The Second City: First in Derivatives

“… the Eastern seaboard did not represent the interests of America whose rich, red heart beat within the walls of the Chicago Board of Trade.” – General Robert F. Wood, chairman of the Board of Directors Sears, Roebuck & Company

In 1833, Chicago was a wilderness outpost of just 350 residents, clumped around a small military fort on soggy land, where the Chicago River met Lake Michigan. The city was built in the middle of a mud flat, which required raising portions of downtown to be on stilts above the sloshy earth, giving Chicago the first of many nicknames: Mud City.

Shortly thereafter, Chicago’s commodity markets were on the upswing as a result of the city’s strategic position within the nation’s transportation network and proximity to some of the most productive farmland in the world. By the end of the 1830s decade, Chicago emerged as a center of financial risk-taking due to land speculation during the building of a crucial canal that ultimately linked the bounty of Illinois farmland to population centers in the U.S.

Fifteen years later – in 1848 – was a transformative year on Lake Michigan’s shores. The Illinois & Michigan Canal was completed in 1847 and opened that spring. The first telegraph arrived in Chicago. The Galena and Chicago Union Railway began construction on its first 32 miles of track. The first stockyard was built (at Madison & Ashland) and the first grain elevator opened.

Far from the Eastern seaboard and New York, a group of Chicago merchants and farmers formed the world’s first modern futures exchange. On April 3, 1848, 83 merchants gathered at 101 South Water Street. The Board of Trade of the City of Chicago (CBOT – now part of the CME Group) was essentially a farmers’ market. The CBOT was created by businessmen as a commercial exchange for grain merchants who needed order in a world of chaos and relief from a hostile judicial system.