Students at the University of Chicago are raising their voices in protest. They want only one thing: the repeal of the Onion Futures Act. They’ve even gotten the attention of the chief federal regulator of commodities markets.
Their protest might be a silly stunt, but peeling back the layers of the 1950s debate surrounding the Onion Futures Act is a good lesson in different ways of thinking about the role of government in the economy.
Americans can trade futures contracts for any agricultural product — except onions. Onion futures have been forbidden since 1958. Buy and sell class IV milk or 90 percent lean beef trim futures to your heart’s content, but dare to trade in expected onions and you can be fined up to $5,000.
In 1955-56, a pair of commodities traders named Vincent Kosuga and Sam Siegel worked to corner the market on onions. They bought massive quantities of the bulbs, raising the price. Then, they bet in the futures market that onion prices would fall — which they knew would happen because they sold off all their onions at once.
Though that was a particularly pungent incident, onion growers had been asking for futures to be banned for years. Congress took up their concerns in earnest in 1958.
Rep. Robert Griffin (R-Michigan) stressed the onion industry’s support for banning onion futures. “The onion growers have never had a Government subsidy or price support and they are not asking for one,” Griffin said. “In light of the millions of dollars we appropriate annually to support the price of other commodities, surely this one request on the part of the onion farmer is entitled to the sympathetic ear of Congress.”
It was an impressive political accomplishment. Restricting futures trading had been fertile ground for legislation, with around 200 bills introduced between the 1880s and the beginning of federal regulation in 1922. But the ban on onion futures was the first to become law.
Proponents understood the value of futures markets in general. They help stabilize markets and enable price discovery. But they argued that onions were different. “Futures trading in onions, because of the small volume and perishable nature of the crop is not an economic tool, but a gambling device for professional speculators,” said Rep. Gracie Pfost (D-Idaho). The Agriculture Department told Congress that only 5 percent of the volume of onion futures trading involved hedging by onion growers.
But Kosuga was an onion grower, and Siegel was a produce wholesaler. And the Commodity Exchange Authority, the Agriculture Department agency that regulated futures trading at the time, punished them. In an administrative proceeding, they were found to have engaged in market manipulation and were suspended from participating in contract markets.
Congress, however, had settled on a simple story: honest farmers versus reckless speculators. Once that was established, onion futures were cooked.
It’s not that Congress didn’t hear the other side of the argument. Agriculture Secretary Ezra Taft Benson (later president of the Church of Jesus Christ of Latter-day Saints) correctly understood that banning futures would not reduce volatility. Sen. Paul Douglas (D-Illinois), who was also an economist, explained that “trading in futures is a stabilizing device” to “shift the risks from those least able to take them to those who are prepared to take them.”
The CEA could not find any evidence that futures trading had, in the long run, affected the price farmers received for onions. As for consumers, “I doubt if the consumer would even notice the absence or presence of the futures market,” said CEA Administrator Rodger Kauffman.
“Every time there were falling prices the market was blamed. It is the same today,” said Rep. Victor Anfuso (D-New York). “When you blame falling prices on the market, it is just like blaming the thermometer for cold weather.” Anfuso also believed the bill to be an unconstitutional restriction on the right to contract.
In the upper chamber, the most vocal opponent was Sen. Everett Dirksen (R-Illinois). He noted that a recent crash in onion prices had been caused by the weather, not speculation, and that the onion market was just as volatile before futures trading began as it was afterward. That eye-watering volatility has persisted to this day.
Opponents raised slippery-slope concerns, but proponents reassured them that onions were unique due to their perishability, growing season and small volume of supply and trading. “This bill should certainly not be regarded as a precedent insofar as other commodities are concerned,” Senate Agriculture Committee Chairman Allen Ellender (D-Louisiana) said.
Yet, mere minutes after Ellender spoke, Sen. Frank Barrett (R-Wyoming) moved to ban futures for wool. Rep. Clifford McIntire (R-Maine) launched a parallel effort to ban futures for potatoes because they share many of the supposedly unique characteristics of onions.
The Senate passed a ban on potato futures in 1964, but it was mashed by the House. In 1977, when Sen. Frank Church (D-Idaho) tried again to ban potato futures, he cited onions as precedent.
Though it has not banned any other agricultural futures, Congress amended the law in 2010 to ban futures for movie box office returns. Those have nothing in common with onions except that an industry group, in this case movie studios, wanted the market banned and successfully buttered up Congress.
I emailed Big Onion to ask whether their position on the onion law has changed. René Hardwick, director of public and industry relations at the National Onion Association, told me, “We appreciate the students’ interest in onions and their enthusiasm for civic engagement. But America’s onion growers fought hard to secure this protection, and the NOA sees no reason to reverse it.”
In the 1958 debates, Rep. Wayne Aspinall (D-Colorado) said onion futures trading should be banned because it “appears to serve no useful purpose.” There are any number of things that might not appear, to a legislator in D.C., to serve a useful purpose. Does that give government the right to ban an entire market?
Anfuso got to the heart of this question in the congressional debate. Another member was dumbfounded when Anfuso said he believed the ban would have no effect on either farmers or consumers. Why care? “It is as simple as this,” Anfuso answered. “Trading is a right of contract. Do you want to deny that?”
Congress answered in the affirmative, passing the bill, which President Dwight D. Eisenhower signed.
Dirksen knew the bill would pass, but said, “I expect to live to see the time when Congress will undertake to undo the mistake.” He died in 1969.
But at least a group of students in his home state is now urging the law’s repeal.
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