FUTURE IN FUTURES
at the 23rd Annual Fall Management Conference, Northwestern
November 7, 1973.
primary requirement for success of the IMM was the unwavering
support of our members. Thus, the results of our first year
were critical. To our relief, we were able to proudly point
to our achievements and bravely talk about the new era the
IMM represented. The 1973 Annual Report to the IMM membership
reflected this belief. In it, I unabashedly stated to IMM members
that "The new era will afford us the opportunity to expand
our potential into other areas within the monetary frame of
reference. That was the essence of the philosophy that fostered
the IMM. Our new market was specifically designed to encompass
as many viable trading vehicles in the world of finance as
practicable. We must be willing and ready to explore all possibilities."
results of our first year also gave us courage to explain to
our immediate community what was happening at the Chicago Mercantile
Exchange. This was no idle task. Success of our ambitious IMM
plans—in great measure—depended on the support of Chicago's
establishment and its leadership. It was imperative that we
spend time at Chicago's two prominent academic institutions:
the University of Chicago and Northwestern University.
theme delivered here was central to the message we reserved
for Chicago. Our city was special, its citizens were innovators,
and its institutions vibrant. Of particular importance were
the futures markets of Chicago. They were inventive, successful,
and expanding. What's more, they represented an economic engine
that could lead our city to greatness.
of what happens is by accident;
of what happens is by design;
of what happens is a combination of both.
city lives or dies, prospers or fails as a result of both accident
and design but particularly as a result of what its inhabitants
do with what they have. Let us read from the Book of Genesis:
two whole years, Pharaoh dreamed that he was standing by the
Nile, and behold, there came up out of the Nile, seven cows,
sleek and fat, and they fed in the reed grass.
behold, seven other cows, gaunt and thin, came up out of the
Nile after them and stood by the other cows on the bank of the
Nile, and the gaunt and thin cows ate up the seven sleek and
fat cows, and the Pharaoh awoke.
he fell asleep and dreamed a second time; and behold, seven ears
of grain, plump and good, were growing on one stalk.
behold, after them sprouted seven ears, thin and blighted by
the east wind.
the thin ears swallowed up the seven plump and full ears. And
the Pharaoh awoke, and behold, it was a dream.
after Pharaoh summoned Joseph to interpret the dream, Joseph
said to Pharaoh:
will come seven years of great plenty through-out all the land
of Egypt, but after them, there will arise seven years of famine.
them gather all the food of these good years are coming, and
lay up grain under the authority of Pharaoh for food in the cities,
and let them keep it.
food shall be a reserve for the land against the seven years
of famine that are to befall the land of Egypt, so that the land
may not perish through famine.
the concept of a futures market was born. Joseph's idea saved
the day. Egypt would place forward buy hedges during the period
of over-supply in order to provide for their needs during the
period of under-supply. Alas, Joseph and the Pharaoh did not
go far enough. They failed to grasp the full magnitude of Joseph's
innovation. They missed their chance to open the First Nile
Board of Trade. Indeed, it would take centuries before the concept
would fully crystalize and be utilized to the full scope of its
potential. Indeed, it required the resourcefulness, wisdom and
vision of Chicagoans to put Joseph's concept to work.
it an accident that happened in Chicago? Was it some grand design?
Or was it a combination of both? We could discuss these questions
at length. We could examine them philosophically or logically.
But they are of no great concern to us now. What is important
is that it happened here. As a result, today Chicago is the
capital of the world's futures markets.
the first ten months of this year, 903,000 hog contracts were
traded at the Chicago Mercantile Exchange (CME) equalling 144.5
million hogs with a monetary value of $11.2 billion. During the
same period, 1.2 million wheat contracts were traded at the Chicago
Board of Trade (CBOT) equalling 181.6 million tons of wheat with
a monetary value of $23 billion.
city grows by adjusting to changes and bending with the constant
flux of time. To survive, it must fit and meet the needs of
the present. In Chicago, the stockyards are gone. But, in 1972
at the Chicago Mercantile Exchange, approximately 1.4 million
cattle contracts were traded, the equivalent of 48 million head
of cattle amounting to a value of approximately $20 billion.
We no longer store grain in Chicago. But, in the first ten months
of this year, the Chicago Board of Trade recorded approximately
7 million transactions of wheat, corn and soybeans, the monetary
value of which is upwards of $170 billion.
we explain the significance of these markets? Need we spell
out their benefits to our city, country, or the world? Suffice
it to say that futures markets are now an integral part of the
agricultural structure of this country. Suffice it to say that
the benefits are of such scope and magnitude that one would be
hard-pressed to enumerate and evaluate them all. Suffice it
to say that futures markets provide our nation with a unique
economic tool that cannot be duplicated in any other form. Suffice
it to say that its users are diverse and everywhere. Futures
serve as an insurer, act as a barometer, function as a stabilizer
of prices, operate to level out supply, provide a consensus prediction,
stimulate competition, perform as an educational institution,
catalog and disseminate statistics, work for both the consumer
and producer, aid in the marketing of food products, and, at
the same time, offer speculators the opportunity to test their
ability against the wiles of the price gods.
it to say that U.S. commodity futures exchanges are part and
parcel of the most successful system of agriculture and marketing
in the world. A system whose productivity has more than trebled
in the last twenty years. A system that is the marvel and model
for the rest of the world. Indeed, it is with a great deal of
pride that we in Chicago can boast of having the two exchanges
that account for over 80% of this nation's futures business.
we fully evaluate what this means for Chicago? Can we fully
assess what $66.1 billion worth of transactions on the CME in
1972 and $123 billion worth at the CBOT means to the financial
infrastructure of our city? Can we fully estimate the value
of the daily margin deposits to our city banks? The CME alone
currently deposits $100 million per day. We estimate that between
the Chicago Board of Trade, the Chicago Mercantile Exchange and
the International Monetary Market (IMM), the cash deposits to
Chicago banks on any given business day amounts to approximately
$400 million. And margin deposits are but a portion of the total
deposits held in Chicago by the member firms of these markets.
Can we calculate the economic thrust generated by these deposits?
The financial services? I leave that to the bankers. Moreover,
these figures will easily be doubled in 1973.
a matter of fact, there are those who estimate that by 1980,
the futures business in the United States will have increased
five-fold. This would mean that the Chicago Mercantile Exchange,
the Chicago Board of Trade and the International Monetary Market
should be generating about $2 billion in margin deposits at Chicago's
banks. If this estimate is extreme, remember that an increase
of only 1-1/2 times present levels—a considerable slowdown of
our present rate of growth—would still account for $1 billion
in daily margin money deposits for Chicago banks. A sizable
figure by anyone's standards.
is abundantly clear is that Chicago's futures markets are an
important and integral part of our nation's agriculture, while
also a significant financial engine in this city's infrastructure.
Of equal import is the fact that in this field of business, Chicago
is second to none. So can we rest on our laurels? Should we be
satisfied with the growth of our Chicago's markets during the
past decade? Volume on the CME alone has risen by 1690% since
1963. One could conclude that we could take a well-deserved
rest and enjoy our successes. If we did, it would not be the
way of Chicago.
was with good reason that Nelson Algren called Chicago "City
on the Make." Chicago has a restless soul. It is forever probing
new vistas, new frontiers. This is the spirit that has made
us great and leads us to an even greater destiny. This is the
essence of our future. And when Treasury Secretary Shultz visited
Chicago several months ago he made a remarkable statement. He
stated he was proud of his Chicago heritage because most of the
important new ideas emerging during the last two or three decades
were either born in Chicago or were conceived by Chicagoans.
futures markets are true to this tradition. Not satisfied with
their phenomenal growth, they gave birth in 1972 to two new and
highly innovative concepts that may prove to be of revolutionary
significance in the growth of Chicago as a world financial center.
The Chicago Board of Trade inaugurated its Chicago Board Options
Exchange and the Chicago Mercantile Exchange, its International
me to dwell upon the latter, I know of it first hand. We believed
that our idea for a futures market in foreign currency was quite
good. We convinced our Board members and our membership that
it was a concept on which we could build the International Monetary
Market and the future of the CME. We were, however, now faced
with the formidable task of translating the idea into practicable
application. To implement it we needed a helping hand from yet
another Chicagoan, Dr. Milton Friedman. It was Dr. Friedman who
gave us the courage to believe we were onto something big and
worthwhile. And it was his unquestionable prestige and credentials
that opened doors for us in Washington and enabled us to state
with confidence that a futures exchange for foreign currency
was a necessity whose time had come.
to what he wrote in his position paper on this subject upon the
fall of Bretton Woods:
that there is now a spot and forward market in London, Zurich
and New York, but it has neither the breadth, nor the depth,
nor the resilience that is needed. A really satisfactory futures
market cannot depend solely on hedging transactions by persons
involved in foreign trade or investment... The market needs
speculators who are willing to take open positions as well
as hedgers. The larger the volume of speculative activity,
the better the market and the easier it will be for persons
involved in foreign trade and investment to hedge at lower
costs and at market prices that move only gradually and are
not significantly affected by even large commercial transactions.
changes 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. Such
a wider market is almost certain to develop in response to
the demand. The major open question is where. The U.S. is
a natural place and it is very much in the interest of the
U.S. that it should develop here. Its development here will
encourage the growth of other financial activities in this
country, providing both additional income from the export of
services, and easing the problem of executing monetary policy.
must fully comprehend the magnitude of our undertaking to assess
and evaluate its progress and success. What we did was revolutionary.
What we did was journey into uncharted waters. What we did was
to enter an arena that was the private and sacred shrine of the
banking community. What we did was to design an economic tool
that had been previously used exclusively in agriculture. What
we undertook was to explain the meaning of Bretton Woods and
the significance of its breakdown. What we undertook was to teach
the American public about a investment vehicle heretofore unknown
on the American shore.
knew it would be a long and hard lesson about a new order, a
lesson we ourselves were to learn as we went along. Because we
were dealing with a new commodity, there were no rules, no frame
of reference. Predictably, our market has already experienced
a number of significant changes. It has been subjected to modifications
brought about by our own learning process and daily dealings
with this new vehicle of finance, one that previously was the
sole possession of gnomes of Zurich, London and Frankfurt.
we asked should this be so? By what right should European centuries
old markets be the sole determinants of the value of the dollar?
Why should there not be an equally resilient market on the American
shore? And, why should such a market not serve both the business
community as well as the public at large? As a matter of fact,
the market we had in mind would only work effectively when there
was a real interaction between speculative and commercial interests.
Such a market would act as an alternative to the interbank market.
Such a market would force foreign exchange rates to become more
competitive and realistic. Such a market could become liquid
much farther out into time.
the beginning, New York banks and bankers considered the project
too ridiculous to consider seriously. Today, the New York banks
look at our venture in an entirely different light. Today, for
instance, both the Chase Manhattan and the City National Bank
of New York deal directly with our market. In Chicago, we were
accepted from the very inception. Not only were we assisted by
all the major Chicago banks, the Continental Illinois National
Bank became our foreign exchange delivery agent and the First
National Bank of Chicago became a clearing member. Moreover Mr. A. Robert
Abboud, Executive Vice President of First National, and Dr. Beryl
Sprinkel, chief economist of the Harris Trust became members
of our Board of Directors.
us it was obvious. If we were right about the need for such
a market, then it belonged in Chicago—the capital of futures
markets. It would be a long, long time before our market fully
blossomed, but from the start we were certain that the result
would be worth the effort. What spurred us on was the magnificent
potential of the concept. Finance was, after all, limitless in
date, the evidence continues to mount that our idea is in synch
with the new world monetary standard. Indeed, when the IMM began,
all we looked for was a world in which rates would annually fluctuate
up or down against the dollar by as much as 2-1/4%. We soon
learned that such would be its hourly rate of fluctuation. Today,
barely eighteen months after the IMM's opening, we have every
reason to be proud of its achievement and are certain of its
immense potential. In our first year, there were 142,928 IMM
transactions amounting to a value of $21 billion. In the first
ten months of 1973, there were already 249,345 IMM transactions.
we believe the IMM to be a grand project with an unlimited potential--a
project that is in the national interest and vital to Chicago.
To put it simply, just as London for centuries demonstrated the
value and power of acting as the world center of financial services,
so can the IMM act as the force to make Chicago a financial center
for the world.
by permission. Excerpted from Melamed on the Markets, by Leo
Melamed. John Wiley & Sons, 1993
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