Streetwise Professor

August 4, 2019

Pork Wednesday: A Tale of Gilded Age LaSalle Street, With a Heavy Dose of Irony

Filed under: Commodities,Derivatives,Economics,Exchanges — cpirrong @ 7:05 pm

On Friday, someone tweeted a picture of the front page of the Chicago Tribune from 126 years prior–2 August, 1893. It depicts the trading floor of the Chicago Board of Trade when a pork corner collapsed:

Actually, two corners collapsed on that day: the one in pork, and another in lard. The “provisions” markets (as the futures in pork and its products were called) had been successfully cornered repeatedly in the year running up to August, but the corners failed in August because the Panic of 1893 (which began in May of that year) weakened demand and made it impossible to sustain prices. From 31 July to 2 August, the price of pork futures fell from $19.25/barrel to $10.50, and lard fell from 9 cents/lb. to 5.9 cents/lb. The pork price fell $9 in 30 minutes.

The night prior to the collapse, the cornerers (notably John Cudahy, of the Cudahy family of meat packers) tried to hammer out an agreement with their bankers to secure financing to fund the deal, but Cudahy’s brother Michael (who ran the family packing establishment) refused to sign. Lacking the ability to fund their positions, the cornerers had to sell, and prices collapsed. (A la Silver Thursday when the Hunt Brothers ran out of money and had to sell. So perhaps this event should be called Pork Wednesday.)

I have spent a good deal of my professional career studying manipulation, so I find these things of academic interest. They are also fascinating from a historical perspective. Not only was this front page news in Chicago, it was front page news around the country: this paper from Omaha is just one example. This is not surprising, given the importance of agriculture in the economy at the time. Agriculture was the biggest industry and employer in the country, and food represented the largest share of consumption, so the vicissitudes of trading on the CBOT and the New York Cotton Exchange were of deep interest to most Americans. Events like those of 2 August, 1893 were a major impetus behind efforts to regulate (or ban) futures trading. These efforts failed until the post-WWI agricultural depression.

And look how big the pork pit was! It would give the 1990s-era T-bond and T-note pits a run for their money.

Further, the ag futures markets were of such economic importance at the time that they created systemic risks. The collapse of the pork and lard corner, occurring in particular as it did when banks were under suspicion due to the Panic, and when there was no deposit insurance or lender of last resort, caused runs on several banks in Chicago due to fears that they had extended credit to the cornerers or one of the four brokerage firms that failed due to the collapse, and hence were insolvent. Two prominent private banks run by Jews failed. The owner of one, Herman Scheffner, committed suicide by drowning himself in Lake Michigan. The owner of the other, Lazarus Silverman, had staved off a run at the onset of the Panic in May, but could not secure funding in New York in August, and suspended payments on 3 August. The failure of these banks, and the heavy withdrawals at others, contributed to a decline in economic activity in Chicago and the Midwest and exacerbated the prolonged depression that gripped the country from 1893 to 1897.

Lazarus Silverman’s story is of particular interest to me, in part due to a family connection (by marriage) and in part due to the compelling nature of the story itself. Silverman had immigrated from Bavaria before the Civil War, and started a business as a bank note broker which developed into one of the premier private banks in Chicago. His bank on Dearborn Street was quite the edifice:

He advised Senator John Sherman on monetary questions, and was a major financier of the development of iron ore in the Mesabi Range. An early investor in Chicago real estate, he was one of the giants of the Chicago financial community during the Gilded Age.

Although his assets exceeded the liabilities of the failed bank, it could not avoid bankruptcy. Nonetheless, due to his great stature and respect in the community, he was basically allowed to serve as his own bankruptcy trustee. Even though the bank’s debts were discharged in bankruptcy and he was therefore under no legal obligation to do so, he spent the remainder of his life repaying its unsecured creditors. After the failure, he conducted his real estate business out a building he had commissioned and whichA now houses the Standard Club.

I have often wondered if Silverman ever pondered the irony that he, a devout Jew who would not conduct business on Saturday (despite the fact that was a working day back then), whose business had survived the Civil War, the Chicago Fire, and the Panic of 1873, was brought low by the collapse of a corner in pork and lard.

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  1. Lard was a component of the CRB until mid-20th century, wasn’t it?

    Comment by Richard Whiteny — August 5, 2019 @ 1:22 pm

  2. Was it once the habit in the USA that the owner of a bankrupt business would compensate unsecured creditors from his own wealth? If so, when did the custom perish?

    Comment by dearieme — August 5, 2019 @ 3:30 pm

  3. “the prolonged depression that gripped the country from 1893 to 1897.”

    How did that compare with the depression of 1929-1939? Clearly, the later depression lasted longer but how did the economic downturns compare?

    The economy apparently recovered on its own from the 1893-97 event. Would a similar recovery have happened after 1929, without Roosevelt and the New Deal?

    Comment by Pat Frank — August 5, 2019 @ 7:03 pm

  4. Yes, the economy would have recovered quite well without the New Deal. See the Depression of 1920-21 where the government didn’t interfere with the economy when it tumbled badly post-WW I.

    Comment by The Pilot — August 5, 2019 @ 7:51 pm

  5. @dearieme-Definitely the exception, and not the rule. Silverman felt honor bound to make good his debts. Few others have felt the same way.

    Comment by cpirrong — August 5, 2019 @ 9:13 pm

  6. @Pat Frank–Almost certainly. The depression of 1921 was even more severe than that which started in 1929, but the recovery was rapid, and led into the Roaring 20s. In large part because unlike under Hoover, and then under Roosevelt, the US government let wages and prices fall to equilibrate the market. Hoover and Roosevelt intervened to keep wages at prices at above equilibrium levels (given the adverse monetary shock) and as a result real output remained depressed for far longer than in earlier episodes (1921, 1907, 1893, 1873).

    Comment by cpirrong — August 5, 2019 @ 9:16 pm

  7. It’s striking that a conspicuously intelligent chap like Hoover and a rather dull chap like FDR should pursue similarly dim policies. I suppose this means that Presidents will often adopt policies that are fashionable, irrespective of their own brainpower.

    Comment by dearieme — August 6, 2019 @ 6:57 am

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