Leo Melamed: If it’s good enough for Milton

In 1970, the world was still chained to the failing fixed exchange rate regime agreed to in 1945 at Bretton Woods in the mountains of New Hampshire. Thereafter, foreign exchange trading was allowed only at the officially established rate of exchange. An individual, regardless of his standing, wealth, or businesses was barred from participation. In a well-publicized story, when Milton Friedman attempted to go short the British pound, a bank refused him the right to do so on the basis that “Friedman did not have the necessary commercial interest to deal in foreign exchange.”

As chairman of the CME, I was acutely aware that the idea of a futures market in currency, where everyone has sufficient commercial interest, was sheer heresy, akin to suggesting monotheism to a pagan. Knowledgeable people implored that the CME reject such a nonsensical idea. Most of our board of directors warned futures markets were suited for traditional agricultural products and little else. The orthodox financial community was also vehemently opposed. At best we were considered an “unwelcome” and very distant relative of the main-line financial family. Futures markets, they predicted, would never be utilized for the sophisticated needs of world banks and commercial enterprises. Besides, Chicago was the wrong place. That was the habitat of Al Capone. Matters of finance belonged in the holy centers of finance — London and New York.

It is nearly impossible today to understand or visualize the world before Milton Friedman’s ideas revolutionized the planet and became orthodoxy. What is self evident today was heretical then. Much of the world was still suffering the pains of command economics. The iron curtain was still intact. The Berlin Wall had not yet fallen. The dollar did not freely fluctuate. “Free to Choose” had not yet become the roadmap for the international marketplace. 

There was another overriding issue which plagued me then. How could I, a lawyer-turned-trader come financial innovator really be certain that foreign currency instruments could succeed within the structures designed for soybeans and eggs. Perhaps there was some fundamental economic reason why no one had before successfully applied financial instruments to futures? Indeed, on the eve of our currency launch, a prominent New York banker stated: "It's ludicrous to think that foreign exchange can be entrusted to a bunch of pork belly crapshooters.” Who could I turn to for advice? Who could overcome the weighty objections by so many? Who could give me the courage to proceed?

For me there was but one person in the whole world capable of settling the issue. By 1970, I had become a committed and ardent disciple in the army that was forming around Milton Friedman’s ideas. He had become our hero, our teacher, our mentor. I even had the temerity to sneak into his lectures at the University of Chicago, although I was not a student, to listen to the great man expound on the free market. What I heard made my spirits soar. Here was the voice of supreme economic authority saying that the system of fixed exchange rates was wrong. That it was time for its demise. Here was the fount of economic logic and vision saying that what I experienced as a child was true: That real value could only be determined by the free flow of supply and demand in an open competitive marketplace — perhaps, I mused, a marketplace like a futures exchange.

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