The Senate Committee on Agriculture approved the Wall Street Transparency and Accountability Act on Wednesday. Should the bill become law, it will prohibit the Federal Reserve from bailing out financial firms that trade derivatives—a practice widely considered to have aggravated the economic crisis. Why is a committee best known for dealing with farm subsidies and forest boundaries regulating financial markets?
Because traders used to gamble with corn. A derivative contract, very briefly, is a bet on what’s going to happen in the future. These instruments are now associated with interest rates, or with a company’s creditworthiness, but in the 19th century they were more often attached to the future prices of agricultural commodities, like rice, wheat, cotton, or corn. Farmers were suspicious: They worried that speculators were depressing the value of their goods and lobbied their representatives to step in. State governments responded first; Illinois, for example, made futures contracts illegal in 1867. Then, starting in the 1880s, Congress wrote one bill after another aimed at regulating “to arrive” contracts (as derivatives were then called). Over a span of about 40 years, federal lawmakers introduced 164 such measures, but the more robust attempts to control derivatives did not become law. The 1890 Butterworth Anti-Option Bill, which tried to ban futures trading, never came to a vote. And the 1892 Hatch Anti-Option Bill, which tried to do the same, passed both houses but failed on technicalities during reconciliation. Since crops were at issue, Senate bills tended to go through the agriculture committee. The committee on banking wasn’t created until 1913.
The first major piece of derivative-regulating legislation to come out of Congress was the Future Trading Act of 1921. Tweaked a year later and renamed the Grain Futures Act (after the original was struck down by the Supreme Court), it discouraged speculation that might exacerbate price fluctuations. The Commodity Exchange Act of 1936 expanded regulation to cover not only grain futures exchanges, but also cotton and rice contracts. It wasn’t until 1974, with the Commodity Futures Trading Commission Act, that Congress expanded the definition of a commodity beyond agricultural products. The term would now cover “all other goods and articles, except onions … and all services, rights, and interests in which contracts for future delivery are presently or in the future dealt in.” The law made it explicitly OK to trade financial instruments, or pretty much anything else—except onions—and at the same time brought all this nonsense under the jurisdiction of a newly created federal commission. (No one was permitted to sell onion futures under any circumstances: a ban dating back to 1958, still in place to this day. That’s because onions are highly perishable and thus arguably more vulnerable to price manipulation—a slight increase in supply can lead to slashed prices.)
The Committee on Agriculture was formed in 1825, when farming was more vital to the economy than finance. The Department of Agriculture was created a bit later on—by Abraham Lincoln in 1862. Through the 19th century, the department would distribute trunkfuls of seeds to congressmen, who would then mail seed packets to constituents—grass seeds to some, flowers or vegetables to others. This tradition went by the wayside in the early 20th century, as Americans moved off farms and into cities and suburbs.
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Explainer thanks Donald A. Ritchie of the Senate Historical Office.