On Sept. 23, Leo Melamed, widely known as the father of financial futures, addressed an audience of Futures industry professionals at the CTA Expo, offering personal stories of his experiences that got him to where he is today.
Melamed said that the first lesson his father taught him occurred when their family was in Lithuania. His father held up one Polish złoty and one Lithuanian litas, asking the young Melamed how much they were worth in relation to each other. Melamed could only guess that they were the same, as the government had dictated. His father then took him to a bakery and bought a piece of bread, worth one Lithuanian litas. But when his father tried to pay with one złoty, the baker stopped him and said, “Two złoty, one litas.”
“It was a lesson I never forgot,” Melamed said. “Because what my father explained was the Milton Friedman doctrine…only the free marketplace can give you the true value of nearly anything.”
Many years later, Melamed would carry that lesson with him as he entered the world of futures and revolutionized it beyond recognition. Perhaps echoes of the baker’s words resounded in Melamed’s head as he observed the global fixed exchange rate system, which had been established at the Bretton Woods conference in 1944, and realized that a new system would be coming.
“By [the 1960s], I recognized that the world had totally changed,” Melamed said. Not only had the international balance of power changed—Japan, the U.K., and Germany were now much more powerful and influential—communication capabilities had also developed over the past few decades. Information traveled “at lightning speed,” and as a result, the value of currencies could change just as quickly. If a finance minister said something that would have an effect on the country’s currency, the news could spread within minutes.
Melamed saw that a fixed exchange rate system would no longer be sustainable with these new developments. “By 1970, I was convinced that the world was going to reject the fixed-rate system and was going to adopt a different system, probably for floating rates,” he said. And this gave him a novel idea—currency futures.
At that time, the Chicago Mercantile Exchange was struggling and in no mood to entertain wild ideas from a 30-year-old trader. Even if Melamed could convince the CME’s (NASDAQ:CME) old and entrenched board to take a flyer on this revolutionary concept, he knew he would have to gain legitimacy for the concept through a trusted source outside the niche futures industry. He chose future Nobel Laureate in Economics Milton Friedman, who was teaching at the University of Chicago at the time and whose lectures Melamed would often attend.