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

Melamed on Milton and the impact of currency futures

FM: How did you convince them? 

LM: I couldn’t get the board of directors’ approval. I couldn’t get the seven votes [I needed] without showing some credibility on this idea. I met with [Friedman] in July [1971] and said ‘I want to launch a futures market in currencies; do you think that’s an ok idea?’ He said, ‘That’s a terrific idea. I don’t know how soon it will be viable because [exchange] rates are fixed, but it won’t be too long before they are no longer fixed. You have to get a head start. It is a great idea, do it.’ I said, ‘Nobody is going to believe me,’ so he said, ‘Tell them I said so.’ I said, ‘I need it in writing,’ and he said, ‘You want a feasibility study on why currencies would make a good futures market?’ I said, ‘Exactly,’ and he said ‘I am a capitalist.’ I said, ‘How much?’ So the study cost us $7,500 and that $7,500 is worth some $18 billion to the Merc today; it was a good trade. That was July. In August, Nixon closed the gold window and then of course all hell broke loose, and I knew fixed exchange rates were not going to last. The idea was now much more valid than before and I was racing. We incorporated the IMM in December of 1971. ...The charter of the IMM said financial instruments. I knew from the beginning that if it was successful in currencies, finance was wide open.

FM: Talk about the impact of Milton Friedman in helping legitimize this effort. 

LM: When Milton Friedman agreed with us, the world took notice. His 1971 paper explaining futures on currencies was the most important factor to give us credibility. His name made the difference. Because of his paper, people who otherwise would not listen gave us an audience. Private-sector officials, who otherwise would not have approved, gave us approval. Presidents, financial ministers, central bankers who otherwise would not have allowed us near their doors, opened the door for us. It was magical! I met with Secretary of the Treasury George Shultz and sent Friedman’s paper [ahead]. All he said was, ‘If it is good enough for Milton, it is good enough for me.’ His name was magic. After the launch, I met with every central banker in Europe and it was the same message: The great economist Milton Friedman thinks this is a great idea. And it worked. 

FM: Were there any significant mid-course corrections you needed to make in the early days of these markets? 

LM: Yes. When I first did all the research on how big the contracts should be and which currencies to trade, we ended up with seven currencies and went to commercial firms and banks. Well, most banks said this is not going to work, but if it works you [must] get the banks to use it, and if you want the banks to use it you [must] have big instruments. [They] trade in $1 million contracts so you have to have $500,000 contracts. So the original contracts were about $400,000. The locals who barely had enough money to buy a $10,000 membership were resistant. So I cut them in half. It got a little better, and in six months I cut them again to $100,000. Then it clicked.

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