BUSINESS CASE: The Chicago Board of Trade

Around the world, commodities are bought and sold on “exchanges,” markets organized in a specific location, where buyers and sellers meet to trade. But it wasn’t always like this.

Jim West

The first modern commodity exchange was the Chicago Board of Trade, founded in 1848. At the time, the United States was already a major wheat producer. And St. Louis, not Chicago, was the leading city of the American West and the dominant location for wheat trading. But the St. Louis wheat market suffered from a major flaw: there was no central marketplace, no specific location where everyone met to buy and sell wheat. Instead, sellers would sell their grain from various warehouses or from stacked sacks of grain on the river levee. Buyers would wander around town, looking for the best price.

In Chicago, however, sellers had a better idea. The Chicago Board of Trade, an association of the city’s leading grain dealers, created a much more efficient method for trading wheat. There, traders gathered in one place—the “pit”—where they called out offers to sell and accepted offers to buy. The Board guaranteed that these contracts would be fulfilled, removing the need for the wheat to be physically in place when a trade was agreed upon.

This system meant that buyers could very quickly find sellers and vice-versa, reducing the cost of doing business. It also ensured that everyone could see the latest price, leading the price to rise or fall quickly in response to market conditions. For example, news of bad weather in a wheat-growing area hundreds of miles away would send the price in the Chicago pit soaring in a matter of minutes.

The Chicago Board of Trade went on to become the world’s most important trading center for wheat and many other agricultural commodities, a distinction it retains to this day. And the Board’s rise helped the rise of Chicago, too. The city, as Carl Sandburg put it in his famous poem, “Chicago,” became:

By 1890, Chicago had more than a million people, second only to New York and far out-pacing St. Louis. Making a better market, it turned out, was very good business indeed.