From Damn Interesting:
Death by Derivatives
In April of 1873, an unhappy man walked along Clark Street in downtown Chicago. His name was Aymar de Belloy. There was a gun in his pocket, and a nickel – enough for one final glass of beer.
He entered Kirchoff’s tavern and sat at a table, then changed his mind about the beer. He drew his gun, pointed it at his forehead, and pulled the trigger.
The bullet careened along the inside of his skull like a speed skater on a banked turn. It stopped at the left temple, sparing his brain. Belloy rose and staggered to the bar, shaking hands with the horrified men he passed along the way. Upon reaching the bartender, he apologized in all sincerity for the inconvenience he had just caused. Then he collapsed.
Belloy was a speculator, or “plunger” as they were then known, at the Chicago Board of Trade, where traders negotiated contracts for the future sale of wheat and other such goods. The value of these contracts was based on, or derived from, the current price of wheat. Hence they would one day take the name we use today: derivatives.
In the 1870s, with few rules in place, a man could make a fortune plunging wheat. He could also lose a fortune, and with it the will to live. Indeed, the string of early derivative traders taking their own lives grew long enough that one writer gave it a name: the “crimson thread of suicide.”
The scale of today’s derivatives market is almost too vast to comprehend. It’s measured in trillions of dollars. Traders, aided by the most sophisticated software money can buy, place bets — billions per second — on the future prices of every manner of stuff. The market hardly exists in any tangible physical sense; most trading takes place across a network of countless devices at data centers around the world.
But in 1873, the global derivatives market was centered in one building on LaSalle Street in Chicago. And it would not have existed at all were it not for the digging of a very long ditch some 25 years earlier.
In 1848, an army of Irish immigrants finished digging the Illinois and Michigan Canal. It was ninety-six miles long and surprisingly shallow—a tall man could stand on the bottom and not dampen his bowler. The canal connected the Chicago River with the Illinois River, which in turn fed the mighty Mississippi, opening an inland waterway from New Orleans to New York. 1848 was also the year Chicago saw its first railway, and stockyard. Its first telegraph and steam-powered grain elevator? Same year.
Indeed, a city’s annus mirabilis (“wonderful year”) doesn’t get much more mirabilis than Chicago’s 1848. These advances would soon turn the city into, well, Chicago, simply by making it so much easier for stuff to move between east and west.
And boy oh boy did stuff thus move: grain, lumber, salt, sugar, pigs, and cattle began floating or rolling into this town on the southern tip of Lake Michigan like never before. There it was unloaded, weighed, graded, sold, stored, and reloaded onto boats or trains heading the other way.
In March of 1848, a dozen or so businessmen gathered to form an alliance of business interests, or what we would today call a trade association. It was a brilliant idea whose only problem was the apparent lack of anything for these fellows to actually do. Founders of the Chicago Board of Trade were determined to find something, but interest soon began to wane. To persuade members to show up for meetings, the founders began offering a free lunch of crackers, cheese and ale. Lines soon formed at the door, filled with men from all walks of life who were only too happy to attend meetings in exchange for free booze—or what we would today call, well, a trade association. The Chicago Board of Trade hired a bouncer to keep the freeloaders at bay, but this still left the nascent organization with very little to do. That would soon change....MUCH MORE