Liquid Capital. Joshua A. T. Salzmann
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solve the problem of bogus receipts; rather, it gave financial institutions a means to stop accepting unverified receipts as currency. By the summer of 1872 it was all but impossible for grain elevator operators to issue false receipts. They did, however, commit fraud by failing to retire old receipts from circulation after grain had been claimed.
Munn and Scott recycled receipts in order to raise money to speculate with a financial instrument designed to eliminate spatial and temporal risk from grain trading, the futures contract. Buyers and sellers of commodities like grain had long been plagued by the fact that the price could change wildly during the time it took to conduct a transaction over great distances. With the use of a telegraph, however, buyers and sellers could sidestep this problem by contracting to deliver a set amount of grain at an agreed-upon price on a future date. While the futures contract eliminated the risk of price fluctuation, it created new opportunities for speculation. Historian William Cronon offers this hypothetical example: “Imagine, for instance, that Jones sold Smith a futures contract for 10,000 bushels of No. 2 spring wheat at 70 cents a bushel, to be delivered at the end of June. If that grade was in fact selling for 68 cents a bushel on June 30, Jones could either purchase 10,000 bushels at the lower price and deliver the receipts to Smith or—more conveniently still—accept a cash payment of $200 from Smith to make up the difference between the contract price and the market price.” These speculations also created the possibility of a market “corner.” A corner occurred when a group of speculators surreptitiously bought up nearly all the real grain supplies as well as the contracts for delivery at a future date. When the futures contracts came due, those who were obligated to deliver grain discovered that they could purchase it only from the very speculators they owed. In other words, cornerers forced their marks to buy grain from them in order to deliver it to them. When that happened, the victorious speculators would bleed their victims dry by charging exorbitant prices.40
During 1872, Munn and Scott joined a group of speculators in an attempt to corner wheat that they financed by selling old grain receipts. The group included warehouse owner Hugh Maher, Munn and Scott’s former broker F. J. Diamond, grain merchant Thomas H. Chisholm, and commission merchant John B. Lyon. In the spring, Lyon began buying contracts for future delivery at the end of August. By July, the trading pits were buzzing with news of Lyon’s maneuvers, and the price of wheat shot up from $1.16 a bushel to $1.35 by the end of the month. As the price rose, more farmers sent their crops to Chicago, making it more difficult for the group to buy up the physical stores of wheat before the August futures contracts came due.41 In order to raise the capital to support their corner, Maher, Munn, and Scott recycled elevator receipts rather than retiring them from circulation after the owner claimed the grain. This practice came to light when fire destroyed Maher’s “Iowa Elevator” located near the confluence of the north and main branches of the Chicago River. The postfire property loss investigations estimated that Maher had circulated receipts for three hundred thousand more bushels of grain than the Iowa Elevator had in store.42
Maher’s duplicity led many Board of Trade members to suspect Munn, Scott, and other elevator operators of the same. The board demanded inspectors be allowed into all the city’s elevators to confirm that receipts matched stores. Munn and Scott acquiesced, or so it seemed. The warehousemen requested some time before the inspection to consolidate their holdings into a few bins. Their request was granted, and Munn and Scott set to work. But, rather than consolidate their grain, the warehousemen installed false bottoms in the bins of their great Northwestern Elevator. By raising the floors of the bins much higher, Munn and Scott made it seem as if their elevator was brimming with all the grain for which they had issued receipts. Their deception went undetected until November. In the meantime, Munn and Scott persisted in their wheat corner attempt, which brought financial ruin upon them.43
Some of the very Midwestern farmers who accused elevator operators of exploitation likely contributed to Munn and Scott’s downfall. As Lyon continued buying up all the wheat supplies, prices soared to $1.50 a bushel on August 10 and to $1.61½ by August 15. At these prices, farmers hastily unloaded their stores; receipts in Chicago rose from 75,000 bushels a day in the second week of August to as many as 179,000 bushels per day in the third week of the month. Acting on behalf of the cornering syndicate, Lyon kept buying, but he was running out of cash. Lyon turned to Chicago’s banks, seeking a large, short-term capital infusion to support the corner until the futures contracts came due at the end of the month. All through business hours on August 19, Lyon bought wheat, spending the very last of his money. Then at five o’clock, he got devastating news. Chicago’s bankers denied him credit, citing provisions in their corporate charters that prohibited lending more than 10 percent of their capital to one borrower. With no more money to buy up wheat supplies, the corner collapsed.44 The men were ruined. Diamond skipped town with his account books. Chisholm drowned himself in Lake Michigan.45 Munn and Scott sold their holdings to grain magnate George Armour in a transaction that netted Munn only ten dollars. The low price reflected the fact that Armour had to honor the receipts issued by Munn and Scott for hundreds of thousands of bushels of grain not contained in the elevators. On October 29, 1872, a court forced Munn and Scott into bankruptcy, and in December they were expelled from the Board of Trade.46 Disgraced, the men faded from public view. Munn last surfaced in Denver, Colorado, where he signed an affidavit just six months before the United States Supreme Court issued its landmark ruling in the case that bears his name, but in which he had no stake.47
Public Space and the Making of a Free Market
In Munn v. Illinois, the Supreme Court confronted the reality of an increasingly complex, interconnected economy. The private property of the few—particularly if located at a transportation bottleneck like the Chicago waterfront—could threaten that of the many. Those few—Chicago’s warehouse owners—brought the case before the courts.
In 1872, Munn and Scott appealed their conviction for violating the Warehouse Act by refusing to acquire an operating license. In 1874, the Illinois Supreme Court rejected their appeal, upholding the constitutionality of the Warehouse Act. By that time, Munn and Scott had gone bankrupt, but Chicago’s remaining warehousemen appealed the state’s ruling to the United States Supreme Court. The elevator operators were particularly interested in overturning the provision of the act limiting maximum charges for grain storage.48 The rate limits, they protested, reduced the value of their private property. Yet those very limits aimed to protect the private property of the traders, farmers, and merchants who, by necessity of economic geography, had to store their grain in Chicago’s elevators.
There was no escaping the fact that the private property rights of the elevator owners and of grain traders, merchants, and farmers were mutually exclusive. The conservative Chicago Tribune cringed at the prospect of state intervention in the economy, but saw no alternative. When the Illinois Supreme Court upheld the Warehouse Act in 1874, the paper lamented: “we have to contemplate a novel and in some respects dangerous decision [upholding statutory economic regulation] on the one hand or we have to face an omnipresent and hitherto invulnerable monopoly on the other.”49
The Tribune’s lament over having to choose between dependence on a monopoly or state meddling in the economy reflected a broader crisis of liberalism. The liberal economic dogmas of the first half of the nineteenth century no longer seemed to apply. In antebellum America, monopolies were widely considered to be products not of private property, but of state grants of special privileges. Antimonopolists during the ages of Jefferson and Jackson therefore embraced laissez faire as a radical, democratic doctrine that protected common people from elites otherwise capable of using their political capital to secure economic favor. Following the logic of classical liberal political economists like Adam Smith, American political leaders such as Jefferson and Jackson believed that private property would serve as a means of self-sufficiency and political independence. By the 1860s, however, it was becoming clear that, as the Tribune noted of Chicago’s grain elevator operators, laissez faire, and even some forms of private property ownership, could be means not of independence, but of dependence.50 The conflict over private property on the Chicago waterfront that led to Munn therefore invited the Supreme Court to weigh the merits of laissez faire against a new liberalism, rooted in a pragmatic understanding of economic space, where the state wielded its power to