Chicago Board of Trade immediately pressed the state of Illinois for regulation. At the same time as the pro-regulation faction had gained power in the Board of Trade, Illinois lawmakers were in the midst of drafting a new state constitution. Constitutional convention delegates were being bombarded by petitions from merchants and farmers calling for passage of an article regulating grain elevators.33 The convention did not take action, however, until the Board of Trade threw its weight behind the effort. At its urging, Delegate William Cary introduced an article calling for warehouse regulation, the text of which, some alleged, had actually been drafted by members of the board. The Board of Trade’s support for the measure made some delegates uneasy. Claiming to represent famers, delegate Thomas Turner, for one, decried the article as a means to help grain traders who he described as “leeches upon commerce and the community, that suck the life blood out of the farmers and dealers in grain.”34
Even if the article was drafted for the benefit of grain traders, other delegates noted that farmers too would profit from accurate market information. Delegate William Coolbaugh, for instance, asked, “Can it wrong the farmer in Fulton county who ships a thousand bushels of grain to Chicago and holds it there, subject to the market, to require the warehousemen there to inform him and the public how many bushels of grain are in store, so that he may exercise his judgment about the best time to sell it?”35 Coolbaugh’s rhetorical question not only described farmers’ need for market information, it underscored the challenges they faced operating over time and distance. The farmer had to pay to transport his crop to Chicago before he knew what price it would fetch on the grain market. The rapid price fluctuations brought about by the market manipulations of grain elevator operators could make this all the worse. Farmers, like commodities traders, had an interest in securing accurate information about grain supplies.
The delegates to the Illinois State Constitutional Convention designated grain elevators as “public” spaces in order to ensure access to market information. They passed an article stating, “All elevators or storehouses where grain or other property is stored for a compensation … are declared to be public warehouses.” If warehouses were public, the delegates reasoned, elevator operators could not invoke their private property rights to prevent inspection. The constitution not only designated the warehouses public, it mandated that their operators take responsibility for disseminating market information by making daily reports of the quantity and quality of grain stores. It also required elevator operators to permit the holders of grain receipts to inspect stores as well as the elevator’s account books. To give “full effect” to this article, the constitution called on the state legislature to “pass all necessary laws to prevent the issue of false and fraudulent warehouse receipts.”36 Members of the state legislature, in turn, invited the Chicago Board of Trade to draft laws regulating warehouses and railroads. With the board’s proposals as a framework, the Illinois General Assembly passed the 1871 Warehouse Act designed to curtail railroad rate discrimination, set maximum storage fees, and prevent the issue of false elevator receipts. The legislature also required warehouse owners to obtain a state operating license and submit to the regulatory power of a new Board of Railroad and Warehouse Commissioners.37
Grain elevator operators resisted state regulation, but Chicago’s Board of Trade and its banks ultimately forced them to comply with the law. Munn and Scott, for instance, refused to obtain an operating license or to let state inspectors enter their elevators. The state sued and won. In July of 1872, the court ordered Munn and Scott to pay a fine of one hundred dollars. The warehousemen appealed the ruling to the Illinois State Supreme Court, beginning the case that would culminate in the U.S. Supreme Court’s 1877 decision in Munn v. Illinois.38 Even before the high court ruling, however, bankers and the Board of Trade forced elevator owners to comply with the regulations intended to prevent the issue of bogus receipts. Chicago banks refused to accept receipts from elevator operators that did not register them with state inspectors, and the Board of Trade barred unregistered receipts from the trading pits.39 Thus, state law did not, in and of itself, 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
