"How Bad Weather Built The 'World's Biggest Markets'"

GUY RAZ, host:

Welcome back to ALL THINGS CONSIDERED from NPR News. I'm Guy Raz.

One of the clearest and quite possibly best descriptions of commodity trading can be found in the film "Trading Places." In it, Eddie Murphy plays a homeless street hustler named Billy Ray Valentine. He's brought in to work for a stuffy Philadelphia commodities firm named Duke and Duke. In this scene, Valentine is brought into a conference room, where what appears to be a breakfast spread is laid out on a table.

(Soundbite of movie, "Trading Places")

Mr. EDDIE MURPHY (Actor): (as Billy Valentine) No thanks, guys. I already had breakfast this morning.

Mr. DON AMECHE (Actor): (as Mortimer Duke) This is not a meal, Valentine. We are here to try to explain to you what it is we do here.

Mr. RALPH BELLAMY (Actor): (as Randolph Duke) We are commodities brokers, William. Commodities are agricultural products, like coffee that you had for breakfast; wheat, which is used to make bread; pork bellies, which is used to make bacon, which you might find in a bacon and lettuce and tomato sandwich. And then there are other commodities like frozen orange juice and gold - though of course, gold doesn't grow on trees like oranges.

RAZ: It's no coincidence that this is one of Emily Lambert's favorite films. She covers the Chicago commodities markets for Forbes magazine, and she's just written a new history of how those markets came about. It's called "The Futures." And in it, Emily Lambert explains why it all started in the Windy City.

Ms. EMILY LAMBERT (Author, "The Futures: The Rise of the Speculator and the Origins of the World's Biggest Markets"): Chicago's weather is horrible, especially in the wintertime. If you've been - I'm sure you know - there are all kinds of things that could be blamed on it, and one of them is futures contracts, because what people needed to do at that time, especially in the grain business, was they grew grain. And then they needed to get it to Chicago to sell. And they did that by traveling on the river.

And then the river would freeze up and they couldn't get their grain to Chicago, and there was a delay. And during that delay, there was a risk that the price of grain was going to fall. So the first reason is the weather. And the second reason is that Chicago, at that time, was a boom and bust kind of town. It was growing like mad. Basically, there were a lot of people in the city who were looking for opportunities, and looking to make their fortunes, and looking to take risks.

RAZ: This was a time where you sort of had the emergence of the pit, right? Now, I think a lot of people would - and forgive me for this, because I'm jumping ahead decades, and I'm jumping into fiction. But I think a lot of people think of "Trading Places," right, the film that takes place in these exchanges, where you've got these guys in, is it green jackets or yellow jackets - I can't remember - shouting all around and in the pit.

(Soundbite of movie, "Trading Places")

(Soundbite of people yelling)

RAZ: And describe what happens inside the pit.

Ms. LAMBERT: Your description is right on. The color of the jacket actually depends on the exchange. The pit is an octagonal area where there are raised steps. So it was crammed with men, and they looked at each other -and that's where they made deals. There were people...

RAZ: This is before computers came around, right?

Ms. LAMBERT: This is before computers came around. And the pits do still exist, although they are not as full, by any means, as they once were.

RAZ: You describe the way a person would get a job at one of these exchanges back in the mid-20th century, even into the '80s - a system where you were vouched for by somebody else. How did that work?

Ms. LAMBERT: So to be a trader, you had to be a member. And in order to be a member, you had to have other members vouch for you. It was very much like a country club.

RAZ: It was a club. Yeah.

Ms. LAMBERT: Yeah. And there was very much a progression of how somebody learned the trading business. You might start off as a runner - taking slips of paper from traders who were making deals in the pits, in the frenzy of the trading atmosphere, and running it to the back office. And then you might graduate to working on the phone, taking orders from people calling in. And then you might become a broker who was in the pit, or a trader trading for yourself in the pit. And then, you might vouch for somebody else and help them get their membership.

RAZ: You describe so brilliantly the differences in culture that sort of began to emerge between the people who worked at the Chicago Board of Trade and those who worked at the Merc. And those differences still exist to this day, but I want to ask you about the culture of these two places, 'cause there's a line in your book that stands out. It says: If your first name was Murray, you went to work for the Merc. But if your last name was Murray, you went to work for the Chicago Board of Trade. Can you explain what that means?

Ms. LAMBERT: Yes. The Chicago Board of Trade was identified most closely with the Southside Irish community of Chicago. And the Chicago Mercantile Exchange, a few blocks away, was predominantly Jewish. And the characters of the places, without a doubt, were - there was the Irish exchange, and there was the Jewish exchange.

RAZ: Was there a sense among people who worked in one exchange or the other that this was the better exchange? Did the people who worked in either exchange think that about their own exchange?

Ms. LAMBERT: Oh, what a funny question. Yes, they very much thought that. There was a tremendous rivalry between these exchanges. And the Chicago Board of Trade, for a very long time, was the dominant exchange. It was the futures market. And the Chicago Merc was the scrappy, younger, annoying sister to the Chicago Board of Trade.

RAZ: There was a time when the futures market was banned in onions. This happened in the mid-'50s, and it involved a man named Vincent Kosuga. Tell me the story about that.

Ms. LAMBERT: He was around in the 1950s, when onion futures were traded at the Chicago Merc. And I would hear things about Vince Kosuga like, Vince Kosuga would show up on the floor and bring his gun.

(Soundbite of laughter)

Ms. LAMBERT: And he liked to - he flew planes and flew one into the ground, and then walked out of the hospital like nothing had happened. All these really outlandish...

RAZ: This guy was kind of legendary.

Ms. LAMBERT: ...tales. Yes. And frankly, I didn't want to put some of these in the book because I wasn't sure if they were true or not. And then I met his nephew, who is a trader, who told me that oh, absolutely; they're all true. And in fact, he had more of them. But this was Vince Kosuga. Vince Kosuga was a New Yorker, a farmer. He grew onions, among other things, and he started trading onion futures at the Chicago Merc.

And he and his broker artificially drove up the price many times - not just them, but they got caught for it. And Congress banned onion futures, and it became the first futures contract ever to be banned. And in fact, the definition of a commodity, until recently, was anything but onions.

RAZ: Emily Lambert, in the book, you say the futures business was quickly corrupted. How would you describe the state of it today?

Ms. LAMBERT: Futures markets were quickly corrupted at the beginning. But over the next couple of decades, they became regulated markets. And the markets thereafter worked reasonably well. But now, there are also related derivatives markets, and those derivatives markets were, one might say, like the futures markets in Chicago in the 1800s.

So what's happening now is that it's almost like we're living back in Chicago in the 1800s, and we're hammering out the kinks of the market so that the markets will continue to function.

RAZ: That's Emily Lambert. She's author of the new book "The Futures: The Rise of the Speculator, and the Origins of the World's Biggest Markets." She's also a senior writer at Forbes magazine.

Emily, thank you.

Ms. LAMBERT: Thank you.