81988
ALFRED
P.
WORKING PAPER
SLOAN SCHOOL OF MANAGEMENT
nUBBLn, BUBBLE, IIOW MUC;il IROUBI.F''
--Financial Markets as Agents of
Capitalist
Development and
Capitalist Cri<;cs:
the case of Futures and Options Markets--
.lohn F. Parsons
WT
#1915-87
August 19R7
MASSACHUSETTS
INSTITUTE OF TECHNOLOGY
50 MEMORIAL DRIVE
CAMBRIDGE, MASSACHUSETTS 02139
nuBBLn, BUBnix,
now
— Financial Markets
Capitalist
the case
muc:h
as
i
roubi.f''
Agents of
Development and Capitalist Cri'^cs:
of Futures and Options Markets-
John
\VP #1915-87
F. Parsons
August 1QR7
Department of Finance, Sloan School of Management, Massachusetts
50 Memorial Drive, Cambridge, MA 02139
Institute of
Technology,
Ml.T.
FEB
8 1988
nunBLE, nUBBLU,
now MUCH
JROL'BI r?
-Financial Markets as Agents of Capitalist
Crises: the case of Futures
1.
Development and Capitalist
and Options Markcts--
Introduction
It
has
developments
become
common
quite
in the financial
sphere
in recent
years for
Icfl
to the simple
productive
The fmancial
sector
is
size arc
end of
economy
profit for
as a whole.
economists to denounce
represented in
both the subject of sharp criticism
many
an analysis as perilously
Paper transactions and more paper transactions are cxccutctl
ballooning
all
left.
liberal
1 he growth in transactions occuring on the options and futures
exchanges and the recent \va\c of mergers of unprecedented
and polemic from the
and
some
speculators but to
This financial bubble
concomitant s\mptom of industrial decline
in
is
no
markets of Wall
treated
by some
Street,
valuable end for the
visible, functional,
the United Slates
escalation of financial vanahles portend, according to this
in the
as a cause
and by others as a
The seemingly fantastic and imposing
common
ui";dom, their os^n inc\itablc
collapse--thc burst of the financial bubbk'--uith a con";cquenl!\ nega1i\c impact
on the sphere of
real
industrial production as well.
The
economic
recent writings of
crisis in
the
I
financial system--a view
financial
Magdoff and Sweezy (19R.\19R5) on the
nitcd Stales will serve as our archetypical
we
will
dub here
the
bubble
thesis.'
financial aspects of current
example of the
Among
this
view of the
the variety of issues regarding
markets to which they give attention are the problems "of a monetary system oul of controh
the dangers of the ir/W proliferation of
new
financial in.stitutions, instruments,
current unchecked spread of a speculative fever..."
and markets; and the
Magdoff and Sweezy emphasize the
relative
independence of the financiai sphere from the productive sphere and use as one example the recent
growth of futures and options markets. The upshot of
economy
features of the
is
their analyses of the financial
put by these authors rather succinctly: 'AVhere
is it all
system and other
leading?
...First,
a
bust of classic dimension.'
In this article
we
point by which
we
which
markets play
financial
mention only the
Our challenge
challenge this view of financial markets.
distinguish ourselves
in
from the l^ubble
theorists':
is
we emphasize
based upon one key
the important role
extending the productive power of capitalism. The 'bubble theorists'
possibility for crisis
which
embodied
is
monctar>' system and which the
in the capitalist
extension and expansion of futures and options markets exaggerate
However, Ihcy almost completely
ignore the support whicli an extension of futures and options markets yields to the development of the
productive forces.
Ihcy ignore
sphere of production
facilitating the
In this
the dialectical relationship between the sphere of circulation and the
paper wc explain the role which futures and options markets play
development of the productive
for monclar>' crisis
forces, while at the
Wc
which these markets embody.
make
classes
power of capitalism
independent of
is
The
its
progressive or dynamic character.
of the 'bubble theorists' to mention the contribution which these financial markets
to the producti\'c
one which
all
failure
result
class,
leads
them
to offer a simpli";lic critiqijc of these markets,
and leads them to propo-^als
of our analysis
is
a focus
upon
for
reform
there exist objectively conflicting class interests.
class
\\'hich
Finally,
we argue
it
follows that in
some
cases
that the 'bubble thesis' traps the
and popular movement into discussing the question of the
role of futures
Magdoff and Sweezy have developed a rather intricate view of the
do justice to a large variety of issues which they
characterization here does not
should be rational for
the relationship of different classes to the
question of the proper role of and expansion of financial markets and
working
the possibility
thereby restore to the discussion the Marxist
emphasis upon the contradictor>' nature of capitalism, including
The
same time recognizing
in
markets from the
financial system,
and our
also put at the center.
More importantly for our subject they specifically emphasize c.erlam connections between the financial
and the productive spheres of the economy, primarily those related to Keynsian notions of aggregate
demand They simultaneously assert, however, the relative autonomy of the financial sector, its
independent imperatives, and its relative capacity for self-expansion, and it is on these ronccpls that wc
focus in this
article.
standpoint of the bourgeoisie and leaves them unable to identify the issues that are
developmcnl of a progressive alternative
in the area
critical for
the
of the financial system since the 'bubble thesis'
ignores the key task performed by futures and options markets for which a substitute must be devised.
This paper
is
organized as follows.
technically
narrow objectives which these markets can
econom)
This exposition
.
we
In the following section
will lay
out
some of
the simple,
the productive sphere within a capitalist
ser\'e to
will implicitly stand as a challenge against
those authors
who have
repeatedly
discussed these markets as pure gambling casinos' and as pure financial transactions' with no rational
and suppnrlhr function within the
futures and options markets
from
capitalist system.
a
In section
more fundamental
.^
wc then
discuss the
problem of
perspective, at the level of the political
economy
of capitalism, presenting their contradictor^' role, the Marxist notion of the dialectic relation between
the expansion of these markets and the development of the productive forces as well as the problem of
monetars
crisis
We
include a brief review of the historicnl development of futures markets
United States including current developments: this review helps to
between these
own
financial institutions
view from that of the 'bubble
which the
institution of these
conclusions for that struggle
markets or the 'bubble
2.
2.1
What Do
and
tiic
thesis'.
illustrate the dialectical relationship
dc\clopment of key industries In wliich wc distinguish our
Finally, in section 4
wc
markets becomes the subject of class
which one
at
in tlie
arrives
discuss the two-fold
and the
conflict
manner
in
diffcient
depending upon whether one nccepts our view of these
thesis.'
Futures and Option Markets
Do?
Futures Markets
To
understand the role of futures markets
understand them
in the
options contracts,
technocratic sense,
who buys and
Conceptually a futures market
are agreed
upon
is
for products to
sells
in the political
we must
first
economy
of capitalism
we must
first
ask the questions "what are futures and
these contracts, and why''"
simply an organized marketplace
be delivered and paid for
at a
We
at
will
begin with a futures market.
which orders are placed and prices
future date.
On
a futures
market two
parties agree to a sale of a
can, in
in
May
before a crop
commodity
is
at
some time
being planted,
sell
i.e.
It
role
farmer
of, for
which
who
prices will
May. The grower has then locked
in
September
in a
is
fixed at the
given price for
its
moment
of agreeing on
crop.
should be clear that the existence of the futures exchange can significantly affect the wealth
and income
first
in
For example, a grower of wheat
the expected yield 'forward' for delivery at harvest time
September. The price to be paid upon delivery
the sale,
in the future.
it
is
example, a farmer
who
is
producing the commodity sold on the futures market.-^ The
immediately obvious that a futures market can serve
has planted a crop of wheat faces a large
mean
a high
income and low
personal property will purchase
fire
and
prices a
risk
is
A
the role of insurance.
on his/her future harvest season income: high
low income.
theft insurance, so the
.lusf
as a person
farmer
who owns
will seek to insure
a
home
him or
or
herself
is much more complicated than this would imply.
buy and sell any wheat for delivery' between any two parties at any location. The
futures exchanges set up standardized types of wheat, dates for delivery, and locations for delivery.
Secondly, quite often one does not actually sell the wheat, but just agrees to settle up' at the end in
dollars. So if two parties agreed to a sale of
bushel of wheat in September at Sl.67/bushel, and at
that day in September wheat turned out to be selling at $1.7n/bushc1, then obviously the farmer/seller is
receiving a lower price for the wheal sold with the futures contract than wheat selling on the
regular--i.e., spot--niarkcl. Instead of deli\ering the wheat and receiving a price $0.03 less than s/he
could receive on the spot market, s/he 'settles up' with the buyer by paying him/her JO. 03; with real
futures contracts this 'settling up' occurs daily based upon the quoted price for the contract agreed
upon and that prices deviation from the originally quoted price. Finally, the farmer will not actually
Instead, the farmer will be able to buy and sell through brokers, for whom the
trade on the exchange
relevant prices are close to those on the exchange.
In point of fact the entire set of transactions
First,
one cannot
just
1
purpose' which these markets serve we will focus on what we believe to be
purpose which gave rise to these markets: Once given, they can be turned
towards other objectives, e.g. tax evasion; and, in addition, they can fulfill these objectives while also
ser\'ing other objectives, e.g. when they are monopolized or manipulated by some agents (see section
•^
In discussing the
the essential and
We
initial
not focus on these other roles, although we do not mean to diminish their significance.
important evolutionary' development of the futures market which is, however, centra] to the
issues raised in this paper is the gradual shift of the users of the market from the actual growers and
traders of wheat, the real productive agents, to financial speculators and financial middlemen. This shift
4. 2. a).
will
An
is
central to the character of the markets as an element of the credit system as
we
below and is central 1o the contradictory nature of the market, to the
which the market embodies.
section 3.1
will discuss in
possibilities for crisis
against
movements
and
in a price
A
By
crop
in the price of the
selling the
crop on the futures market the fanner locks
assured of his/her income ahead of time
is
second role which the futures markets serve
is
the provision of important market signals and
information to fanners and other producers or operators in an industry.
The
effects
of supply and
demand on
the futures market for September wheat will be a result of various people's
demand
September wheat,
for
available in
for
if
some
plentiful,
for
May
in
it
September wheat
is
etc.
TTiese various pieces of information about future needs
will
If
the expectation in
May
is
be high, then the futures market price wUl likely be bid
anticipated thai in September alternative supplies arc not going to be available
reason, then again the futures price will be higli;
then the futures price
will
be used by the individual farmer to
how
forecasts of
forecasts of the quantity of supplies that are likely to be
September from various sources,
demand
upward;
or
May
wheat are currently summarized by the price on the futures market
that the
for
their
May
if
alternative supplies are likely to be
be low. The information that
make
is
reflected in the futures price can
decisions at the time of planting about which crops to plant,
to allocate the available productive resources
If
the
May
futures price for
September wheat
is
high, then the farmer can adapt his/her production decisions to take advantage of the anticipated high
demand.
It
is
important to note that
this role
can be sen'cd to a particular farmer by a futures market
without that fanner ever trading on the particular market.-
Of
course, the farmer
is also uncertain about the quantity of wheat that s/he will harvest, and
income just by selling the expected quantity of wheat forward In the
event of a disastrous crop, the farmer would be obliged to deliver larger amounts of crops than s/he
had, and in the event of a good crop, the extra wheat would be sold at whatever happened to be the
price on the market: hence, the farmer's income would still be uncertain. In fact, it is possible that
selling the expected quantity at the forward price may yield a more variable income than no futures
sale. This article is not meant to go into detail on the subject of futures contracts. We note only that
how to hedge risk under a variety of circumstances—including combined price and quantity
uncertainty--is the primary subject of study of the use of futures markets, and there are various
solutions to the problem just stated of quantity uncertainty. The complexity of the problems grows, but
so s/he cannot obtain a certain
the essential idea of insurance remains.
on planting decisions affected by the creation and operation of a futures market see
(1970), Simmons (1962), and Gray (1972).
It is typical to use storage decisions—in contrast to planting dccisions--as those most prominently
affected by futures prices: "A futures market facilitates storage decisions through the substantial
guidance it provides about prospective returns and through its substantial reduction of risks. It is the
For
a study
Tomek and Gray
A
third role wliich the futures mjirket serves
is
a
consequence of the
two:
first
affects the
it
market relationship of a farmer, for example, with other agents such as a banker or a commercial
supplier
it
who sometimes
grants credit.
If
the farmer
is
possesses a greater degree of security against which
equipment
crop
Alternatively, the
this year,
and determine
bank can
can borrow
is
clearly
too low to
Similarly, a storage agent can confidently forward a larger
hold
for later delivery
2.2
when
can confidently determine the
it
its
future crop, then
for planting
justify the extension
credit.
if
money
on
and purchasing
calculate the expected return to a particular farmer for a given
the price
if
it
able to lock in a price
sum
of short term
of capital to purchase wheat and
of the resale of the wheat.
likely value
Option Markets
An
a furniture
option contract
at a stated price.
option--to the lumber
company and
decides to exercise
its
takes delivery of the pIvv\'ood.
combination of these
reflect
the right, hut not the obligation, to hu\ or
company may purchase from
amount of ph'wood
company
is
The
However,
is
though not storable
company makes
if
it
at
If at
months
months the
tlic
agreed
the furniture
a given
furniture
upon
price
company does
and
not
The price-of-storagc relations show that futures prices
They thus guide inventory decisions in a rational wa\'. In
full
carrying charges and thus induces storage.
sell
unneeded
In periods of
stocks. ...Live cattle,
usual sense, can be fed for varying periods, atid current prices in relation to
very near-term futures can guide the pace of marketing finished animals in a
decisions" (Peck, 19R5, 45
in six
Tor example,
a paymciit--the price of the
company
months
costs arc available, inducing merchants to
in the
buy
the end of six
pays to the lumber
the end of six
to
a given asset.
important
periods of surplus the market reflects
full
furniture
option, then
effects that
company an option
receives the option.
current surplus and shortage well
shortage less than
a lumber
sell
&
way analogous
to storage
47).
The importance of these last two roles in the actual development of futures exchanges is
mentioned in Hieronymous (1971, 72): Referring to the historical development of the wheat futures
market in Chicago and the US Midwest, he writes that, "In some instances the Chicago merchants
advanced funds with which to pay farmers, and in others bankers judged the firm contracts desirable
collateral and made loans
Merchants were able to bid more rationally for farmers' grain when they held
firm sales contracts. This doubtless worked to the advantage of farmers. The forward contracts
materially lessened the pricing and financing problems of the river merchants." He continues in more
detail in discussing the particulars of fmancing using futures on pp. I29-.1.'>, from which we will quote
only a short passage: "First, the importance of hedging (using futures contracts] in fmancing stored
inventories of grain has long been recognized. Terminal elevator operators, cotton merchants, grain
processors, and, to a lesser extent, country grain warehousmen are often able to borrow in excess of 90
percent of the value of the stored commodities at prime rates of interest, providing the inventories are
offset by short positions in futures markets."
exercise
its
option, then
lumber company
is
makes no
it
free to sell the
payment beyond the
additional
plywood
to any other buyer
on
Similarly, the purchaser of a call option
a stock
at
owns
the then going price.
the right, but not the obligation, to
the stock from the writer of the option at a specified price within a specified time period.
holder of the
call
option
call
option exercises the option, then
the holder of the option allows
If
hands. TTie holder of the
call
buy
the
If
pays the agreed upon price to the writer of the
to expire unexercised, then
it
option has, most
it
and the
cost of the option
initial
likely,
no
further
however, already made an
money changes
payment
initial
to the
writer of the call option at the initial point in time.
Options are similar to futures contracts
and a future date
differ
from futures contracts
at
in that the actual trade is
the option to exercise the contract.
exercise their option based
was written and when
upon
expires.
it
purchase the pK-wood which
if
is
it
it
If,
for
less
call
price
may
will
commodity and
one of the
a
They
be executed.
a decision of
Obviously that party
example, the price of ph
it
is
ob\iousIy
needs by exercising
cheaper to buy
its
parties
choose whether or not to
its
option
in
wood
rises
over the
six
months and
is
company
to
the interest of the furniture
If,
howc\ei. the price of plywood
falls
pl^'wood needs on the spot' or current open market.
call
option since they can thereby purchase the stock
the contract prior to the rise in the stock price.
the
upon
contingent
the stock price rises tremendously, then the holder of the
likely exercise their call
let
parties specify a
stated in the option contract, then the furniture c(Mnpan>' will leave the option
unexercised because
Similarly,
two
the resolution of various events between the time at which the option
greater than the going price of pl>'\vood, then
below the pncc
the
which an exchange of the commodit>' and the
price
endowed with
in so far as
If
option on the stock
at
a price that
was
than that specified
in the
fixed in
the stock price had fallen, then the holder
option expire unexercised since they can purchase the stock on the open market
will
would
at
a price
option contract.
n
It is
sometimes
said in casual discussion that
one buys an option because one always gains when
the stock price rises--since the option holder then purchases the stock at the lower price stated in the
option contract --and one loses nothing when the stock price
the option expire without
outstanding option
is
making any payment. This
always valuable, but as stated
it
is
falls--since the
true as far as
it
option holder merely
goes, and that
obviously ignores the
is
fact that the
lets
why an
option holder
Why
do firms buy and
these options contracts? Just as futures contracts served as insurance,
sell
Options can serve as insurcince devices
in
appropriately hedged or insured by use of futures contracts; that
is,
so do options contracts.
described in the farmer example given earlier.
option.
wUl typically
term interest rates
its
end of the
is
be paying to
its
lower rale
deal, thai
is,
when
all
risks arc
of the sort
customers
If
at the current short
with a fixed contracted
long term and short
depositcrs the new, higher short term rales;
short and long term interest rales
many mortgages
rate in the
mortgage
The bank
at
which they were contracted.
and I/ian to insure
is
in the interest
itself against
movements
option (Sloll and Whalcy, 1985, 227-8).
of the current crop
in the
ils
For the
in the interest rale
earlier
it
in
interest rates
a
at
Ihe
must purchase the appropriate
more appropriate device
and Whi.)^/, 1985, 227). Second,
it
risk
is
on
order for the Savings
example of the farmer with the
ground, a put option would be
price (Sloll
With long term
homeowner, and
than the futures contract mentioned above since the farmer faces
on the
not always the case,
deposits but also earning a lower rale
Ixian has sold an option to the
the
is
of Ihe holder of the mortgage to refinance
then be paying a lower rale on
will
This
fall.
gave the borrower Ihc right to refinance
it
The Savings and
mortgages
as well as
not
on the losing end of the gamble. One might expect that the bank would gain on the other
however, since
below the
its
home mortgages
funds on long term
will
risks Jire
all
find itself facing a peculiar interest rate risk.
then the bank
rise,
First,
have the inherent characteristics of an
outstanding loans continue to pay interest at the fixed rated
The bank
its
and which loans
interest
rate of interest
its
risks
not
For example, a Savings and l>oan which accepts deposits from
term rate of
but
Some
two ways.
for
risk
of Ihe value
hedging the
risk
on the quantity of his/her harvest
possible by various appropriate
trading strategies to use the purchase and sale of options to duplicate the results of a futures contract,
and
in so far as
we have shown above
thai a futures contract
is
an insurance device, then so too
will
be the appropriate portfolio of option contracts.
is
required to
Ihe
make an
initial
writer of the option
is
payment
in
exchange for obtaining
this valuable right in the first place.
obviously on the other end of the deal, losing
the writer must be compensated
if
they are to be
'freely'
when
the holder gains, and
agree to writing the contract
at
the outset.
The second and
third objectives
which the option market serves are comparable to the second and
They
third objectives of the futures market.
yield information
'commodity' and they allow firms to therefore execute
not have been
feasible.
An
which information arriving
option
credit
on the expected
future price of a certain
and investment plans which would otherwise
particularly appropriate for mediating business relationships in
is
in the interim,
i
e.
within the period of validity of the option,
production decisions and for which a simple fixed futures contract
is
relevant to
therefore inappropriate to
is
organizing the production decisions.
The organized option exchanges
gambling casinos--and more often than not
negative consequences
As
far as
it
sometimes
arc
this
is
meant
goes the analogy
is
money
not exactly
face, a device for
and stock markets
Net supply on the organized option exchanges
someone purchases
a call option
Nevertheless, the option markets serve
gambling casino analog)
However,
The
wrong
outcome of
some
a
random
clearly objective
futures exchange
is,
The
sort of inherently
established option
capital to particular objectives as are the
is
another person must have sold that
taking opposite positions or bets on the
imply some
to ipso facto
markets are not, on
funneling
our 'bubble theorists' as pure
referred to b\
always zero—that
call
option.
2.3
This key aspect
is
slighted
if
sides are
variable, such as the stock price.
economic purposes not implied by the
in this regard, also a sort
of gambling casino.
in
organizing the
relationships of particular businesses, and therefore in organizing the protluction decisions
businesses make.
whenever
The two
market, the options market serves specific purposes
just as with the futures
is,
bond
which these
not denied by the gambling casino analogy.
Options on Futures!
As an
illustration of
Magdoff and Sweezy (1985,
the fact that one can
whom
now
how
7)
far the "proliferation
of purely financial transactions" can proceed
point to the options and to the futures markets, and with exclamation to
even buy options on futures'
It
is
not surprising that those authors for
both futures and options markets arc a chimera, a simple gambling casino from which expectations
of profit are built out of thin
quintes.sential
air,
would judge
a
market where one
demonstration of the ludicrous extremes to which
sells
US
options
o/j
futures the
financial capital can go.
If,
10
however, the explanations which we have given above for the role of futures and option markets are
reasonable, then one might be suspect of this fanciful prejudice regarding an option on a futures
Tliere
contract.
futures
at
is
which we
a rather streiightforward,
will
attempt to present
if
technical, explanation for a
in brief,
but
first it
market for options on
should be mentioned that the bewilderment
an option on a futures contract already exhibits a certain ignorance of the basic character of an
An
option
option contract by definition concerns future delivery: the difference between a simple
option and a simple futures contract
is
that the option
holder's decision while the future contract
makes the
make
a futures contract merely forces the holder to
delivery--it
a sort of hybrid of the classical
is
is
a contract for delivery contingent
future delivery an agreed
upon
on the
An
fact.
option on
the decision about delivery prior to the actual
form of futures and oplions, and not simply a more
overblown balloon.
Note
that the difTerencc
options market provided a
between the options and the futures markets described above was that the
random payoff
structure as a function of the underlying asset
from the random payoff structure pro\ ided by a futures contract
when both
contract,
economic
activities
exist,
can depend upon various conditions,
incorporate different risk structures and the
different fmancial contracts
correspond more or
The
choici' of
among which
random payoff
is
which
differed
an option or a futures
the fact that various real
structure of these
less to the risk structure whicli is rclc\aiit
A
simple
explanation of options on futures contracts would be that an option on a futures contract provides a
third alternative
More
cost of the
structure with
which the person or corporation can hedge
import'^;";iy in the empirical reality of the futures options currently traded
form of trade and the amount of
transaction.
position
random payoff
One can
on the
capital
and
at less cost.
the transaction
which must be forwarded to execute each type of
use the futures options to create a risk profile which
asset itself
is
their risk.
is
a duplicate of the
Hence, options on futures contracts become
just
option
another
This back-door explanation for futures on options--that they serve a purpose which can be
it at less cost-also applies to the sirnpler futures and options
markets for which the underlying asset is not an agricultural commodity but a fmancial security such as
a share of stock. It is possible to duplicate the random payoff to a call option on a stock by trading
simply the stock and bond appropriately (niack and Scholcs, 1973), however, the options market provides
°
served by other means, but they do
11
version of the simple options contracts
If
the latter plays a valuable role, then the former
may
as
well.
The Role of Futures and Option Markets
3.
In the last section
we focused on
the
manner
in
which an individual person or business would use
the futures and options markets and stated that these markets allow the individual agent to accomplish
three objectives:
1)
to
sell
risk--to create in effect
commodity
efTiciently identify the price for a
improve the agent's
credit relations
own
2)
they allow the agent to
to be delivered several periods forward
production decisions,
and thereby make
an insurance market,
3)
and they allow the agent
feasible productive activities that
to enter into
discusses the role or effects of the futures and options markets
as a whole.
is
3.
1
to these effects
which we
Futures Markets in Marx's TTicory of
now
Money and
which
on the
feasible.
economy
capitalist
Credit
attain extensive proportions
Marx
s
money and
thcor)' of
under capitalism
Futures and
options markets are just one more manifdlation of the extension and expansion of credit nnd
relations, viz. the
expansion of these
circuits.
extensive
turn.
TTie development of futures markets musi be seen in the context of
the circuits of commodities and capital
more
would not otherwise be
None of these
It
and to thereby
On
the one hand, this expansion
money
accomodates the
operation of productive forces which would not be usable without these markets and so they contribute
to the
economic expansion of
capital
On
the other hand, because these markets
make more
extensive
the circuits of capital, because they represent an extension of credit and money, the development of
these markets necessarily includes the possibility of monetary' crisis and in fact increases the possible
the
ser\'icc at
That
a less cost.
this is the
premier justification for financial futures
the motivating factor for options
on
futures
is
is
argued in Silber (1985), and that
it is
explained in Stoll and Whaley (1985, 255) where three
transaction cost reasons are given.
StoII and Whaley (1985, 253) also argue that futures contracts arc not primarily used for hedging,
but for trades where there docs not exist a good spot market: the option market is for hedging.
12
scope or depth of
crises.
kept in mind and which
It is
is
this two-fold contradictory character
often
abandoned
of these markets which must be
in current discussions.
This two-fold character can best be seen in a discussion of the original development of these
Futures markets are a creation not of the twentieth century, but of the nineteenth century,
markets.
and although some of the key developments occured
common
in
mentions
specifically the
Europe
that
Europe
as well.
Marx
commodities sold
own
money.
for their
A
his study.
He
United States, futures trading was becoming
discussion of the development of
form of exchange which
was the subject of
the development of
in his
in the
is
a futures contract and which
refers to futures contracts as
futures contract
is initially
credit
was developing
in the
one more manifestation of
one form of means of payment
for
exchange value. The formalized futures contract represents one version of
the development of credit relations out of the repeated transactions of simple
According to Marx, the futures contract
circulation in
money and
is
one form of the development of
which the purchase of commodites on one
side of the
commodity
circuits
circulation.
of commodity
exchange becomes separated from
the deliver)- of commodites or sale of commodities on the other side of the exchange:
No
needed to show that such purchases on credit, in which the two poles
in lime, evolve spontaneously on the basis of simple
circulation of commodities
At first it happens that in the course of circulation certain
commodity-owners confront one another repeatedly as buyers and sellers. Such repeated
occurrences do not remain merely accidental, hut commodities ma>, for example, be ordered
for a future date at which they arc to be delivered and paid for
The sale in this case
takes place only nominally, i.e., juridically, without the actual presence of commodities and
money. The two forms of money, means of circulation and means of payment, arc here still
identical, since on the one hand commodities and money change places simultaneously, and
on the other, money docs not purchase commodities but realises the price of commodities
pr'jviously sold. (Marx, 1970, 142, emphasis added)
proof
in detail
is
of the transaction are separated
In this discussion the futures contract originates spontaneously, facilitating the sale of products
that have been
produced or that
will
be available for
sale,
the intent of fulfiling a previous order or futures contract.
therefore dependent
possibility for
to
sell
upon
its
The
origination of the futures contract
is
the then current stage of production, division of labor, and circulation and the
exchange which
forward loses
but which were not necessarily produced with
is
embodied
in
them.
As
the tran.saction
is
repeated, as the opportunity
chance characteristic and becomes dependable, then the system and organization
13
of production and the division of labor
is
altered to take advantage of this opportunity.
relationship between the process of circulation and the organization of production
The
use of
money
is
also undergoing development.
circulation
With the development of
circulation
and the means of payment
money
a futures contract
The development
development of the process of circulation,
is
Money
is
is
The
at the
center here.
originally used merely as a
serves simultaneously as the
However, the development
of the monetary system simultaneously embodies the creation of the possibility of monetary
specialb.e
its
The more advanced system of
production and to expect that
purchase the components that
it
needs.
can generally depend upon buying and
it
is
it
will generally
what
it
is
will
sell
money
as
means of payment
Money
be able to
sell its
many
commodities or to
in the
more
sophisticated market, there will
be timc^ when the
many
their products, there will
explained the development of the possibility for a monetary
of
the result of the various decisions of
able to rationally specialize, and while each
needs
be times when these expectations are not realized, there
individual capitalists conflict and they are not able to
The
crisis.
circulation enables each capitalist to rationally
But while each
selling
means of
more advanced forms of
organization of production, for the use of higher levels of division of labor.
individual capitalists.
means of
of the monetary' system, one feature of the
necessary for the use of
development of the division of labor remains unplanned:
dialectical
crisis
which
is
decisions of the
be a
embodied
crisis.
in the
Marx
development
as follows:
functioning as means of payment thus contains a contradiction: on the one hand,
when payments
it acts as a nominal measure; on the other hand, when actual
made, money enters into circulation not as a transient means of
circulation, but as the static aspect of the universal equivalent, as the absolute commodity,
Where chains of payments and an artificial system for adjusting them
in short, as money
developed,
ha\c been
any uphea\al that forcibly interrupts the flow of payments and upsets
the mechanism for balancing them against one another suddenly turns money from the
nebulous chimerical form it assumed as a measure of value into hard cash or means of
payment. Under conditions of advanced bourgeois production, when the commodity-owner
has long since become a capitalist, knows his Adam Smith and smiles superciliously at the
superstition that only gold and silver constitute money or that money is after all the
absolute commodity distinct from other commodities—money then suddenly appears not as
the medium of circulation but once more as the only adequate form of exchange value, as a
unique form of wealth just as it is regarded by the hoarder. The fact that money is the
sole incarnation of wealth manifests itself in the actual devaluation and worthlessness of all
physical wealth, and not merely in purely imaginary devaluation as for instance in the
Monetary System. This particular phase of world market crises is known as monetary crisis.
(Marx, ]'970, 146)
payments have
balance,
to be
14
As we
indicated earlier, one of the key roles of a futures market
who
and financiers
to allow merchants, capitali.sts,
is
are involved in a given process of production to rationally extend a greater
amount
of credit to particular agents--in our example, the farmer or the miller. This development of credit as a
component of
the development of the futures markets
is
also linked to the
production and simultaneously with the possibility for a monetary
aid the extension of capitalist reproduction
mentioned by Marx
is
crisis.
development of the forces of
The power of credit markets
to
in Capital III:
...the self-expansion of capital based on the contradictory nature of capitalist production
pcnnits an actual free development only up to a certain point, so that in fact it constitutes
an immanent
and harrier to production, which are continually broken tluough by the
Hence the credit system accelerates the material development of the
productive forces and the establishment of the world-market. It is the historical mission of
fetter
credit system.
tlic capitalist
system of production to raise the malcnal foundations of the new
production to a certain degree of perfection
violent eruptions of
the old
mode
tliis
mode
contradiclion--crises--and thereby the elements of di.sintegration of
of production. (Marx, 1967b, 441)
3.2 Evolution of Futures
Markets
in the
US
In oui analysis of the role of futures
maikcts we have emphasized the bond between the futures
contract and the organization of production, between the futures contract as one piece of the
credit system--!. e. as
production.
i.e.
a certain
the use of futures markets.
opens up.
decline in
money and
an expression of the productive relations--an(l the organization of the force? of
This relationship should be seen
de\'c]opment.
of
At the same time credit accelerates the
stage in the
in a
dynamic,
dialectical fashion.
development of the forces of production,
Technological and
is
.social
a pre-requisitc for
Subsistancc agriculture conducted for the annual needs of
a
small
This manifests itself in various concrete developments within markets in which futures trading
For example, examining regional diversity in mortgage rates, Culbertson found a significant
regional differences was associated with the introduction of futures trading in mortgages, the
GNMA futures contract
(Culbertson, 1978).
A distinct role of the futures markets, and one on which we will not focus here, is the manner
which they allow the quantity of circulating capital to be reduced and in this fonn lower the costs of
production This role is a consequence of the second use of futures markets mentioned above and was
also discussed by Marx: "In the third place the development of the credit-system also exerts an
influence. The less the spinner is dependent on the direct sale of his yam for the renewal of his
supply of cotton, coal, etc.— and this direct dependence will be the smaller, the more developed the
credit-sy.stcm is--the smaller relatively these supplies can be and yet ensure a continuous production of
yam on a given scale, a production independent of the hazards of the sale of yam." (Marx, 1967a, 142)
in
15
community and based upon
since
it
narrow production decisions does not give
relatively
docs not require the sophisticated
distinct industrial processes
scale agricultural
particular
it
level
rise to
a futures market
of intertemporal coordination between agents involved in
which futures markets serve to organize. Advanced,
capital intensive, large
production requires highly rationalized organization of various processes and
in
requires highly rationalized intertemporal allocation of resources and intertemporal
coordination of operations of various person.
Under capitalism
this allocation
As
exchange and circulation process
and coordination
large
is
mediated through the market, through the
markets for standardized agricultural products such as wheat
develop, as the technology for storing and transporting these products developed so
tliat
the
many
small
markets of a vast land mass such as the United States became united into a single vast market
ser\iceablc
from any agricultural
tcrritor>',
becomes
highly rationalized production
then large scale capital intcnsi\'c agricultural production and
possible.
But for
this to
be realizable within capitalism, the
appropriate 'relations' must be fashioned, the appropriate system of circulation and exchange, the
appropriate credit system
a
commodity
A
futures market
must
arise in
which the value' of the commodit\--cvcn of
and equated with or compared with
available for deliver>' in the future--can be expressed
the 'value' of other commodities—including a comparison with the
a different
commodity because
it
is
same commodity
available for use at a different date
market on which particular commodites available
A
at future dates find their
futures market
prime example of the continuing development or extension of the money and
more advanced
system occurs step wise
credit
stages of the division of labor
development of the technological opportunity
markets
financial
will
for
capitalist
among
left
is
credit system.
simpK
the
then a
This
conjunction with the development of
methods of production. The
new forms of production and
be parallel and mutually reinforcing, they
TTie current discussion
relatively
and more
in
is
terms but
\aluc given expression in
But the development of such markets
terms of a current unit of Ihc universal equivalent
development of the money and
in physical
will
the development of these
be dialectically related.
or liberal authors in which futures markets are characterized as
autonomously developing phenomena, or
in
which futures markets are characterized as the
16
result of the
opposed
dynamics of the
financial sphere alone, a result of the imperatives of finance capitalists as
to industrial capitalists, a result of the nsurow,
populations of Wall Street,
sphere--in fact the
deemphasize the
all
main theme of the 'bubble
problem with the current developments
between the futures markets and the productive
thesis,' is that this tie is
in futures
markets.
in the productive sphere
commercial relationships. At
this stage the relationships
Slowly, in territories in which
tlic
two
In his
show
Marx
indicated,
were narrowly
was generalized
Marx emphasized
that
an intimate connection
first
as a feature of individual
restricted to
to a larger
two
parties.
this
market futures markets began to
the relationship between the sphere of production and of
circulation and the reflection of this relationship in the geographical points of
commodity markets.
to
the premier
same constancy of trade which spontaneously generated
particular persons
take on an organized form.
exists
we wish
is
and the development of futures markets.
Futures markets developed, as the comments by
relationship between
missing and this
In this section
and that even to the present day there
historically there has existed,
between the development
tie
myopic, and petty sociology of the various
development of these
notebooks which form the Grundrisse Marx includes the following sketch;
The
various markets other than the money market are, firstly, as different as are products
and branches of production themselves. The chief markets in tiiesc various products arise
centres which arc such either in respect of import or export, or because they are either
themselves centres of
in
production, or arc the direct suppls points of such centres.
a given
(Marx, 1973, 280)
The
tie
between the development of these markets and the actual de\'elopment and structure of
production and circulation to which Marx
ga\'e
passing reference can best be seen in terms of the
See Magdoff and Sweez.y (1985, 6-7). They begin by asserting the capitalist imperative of
expansion and growlh facing bankers and other financial businesses, they then argue that the creation
by these "money pushers" of various purely financial transactions have been the result, and conclude
with "The crucial point, and one that
is
almost totally missing from traditional economic discourse,
is
become an autonomous subsystem of the economy as a
whole, with an enormous capacity for self-expansion." Our assertion, of course, is that the crucial
advantage of a more orthodox Marxist analysis is that the financial sphere is not autonomous and not
that the financial sphere has the potential to
between the expansion of financial markets
is an inherent
feature of the capitalist mode of organizing circulation and production even when it is operating
smoothly, and not a problem of the improperly organized or wildly out of control financial system.
capable of enormous' self-expansion.
and the productive sphere, and the
There
is
a key link
crisis potential
of the expansion of financial markets
17
development of the agricultural commodity futures markets
in
in
the
US
during the nineteenth century and
terms of the development of energy commodity futures markets during the twentieth century.
In the United States the
agricultural
commodities
development of commodity futures markets occured
in the trading cities
of the midwest.
first
in the
market for
Canal
In 1848 the Michigan-Illinois
opened, providing river access to Chicago and thereby cheap transportation from the interior farmlands
Between 1847 and 1851 eastern shipments of
via the Illinois River.
Com
bushels to over 3 million bushels--a 44 fold increase.
riverway primarily during the late
transportation opened
up
in the spring.
and financing needs developed—that
means of exchange. Owners of
their grain.
for grains
The
and winter
fall
is,
cribs
money came
actual clearinghouse fomi that
to be used as a
and elevators would
in
is
1891.
commonly known
Wheat
The
of a standard sort
money
was held
until
travel to
means of payment
waterway
instead of as a
Chicago to find future buyers for
it
began to develop standards
for organized futures
toda\- as the futures
markets developed.
market was instituted
futures markets developed at nearly every
market, including Chicago, Kansas City, Minneapolis.
(Peck. 1985).
it
elevators developed along this system therefore,
and homogeneous trading practices the opportunity
Minneapolis Grain Exchange
where
of Trade was established in 1848 and as
The Chicago Board
from Chicago grew from 67,000
was shipped to holding areas along the
after the harvest,
Comcribs and
com
Ncu
'N'ork.
at the
major terminal
Duhilh. Milwaukee, St
I
ouis,
and
Omaha
futures markets clearly developed as n result of the growing regularity of transactions
among
a
dcfmed
set
of merchants--thcy were not in any fashion the consequence of
capitals search for profits during a period in which investment in productive capital seemed
unprofitable, the source for the current expansion of these markets according to
1 rade
in
Magdoff and Sweczy.
other commodities apparently independently generated the development of futures
markets--in cotton for example
originated out of the
New York
at
the
New York
Cotton P.xchange. The
New York
Mercantile Exchange
Butter and Cheese Exchange, organized in 1872, and the Chicago
Mercantile Exchange originated in 1874 in the formation of the Chicago Produce Exchange (later the
Butter and Egg Board).
The New York Producer Exchange emerged
as a futures market in this time as
The Coffee Exchange began
well.
exchange
1925 and
in
Trading
later joijied
in futures
was
Exchange with futures trading
in the 1920's.
One
in 1882,
with the
Sugar was added
two (Peck, 1985 and
first
initially characteristic
in
metals-copper,
Hides were also traded in
of the most important
New York
silver, zinc,
crude
oil
new developments
Mercantile Exchange in
certain key
commodity during
time
developments of
March of 1983
be delivered
in
in the
(Verleger, 1987).
dishing,
development of
which gradually induced the
this sort are
The
Oklahoma
at
oil
in
crude
oil
traded in
New
the intersection of
a futures
market
development
linear
for
in the
initiation of a futures market.
important to point out.
Oil has
become
important to a vast array of industrial processes.
a key
Tor
a period of
followed
The importance' of
the corporation and not invoh-ing market mediated transactions.
economic sense
drastically increased following the creation
c^f
OPEC
and the two
The necessity of integrated operations has also declined over the
there exist firms which can produce
buy crude from producer?
various
oil to
Organized futures trading
oil.
production, refining, and marketing has been a largely integrated process coordinated within the
oil
bounds of
to
oil
this century, vitally
The Commodity
of futures markets during the past half
and do not involve a simple and continuous
productive technology and market for
However,
Irwin, 1954)
and lead-developed out of markets begun
in the area
petroleum pipelines. The motivating factors
arc complicated
a scperate
this fashion at that time.
York was West Texas Intermediate cpjdc
several key
and Cocoa was traded on
only of agricultural commodities.
century has been the creation of a futures market for crude
began on the
in 1916,
cmdc and
sell it
to independent refiners,
This means that the market
component processes in\olvcd
in
bringing crude
relationships require organiz.ed spot exchanges.
They
futures or a spot market for natural gas
participants and various
work
oil
also,
and coordination opportunities mediated on the market,
Similar factors are currently at
last
is
government agencies involved
large price hikes
two decades, so
an
which
that
and independents seeking
more important
to the organization of the
under various guises to consumers. 1 hese
however, require longer tenn decision making
that
is
they require a futures market.
in the natural gas industry.
However, there
oil in
are
many
There does not yet
discussions
among
exist a
industry
in the field regarding this possibility.
One key
19
prerequisite for the institution of a futures market
is
the expanded use of natural gas which has
proceeded over the past half century and which has drastically increased during the
especially outside the United States.
This second prerequisite
places.
a market
is
possible.
is
The second
prerequisite
is
last
two decades,
gradually developing in a variety of
the organization of production in such a fashion that mediation using
This prerequisite
is
not currently
changes are under way which lead one to believe that
fulfilled in
it
the natural gas industry, but
may become
many
among
a possibility, and discussion
industry and government figures centers around the question of the current stage of this development
(Toman,
1986).
The
current center of a spot market for natural gas
Texas where a
is
large
number of
pipelines exist and are connected--and where a large base of industrial users exists able to contract with
a large base of suppliers
In each of these
production.
keen
on terms not governed by longstanding
examples there
clearly exist
federal regulations of interstate trade.
important developments
discussions leading to
development of a futures market and they participate(d)
and acceptance of money
in the
capitalist?
smooth and
examples we think
it
in the light
should be hard for one to reamin by the thesis that 'bankers' per
traditional routes
and therefore
its
interest in a
capital to
new avenue such
expand and
as
industries
which preceeded and continued
in parallel
in the forces
its
of concrete
sc
were or are
do so
inability to
new commodity
the primary force leading to the developments of these institutions at this time.
be hard for one to continue to ignore the developments
interest
arc, of course, a necessary
But
successful establishment of such markets.
money
The
in the discussions.
and the players on these exchanges
the initiators of these markets, that the imperative of
its
in the various
development or consideration. Financiers, speculators, investment bankers, and
its
other specialists on Wall Street (or LaSalle Street) also particpate(d)
via
realm of the forces of
In each case, persons involved in the operations end of the industry displayed or display a
interest in the potential
element
in the
And we
futures
think
it
was
should
of production in each of these
with the establishment of the futures market and
which make the transactions on these markets anything but purely
financial.'
20
CSass Interests and the Regulation of Futures and Option MaHccts
4.
The Subject of Conflict
4.1
The
organization, development, and extension of futures and options markets pose a variety of
decisions over which classes maintain conflicting interests and responses and which
two
categories.
First, the decision
of
how
best to regulate
and modify the
we
will divide into
static tradeoff
the existence of a futures or options market; and, second, the problem of regulating the
development of the market and managing the consequences of
4.
1
.a
its
inherent in
dynamic
development.
Regulation of the Static Tradeoff
The
static tradeofT
above: the futures market
possible
(
1
)
inherent in the existence of a futures or options market has been detailed
is
a case of an extended circuit of exchange which simultaneously
development of the forces of production within the
a higher
the one hand, and (2) a greater danger of a
modem
capitalist society, as
more
all
who
persons have historically enjoyed some of the
they do not enjoy the
full results.
it
is
working
is
more
bear the costs of monctar>-
fruits
of the expansion of
Hence, the position of
class will see the
these problems.
The
likely to
of production on
In
the working class and the
crises,
and while these same
humankind
s
productive powers,
different classes to the unbridled
of the credit system or futures markets and therefore these speculati\e markets
ruling capitalist class
mode
extensive monetary' crisis on the other hand.
throughout the history of capitalism,
farming and agricultural workers above
capitalist
makes
is
development
also different.
The
\iew their development as unequivocally advantageous, while the
problems inherent
capitalist class, all
in
them and
will seek
various solutions by which to avoid
other things equal, will choose a greater degree of development
of the futures markets than the working classes would choose.
There
tradeoff.
exist within a given class different positions regarding the regulation
of the static
Individual fmancial capitalists actively involved in the relevant fmancial markets tend to be
strident advocates of unregulated extensions of these markets.
Industrial capitalists
bound
to the fate of
and not successfully integrated to a fmance capital group tend to have a powerful
stake in the balanced development of capitalism and a deeper concern with the dangers of a crisis.
any given concrete historical example the divisions and basis for disagreement may be more varied.
a single industry'
In
21
The
conflict over the regulation
of the
lor example,
variety of concrete institutional decisions.
can be played out in terms of a large
static tradeoff
toward whether or not a futures market should
exist
different classes
may
take different stances
or not, or different positions regarding the
appropriate length of contracts permissable, to the degree of surety necessary for the persons dealing in
contracts,
i.e.
towards the degree of
risk
The
inherent in the credit extended.
conflict over the
regulation of the static contradiction can also be played out in terms of institutions other than the
markets themselves, for example
structure of farming
manner
of
its
in
These other
farmers push for governmental income guarantees or regulation of the
institutional structures
which the futures market
modify the cnmequenccs of
interacts with the producli\'c sphere
a crisis or the
and therefore the consequences
extension.
The
is
if
typical for
markets
is
balloon' thesis suppresses the class content of the problem of futures and options markets.
proponent? of the 'balloon'
clearly irrational
thesis to write as
from the standpoint of
engineered or ad\ocatcd only by those who:
markets per
se,
1)
all
self-destructive path
which they are pursuing, and
interests are directls
and immediately
classes.
tied to the
from within the
who
finally
and the resulting objective basis
viz.
these markets
is
.1)
fail
to sec the folly
and ultimately
to a \cry small section of financiers
whose
Proponents of the
class perspective or objective class interest of the
for class conflict
contradictory nature of capitalist markets,
The expansion of
expansion of the financial industr>'
bourgeoisie the expansion of futures and options markets
interest
the rapid expansion of these fmancial
^Uzk foolishly to an ideologically motivated advocacy of
or 2) to myopic bankers and financiers
'balloon' thesis ne\cr argue that
if
make
sense.
They
fail
to see this class
because they emphasize only one side of the
the possibility for a
ignore or underestimate the other side of the contradiction,
viz.
monetary
crisis,
and they completely
the dialectical role which the expansion
This occurs as well in the conflict over the regulation of the conflict inherent in the use of
market for labor. This market also embodies the danger of crisis and the disaster of unemployment.
Within the system of capitalism trade unions and working class political organizations have fought for
unemployment compensation. This shifts some of the cost of unemployment from the working class to
the capitalist class, the degree of shift depending to some degree on the structure of the tax system and
other factors
It
a
22
and sophistication of the money and
credit
system and these financial markets play in developing the
productive forces under capitalism.
Tlie bourgoisie cannot, within the
framework of the
capitalist
mode
of production, bring about
development of the forces of production without expanding the system of market
extending the
markets.
money and
And
this
relations, without
credit system, without, in this particular case, using futures
and options
the working class cannot successfully oppose the expansion of these markets or their
adverse consequences
makes the use of these
ignores the underlying objective necessity which
if it
markets a consideration. The working class cannot simply oppose the extension of these markets unless
it
proposes an alternative device, an alternative form of relations which
the expansion and development of the productive forces.
working
4.1.b
and
class in a theoretical
political
will
accomodate and encourage
Proponents of the balloon'
thesis leave the
dead end.
Regulation of the Dynamic Problems of Development
In the discussion of the static tradeoff
wc
are abstracting to a capitalist
mode
of production with a
given Ie\cl of development of the forces of production and a given structure of capitalist institutions or
relations of production.
The system must reproduce
wc may
within a chosen lime frame
think of
of the forces of production, of the relative
tlic
si/.e
itself,
either simple or
qualitative character of the system
of various sectors of the
economy
constant or as variant without clear direction towards qualitative change
be made concerning the structure of futures markets
in the relations
expanded reproduction, but
in
terms of the
and of the structure
as being basically
The choices or
static tradeoff regard
decisions to
small changes
of production which accomodate for better or worse the current stage of forces of
production and which simultaneously entail consequences for the division of surplus value between and
within various classes.
Capitalist society
is,
development has not been
last
however, an unusually dynamic
in
any way limited to expansion
mode
of production, and
its
in a purely quantitative sense.
dynamic
During the
century capitalist society has experienced development which has included significant restructuring
in terms of the forces of production--that
is,
for
example, a drastic decline
in the
proportion of
23
employment
and therefore
in agriculture
and the evolution of
development of futures markets play
the agricultural
employment
capitalist relations
in the
of production
which occured
agriculture
of market relations
population--as well as significant modifications in the
two most notable being the inauguration of the
relations of production--the
stage of capitalism
in rural
in the
state
monopoly
capitalism.
The
imperialist
and monopoly
gradual extension and
For example, the decline of
a role in these dialectical processes.
United States has been directly related to the development of
in this sector
and to the extreme degree of rationalization of
United States. This process has been pushed largely by the extension
in agriculture, especially the expan.sion
of the credit system including the mortgage
system and the growth of futures markets.
These market relations govern the decisions of which farmers
agriculture and into the labor force
cmd which
will
will
be ruthlessly pushed out of
prosper and profit from the rationalization.
During
the twentieth century the use of these market relations was significantly modificd--but not
eliminated--by the introduction of state
prices,
incomes, and the allocation of resources
In the case of regulation to
proper
monopoly
level
regulations including government
in the agricultural sector.
modify the development of
of development of the futures markets arc not
relations of production needed to
management of
capitalist society, decisions
made
about the
primarily in terms of ihc nccessap,'
accomodate the cuncnt forces of production, they
arc not
made
rationalize the current system of capitalism in the interests of a given class, but rather they arc
to properly
manage
division of value
the development of
among
some
classes or the de\'elopment of
broader or longer term interest of a given
Two
at
hand.
will
make
tiicsc-
classes
themsehes
empoverishment of
and with
less
this last point
more
precise
The
first is
a portion of traditional family farmers.
manage
the
the pursuit of a
has, however, political repercussions
directly relevant to
our subject
implemented by means of the
This process has occured with
speed and ruthlessness over the entire past centur>'.
numbers of family farmers
in
made
class.
In the United States the rationalization of agriculture has been
large scale
greater
examples
sections of the forces of production and to
to
During
TTie displacement of large
this past centuPi the state
has
24
intervened continuously in the operation of agricultural markets.
Nevertheless,
it
has almost never, or
only with respect to certain limited subjects, attempted to halt or reverse the process of the elimination
of the famiily farm.
It
has, instead, slowed the process at a given point in time,
that individual farmers had the opportunity to adapt 'optimally' to the fate
them,
etc.
managed
the process so
which was made
Bourgeois politicians have often hoisted the baruier of defending the family farm, but no
serious analyst can view the statistics
on the changes
in
American
agriculture
and pretend that the
essence of these promises or slogans conformed to the policies implemented
In this case, then, the
measures taken to regulate the development of the markets were taken to retard unfavorable
consequences from too
demand
s
political
swifl a change.
The second example concerns
to the 1980
clear to
the recent changes in the banking system in the United States.
there existed a segmented market for key financial services.
Commercial banks
Prior
collected
deposit or checking accounts and processed commercial transactions, and these banks provided
the loans to the commercial sector of the
economy. Savings and
Lxians,
locus for gathering time dcposits--savings accounls--and Savings and
housing construction, mortgages. The
legal basis for this separation
I
on the other hand, were the
oans made loans
largci> to finance
has gradually been abandoned and
primarily in such a fashion that the Savings and Ixians will disappear and their business will be taken
over by the commercial banks.
occurs
at a
gradual pace.
certain steps
which seem
The
state has
Although the
in
state
taken great pains, however, to guarantee
remains intent on completing the process,
tliat this
it
process
has taken
contradiction with the goal, or which appear unnecessarily costly.
Many
Savings and Lxians arc being permitted, for example, to conduct business similar to that which
commercial banks perfonn.
permit
many unsound
allow
this,
however, the regulatory agency must also simultaneously
Savings and Ix)ans to continue to exist and speculate with their investments in a
manner which endangers
and primarily the
To
the depositers, the institutions ultimately connected with the savings and loan,
federal insurance agency.
The reason
for bearing this cost, the reason for
gradual transition in the unification of this portion of the banking system
losing the organizational capital
embodied
in
may
making
the
be the need to avoid
a certain fraction of the Savings and Loans.
In this case,
25
manage
then, the measures taken are a device to efTicicnlly' develop the productive forces, to properly
the change, to master the dialectic internal to the capitalist system.
The
objective problem posed by the
of this problem
in the public
dynamic development of capitalism and the subjective
has been key to the maintenance of the
stability
and
this
of the capitalist system in the United States despite
the extremely fast paced development and sometimes startlingly
movements
US
consciousness have not often coincided in the history of the
reflection
inhumane consequences. Many of
the
to restrict the operation of futures markets have, for example, their objective source in the
inherent />o/(7/ca/ problems of the process of development under capitalism
The primary spur
to political
action has been the mass of farmers empoverished through the capitalist process of rationalization in
agriculture.
As
vvc will see,
however, although
this is the objective basis of political discontent, the
subjective expression of this discontent has seldom been focused
on
tiic
exact problem.
Instead,
attention has always been returned to questions of the 'proper' operation of the futures market, to the
problem of eliminating the abuse' of these markets
with
The
public discussion has often proceeded as
if
properly functioning futures markets there would ha\c been no losers, no bankrupt farmers.
discussion curiously ignores the objective basis for the bankruptcies, that
bankruptcy
is
just \hc
is,
it
form which the ncccssars technological rcstnicturing of
the system of capitalism.
Although
it
is
The
ignores the fact that the
agriculture- takes within
the consequence of the d\narnic development of capitalism
which has often motivated the public discussion, the bourgeoisie has successfully maintained the
discussion in terms of the static tradeoff, and then even in a language which
is
on
their terms.
4.2 History of Regulation of and Cla.ss Struggle over Futures and Options Markets in the
4.2.a
Reform
The most common form of
took
US
is
regulation of futures markets and the
initial
form which any regulation
the establishment of rules which modify the operation of the market but which do not
qualitatively change
its
capitalist character.
Such regulations include margin requirements, agreements to
accept required arbitration procedures, standardized contract and certification procedures,
membership
26
and bonding
practices.
At times these regulations have been instituted
privately; that
as rules
is,
imposed by the exchange authorities or as agreements negotiated among a professional or defined
Alternatively these regulations are imposed by government authorities or legislatures.
business group.
These regulations modify the operation of the futures markets
the> assure that the
market operates as
This form of regulation has been key
such regulation
gas revolve.
is
it
in
it is
less feasible.
around questions of whether or not
feasible that the current discussion of the possibility for a futures
market
in natural
Second, they represent a choice regarding the tradeoff between the essentially
contradictory character of the market, a decision about the extent to which the market
the credit circuit
is
Third and finally, this form of regulation
expanded.
the redivision of property which inherently occurs at the
futurc<;
and foremost
First
intended to, making fraud and manipulation
is
the history of the US:
in
one of three ways.
moment
is
is
instituted
used to modify or negotiate
of institution and expansion of a
market.
Private regulation of these markets
came
relatively early in their hislop>'.
their contractual obligations.
regulations
ser\'c
component
two
of these
distinct functions
two functions
1865
..in
fulfilled for
one of two reasons.
is tlic
First,
deceive and to escape their obligation.
they
may
is
operate
in similar
are
to
do
may
be no problem, howe\er
if
This discussion
is
Now
ina>'
that
it
is
may
a contract
same lime being aware
not
that
under
these instances are,
aware that the other party expects the
will not, in the
given event, be
based primarily upon the histories presented
Citations for specific facts will not be given.
common
have an intention to
commonly understood what
the one party
knows
The
this either with absolute certainty, or
generally intend to complete their obligation while at the
if it is
they did not
implemented: these regulations arc
a contract that will be fulfilled
They may intend
if
Ihesc types of
'
fashion
one person writing the contract
contract to be fulfilled while the one party
(1965).
tlic\'
means by which they
certain circumstances they will not be able to:
then there
margin provision was adopted
although
intended to assure that a contract signed
be
a
had been
"In 1863 rules
adopted [by the Chicago Board of Trade] according to whicii members could be suspended
meet
and
in
fulfilled,
then
Peck (1985) and Cowing
27
there
is
a measure of deception and intent.
Second, events might
of the parties signing the contract and under which
able to
fulfill
their obligation.
any party agreeing
the product
their
is
own
some
is
This
is
it
is
arise
commonly
which
are outside of the control
one party
realized that
unavailable and that the price
on
the
open market
is
may
find that their
The
pjirty will
own
supply of
extremely high, and that therefore
wealth does not suffice for their covering their obligation: for any given
which the
not be
inherent in the nature of the futures contract, for example, since
to deliver a quantity of a product at a fixed price,
price level at
will
initial
wealth, there
be bankrupt and unable to cover their obligation.
stated regulations restrict the possibility of the
first
form of fraud by creating a certainty on
the part of both parties that the other party has certain resources, that the party cannot
remove these
resources until after the contract has been completed, or that the party will face various penalties
they attempt
te
particular degree of certainty that
example of our
first
its
is
thereby
rules
common
do not
give absolute certainty, but they create a
knowledge.
Ilcncc this form of regulation
function for regulations of a futures market: they assure
market perform? what
The
These
escape their obligations.
it
all
intended to perform.
is
stated regulations similarly create a degree of certainty that each party will be able to
solvency of a party to the
first
contract
is
also guaranteed a degree of certainty.
example of the second function of regulation:
inherently contradictory nature of the market.
money
is
an
is
concerned that the
contract obligations, and therefore that any obligation, the certainty of which
of which
if
is
fulfill
dependent upon the
1 his represents an
to decide the optimal extension of the market given the
This form of regulation establishes a
limit to the extent
permitted to act as a means of payment, a limit to the size of the disconnection
between the forwarding of goods and the
realization of their value.
development of the market, and on the other hand
it
It
limits
on the one hand the
reduces the probability of collapse, because
reduces the repercussions which might fiow throughout the entire edifice as a result of problems
it
at
one
point.
This represents the ultimate question of
and the options available
for avoiding the
fine
tuning of the system, taking the system for granted
problems altogether as limited or non-existent. Resolution of
28
this issue
is
a class question in the narrow economistic sense similar to that of pure
Different forms of regulation will mitigate to greater or lesser extent
questions facing a trade unionist.
the probability of crises and the
concomminant danger
may
forms of regulation
Similarly, certain
be able to
to
However, the
capital.
level
working people
that
will
bear those burdens.
those forms of deception and manipulation
restrict
and monopolistic pressures to which small farmers may be
merchant
wage bargaining
pjirticularly vulnerable vis-a-vis large
of importance and the degree of information
avjiilable
with which
choose and implement a strategy capable of winning meaningful gains has never been particularly
significant.
Government involvement
stages
store'
government acted to
Initially the
confidence scams.
in this type
In the
commodity
of reform of futures markets occurred in several distinct
halt fraudulant practices
futures business there arose quite early a large
brokerage or futures trading offices which are
from the
large
number of farmers and
others for
over
many
which
restricted fraudulant activity
years and the
The
first
stage of
what
is
seller to
states followed in 1913."
dealers, but they also
Hence
this
and
at
in 1907.
is
Additional
the national level
in the
primarily an example of the
muckraking
first
role of
be.
in 1911,
and required
.ignificant disclosure
of
be given to government authorities before securities of
"Arizona, I^ouisiana, and South Carolina enacted similar laws in 1912;
These laws were often targetting stocks, but they
commodity markets and brokers of futures
risky.
in various states
supposed to
it is
such law was passed in Kansas
various types could be sold.
and the
Arkansas and Nebraska
In 1905 North
government regulation of commodits markets was the prohferation of 'Blue
information and certification of the
twenty other
was passed
This type of regulation
regulation: guaranteeing that the market
Sky' laws.
futures were a key activity.
as did
number of comer
as 'bucket shops' selling and buying futures
methods of these confidence men were broadly publicized
literature of the Progressive Era.
The second
known
whom
Dakota and Minnesota outlawed the bucket shop
legislation
which might be characterized as
affected
These regulations required information on
as well.
securities
gave the state the power to disallow the sale of securities deemed too
form of regulation
fulfills
both the
first
function of regulation, assuring that the
29
market
is
what
it
is
supposed to be, but also
in
many
cases the second, determining the appropriate
tradeofT between the extension of risky credit and the dangers of
crisis.
Disputes over these issues can, in some cases, represent a sharp confrontation between classes, and
one which operates
industry' was, as
The
terms of the development of capitalism.
in
we have noted
use of futures markets in the grain
in the history of their origin, closely tied to the routes of their
transport to the central points of transportation eastward and tied to the transfer of ownership at
points of storage.
In the
railroad monopolies.
monopolies the
US
the transportation of grain
came
gradually under the control of the
These railroads often owned the storage systems as
railroad
companies were able
futures markets to aid their collusive pricing
at
well.
As
a result of their
times to manipulate the futures markets or to use the
and buying
practices.
Farmers, especially
Minnesota and
in
the Dakotas, agitated for a variety of regulatory restrictions and rules of participation to fight these
One key movement
monopolies.
in the history
cooperatives, especially marketing cooperatives.
of the
US
agricultural industry
These cooperatives were,
was the organization of
for a period of time, excluded
from the organized futures exchanges. The owners and fmancicrs operating the exchanges maintained
this exclusion.
With the passage of the Futures Trading Act
right lo use
exchange?
tiif
1
combat the monopoly use of
Lis
1921 the cooperatives finally
and other reform rcguialidns of
tlic
won
the
fulurc- markets were efforts to
the market system to systematically dispossess the farm population, they
were attempts to restore the 'competitive
4.2.b
in
capitalist'
form of development
in its idealistic representation.
To Be or Not to Be: What Role for the Market and Speculation
From
the late 1880
s
through the I930's the issue of whether or not to allow the
contracts was at various times hotly debated.
securities
had arisen
at
The
issue of potentially
an earlier period vis-a-vis financial markets
issue has surfaced again as several of the earlier restrictions
in
banning a market
New
York.
sale
in certain
In recent years the
on the existence of futures and options
markets have been relaxed, but this has not truly been the subject of broad public debate.
the issue been
more
publicly,
more fundamentally, and more
bounding the turn of the century.
of futures
Never has
intensively debated than the five decades
30
During the
late
1
800's there were a variety of
movements
to ban various financial markets as
A
places for speculation' and gambling and unrelated to productive work.
among
market,
and consumers was considered
actual producers
manipulating or using such a market were considered
culprits.
market, including a futures
acceptable: only \he financial speculators
The
California constitution of 1879
forbade futures contracts, and some important grain and cotton states passed anti-futures laws in the
The
next decade."
the
Washburn
first
bills
debated in the
US
Congress were the Hatch
bill in
House and
the
the Senate in which speculative purchases and sales of grain and cotton futures
bill in
were to be eliminated
house
two key
Under popular pressure each
via discriminator\' taxation.
bill
passed
its
respective
1893 with a significant majority: the manouvcrs of constitutionality were used as a screen for
in
commercial
interests pressuring particular
so that both bills died
at
overwheliming suppport
Congressmen and neither
the close of the session
Pressure continued
bill
was passed by the other house,
and no regulation was implemented despite
on a
variety of governmental levels: Lxjusiana
banned futures
contracts in 1898; around the turn of the century several states banned 'speculative' and gambling
financial contracts
which often meant
a restriction
on
futures trades and a complete
Texas (1885), Iowa (1886),
trades--these states included Tennc^cc (1883), Arkansas, South Carolina,
Michigan (1887) Missouri (1889) North Carolina
Mississippi and
In 1913
owning
Montana
two
(19f)5)
Arkans.i-;, Florida,
Alabama,
(1908).
efforts at
banning the use of the
future*;
the commodities to be sold, were the Clarke and
Underwood-Simmons
Georgia (1906)
ban on option
Tariff legislation: both
The
markets by speculators, persons not actually
Cummitis Amendments
amendments were
defeated.
In 1914
to the
and 1916 the Cotton
court system accepted the distinction between a legitimate contract for future sale and a
gambling contract, although they made it difficult in practice to label any futures
contract a gambling contract. Courts focused upon the notion of the actual intent to dehver the good,
and although 97% of futures contracts were settled using money, without delivery of any goods, since
the contract gave the buyer the right to demand debvery of the goods and was written as if delivery
were the intent, the courts generally interpreted all futures contracts as legitimate and the functional
distinction between speculative and legitimate futures trades had to be worked out carefully in specific
legislative materials. Options contracts, however, were easily interpreted as gambling contracts and
therefore during this period were often illegal under legislation against gambling and having little
'
'speculative' or
specific intent to regulate
option markets.
31
Futures Act was passed and amended, but this legislation merely regulated the cotton futures market in
the sense described above, restricting the range of contracts saleable in an effort to improve the
War
During the course of World
functioning of the market in accordance with capitalist principles.
I
trading in futures were sporadically cancelled due to the problems of market manipulation and trading
news of events
in the war,
and eventually Congress and the President implemented controls over the
price of certain commodities, including fixing the price of
stopped completely and did not resume until July
The
first
federal level legislation actually
15,
wheat so that trading
implemented to
significantly restrict
a rewrite of the
intention of eliminating speculative use of a futures market, that
physical
wanted
real'
buyers and
commodity while prohibiting
to merely
buy and
sell
sellers
who
is
and
essentially
Futures Trading Act that had
passed in 1921 and had been declared unconstitutional by the Supreme Court.
betweem
wheat futures
in
1920
modify these markets was the Grain Futures Act of 1922,
futures trades
It
was written with the
with the intention of allowing
intended to actually transfer ownership of the
the use of the futures market by owners of
the legal claim to the future delivery,
hoping
money
capital
to profit off price
and never intending to take dclner)^ or c\cr actually possess the commodity, liic law also
the oversight of the commodit\' futures market by the Secretary of Agriculture and
organized exchanges to admit farmers' cooperatives to buy and
something which the exchanges had to
1936 extended
which
tlic
sell
on the
that point successfully blocked.
Cirain I'uturcs Act to
more commodities and
il
who
changes
estah;i'=li^d
forced the
fioors of the exchanges,
The Commodity F.xchange Act of
limited the
amount of speculation
in
single traders could participate.
The
effective
restrictions
on
agricultural
commodity options
trading were
lifted
by Congress
in
1982.
October 1984.
Opposition to the existence of futures markets has also come from the particular commercial
interests that
would have
on
suffered
from the immediate creation of the market. Commercial
the onion industry succeeded in shutting
down
a futures market in onions.
interests in
There were strong
conflicts
32
from
direct
commercial
interests
around the organization of the potato futures and the Hve
cattle
futures markets.
4.3 Political Slogans, Political Alternatives
The
is
political character
of the variety of
movements which made up
an important and complex subject which has been
and which
is
quite
beyond the task of
complementary and contradictory
political slogans
long period
dealt with in a variety of journals
The key movements
this paper.
this
and ideologies.
in
US
histor>'
and monographs
exhibited a variety of
For our purposes
il
is
key to
distinguish between two.
First, there is the trend
Within
this trend the
which blamed the
financial speculators for the plight of the farmers.
primary problem was seen to be the misuse of the markets which led to the unfair
dispossession of individual farmers.
This trend incorporates some conservative elements, elements that
wished to preser\'e American agriculture
in its idyllic
aspects of the development to which capitalism
form and
that
was subjecting the
saw only the shabby and inhumane
agricultural .sector.
This trend also
incorporated a recognition of the distinction between the financial interests and the farmers.
it
failed to see the inherent
it
failed to identify
However,
connection between the financial interests and the process of development;
and accept the nccessap,
role
which the
financial capitalists playcil in increasing the
concentration of agricultural capital and the fact that this result could not be obtained without the
support of financial capital
system.
if
the process
This trend imagined that the market could operate well and accomplish the
development of intensive agriculture
doing
was going to take place within the confines of the
this.
It
limited
its
ba"^cd c^niy
upon
the
'real'
producers, but
level
of
had no acti\c plan for
objections to banning the fmancial interests and did not seek to actively
develop alternative institutional structures which could
fill
their rolc--prcciseIy
trend did not see the fmancial capitalists as fulfilling any necessar) role.
the one
it
same
capitalist
made by our modem day
This
because
is
this ideological
a mistake similar to
'bubble theorists'.
The second category of opposition complemented,
the financial speculator, but can be characterized by
its
at
times, the
first.
It
shared the contempt for
active effort to organize alternative institutional
33
forms by which the farming population could adapt to the progressive development and capital
concentration of agriculture.
involvement
in
The
socialism.
adapt to and
This
is
best seen in the cooperative
movement,
planning and managing the agricultural sector, and
in the agitation for state
in the various
groups calling for
successes of these groups during this era were due to their recognition of the need to
in fact to
support the developments in the productive forces, to fmd appropriate
of productive relations which supported the
new
level
of productive forces.
new forms
These forces did not merely
decry and denounce the action of the financiers; they recognised both the destructive and the
objectively valuable role which these financiers also played, and they attempted to develop an alternative
which avoided the problems but which
was due
the tasks of the financier.
The
success of these groups
to the fact that they did not ignore or discount the side of the contradiction
which the 'bubble
ignore.
theorists
5.
fulfilled
Conclusion
Our conclusion may be summarized
consequences of the bubHic
The
be apppT'-nt.
all
spheres of productive relations.
for capitalism's
productive sphere.
s
limits
The development
nor
for development; the
its
i";
a classic case
of capitalism's extension of
Options and futures markets arc simply one
expansion of the range of commercial and moncli/cd relations. This
expansion of the financial sphere of the economy
capitalism
following theses; the contrast in each with the
dc\'clopmciil of (iptions and future? markets
market relations into
more form
thesis' will
in the
is
a force suppnrlivr of the expansion of the
of these apparently exotic financial markets illustrates not
irrationality, but rather capitalism's
development of these markets
ser\'e
remaining
rcser\'cs
and continuing power
to expand production and to increase the social
nature of the production process and hence represent a minor countertendency to, as opposed to a
product of or reaction
This
is
to, the current structural crisis.
the objectively progressive content of the development of capitalism and of these capitalist
markets, an objective feature of capitalism which
Marx and Hngels
repeatedly stressed.
To
be sure, the
34
objectively progressive content of capitalism has long been outweighed
now
than
at its
alternatives for accomplishing the
same
goals, viz. existing socialism
features,
is less
revolutionary
its
reactionary and destructive
inception, and certainly stands against clearly defined
and national economic planning of
Nevertheless, the fact remains that these capitalist institutions represent a force for
various forms.
mode
material development within one social formation and
and serve
capitalism,
by
as
of production, developed state-monopoly
one form of reserve which give to the
capitalist
system the dynamism which
it
persistently demonstrates.
To
recognize the objectively progressive element of these markets
destructive or harmful impact.
This persistently shows
itself in
is
two forms.
First, the
these markets exaggerates the contradictory nature of capitalist society: that
of
money and making each
transaction yet
increase the danger of severe
characteristic of financial
monetary
more removed from
crisis.
The
is
establishment of any market, the extension of
and
a
new
this redivision
conducted
in the
is
ruthless
destroyed in the process.
example, can
mean
new machinery and
the
by extending the
circuit
consumer and producer they
correct insofar as
it
asserts this
commodity
is
relations to
that in an objective sense, the
any sphere, or the adjustment of
organization of markets entails a redivision of the economic product of society
supervised and
most
extension of
markets under capitalism. The second harmful aspect of the extension of
market relation? via the development of futures and option markets
market prices to
is,
the ultimate
'bubble thesis'
not to discount or ignore their
managed by
manner with no
The extension of
empo vcrishment
the ruling class.
Under capitalism
this redivision
is
regard for the well being of those persons hurt or
futures and options markets in agricultural commodities, for
of large numbers of farmers.
.lust
as with the introduction of
technologies in industr>', futures and options markets are instituted under the control
of particular classes and their institution can be and
is
used to the benefit or loss of various groups and
classes.
Class struggle ensues around the establishment of these markets out of reaction to these
consequences.
First, since the costs
classes, there are dtfTerences
of the cyclical crises of capitalism arc
bom
with regards to the value of extending the sphere of
two
unevenly across
money and
credit,
of
35
extending the circuits of capital and thereby exaggerating the potential consequences of
since the establishment
utilized
by
this class
under control of the ruling
is
and by particular elements of
the productive value derived from these markets.
and the
capitalist class
moment
crises.
Second,
of establishment
is
do not share the benefits of
this class, other classes
Moreover, particular groups are
specifically threatened
by the extension of these markets. Class struggle sometimes focuses around the technical questions of
regulation of the market and at other times around the question of whether or not such markets should
be created
at all;
alternatively
is
is
a
the former form of struggle
compromise solution
typically a response to the .second
not
it
will
to the
is
typically a response to the
problem of
first
problem, or
a redivision of wealth, while the latter struggle
problem of these markets, the redivision of wealth and whether or
happen.
The key problem
in
organizing a political struggle in the interest of the working class involves
correctly identifying the objective interests of the
program which becomes
a materia] force in the
working
class
and translating
development of
society.
this into a
popular
In terms of these markets
it
is
important to recognize the objectively supportive role of these markets, to recognize the role which they
play in aiding the expansion of the productive forces.
working
clas<;
cannot for long remain on the
level
Any program
to defend the interest of the
of merely dccr)'ing or opposing the development of
futures and options markets because of the disastrous consequences which they have for the
class.
It
become?
critical to articulate alternative
means
for supporting the
working
development of the
productive forces, to develop a substitute for the function which the futures and options markets serve.
This alternative can be restricted to mechanisms of regulations and
within the framework of state
However,
if
monopoly
one never recognizes the
capitalism, or
task for
it
state
planning of industrial processes
can extend to democratic systems of planning.
which an alternative needs to be dcfmed, then one cannot
begin to develop a consensus on the proper alternative.
36
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