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.