Commodity futures contracts: Furnishing an elastic currency in the nineteenth century |
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Authors: | Joseph Santos |
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Affiliation: | Department of Economics, South Dakota State University, P.O. Box 504, Brookings, SD 57007-0895, USA |
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Abstract: | In this paper, I show that nineteenth century US interest rates are relatively more volatile before 1874 and I propose, and demonstrate how, commodity futures trading is the likely principal proximate explanation for this change in behavior. Borrowing from Turnovsky [Econometrica 51 (1983) 1363], I model the optimizing behaviors of risk averse producers and risk neutral speculators in the absence and presence of futures contracts and I show that, so long as one party to a futures contract was risk averse, futures markets would have quelled interest rate volatility caused by variations in planting and harvesting conditions. |
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Keywords: | Federal Reserve system Futures markets Interest rate volatility Seasonal cycles US money markets |
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