flank attack on 2 May, 1863 is usually the focus of accounts of the battle, and indeed, it was a daring and brilliant achievement.  But it did not win the battle for Lee and the Confederacy.  Lee only prevailed after a brutal slugging match on this day, 150 years ago.  Wave after wave of Confederates, under command of Jeb Stuart, repeatedly assailed the western side of a Federal salient surrounding the Chancellor house.  And wave after wave was beaten off by Union soldiers of the Third and Twelfth Corps.  What proved decisive was a disastrous decision to evacuate the high ground at Hazel Grove, made by the Union commander, Joe Hooker.  The Confederates seized this commanding terrain, and the artillery planted there proved decisive.  It was perhaps the only time in the war that Confederate artillery decided a battle: there were several fields where Union artillery proved decisive.  Confederate artillerist and memorialist Porter Alexander said of the abandonment of Hazel Grove: “There has rarely been a more gratuitous gift of a battlefield.”

Chancellorsville is often called Lee’s Masterpiece.  And it was, in many ways.  But it also illustrates the ultimate futility of the Confederate cause.  Even after the rout of the Eleventh Corps on the 2d, the Union forces far outnumbered Lee’s and were in a position to carry out a vigorous defense.  Even with the gratuitous gift of Hazel Grove, the Army of Northern Virginia suffered huge casualties to drive the Federals from the environs of the Chancellor House and Fairview.  The casualties were particularly devastating at every level of command.  The battle was a virtual holocaust of division and brigade commanders, field officers, and company officers.  As a result of the battle, Lee had to undertake a wholesale reorganization of his army, and many of those promoted to fill the positions of those killed or maimed on May 3d proved overmatched two months later, on the fields of Pennsylvania.

In brief, even to execute a “masterpiece”, and one facilitated by numerous errors by his opponent Hooker, Lee had to spend lives at an unsustainable rate.  One wonders how it would have been possible to prevail, since even victory was impossibly costly.

Indeed, even the action of the 3d was not decisive.  The Army of the Potomac retreated from the Chancellorsville salient to a more compact position abutting the Rappahannock River, and entrenched it strongly.  It is highly unlikely that it could have been dislodged by an attack by Lee’s spent force.  But Hooker, who had already suffered a loss of confidence and courage on 1 May, and who had been severely concussed by a shell on the 3d, wanted no more of Lee.  Even though a majority of his corps commanders favored fighting it out on the new line, Hooker decided to retreat.  The ultimate victory was due more to Lee’s psychological dominance over an addled Hooker that proved decisive, than to the military dominance of the ANV.

And this worked on Lee’s psychology too, and not in a good way.  Chancellorsville contributed to a hubris that proved disastrous at Gettysburg.

Meanwhile,while Lee was triumphing at Chancellorsville, events were developing far to the west, in the heart of Mississippi.  After months of frustrated attempts to get at Vicksburg, Grant was on the east side of the Mississippi River.  He had beaten back a Confederate force commanded by John Bowen at Port Gibson on 1 May.  He was advancing east, towards Jackson.

Lee fought a masterful battle in early May.  Grant fought a masterful campaign over three weeks of that month.  The campaign proved far more decisive than the battle, as I’ll discuss in future posts on Jackson, Champion Hill, and Big Black Bridge.

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