The Cotton Kings: Capitalism and Corruption in Turn-of-the-Century New York and New Orleans by Bruce E. Baker and Barbara Hahn (review)

Derivatives are instruments whose value derives from an underlying asset—more specifically, in the movement of the asset's price. Because they involve only an exchange of money, there are always far more derivatives than the commodities that purportedly underpin them. Derivatives also attract speculators and gamblers. But as the authors of The Cotton Kingsremind us, the market for futures (a derivative) plays an essential role. It enables buyers and sellers to hedge—that is, protect themselves by buying additional contracts for a higher or lower price so as to end up at their original target price. The futures market also provides continuous information about the price of the commodity in the near and long term.

In an ideal world, prices will always reflect accurate information that is available to everyone. But what if information can be manipulated, not just by rogue traders but by the "market" itself? This question is at the heart of The Cotton Kings, which investigates the attempts by the New Orleans cotton "bulls"—futures traders who bet on the rising price of cotton—to corner the world market in the first decade of the twentieth century. The upshot of their activities (along with some parallel shenanigans in the wheat market) was that Congress stepped in and made cornering the commodities markets illegal. It's an oft-repeated story: A market starts out being controlled by private institutions; the private institutions fail to stop the corrupt actions of its members, or the institutions themselves become corrupt; finally, the state steps in. Private ordering yields to public regulation.

Bruce E. Baker and Barbara Hahn go beyond this neat narrative. They resurrect forgotten individuals and argue that the "villains" were not the diabolical New Orleans bulls; the true villains resided a thousand miles north, in New York. It is hardly surprising that sectional rivalry features so prominently in a book about cotton. Both the New Orleans Cotton Exchange (NOCE) and the New York Cotton Exchange (NYCE) were private, members-only institutions, but the brokers of New Orleans were geographically much closer to the cotton growers. The low price of cotton enabled the growth of consumption worldwide but kept farmers in a state of near-penury—and therefore natural allies of the bulls. The New York exchange, meanwhile, was dominated by "bears," futures traders who bet on the falling price of cotton. Worse, the NYCE gave institutional support to bears through its system of fixed differences. The authors explain this arcane practice in the glossary, but suffice it to say that a "revision committee" had immense powers to keep cotton prices low.

Baker and Hahn give center stage to New Orleans broker William Perry Brown. In their plot to corner the market, Brown and other bulls skillfully deployed their networks of family, friends, bankers, southern mill owners, and eventually cotton farmers. The New York bears also had ties, including to president of the United States William Taft, whose brother was the NYCE's chief lawyer. Much of the book recounts how the two sides competed by obtaining better information, or just manipulating it to their own benefit. As befits an agricultural story, timing and chance were vital catalysts. Farmers could not coordinate a movement to limit the cotton supply, but disastrous weather events and the spread of the boll weevil did it for them.

Legislation to reform the exchanges stalled in the Republican-controlled Congress because of bitter party divisions, but the elections of 1912 broke the Republicans' hold, easing the passage of new legislation. The story also contains a hefty dose of irony, the biggest being the ultimate triumph of the New Orleans bulls. Punished for their attempts to corner the cotton market, the bulls nevertheless prevailed. New federal laws affirmed the legality of cotton futures trading as it was practiced in New...