The corner that started it
In 1955 two traders, Vincent Kosuga and Sam Siegel, set about cornering the onion contract on the Chicago Mercantile Exchange. They bought onions and onion futures until they held 99.3% of all the onions in Chicago, some 30 million pounds of them sitting in storage. Ownership of that scale is its own kind of power, and they used it twice.
First they went to the growers and told them to buy the stockpile back, or watch it flood the market and crush the price. The growers paid. Then, having quietly gone short in the futures, Kosuga and Siegel released the onions anyway. A 50-pound bag that fetched 2.75 dollars in August 1955 was worth 10 cents by March 1956, and at the bottom a sack of onions in Chicago sold for less than the empty bag that held it. Growers were ruined; the two men made a fortune on the way down, having already been paid on the way up.
The law that answered it
The outrage was national, and it found a young Michigan congressman named Gerald Ford, who sponsored a bill to ban trading in onion futures outright. The Onion Futures Act was signed by President Eisenhower in August 1958, the first law ever written to abolish the futures market in a single commodity. It has never been repealed; to this day the onion is the only agricultural commodity in which futures trading is illegal in the United States.
What banning the market actually did
Here is the part the growers did not foresee. Taking the futures market away did not steady the price of onions. It left it wilder than almost anything that still trades. Fortune, digging into this in 2008, found the onion price had risen 400% between October 2006 and April 2007 and then collapsed 96% by March 2008, as the Department of Agriculture blamed first the weather and then a glut. Over the same stretch oil had risen about 100% and corn about 300%, and both looked sedate beside the vegetable nobody was allowed to hedge.
That is the opposite of the folk theory that speculators cause the swings. A working futures market tends to dampen volatility, because it lets a grower lock in a price months ahead and hands the risk to someone who has chosen to carry it. Remove the market and the risk does not disappear; it sits on the grower, unhedged, every single season.
The coda nobody saw coming
For fifty-two years the statute forbade exactly one thing. Then in 2010, folded into the Dodd-Frank Act, Congress added the second and still final entry to the list of futures Americans may not trade: motion picture box-office receipts, after the studios lobbied to kill a pair of new exchanges that would have let anyone take a position on opening weekend. So the complete list of futures outlawed in the United States reads, in full, as onions and Hollywood box office. The second is a story of its own.
The point
The onion ban is the cleanest natural experiment the markets have ever run. A commodity had a futures market, lost it to an act of Congress, and went on trading in the raw, so we get to see the before and the after. The after was not calm. It was chaos, visited on the very people who had wanted the market gone.
A futures market is a tool for moving risk from those who cannot bear it to those who choose to. You can ban the tool, as America did, in a fit of entirely understandable anger at two men who deserved it. What you cannot do is ban the risk. It does not evaporate when the market closes. It simply changes whose books it lands on, and the onion farmer has been finding that out every year since 1958.
Levanter Markets publishes for education. Nothing here is financial advice.