Exploring Economic History

with Palgrave Macmillan

Can Policymakers Learn from the Case of State-Industry Collaboration in the Earliest US Financial Markets?

The accepted wisdom of mainstream economics is that free markets—assuming rational and informed participants—result in efficient resource allocation. It has been further argued that, even if intervention could result in more efficient and fair markets, the government does not have the information or the capacity to make markets more fair and efficient: Regulators engage in irrational ‘Pavlovian’ responses to crises, while ‘too many’ regulations may actually cause crises they were intended to prevent. Of course, the Chicago school further posits that regulators are always ‘captured’ by special interest groups that seek economic rents, and therefore government regulation makes markets less fair and efficient. Finally, even if regulations are justified, they are costly, inhibit innovation, or are gameable. 

The unhelpful false dichotomy of government failure versus free market efficiency drives a huge wedge between those who favour more laissez-faire approaches, such as Robert Litan and Donald Trump, versus those who wish to further the command and control powers of the state, such as Admati and Hellwig and Elizabeth Warren. Neither end of the ideological spectrum is likely to be correct. Yet these ideological differences make constructive discussion difficult, and consensus nearly impossible, resulting in the rolling in of regulations in times of crisis, such as Dodd-Frank, and the rolling back of regulations, or even the remaking of regulations on the ground, during periods of red tape cutting or, I might argue, selective amnesia. 

Is it true that more government regulation is bad? That is, can the state provide for better markets? The answer throughout history is often yes. But why should policy makers, academics and even the general public care about the history of finance? Surely, there is nothing to be learned from the nascent and primitive markets that preceded the modern day globalized financial system.

Well, I for one strongly argue that history can be a very useful tool for understanding the current financial markets and even offer solutions to problems often viewed from the ‘pro-market’ laissez-faire perspectives that originated with the classical economists, or the public interest argument for more regulation. The US grain futures markets of the 1920s and 1930s were not much less complex than those of today, and the same issues faced then are equally applicable in today’s post-crisis financial markets. While it is true that the Chicago futures markets originated with self-regulation by the Chicago Board of Trade (CBOT) in the 19th century, by the end of World War I it was clear to many that the self-administered supervisory infrastructure was ill-equipped to deal with the fast-growing markets. 

Previous to my research, it was claimed that the ‘market’, in the form of the self-regulatory authority at the CBOT, either won or lost the interwar political struggle against a newly-emergent federal government, backed by the ‘populist’ agrarian movements that began in the late 19th century. The American Enterprise Institute repeats the oversimplified case thus: ‘Futures regulation surfaced in an atmosphere of chronic distrust and suspicion toward those markets, hardened by decades of campaigns to outlaw futures trading entirely’. Indeed, much of what had been written on this topic – as in other subjects - suffers either from over-simplistic explanation or is excessively ideologically-driven. Indeed, conservative think tanks and others claim that the pre-Great Depression ‘laissez faire’ markets were subject to ‘highly functional’ rules where ‘competition encouraged good innovations’. Self-regulation, and not the state, in this view, was solely responsible for many institutions that survive into the present day. 

However, my work clearly shows that, before the 1922 Grain Futures Act, the industry was not capable of enacting rules that were clearly in the best interests of all. In the early 1920s, a few industry representatives used their inside power to lobby hard for industry-friendly regulations, but to get such protections they had to commit traders and other market participants to provide data about market activities and actors to the regulators, customers and academics – creating modern and (reasonably) transparent markets. In the mid-1920s, the regulators worked behind the scenes with the more progressive futures traders to have the CBOT adopt several key modern institutions that exist into the present day. The leaders at the time privately admitted that such innovations could not have been effected using self-regulation alone, due to the coordination problems identified by academics such as Mancur Olsen – powerful reactionaries benefitted from the previous primitive status quo. Thanks to government cooperation with industry, the CBOT was able to adopt modern clearing, co-regulatory Business Conduct Committees and Special Account Reporting. 

The popular dichotomy plays more regulation against less, and government versus free markets, without regard for the quality of regulation and the degree of collaboration between industry and its erstwhile supervisors. In fact, in the interwar years, the industry and the government (and its agents) often cooperated and collaborated. In addition, there was a crucial role for government officials to act as coordinating agents in facilitating collective action of private agents by collecting and disseminating information to all concerned parties (creating a public good), without actually exercising the implicit threat of forceful punitive action. The archival material robustly supports the assertion that even weak government authority can facilitate publicly useful changes in financial practices—marketing of financial derivatives in this case. 

The interwar CBOT is far from the only example of successful state-industry collaboration and co-regulation. Similar observations of the benefits of regulation on industry are percolating in academia, such as Daniel Carpenter’s analysis of the Food and Drug Administration. 

If the trope that free markets should (and do) triumph over restrictive government interventions is so easily falsified in this history of the interwar CBOT, might that be the case in other markets as well? In that case, might collaboration and coordination be the solutions to today’s often-partisan battle between ‘more’ or ‘less’ regulation?

Rasheed Saleuddin, author of The Government of Marketsis an author and researcher at the Cambridge Centre for Alternative Finance and an experienced investor and advisor. 


Robert Sirico, “The Moral Case for a Free Economy”. Presented at the Heritage Institute (2018).

Barth, James R., Gerard Caprio Jr, and Ross Levine. Guardians of Finance: Making Regulators Work for Us. (Cambridge: MIT Press, 2012).

Sam Peltzman, Michael E. Levine, and Roger G. Noll. “The Economic Theory of Regulation After a Decade of Deregulation.” Brookings Papers on Economic Activity. Microeconomics (1989): 1-59.

Kevin Dows and Martin Hutchinson, How Should Financial Markets be Regulated’, Cato Journal 34 (2014). Stephen Craig Pirrong, “Self-regulation of Commodity Exchanges: The Case of Market Manipulation,” Journal of Law & Economics, 38 (1995): 141-206.

John H. Stassen, “The Commodity Exchange Act in Perspective--A Short and Not-So-Reverent History of Futures Trading Legislation in the United States,” Washington & Lee Law Review, 39 (1982): 825-843, p. 826.

Philip McBride Johnson, “Federal Regulation in Securities and Futures Markets,” in Futures Markets: Their Economic Role, ed. Anne Peck. Washington DC: AEI Press, 1985, p. 30. See Senate Report no. 93-1131, 93rd Congress, 2nd Session, reprinted in U.S. Code Congressional and Administrative News (1974), pp. 5843, 5853-55.

Examples of over-simplifications include Julius Baer and Olin Saxon, Commodity Exchanges and Futures Trading. (New York: Harper and Brothers, 1949); Jerry W. Markham, The History of Commodity Futures Trading and its Regulation (Westport, Conn: Praeger, 1987); Stephen Craig Pirrong, “Self-regulation of Commodity Exchanges: The Case of Market Manipulation,” Journal of Law and Economics, 38 (1995): 141-206; John V. Rainbolt, “Regulating the Grain Gambler and his Successors,” Hofstra Law Review 6 (1977): 1-27. Ideological biases can be evidenced by rhetorical flourishes in John H. Stassen, “Propaganda as Positive Law: Section 3 of the Commodity Exchange Act (A Case Study of How Economic Facts Can Be Changed by Act of Congress),” Chicago-Kent Law Review, 58 (1982): 635-656; and Anne E. Peck, “The Futures Trading Experience of the Federal Farm Board,” in Futures Trading Seminar Proceedings, Vol. IV. (Chicago: Chicago Board of Trade, 1976).

Kevin Dowd and Martin Hutchinson, “How Should Financial Markets be Regulated”, Cato Journal 34 (2014).

Randall Kroszner. Central Counterparty Clearing: History, Innovation, and Regulation. Speech at the European Central Bank and Federal Reserve Bank of Chicago Joint Conference on Issues Related to Central Counterparty Clearing. Frankfurt, Germany. 3 April 2006.

Transparency is considered a key element in creating efficient and fair markets. See, for example Archon Fung, Mary Graham, and David Weil Full Disclosure, The Perils and Promise of Transparency (New York: Cambridge University Press, 2007).

Mancur Olson. The Logic of Collective Action. (Cambridge: Harvard University Press, 1965).

Daniel Carpenter, “Confidence Games: How Does Regulation Constitute Markets?” in Government and Markets: Toward a New Theory of Regulation, eds. Edward Balleisen, and David Moss (Cambridge: Cambridge University Press, 2009).