Grain Futures Act of 1922

What Is the Grain Futures Act of 1922?

The Grain Futures Act of 1922 is a federal statute that was passed in 1922 by the U.S government. The Act established a new restriction: all grain futures are required to be traded on regulated futures exchanges. The Act also required exchanges to make more information public while also limiting the amount of market manipulation.

The U.S. government established an agency within the U.S. Department of Agriculture to administer the Grain Futures Act.

Understanding the Grain Futures Act of 1922

According to the language of the original statute, the Grain Futures Act was "for the prevention and removal of obstructions and burdens upon interstate commerce in grain by regulating transactions on grain future exchanges, and for other purposes." The Grain Futures Act of 1922 was the predecessor of subsequent legislation that significantly shaped the way agricultural commodities are traded.

History of the Grain Futures Act

In the 1920s and 1930s, the federal government began to more heavily regulate commodities. As a result of the Grain Futures Act, the U.S. government obtained the right to access previously unavailable information about the markets. This information was published and subject to an in-depth analysis that regulators, Congress, and participants in the futures market could access.

The impetus for passing the Grain Futures Act was fraud in the commodity markets. In the late 19th century, an early type of commodity fraud called "bucket shops" appeared. At a bucket shop, individuals could make bets on current prices for commodities. However, these bets were not formalized in contracts on any exchanges. Instead, the establishments operating as bucket shops would place the bets on their own books and offset all bets they received with their own resources. Not surprisingly, these bucket shops could not always make good on their wagers, as many that made successful bets discovered when they came to collect their winnings.

Although the Chicago Board of Trade (CBOT) attempted to intervene in the bucket shops' operations by cutting off access to their market quotations, bucket shops continued to thrive as a result of competing exchanges that stepped in and started providing their own market quotations. At the state-level, there was also regulation put in place that tried to regulate bucket shops. When it became clear that neither of these approaches would work to curtail the fraudulent bucket shops, the U.S. Congress enacted the Grain Futures Act.

The Grain Futures Act was introduced in the United States Congress just two weeks after the U.S. Supreme Court declared the Futures Trading Act of 1921 unconstitutional. While the Grain Futures Act included similar rules to those found in the Future Trading Act—including the requirements for designation as a contract market—the Grain Futures Act differed from the Future Trading Act because it banned off-contract-market futures trading rather than taxing it.

The Grain Futures Act also created the Grain Futures Commission. This commission was comprised of the Secretary of Agriculture, the Secretary of Commerce, and the Attorney General. These designees had the ability to suspend or revoke a contract market designation.

The Commodity Exchange Act (CEA)

Eventually, the Grain Futures Act of 1922 became extremely difficult to enforce because disciplinary action was taken against the exchange itself rather than individual traders. This flaw was amended in 1936 when the Commodity Exchange Act (CEA) was passed.

The Commodity Exchange Act prevented and removed obstructions on interstate commerce in commodities by regulating transactions on commodity futures exchanges. It established the statutory framework under which the Commodity Futures Trading Commission (CFTC) operates. The CFTC was established in 1974. In 1982, the CFTC created the National Futures Association (NFA).

Without such regulations like the Grain Futures Act of 1922 and the subsequent legislation it led to, market participants could be subjected to fraud and, in turn, lose faith in the country’s capital markets. This could make capital markets ineffective at efficiently allocating financial resources to the most deserving means of production and productive economic activities to the detriment of investors, consumers, and society.