30th ANNIVERSARY CELEBRATION
May 14, 2002
by Milton Friedman in Honor of
30th Anniversary Celebration
of the IMM
is a great pleasure to be with you today to celebrate the 30th anniversary
of the establishment of the International Money Market.
morning's Wall Street Journal carries quotations for
48 financial contracts. Contracts in currencies, contracts in
interest rates, contracts in indexes. Each for a number of different
dates, and that doesn't even count futures options. These contracts
are traded on futures exchanges around the world, and they constitute
a major undertaking in the worldwide capital markets. They enable
investors and traders to hedge and trade risk in a way that enables
them to pursue their objectives. They have contributed to the
remarkable growth in world trade over the past 30 years.
hard to recall today what the situation was like in 1971 when
financial futures contracts were merely a gleam in the eye of
Leo Melamed, the remarkable man who was then Chairman of the
Chicago Mercantile Exchange.
markets are indeed very old, dating back many centuries, but
they were traditionally markets in commodities, there were no
markets in financial items. The business of the Chicago Mercantile
Exchange was typical. It was butter and eggs, potatoes and onions,
pork bellies and cattle. Banks and other large financial institutions
might offer future cover to their customers, but none of them
would offer the public at large such facilities -- as I found
out when I tried to short the British pound at one point, and
no bank in Chicago would take my order. It was that episode as
reported in the Wall Street Journal that led Leo Melamed
to telephone me one day in 1971, asking for me to provide counsel
and advice on a crazy idea he had of establishing a market in
financial futures. At the time, such a market would have been
impossible because at the time, the Bretton Woods agreement was
in existence, and currencies, foreign currencies, were traded
at pegged exchange rates. Exchange rates were changed sometimes
by large amounts, but only by long intervals. There was none
of that day-to-day price movement and fluctuation which is the
very lifeblood of futures market, which is necessary in order
to have a volume of trading that will enable hedgers to hedge,
speculators to speculate. However, Leo could see, as I did, that
the Bretton Woods system was not long for this world, that it
was running into increasing difficulty and that it was likely
to be succeeded by a very different system, a system of floating
exchange rates. He called on me for advice because he knew of
my interest and activity in that area, and he wanted to get assurance
from me that floating exchange rates were coming, and that they
would provide the kind of continuous price movement that was
necessary for a market.
view of that vision, Leo and his colleagues developed the International
Money Market. They developed the idea of a market in which the
items traded would be futures in currencies, and their timing
was perfect. The Bretton Woods system came to an end on August
15th 1971, when President Nixon closed the gold window
as part of the broad program of price and wage control.
International Money Market started on May 16th. It
started with trading in seven currencies. Its reception by the
financial market was anything but enthusiastic -- this was a
crazy idea by those people out in Chicago. On the day the IMM
opened for business, one New York bank foreign exchange dealer
was quoted in the Wall Street Journal as saying, and
I quote, "I am amazed that a bunch of crapshooters in pork bellies
had the temerity to think that they can beat some of the world's
most sophisticated traders at their own game." The bunch of crapshooters
went from one success to another, first trading in currencies,
then introducing contracts in interest rates and stock prices
and so on, until you have the variety that you have today.
1981, they introduced cash settlement instead of physical completion,
and that made it possible to establish the Eurodollar market,
today the largest of the items traded. Today, financial futures
account for 98 percent of the contracts traded at the Chicago
Mercantile Exchange, and the Chicago Mercantile Exchange is by
far the largest financial (futures) market in the United States.
not a bad story for a bunch of crapshooters. My heartiest congratulations
to them on their 30th anniversary -- and in particular,
to the Chief Crapshooter of them all, Leo Melamed.
by Leo Melamed
at the CME Celebration of the
30th Anniversary of
Friedman is correct in pointing out that it is impossible today
for anyone to fully visualize the time in 1971 when the idea
for futures in financial instruments was born.
how can we—living in the globalized world of present day:
—where Dick Tracy technology is not the
figment of Chester Gould's imagination but every teenager's
—where every nuance of market information
is transmitted to every corner of the world at cyberspace speed,
—when dramatic market values transformations
result at the sound-bite utterance of a government official,
—where contract settlement occurs not
in physical delivery but in cash,
—where financial futures contracts are
traded on every continent, from Argentina to Australia, from
Italy to India, from Taiwan to Turkey,
—when 98% of CME transaction volume is
—when last year's Eurodollar futures
volume alone, not counting options, recorded 184 million contracts,
—when last year's CME's total notional
value was 293.9 trillion dollars.
can we picture what it was like 30 years ago to propose currency
futures at a time:
—when board markers used chalk to record
bids and offers,
—when technology consisted of a ticker-tape
flowing into a wastebasket,
—when business was so leisurely that
you could smoke in the pits,
—when our market's entire connection
to finance was in grains, hogs, cattle, pork bellies, eggs,
butter, poultry, potatoes and lumber,
—where total CME annual volume was a
touch over 3 million contracts.
illustrate the psychology of those days, I have often used Bruce
Johnson's tale, of when he invited some of his Iowa relatives
to visit the floor after the IMM was launched. They told him
they came to see the pit where Swiss hot dogs were traded. It
took him a moment or two to realize they were thinking of the
Swiss Franc contract.
how can anyone today imagine futures markets without an interest-rate
component, without currency contracts, without equity indices.
Not only are our markets of today but a distant cousin of the
markets of three decades ago, with but a faint resemblance to
what they were, they are today an indispensable component of
the global financial fabric.
May of 1986, fourteen years after its inception, Nobel Laureate
of Economics, Merton H. Miller, bestowed upon the IMM a supreme
and unparalleled honor -- he nominated financial futures as "the
most significant financial innovation of the last twenty years."1
Greenspan's current congratulatory message makes a similar assessment
when he states "Indeed, the transformation of the financial system
has been so profound and the benefits so great, that it seems
questionable whether even those that launched the IMM could have
full appreciated what they were setting in motion."2
course we didn't. But we knew it was revolutionary and big. In
the 1972 IMM Annual message to the members I dared say:
opening of the International Monetary Market on May 16, 1972
was as revolutionary a step as the establishment of the first
organized commodity exchange when that event occurred...
believe the IMM is larger in scope than currency futures alone,
and accordingly we hope to bring to our threshold many other
contracts and commodities that relate directly to monetary
matters and that would complement the economics of money futures.
we were fearless:
were a bunch of guys who were hungry.
were traders to whom it did not matter-
whether it was eggs or gold, bellies
the British pound, turkeys or T-bills.
were babes in the woods, innocents,
in a world we did not understand,
too dumb to be scared.
were audacious, brazen, raucous pioneers-
too unworldly to know we could not win.
the odds against us were too high;
That the banks would never trust us;
That the government would never let
That Chicago was the wrong place.
we were lucky.
dare say, if ever one needed proof that "Necessity is the mother
of invention," one need only review the economic disorders leading
to and following the creation of our new exchange.
followed was an era of financial turmoil rarely equaled in modern
history; turmoil that tested the very foundations of western
society: the U.S. dollar plunged precipitously; U.S. unemployment
reached in excess of 10%; oil prices skyrocketed to $39 a barrel;
the Dow Jones Industrial Average fell to 570; gold reached $800
an ounce; U.S. inflation climbed to an unprecedented peacetime
rate of 20%; interest rates went even higher.
I doubt I could ever have had the courage to proceed with this
revolutionary concept without its embrace by Milton Friedman.
man who last week, at the White House celebration in honor of
his 90th birthday, was honored by the President as
the man who changed the world by devoting his life to promoting
the invisible hand of economics while denouncing the invisible
foot of government. The man who Mr. Greenspan called the greatest
economist of the 20th Century. The man who for me,
thirty years ago as well as today, embodied an economic Supreme
Being. His endorsement of the idea was all the validation I needed.
Professor Friedman in the position paper commissioned by the
CME in the fall of 1971:
in the international financial structure will create a great
expansion in the demand for foreign cover. It is highly desirable
that this demand be met by as broad, as deep, as resilient
a futures market in foreign currencies as possible in order
to facilitate foreign trade and investment.
fortunately, he was not alone.
most of the financial world ridiculed the idea, there were some
brave and visionary souls in Chicago who, joined us in this historic
step. Without their intellectual support, without their time
and energy, without their conviction, it may have never come
of them are with us here today.
of dignitaries followed.)
Message from Alan Greenspan
Commemorating the 30th Anniversary
of the IMM
and global financial markets have quite literally been transformed
during the last 30 years and, without question, the International
Money Market has played a noticeably important role in bringing
about that transformation. The list of milestones that it set
in place is quite impressive: the first financial futures contracts
(foreign currency futures), the first cash-settled futures contract
(Eurodollar futures), and the first successful equity index (S&P
500 futures), to mention just a few. The launching of the Eurodollar
contract, in particular, proved a landmark. Before the Eurodollar
contract, many were unwilling to trade a contract that could
not ultimately be settled through physical delivery of the underlying
asset. And, before the Eurodollar contract, very few banks saw
any use for financial futures. Twenty years after the launch
of Eurodollar futures, most financial futures and the vast majority
of swaps are cash settled and banks are the biggest users of
Eurodollar futures and the dominant players in the swaps markets.
be sure, others have taken advantage of the innovations that
the IMM has made and today the IMM faces fierce competition,
not just from exchanges here in Chicago, but from exchanges and
over-the-counter markets around the world. Nonetheless, the Chicago
Mercantile Exchange has become the largest futures exchange in
the United States, largely on the strength of the IMM. Eurodollar
futures are the world's most actively traded futures contracts.
financial derivatives markets, which the IMM has played a critical
role in developing, have significantly lowered the costs and
expanded the opportunities for hedging risks that previously
were not readily deflected. As a consequence, the financial system
is more flexible and efficient than it was 30 years ago, and
economy itself may be more resilient to the real and financial
shocks. Indeed, the transformation of the financial system has
been so profound and the benefits so great, that it seems questionable
whether even those that launched the IMM could have fully appreciated
what they were setting in motion. What is clear is that participants
in financial markets across the country and around the globe
have good reasons to join the International Monetary Market in
celebrating their 30 years of accomplishment.
Innovation: The Last Twenty Years and the Next, Merton
H. Miller, Graduate School of Business, The University
of Chicago, Selected Paper Number 63, May 1986.
by Federal Reserve Board Chairman Alan Greenspan on the
30th Anniversary of the International Monetary
Market (IMM), May 12, 2001.
to top of page | Return to
Index | Home Page