Futures Trading in Onions: The Speculative Bubble of 1955
At the height of the Dutch Golden Era in the 17th century, the Dutch Republic went through "tulip mania" when the price of the flower exceeded its intrinsic value. Called a speculative bubble, this kind of craziness is today caused by greed that occurs in futures trading.
Such craziness occurred in 1955 by two men who traded in onions. Sam Siegel and Vincent Kosuga attempted to corner the onion market by buying enough onions to manipulate its market price, similar to the tulip mania that happened 300 years before.
The Chicago Mercantile Exchange is the heart of futures trading in the United States, and in the mid-1940s, trading future contracts on onions became popular because the farmers could get a guarantee on the price of their harvest regardless of what the market did. By 1955, onion future contracts dominated the Chicago Board of Trade by making up 20 percent of all its trades.
Kosuga, an onion farmer in New York, decided to use his knowledge of the industry to trade future onion contracts.
They stored the onions in warehouses across the country to hide what they were trying to do. By late 1955, the two had purchased and stored 30 million pounds of onions. They bought so many that they caused an onion shortage in some parts of the United States.
When Kosuga and Seigel controlled 98 percent of Chicago's onion market, they set their own prices. They called a meeting with farmers and traders in the onion business and demanded that anyone in the business had to buy their onions an inflated price, or they would flood the market with onions and bottom out the market price. The two profited heavily from the high prices they charged.
Despite promising other onion traders they wouldn't flood the market, Kosuga and Seigel started shipping their stored onions into Chicago, causing the market price to drastically drop. In August 1955 onions cost $2.75 a bag; at the end of the onion season in March 1956, the price of onions dropped to $.10 a bag.
Many traders lost money; onions were worth less than the $.20 bags they came in. But Seigel and Kosuga survived: "They called orphanages. They called hospitals, schools, whatever. They tried to get rid of as many onions as they could, and the rest of them, they dumped in the Chicago River," Kosuga's nephew Harvey Paffenroth told NPR. "He [Kosuga] made a fortune. He made $8.5 million. That's a lot of money in 1955."
In the end, the actions of the two onion traders prompted Congress to pass the Onion Futures Act in 1958, which banned the trading of future onion contracts. The law remains in effect today to ensure that the Onion Crisis of 1955 won't happen again.
