Codificación de los colores

The first operation in the wheat futures for which we have evidence was on 30 December 1924.23 _{Keynes went on trading in this commodity—although}

discontinuously—up to 1939, when the commodity markets closed on the outbreak of war.

We have divided the decade considered here into two sub-periods, one from the date of the first operation recorded in the ledgers to 3 August 1926, the other from 17 October 1929 to 9 December 1935.

In the interval between these two sub-periods, no investments in wheat futures are recorded in the ledgers, even though the years 1927-1928 saw Keynes active in futures contracts in other cereals.24 _{We have yet to arrive at a clear explanation of this gap in}

wheat trading but we may infer that it should have some causal relations with both his negative financial situation at the time25 _{and his dealings on the other grain products,}

but also with the depressed conditions characterizing the wheat market in those years. Indeed, as we have already seen, in the second half of 1920s the wheat market came up against the severe consequences of the introduction of protectionist measures.

From 1924 to 1926 Keynes traded on the Winnipeg and Chicago futures markets. In the first seven operations recorded in the ledgers, from 30 December 1924 to 29 January 1925, Keynes went short both on Winnipeg and Chicago markets (selling forward contracts basically for May deliveries and in one case for July delivery), revealing his bearish expectations on both places (see Graphs 1 and 2). Given that from December 1924 to the end of January 1925 future prices were increasing on both markets (although more sharply in Chicago than in Winnipeg), we may conjecture that his

23 _{Before this date investments in the wheat futures market are not recorded in the ledgers, but Keynes}

had already been active since 1920 in futures markets on other commodities, like cotton, tin, copper, spelter, lead, sugar, rubber and in futures on currencies (KP, SE/11/2/4-30). At the end of 1924 he entered upon the grain markets: that same year he was appointed First Bursar of the King’s College and his involvement in speculative activity increased.

24 _{Keynes operated in corn futures (on the Chicago market) and maize futures (on the Buenos Aires and}

London markets). For example, in 1928 Keynes bore losses for £2755 on the Chicago corn market in the first part of the year and realized profits for £2104 on the Buenos Aires maize market in the second part of the year (KP, TC/4/2/27). In the latter case Keynes adopted an investment strategy based on the renewal of long positions.

25 _{In 1928-29 Keynes bore a severe financial setback, from which he fully recovered only after 1932. The}

two other important financial setbacks in Keynes’s career as an investor occurred in 1920-21 and 1937- 38 (Skidelsky 1992: 638).

strategy aimed at anticipating reversal in the trend prices.26 Then, from 10 February to 16 March 1925, just when prices were falling on both places, confirming his expectations, Keynes progressively closed his positions, making a huge profit. In this case Keynes traded contracts of six-month maturity but he decided to offset these positions as soon as he had a chance of earning profits. On 17 March 1925, when the future price was low, Keynes opened a long position on the Winnipeg market for a contract of a longer maturity (October), expecting a future increase in prices, and he closed this position on 5 May, as soon as his expectation proved correct, again reaping some profits.

Source: Keynes’s ledgers. Futures prices are drawn from the Corn Trade News (weekly edition),

published on Wednesday.

Note: The price refers to 1 bushel of wheat (= 60 pounds or 1016 kg). P1 denotes the futures price of

the contract for the first available standard maturity on the Winnipeg market.

From 24 August 1925 to 24 March 1926 Keynes started a second cycle of investment on the Chicago market, again assuming short positions (see Graph 2). He made four ‘short sales’ from the end of August 1925 to the end of December 1925 for

26 _{Skidelsky (1992: 640) points out that in the 1920s the ‘philosophy’ which characterized Keynes’s} investment behaviour in general was that of acting against the opinion of the majority of people and, by these means, trying to anticipate the reversal in the future course of prices.

contracts of May delivery and then closed these positions in the following three months. During this second investment cycle futures prices on the Chicago market fluctuated above and below the prices fixed in the contracts sold forward by Keynes. Consequently, Keynes bore some losses in the first three operations he made, making profits only with the fourth. Then, from 5 May to 17 July 1926, he went long again by buying 2 contracts, but in one case he sold at the same price at which he had purchased and in the other he gained only a very small profit. In the last operation of this phase Keynes went short again by selling forward 10,000 bushels for December delivery on 19 July 1926. He closed the position on 3 August, making some profits. Looking at the spread between spot and future prices (see Graph 2), we observe that along these investment cycles, in the presence of backwardation, Keynes decided to go short in the period August 1925-March 1926 and long in the period May-July 1926. In both cases, his open interest was greater when the positive differential between spot and future prices came higher. We also remark that in the only phase of contango of the whole period, between January and March 1925, he went short.

Sources: Keynes’s ledgers. Futures prices are drawn from the Corn Trade News (weekly edition),

published on Wednesday. Spot Prices are drawn from the Wheat Studies of the Food Research Institute

(1934).

Note: The price refers to 1 bushel of wheat (= 60 pounds or 1016 kg). P0 denotes the spot price. P1

In relation to these investment cycles in wheat futures, Keynes recorded in the ledgers realized profits for £ 2290 in 1925 and realized losses for £ 163 in 1926, with a greater loss at the beginning of the year (following his unfortunate second investment cycle), partially offset by a gain at the end of the year (see Graph 3).

Note: Our calculation on the basis of data contained in Keynes’s ledgers.

It must be remembered that at that time the gold standard system guaranteed a fixed parity between dollar and sterling, so the exchange risk for an investor like Keynes, who—as we have seen—in 1924-26 traded only in contracts denominated in dollars, was not so great.27

Then, as recalled above, there came a break in Keynes’s investment activity and we find no more records on wheat futures in the ledgers until October 1929.28

On 17 October, a few days before the Big Crash on the NYSE, Keynes recorded a forward purchase of 200 tons of wheat for February delivery on the Buenos Aires futures market and he closed the position a few days later, on 30 October. The reason for this single operation on a market that Keynes had never used before for futures wheat trading, following upon a suspension of almost three years in his trading in this commodity, is by no means clear. The only thing that we can infer from his behaviour is

27 _{The risk was not completely eliminated because some slight oscillations around the parity (the} exchange rate that Keynes recorded for the wheat futures contracts he traded in May-August 1926 in the Chicago market was 1£= 4,86$, KP, TC/4/1/10-41) were usual and could easily affect an investment activity like future trading based on the gain (or losses) deriving from the differentials between the opening and closing prices of a given contract.

28 _{This break is confirmed by the statements and accounts of the Tilton Company (KP, TC/4/2/2 and} TC/4/2/57).

that he had bullish expectations on this market but it is hard to reconstruct the elements on which he founded this opinion. We may conjecture that Keynes’s choice to invest in Buenos Aires wheat futures could have depended on his expectations of approaching financial difficulties for the North-American markets or on some privileged information he had acquired. Nevertheless, the increase in future prices in Buenos Aires failed to come about and Keynes judged it imprudent to wait beyond the end of the same month. So he rapidly closed the position he had opened less than two weeks before, losing some money in the process.

After this operation there is another break in the records of the ledgers from the end of October 1929 to July 1931. This break seems much more explicable with the turmoil on the financial markets brought about by the Great Depression, which extended throughout 1930. In fact, as Keynes himself warned in his last Memorandum (1930):

At the close of the crop year 1929-30 international wheat prices reached their lowest post-war level […] The decline in the volume of trade between 1928-9 and 1929-30, over 300 million bushels, was the largest change recorded in the twentieth century […] There is nothing in the immediate outlook to lift prices to even a moderately high post-war level. (CWK XII: 644 and 647)

His deeply pessimistic view also appears in a letter he wrote to Walter Case29 on 16 December 1930: ‘[…] I cannot perceive the least reason in the world for expecting an early recovery. Nothing whatever is happening to make such a thing likely’. As far as commodities are concerned, he wrote: ‘I am somewhat sceptical as to a material recovery being brought about merely by restriction of supply. It will be very difficult to maintain any material recovery unless it be through an increase in the side of demand’ (KP, BM/2/175).

One consequence of this difficult economic and financial situation was the decision of the British government to devaluate sterling, abandoning the gold standard and the fixed parity with the dollar on 21 September 1931. The fluctuations in the rate of exchange heightened the level of uncertainty in transactions for British investors and made trading in the international futures markets more challenging. Nevertheless, Keynes does not appear to have been discouraged by this additional difficulty: his long- lasting training in foreign exchanges markets helped him cope with it.

In fact, a few months before Great Britain’s abandonment of the gold standard, Keynes returned to wheat futures opening a long position on the Liverpool market on 3

29 _{Walter Case (1885-1937) was a banker, director of an American investment firm based in New York,}

the Case, Pomeroy & Co. In the period 1930-37 Keynes exchanged letters and cables with him containing information about wheat and commodities in general.

July 1931. The reason behind this decision can be inferred from a letter that Keynes wrote to Case dated 29 July:

[…] I am more inclined to think than I was that it is just worth while having at the back of one’s head that a purchase in terms of sterling of commodities having a world price may be in conceivable circumstances a hedge against anything that might happen to sterling. This also applies to the question of buying wheat in Liverpool. On further consideration I think that I overstated the objections to Liverpool as a market. (KP, BM/2/121)

As shown in graph 4, Keynes kept long positions over the whole period spanning from July 1931 to June 1932, in situations of both backwardation and contango.

Source: Keynes’s ledgers. Spot and futures prices are drawn from the Corn Trade News (weekly edition),

published on Wednesday.

Note: P0 denotes the spot price. P1 denotes the futures price of the contract for the first available

standard maturity on the Liverpool market. P2 denotes the futures price of the contract for the second available standard maturity on the Liverpool market.

On 2 December 1931 he also opened a long position on the Winnipeg market (see Graph 5) with a forward purchase of 15,000 bushels of wheat for May delivery at a price of 65 ¾ cents.

Source: Keynes’s ledgers. Futures prices are drawn from the Corn Trade News (weekly edition),

published on Wednesday.

Note: The price refers to 1 bushel of wheat (= 60 pounds or 1016 kg). P1 denotes the futures price of

the contract for the first available standard maturity on the Winnipeg market.

On the same date Keynes registered in the ledger the opening of another long position in the Liverpool market with a forward purchase of 1 load of wheat to be delivered on May at a price of 6 pounds, which means that Keynes was betting on an increase in prices in both markets in the following six months. Although Keynes opened two positions on two markets on the same day, the combination of these operations did not take the form of a straddle.30

30 _{A straddle is the combination of two opposite positions on two different markets (and possibly two}

different dates) with a view to closing the positions simultaneously, speculating on the price differential.

On 28 January 1932 (i.e. far before the delivery date) he closed his position on Winnipeg at a price of 61½ cents, lower than the purchase price of two months before. Probably at the time he imagined that the future price on Winnipeg would fall even further in the following months and his strategy aimed to limit the losses.

That same day (28 January) he still had bullish expectations on the Liverpool market and he opened another long position by buying forward 2 loads of Liverpool wheat for May delivery at a price of 5/2 ⅜ pounds. In April 1932, near the delivery date, he closed all his opened positions for May Liverpool wheat with alternate fortunes, because in one case (for the contract bought in September 1931) he sold at a price higher than the original purchase price, while in the other cases he sold at a lower price.31 From the different timing of the offsetting of these long positions on the two markets we may conjecture that, in February-March 1932, Keynes was still confident of having a chance of profit on Liverpool or that he was following a different investment strategy in the two markets.

On 29 February 1932, Keynes closed the long position he had opened on 25 September 1931 for 1 load of wheat for March delivery on the Liverpool market for a price higher than the buying price, gaining some profit and, at the same time, he opened another long position for 1 load for a longer maturity (July). He closed this latter position on 2 June 1932, when, approaching the month of delivery, his expectation of an increase in price proved correct. These operations made it clear that on the Liverpool market Keynes followed a roll-over strategy of long positions.

On 9 November 1932, he returned to the Winnipeg market, trying the same strategy he had adopted on the same market one year before (in December 1931). He went long, buying forward 10,000 bushels for December delivery at a price of 47 ½ cents. This time he appeared more cautious in two respects: he bought a future contract of a lower quantity and a shorter maturity (two months rather than six months). It is to be noted that from December 1931 to November 1932 the future price on Winnipeg decreased from 65 ¾ to 47 ½ cents—a circumstance that could have justified Keynes’s bullish expectation. The sensible reasoning at the bottom of Keynes’s investment choice seems to have been that since the price had fallen sharply in the previous year it should necessarily rise back in the near future. In any case, as graph 5 shows, the future price on the Winnipeg market remained low for a while and Keynes decided to close his position on 30 November 1932 at a price of 44 ½, losing some money.

31 _{More precisely, he sold forward the wheat bought on December 1932 at a price only slightly lower that}

the buying price, but he sold at two prices substantially lower than the buying price the 2 loads that he had bought forward on 28 January 1932.

In spite of the evidence against it, Keynes remained convinced of the rationale of his investment choice (i.e. that the future price on the Winnipeg market was abnormally low) and shortly after, on 31 January 1933, when the future prices rebounded to 47 cents (that is, the same level reached in November 1932), he again bulled the market. In fact, he opened a long position of 10,000 bushels, this time for July delivery. On this occasion, Keynes hit the mark: the future price started to climb back and he closed his position on 30 May 1933 at a price of 68 cents, making a huge profit.

In July 1933 the future price for contracts of July delivery (practically the spot price) on the Winnipeg market shot up.32 On 15 July 1933 Keynes made a short sale of 10,000 bushels for July delivery at the exceptionally high price of 98 cents and closed his position a few days later, on 24 July 1933, at 82 cents. In the Winnipeg market—as we have seen—Keynes acted as an investor trying to anticipate inversion in the price trend. After this period of intense investment in the Liverpool and Winnipeg markets, Keynes abandoned the wheat market for two years, until July 1935. In these years he traded heavily in cotton, spelter, corn and maize and, in the first part of 1935, also in cotton oil (KP, TC/4/3/99).

After this break, on 8 July 1935 Keynes returned to wheat futures, buying forward a large quantity of wheat (50,000 bushels) on the Chicago market for September delivery, gambling on a future increase in prices. Only ten days later he closed his position at 85 cents (that is, 5 cents higher that the buying price), making a huge profit. The choice of this timing and market and the motivations behind his bullish expectations may well have been closely connected with the institutional changes brought about in the Winnipeg wheat futures market on 5 July 1935, i.e. the establishment of the Canadian Wheat Board, which made Chicago the only market place entirely devoted to private trading in North-America.

A different technique was adopted by Keynes one month later on the Liverpool market. From August to December of that year Keynes opened a series of long positions through contracts of 5 loads at a time (Graph 6). This behaviour testifies to Keynes’s increased financial capacity from the mid-1930s onwards. It must in fact be remembered that a cover of about 25 per cent was to be deposited to the broker for each given contract.

32 _{Thanks to the fact that delivery in the wheat market was possible until the last day of the month of the}

Sources: Keynes’s ledgers and Tilton Company statements. Spot and futures prices are drawn from the Corn Trade News (weekly edition), published on Wednesday.

Note: P0 denotes the spot price. P1 denotes the futures price of the contract for the first available

standard maturity on the Liverpool market. P2 denotes the futures price of the contract for the second available standard maturity on the Liverpool market.

As a result of his investment policy, Keynes ended the year having bought forward