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Book Notes: Oceans of Grain
An excellent and timely new history of the world grain trade
Full title: Oceans of Grain: How American Wheat Remade the World
Author: Scott Reynolds Nelson (historian at Univ. of Georgia)
Publisher: Basic Books (publishes all the best new history titles)
Amazon link to buy
My Rating: 9.5/10. I absolutely loved this book, definitely one of the best works of history I’ve read in years. With grain prices on the rise and Russia once again at war, it’s a must read. The half point deduction is only because I wish the narrative had continued in more detail beyond the year 1920. The rest of 20th and 21st centuries are covered only briefly in the conclusion.
Below are some of the most interesting points for me, but there are so many more. Incredible historical details, economic data, and anecdotes on every page.
What is physiocracy? An 18th century theory that a nation’s wealth derives solely or primarily from the value of land agriculture and land development.
Catherine the Great is the original imperial physiocrat.
The areas that are now Ukraine, Poland, Belarus, and Southern Russia are the best places in the world to grow grain. This has been true for thousands of years, and the Russian Empire would become rich and powerful by modernizing the agricultural practices in the region and selling the grain to Europe by sea.
Ukraine: the port city of Odessa was constructed by the Russians for just this purpose. In order to pay for all this expansion — both land purchases and military campaigns — Russia issued “assignats”, the first Russian imperial fiat currency. This financial innovation worked very well, during the period of expansion.
Catherine also guaranteed private property to farmers in a way that had never been guaranteed before — even in cases of treason, farmland could not be seized by the Empire.
The ultimate ambition of the expansionist policy — and this becomes highly relevant by WWI — was to turn Istanbul, the most important city in history for the transit of grain, into Tsargrad.
Consequence: Russia became rich, but its wealth was not concentrated in the heart of the empire (the Volga basin) but on its edges: Ukraine, Poland, etc. When Russia was finally overstretched by 1900, it ends in disaster.
This imperial geography was very different from the Romans, whose wealth was highly concentrated in Rome and in the campagna around Rome.
One of the main reasons to read this book is to understand the Russian history around Ukraine and the grain (+ other commodities) trade.
Thomas Jefferson was the agrarian physiocrat among the Founders. His Louisiana purchase cemented this legacy forever.
Cotton is good for slavery. Wheat is good for capitalism
Slavery as it existed in the US was not suited for wheat cultivation, but for cotton; the latter requires significant manual labor, which was economically compatible with chattel slavery. The Westward expansion of wheat cultivation was a strong pressure against slavery and allowed capitalists to instead develop railroads + technology.
Southern states had very low demand for manufactured goods, which also meant it was more expensive to ship cotton from the south on trains (they’d be empty on the way back).
Midwestern wheat created a middle class there, as well as a more egalitarian society than in the South or East. All the wealth in the south was held through land (and slaves). In 1860, the mean value of household real estate in Louisiana was $5,258. The median was zero. In Minnesota, by contrast, the mean land holding was $500, and the mean value of all land was $871. In New Jersey, a mean of $2000 and a median of zero. In the East, where the cheap wheat was consumed, cities grew and wealth inequality increased.
Small homesteads growing wheat, not large slaveowner plantations growing cotton, were the future of American agriculture as the nation expanded West. Wheat germ could feed livestock; cotton could not. Wheat could be harvested without slaves; cotton could not.
“Robber barons” or “boulevard barons”
The American term “robber baron” has been used to refer to railroad barons and grain traders of the late 19th cent. Nelson says this is a misnomer. A robber baron seeks to extract greater and greater fees from a stable supply — the medieval robber barons imposed tolls on grain that passed near their outposts. Robber barons are rent-seekers: Constantinople/Istanbul could impose a tax because of its geographic dominance alone.
What many of the American railroaders actually made money on was cheapening the cost of delivery and increasing the total supply, not increasing the tolls. Nelson gives us a new term to describe these people: boulevard barons.
A 20th/21st cent. “boulevard baron” might be Steve Jobs, or Bill Gates. Each made trillions for themselves and companies, but not through rent-seeking. They increased the supply and drastically cut the costs of personal computers, collecting a fee for that innovation.
Zero-sum robber barons versus positive-sum boulevard barons.
The Republican Party in all of this
The Republican Party was largely a product of the two previous phenomena described: the economic symbiosis of Westward expansion, wheat cultivation, and railroads; and the significant wealth of the boulevard barons and grain traders in the East. They formed the Republican Party to take on the South, not explicitly to end slavery in the South (at first), but to protect the capitalist and slave-free ecosystem they were creating in the growing West.
How the US Dept. of War invented the futures contract
1863: the height of the Civil War. Assistant Secretary of War Peter Watson is in charge of supplying grain to the Union army; the department is full of spies for the Confederacy and the supply contractors. Contractors could overcharge the US when it lost battles. Watson operates in complete secrecy, working out of a railway car.
Problem: how to feed horses and troops deep in enemy territory without getting fleeced or even defrauded by cereal merchants who knew they could exploit the wartime government?
The union paid for cereals with “greenbacks” — fiat currency not backed by gold, which the regular US dollar was. Greenbacks traded below the dollar but fluctuated wildly depending on the state of the war. A streak of battle victories or losses could sharply change the greenback price. Speculation ensued.
The standard USG purchase size was 10,000 bushels, which created a cereals oligopoly — only 12 merchants had enough supply to fulfill the standard contract, which allowed them to set the price higher.
Solution: an army officer in New York sends encoded telegrams to the Chicago Board of Trade. USG enters, through the CBT, into 100 contracts for just 1000 bushels of oats (10% of the normal size) with a fixed month of delivery.
The original financial innovation of the futures contract was actually anonymity. A third party (CBT) enforced the contract and collected the margin without identifying buyer or seller to one another. This protected the USG as it was the most vulnerable customer in wartime.
Futures contracts made everything more efficient. Before 1850, information and goods travel at roughly the same speed. After the telegraph makes information travel instantaneously, the price of goods can be negotiated well before they arrive, in real time. Prices could be negotiated in advanced and buyers could collect directly from the transit ships or trains — lower need for warehousing. This cut the cost of delivery and cut out middlemen.
Futures pricing also increases total market liquidity. It allows anyone to speculate in small amounts and guard themselves against price increases, or try to exploit them. Trading slips of paper in Chicago that guarantee delivery of grain is more efficient than trading the grain itself.
As we know, nearly all commodities — minerals, petroleum, agricultural products, chemicals — are now traded on futures.
Cutting cost of delivery is the #1 priority for USG after Civil War. The Civil War cost a lot of money and even with Reconstruction, the US was deep in debt. It cost $0.30 to bring one bushel of wheat from Chicago to the Atlantic. Russia could bring its wheat to sea for less, including the cost to produce it.
US Senator Roscoe Conkling, 1873: “Show us how to transport cheaply the growth of the West into the port of New York and our debt vanishes like the shadow of a passing hour. Cheap transit is, indeed, the great material question of the hour.”
1869: the Suez canal opens trade between Europe/Asia without having to go around the southern cape of Africa. Large, traditional sailboats cannot pass through the canal because there isn’t enough wind, so steamships gained in importance. But this didn’t destroy the sailboat, because dense grain is perfectly suited for traditional boats. And with the innovations of the futures contract and the underwater telegraph (completed 1866), speed no longer mattered for grain trade — prices could be negotiated as it was in transit. The boats themselves became the warehouses. Old technology (wooden boats) was, in a sense, refitted with technological accessories (futures trading + telegraph) and extended the useful life.
Dynamite ⇒ deep water ports.
North America has more natural deep water ports than anywhere else.
1866: a ship in Panama accidentally dumps a crate of TNT into the port, which blasts off tons of earth. Humans could manually make ports deeper. Rotterdam (Netherlands) was an inland city, but the Dutch made it into the biggest seaport in Europe with dynamite. Making the ports deeper allowed for more and bigger boats carrying American grain to enter. American grain floods in.
Law of Logistics: the “last mile” costs much more than every other mile. With grain, the “last mile” is the baking of the bread. Sea delivery to a city with a port was about 30x cheaper than land delivery, which in turn helped to reduce the “last mile” costs as well. The bread price in Europe falls 40% from 1870-1900: largest drop ever recorded in food price.
Effects: industrialization rapidly accelerates, the cities swell in population (Antwerp grows 400% from 1850-1900) draining the countryside and collapsing the value of the rural European land. Real estate in cities goes up astronomically. Many of the ships bringing grain to Europe went back to America carrying immigrants.
Was World War I really just the 8th Russo-Turkish War?
Cheap grain from America changed war forever. Prussians and Germans in late 19th cent. understood this well, hoping to use the cheap grain with railways from the coast to increase the speed at which their armies could move.
The American/Allied narrative about the origin of WWI has always been twofold. 1. German nationalism and aggression combined with 2. the killing of Archduke Ferdinand ignited the conflict. But because the US only entered the war in 1917, we forget that in the bulk of the conflict, including at the outset, Tsarist Russia was a major player. WWI was a two-front conflict, but the second front was closed with the Bolshevik surrender (Brest-Litovsk) before the US really got involved.
Nelson presents a theory partly from historian Sean McMeekin that the real dynamic at play 1910-1914 was Russian provocation, intended to disrupt the growing German-Turkish (Ottoman) alliance. Germany with its land armies and Turkey with its control of the Bosporus could starve Europe and bankrupt Russia.
In July 1914, Turkey was scheduled to receive a dreadnought class ship from England — a ship powerful enough to destroy an entire navy, as had happened twice before (USA against the Spanish and Japan against the Russians). The delivery of this ship would give Turkey total dominance over the Black Sea. Russia had gone to war with Turkey seven times already since Catherine the Great.
When the Archduke is assassinated, Germany doesn’t immediately react, but Russia amasses its troops on the borders of Serbia — McMeekin argues this was intended to provoke Germany into declaring war against Russia so that Russia could go to war against Turkey and take Istanbul.
If McMeekin’s theory is correct, the Russian plan worked (at the beginning). The Germans give Russia an ultimatum to disarm, which is refused. They declare war and provoke Britain into war on Russia’s side; Winston Churchill, then a Naval official, cancelled the Turkish dreadnought delivery. Weeks later, German ships sold to Turkey, manned by German officers in Turkish uniforms, attacked Odessa. Russo-Turkish war begins.
The Entente powers failed spectacularly to take Istanbul, most notably the naval disaster at Gallipoli. Istanbul is, and has always been, a nearly impregnable fortress, requiring decades or centuries to plan and execute a successful conquest. Modern military technology changed none of that in WWI, including artillery, machine guns, destroyers, and submarines.
As a consequence, Western Europe would be squeezed for grain, and the price more than doubled 1914-1915.
Implications for 2021
In its conclusion, the book offers this grim paragraph re: Russia and Ukraine.
Ukraine’s absorption into the Soviet Union made the Soviet experiment possible again. Indeed, modern Russia’s relative weakness as a great power now (2021) may still ultimately depend on its separation from Ukraine. Russia’s gross domestic product is now the size of Italy’s. Ukraine has always been the greatest prize, as Catherine the Great well knew.
If Nelson is right, then Putin’s calculation before invading Ukraine might be a calculation as old as any Russian monarch’s: that Ukraine is absolutely integral to an imperial Russian state. For now, it’s hard to tell if that calculation will pay off.