Chicago Mercantile Exchange
Chicago, Illinois
May 14, 2002

Videotaped Congratulatory Message
by Milton Friedman in Honor of the
30th Anniversary Celebration of the IMM

It is a great pleasure to be with you today to celebrate the 30th anniversary of the establishment of the International Money Market.

This 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.

It's 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.

Futures 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.

In 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.

The 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.

In 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.

That's 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.

Thank you.

Remarks by Leo Melamed
at the CME Celebration of the
30th Anniversary of the IMM

Milton 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.

Indeed, 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 reality,
—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 financial,
—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.

How 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.

To 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.

Indeed, 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.

In 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

Alan 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

Of course we didn't. But we knew it was revolutionary and big. In the 1972 IMM Annual message to the members I dared say:

The 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...

...we 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.

And we were fearless:

We were a bunch of guys who were hungry.

We were traders to whom it did not matter-
  whether it was eggs or gold, bellies or
  the British pound, turkeys or T-bills.

We were babes in the woods, innocents,
  in a world we did not understand,
  too dumb to be scared.

We were audacious, brazen, raucous pioneers-
  too unworldly to know we could not win.

That the odds against us were too high;
That the banks would never trust us;
That the government would never let us;
That Chicago was the wrong place.

And we were lucky.

I 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.

What 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.

Still, I doubt I could ever have had the courage to proceed with this revolutionary concept without its embrace by Milton Friedman.

The 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.

Wrote Professor Friedman in the position paper commissioned by the CME in the fall of 1971:

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.

And fortunately, he was not alone.

While 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 to fruition.

Some of them are with us here today.

(Introduction of dignitaries followed.)

Congratulatory Message from Alan Greenspan
Commemorating the 30th Anniversary of the IMM

U.S. 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.

To 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.

The 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.

*  *  *

(1) Financial 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.

(2) Comments by Federal Reserve Board Chairman Alan Greenspan on the 30th Anniversary of the International Monetary Market (IMM), May 12, 2001.

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