Leo Melamed: In the middle of the action from the beginning

Agents of Change

“That is the brilliance of the IMM, it created so large a structure that it could encompass interest rates and stock index markets and a variety of other financial instruments and all of that was as if planned for right from the beginning when most of the world didn’t think that it would succeed and was certain we would fall on our face.”

Not that the creation of currency futures itself was a small idea. “Currencies were considered the bastion of financial wherewithal and belonged in the banks and belonged in New York and belonged in Zurich, maybe in London but certainly not Chicago and not at the Chicago Mercantile Exchange,” Melamed says.

With currencies however the CME also had some luck. Melamed notes that many economists, Milton Friedman being just one, felt the fixed exchange rate of the time had outlived its usefulness. Then as the CME prepared to launch currency futures, President Richard Nixon on Aug. 15, 1971 closed the gold window effectively ending the Bretton Woods system and allowing for the free float of currencies. “Our preparation speeded up because clearly what we felt could happen a year from then, was happening immediately,” Melamed says.

Brought in academics

“Milton Friedman’s encouragement gave me the strength that I needed with what was not just a brand new idea but a revolutionary idea. When you are going to do a revolution you want authentication from people you respect and admire,” Melamed says. 

The authentication that Friedman brought to the IMM was a model Melamed and the CME would follow over the years. “The Merc consistently did things to encourage the academic world to embrace what we were doing, to speak out, to write, to comment, to study the value of futures markets,” he says.

Melamed’s embrace of the academic world is not a surprise as both of his parents — who escaped from Poland and the Holocaust with their young son in 1939 — were teachers. And it was a strategy that would pay off for the emerging exchange. “I believed that our markets are so esoteric and so arcane that it was difficult to understand even for the knowledgeable, even for the people that are expert in the world of business.”

The futures markets were also viewed by many as simply gambling dens of noisy speculators with no economic purpose. “I of course believed very much in the economic value of futures but how do you go about proving that? It is self serving that the chairman of the CME says futures have an economic value; it means something if a professor of finance or a great economist or a study in a major university says so,” Melamed says.

 

That is why the CME sought the academic world to understand and explain the value of its markets. “The academic world had the credentials and didn’t have any reason to be friendly to us or not be friendly to us. They were academics, hopefully they would tell the truth and they would be recognized as that. So that was the mission.”

The CME authorized money to advanced courses on the study of futures markets at the University of Chicago, Northwestern, Columbia and University of Illinois. “The idea was give them the money, let them teach people how to use our markets and then these students would learn and they would write academic studies and one thing would lead to another.”

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