Leo Melamed: If it’s good enough for Milton

Suddenly, the inevitable came to pass — the stresses resulting from the dysfunctional fixed exchange rate system was more than the U.S. could bear. On August 15, 1971, President Nixon cancelled the Bretton Woods Agreement and dropped the U.S. dollar convertibility to gold. It was what Milton Friedman had advised Nixon to do so from the beginning. For the world it unleashed a financial tsunami whose reverberations would be felt a decade later. For me it represented the moment of truth. 

We met for breakfast on Saturday, November 13, 1971, at the New York Waldorf Astoria.

I began by asking that he promise not to laugh. I held my breath as I put forth the idea of a futures market in foreign currency.
The great man did not hesitate. “It’s a wonderful idea,” he said emphatically. “You must do it!”
Elated, I pursued, “Is there any reason foreign currency might not work in futures markets?”
“None, I can think of,” he replied.
For a moment his words hung in the air. When my voice returned, I said, “No one will believe you said that.”
Milton chuckled, “Sure they will.”
“No,” I boldly said. “I need it in writing.”
He smiled, “Are you suggesting that I write a paper on the need for a futures currency market?”
I nodded. “You know I am a capitalist?” Milton ventured.

We shook hands and settled on the amount of $7,500 for a feasibility study on “The Need for a Futures Market in Currencies.” A friendship and bond was formed that lasted a lifetime.

Within a month, I held in my hand the Holy Grail for the Chicago Mercantile Exchange. The most influential economic mind of the 20th century provided the CME with the intellectual foundation upon which to build its financial futures super-structure. He said all he needed to in 11 pages.

The rest, as they say, is history. On May 16, 1972, the International Monetary Market (IMM), the financial division established by the CME for the exclusive trade in instruments of finance, ushered in the modern era of financial derivatives. Coincidentally, the following year, the Black-Scholes model provided the foundation for exchange-traded equity options. Both events occurred in Chicago. During the first decade of its existence, the IMM, initiated a series of innovations in foreign exchange, interest rates, and equity indexes. In 1986, precisely 14 years after its inception, Nobel Laureate in economics, Merton H. Miller, declared financial futures as "the most significant financial innovation of the last 20 years."

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