From the September 01, 2012 issue of Futures Magazine • Subscribe!

Melamed on Milton and the impact of currency futures

The growth of financial futures has been one of the more remarkable success stories of the latter part of the 20th century. So much so, that it is hard to imagine a world without them — even though their age is a relatively green 40-years-old. It all began with the Chicago Mercantile Exchange’s International Monetary Market (IMM) and currency futures. Coincidently enough, financial futures are the same age as Futures. With September being our currency focus, we thought it was a great time to sit down with the architect of the IMM, Leo Melamed. Melamed details the difficult steps of getting this new concept for futures off the ground, its early hurdles and how the influence of future Nobel Laureate Economist Milton Friedman legitimized the idea in the eyes of the world’s economic leaders. 

Futures Magazine: Leo, you have stated in the past that the idea for the International Monetary Market (IMM) was a broad one, encompassing many different kinds of financial futures in multiple sectors. Why were currencies the first? 

Leo Melamed: There were a variety of reasons. First of all, currencies were in the news all around the late 1960s and early 1970s. The issue of whether flexible exchange rates would replace the fixed exchange rate system of Bretton Woods was uppermost in the news. You couldn’t open a newspaper in 1970 without seeing somewhere in the business pages the discussion about the fixed exchange rate system and the strong voice of Milton Friedman saying that he didn’t believe in fixed exchange rates and that they would not be able to be maintained going forward. So I was very cognizant of the currency issue. My main objective at the Merc was to diversify. I was very much conscious of the fact that when I was [just starting out] as a runner at the Merc, [the Exchange] had lost the butter and egg market, [its] dairy products went under and [it was] a one-product exchange. 

[We] tried turkeys, potatoes, shrimp, but it was always agriculture because that was the definition of futures. So here is all around me this discussion about currencies and whether the fixed exchange rate would survive, and bingo — the light went on. Why not try currencies?

FM: Did you have much internal opposition?

LM: At the time I was under 30 and all the board of directors were just under 130, I thought (laughes). They all thought this young kid was going to bring the exchange down, like they had such a big deal. But I needed the votes. I needed a credible voice to say it was a good idea and the only credible voice I could think of was Milton Friedman.

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