The Jewish History of Futures (and Options)

From Torah to Today, Jews Have Led Way in Derivatives

OMG, CME: Leo Melamed (second left) rings the bell to start trading on the CME, by some measures the largest futures exchange in the world.
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OMG, CME: Leo Melamed (second left) rings the bell to start trading on the CME, by some measures the largest futures exchange in the world.

By Gordon Haber

Published November 19, 2013, issue of November 22, 2013.

Everyone’s heard of derivatives, options and futures, but the details of how they might save or destroy civilization are so daunting that the simple facts get lost.

Let’s get down to business: A derivative is a financial security (tradable itself) whose value is based on that of an underlying asset. In other words, instead of purchasing, say, 100 shares of Procter & Gamble, you can buy a “call option,” which gives you the right to buy the shares at a certain date and price, or to sell that right. You are in essence betting that the share price of P&G will rise, in which case the value of your option rises — but if it doesn’t, you’re only out the fee for the transaction, or “option premium.”

At this point (if you’re still reading), you might be thinking that the above is a simplification, and you would be right. You might also ask what this has to do with the Jews. The answer to this question is that there is nothing particularly “Jewish” about derivatives. However, given the strong historical associations between Jews and finance, it’s only natural that we would find Jews involved in such transactions.

The story begins with Torah, believe it or not. One financial historian argues that the first recorded instance of an option is in Genesis 29, when Jacob exchanges seven years of labor for the hand of Laban’s shapely daughter Rachel. It was also an early example of a bait and switch scheme — instead of the hot one, Jacob first got the mieskeyt, Leah.

Derivatives were common in the ancient world. The dry air of Mesopotamia has preserved thousands of futures contracts — agreements to deliver commodities like wood or spices sometime in the future at a fixed price — recorded on cuneiform tablets or papyri. In his “Politics,” Aristotle (not a Jew) writes of Thales the Milesian (also not a Jew), who made a fortune by buying options on olive presses and then renting them out at higher prices.

But it seems safe to say that Jews brought derivative trading from Mesopotamia to the Roman Empire and, after the disastrous expulsions from Iberia, to the generally more secure and business-friendly cities of Northern Europe. In the 16th and 17th centuries, derivative trading flourished in places like Bruges, Antwerp and Amsterdam, with Jewish merchants and stockbrokers frequently in the mix.

One such broker was Joseph Penso de la Vega (1650-1692). De la Vega’s father was a converso who, after running afoul of the Inquisition, fled from Spain to Antwerp in order to openly practice Judaism. The family ended up in Amsterdam, where Joseph established himself as one of those enviable polymaths, a successful speculator and respected author of prose, poetry and plays in Spanish and Hebrew.

In 1688, de la Vega published his masterwork, “Confusión de Confusiones.” Written in Spanish, the book explains the inner workings of the Amsterdam Stock Exchange, including a number of forms of derivatives. De la Vega seems to have preferred options, considering them less risky than other forms of trading.

But “Confusión de Confusiones” is more than just a kind of early how-to manual. De la Vega had a novelist’s eye for the telling detail, describing the “unpleasant smells of perspiration” in the Exchange, the wheeling and dealing in Amsterdam coffee houses, wherein “one person takes chocolate, the others coffee, milk, and tea; and nearly everybody smokes while conversing.”

De la Vega seems to have been an honest sort, or at least the book gives that impression. He was clear-eyed about the dubious ethics of many traders. “The best and most agreeable aspect of the new business is that one can become rich without risk,” writes de le Vega, with no small irony. “Just as the Hebrews, when they are seriously ill, change their names in order to obtain relief, so a changing of name is sufficient for the speculator who finds himself in difficulties.”

Derivatives must have played a part in the rise of the great Jewish financier families of the 19th century, such as the Rothschilds and the Lazards. But in their cases it is harder to find historical data. Their clients, whether they were the Bank of England or the Prussian royal family, preferred secrecy. In addition, family networks could be less formal in their agreements with each other — Nathan Rothschild in London wouldn’t need a written contract when doing business with his brother James in Paris. Discretion was also preferable due to various attempts by European governments to regulate derivative trading — which, then as now, tended to be ineffective.

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