As railways and canals connected vast regions of America, cities like Chicago emerged as crucial trading hubs due to their strategic locations. The completion of the Erie Canal in 1825, for instance, transformed Chicago from a small city into a thriving commercial center connecting the Midwest and the Atlantic Ocean. In 1857, the Madeira Pet ship directly reached Chicago from England, utilizing the expanding canal network, marking the first oceanic arrival in the city.
Chicago swiftly became the heart of America’s grain trade. Merchants purchased grain from farmers, stored it during fall/winter, and sold it in spring. However, this involved risks and costs, as merchants had to pay for the grain, transportation, and storage while being exposed to price volatility. To hedge this risk, merchants entered into contracts for future grain deliveries at prevailing prices.
The first such “time contract” was written on March 13, 1851, for 3,000 bushels of corn to be delivered in June, priced $0.01 below the cash price on the contract’s date. This innovative idea rapidly gained traction.
On April 3, 1848, the Chicago Board of Trade (CBOT) was founded with 82 members, initially promoting trade among them, functioning as a meeting place to resolve disputes and discuss commercial matters. In 1858 and 1859, two critical developments changed the CBOT’s trajectory. In 1858, a new department for classifying and certifying grain grades boosted buyer confidence and market development. In 1859, the CBOT became a state-chartered private association, empowering it to implement trading rules among members and regulate grain trading and inspection.
In May 1865, the CBOT started converting actively traded, homogenous forward contracts into futures contracts. Today, the Chicago Board of Trade remains one of the world’s oldest futures exchanges.