Doctoral Dissertation Research: The Emergence of Financial Geographies: Derivatives, Chicago, and the Growth of Speculation (1972-1987)

University Of Wisconsin-Madison, Madison WI

Investigators

Abstract

From global currency flows to nation-state financial solvency and family home mortgages, much of contemporary life is influenced by derivatives, but social scientists have barely begun to study how derivatives work, where they came from, and how their negative impacts might be mitigated. While commonly associated with Wall Street and New York, these specialized financial instruments were primarily developed in Chicago because of that city's history of trading agricultural futures. This doctoral dissertation research project will investigate the invention and regulation of financial derivatives in Chicago, Illinois during the period from 1972 to 1987. The doctoral student hypothesizes that this geography is much more than a simple coincidence as it has generally been characterized by social scientists to date. Instead, this geography is vitally important to an improved understanding of both the nature of financial derivatives and to their role in financial crises, most notably the credit crisis of 2008. It was in direct relation to Chicago as a center of agricultural commodity exchange and not to New York's financial landscape that the U.S. government constructed the foundations of its regulatory structure for contemporary derivatives; a structure that made industry self-regulation its principal axiom. As these markets rapidly expanded away from Chicago in the late 1980s and 1990s, they carried the self-regulatory model with them, but as they transformed the global financial landscape, they brought with them none of the other localized institutions that made Chicago's self regulation successful. The student will employ political-economic and institutional perspectives in economic and urban geography to reveal the fundamentally spatial dimensions of the origin, early regulation and precipitous growth of financial derivatives. He will seek to construct a rich description of the early history of financial derivatives and the struggles over their political legitimacy by empirically investigating the negotiations between the financial industry, the federal regulatory agencies, and the U.S. Congress. To accomplish this, he will employ in-depth interviews with key members of Chicago's 1970s and 1980s financial community as well as a critical reading of industry and government documents, congressional hearing records, trade journals, and business periodicals. While financial derivatives were widely discussed in the mainstream media as contributing to the 2008 global financial crisis and subsequent economic recession, they have received little scientific attention beyond the discipline of economics. Scholarly inquiry on derivatives generally has failed to examine the history of their regulation or to draw connections between derivatives and financial crises. This project will help fill these gaps by investigating the early Chicago-based history of financial derivatives. The project will use qualitative methods developed by urban and economic geographers to analyze how the history of agricultural exchange and the specific financial institutions in Chicago set important precedents for the governance of derivatives. While these precedents, many of which allowed the derivatives industry to police itself, functioned relatively well for the industry when it was isolated in Chicago, the original governance model was unable to prevent market failures and financial crisis in the1990s and 2000s when derivatives trading spread to New York, London, and eventually across the globe. The project therefore will improve policy makers' and society's comprehension of derivatives markets and the institutionally and geographically contingent nature of their regulation. As a Doctoral Dissertation Research Improvement award, this award also will provide support to enable a promising student to establish a strong independent research career.