As it happened, I was then the chairman of an insignificant, backwater, pork-belly futures market, the Chicago Mercantile Exchange. My good friend, Adlai Stevenson, the former U.S. Illinois Senator, likes to tell the story this way. One day in August of 1971, as Chairman of the Senate Subcommittee on International Finance, he received a note that the President, Richard Nixon, had closed the gold window. Stevenson says he had no idea what this meant. In fact, in his view nobody in Congress knew what it meant. And maybe, he goes on to say, no one in the U.S.--- except this one guy at the Chicago Mercantile Exchange.
That is a bit of an overstatement but several things are certain. It wasn't easy. What the modern world needed, I thought, was a system that would allow currency values to adjust in an ongoing fashion. In other words---at a futures market in financial instruments ---where prices reflected continuous changes as demanded by the constant flow of new information. Such a system would allow risks to be hedged and opportunities to be captured in real time.
In early 1971, my suggestion for a futures market in foreign exchange was met by derision and contempt, not only by my board of directors but by practically the whole financial world. The idea prompted a prominent New York banker to laughingly say, that "foreign exchange couldn't be entrusted to a bunch of pork belly crapshooters in Chicago."
As some in Chicago were apt to say, "Futures in Finance, fuhgeddaboutit."
Besides, I was a lawyer, not an economist. To achieve a measure of credibility I went directly to Milton Friedman. Not only did he like the idea, at my request, he authored a feasibility paper embracing the concept. That paper proved magical. His fee was $5,000. The International Monetary Market, IMM, was launched by the CME on May 16, 1972, and merged with the CME in 1976. Some will tell you that today the CME has a street value of perhaps $100 billion. Now that's what I call a pretty good trade.
Actually, Friedman also tried to defy Hegel's law by urging President Nixon to abandon fixed exchange rates directly after his election in 1968. Nice try! By the time Nixon acted on August 15, 1971, world currency values were so screwed up, they were nearly beyond repair, and the US was about to go broke selling gold to the whole world at $35 an ounce.
I must admit our timing was lucky. If one could ordain the perfect backdrop for the creation of a new futures exchange designed to manage the risk in instruments of finance, one could not have bettered what actually happened. The decade that followed can be described as a "Perfect Financial Storm," --- turmoil that tested the very foundations of western civilization.
The U.S. dollar plunged precipitously; U.S. unemployment reached in excess of 10%; oil prices skyrocketed from about $7 a barrel to $39; the Dow fell to 570; gold, from its $35 base, reached $800 an ounce; U.S. inflation climbed to an unprecedented peacetime rate of 20%; interest rates went even higher.
The IMM went from currency futures to interest rates to stock indexes and to derivatives across the entire financial spectrum. We were copied by every industrial nation in the world. Not to brag, but in 1986, Nobel Laureate, Merton Miller called financial futures the most important financial invention of the past twenty years.
So, what did history teach us over the past five or so decades? Well, yes, that necessity is the mother of invention. And yes, that timing is everything. But we also learned that when it comes to innovation, the U.S. is the place to be. Could the Internet, Google, Microsoft, Apple, Facebook, or Amazon, to name but a few, have been created somewhere else? I have grave doubts. Could the IMM have been initiated in another country? Same answer.
Thomas Friedman said it best: America, he wrote, allows "extreme freedom of thought, an emphasis on independent thinking, a steady immigration of new minds, and a risk-taking culture with no stigma attached to failure." Yes, those are the precise attributes that make our nation exceptional. We are the world's crucible for innovation.
This Becker Friedman undertaking is another example. It is an initiative within the academic sciences which to my knowledge has not been undertaken anywhere else. An innovative effort to jointly advance our understanding of the links between financial markets and the macroeconomy. To construct more comprehensive models for assessing systemic risk. To foster discussion and research. To collect resources for analysis and study. And, to the extent possible, to create and share a databank of economic information.
In short: To learn from history and act on principles deduced from it, and finally prove Georg Wilhelm Hegel wrong. I wish you luck.