BY LEO MELAMED
the Celebration of the Chinese Language Publication of
Escape to the Futures
me to begin by stating how honored I am to be at this celebration
and the fact that the Shanghai Securities Newspaper Publishing
House undertook to publish a translation of my memoirs, Escape
to the Futures. Notably, this is the second language that
my memoirs have been so honored, the first translation being
Chinese language translation could not have been possible without
the special efforts of my friends Yang Ke, Chen Hen, Jiang Yang,
CEO of Shanghai Futures Exchange as well as the Chairwoman, Madam
Wang Li-Hua of the SHFE. I am deeply indebted to Yang Ke for
his talent and translation skills in making this publication
was a child of barely seven years old when World War II broke
out and ensnared me in its iron grasp. I was destined to be
a victim of the Nazi juggernaut as did the 6 million other
Jews in Europe, including 1.5 million children, who perished
at their hands. Fortunately, fate had another mission for me.
Clearly, my escape was due to providential intervention. But
perhaps the biggest part, was due to the brilliance of my father
and mother, who miraculously found a way to save themselves
and their only child from the ovens of Auschwitz and Treblinka.
escape to freedom in 1939 spanned two years, three continents
and six languages as my parents with me at their side outwitted
the German Gestapo and the Russian KGB. To attempt now to describe
that journey in detail would take days—to say the least—far more
time than this celebration will allow. Suffice it to say that
the journey, which took the three of us from Poland, through
Lithuania, through all of Russia, across the Siberian steppes,
to Japan, and eventually to the United States of America is
a story that could make a good Hollywood adventure movie. However,
at the time it was anything but thrilling. Every step we took
was fraught with danger, every step could have been our last.
I believe my father had to make perhaps a thousand decisions,
each one being the difference between life and death—and he
made every one of them correctly.
I found myself in Chicago as a young boy with my whole life in
front of me. I chose the profession of law but very soon found
myself fascinated by the world of futures markets. Ultimately,
I decided that my future was in futures. Not knowing whether
I would succeed or not, I took the risk. In a way that decision
epitomized the essence of my being—a willingness to take risk.
But I must say that my rise to the top of the complex futures
world is a tribute to the beauty of America. Here I was, a refugee,
without money, without clout, without connections, without family,
and yet America gave me the opportunity to use my imagination
and talent to lead the Chicago Mercantile Exchange, and, in doing
so, some would say, I not only brought the CME from a pork bellies
exchange to a world-class financial institution, but revolutionized
the markets worldwide.
to the Futures is the story of how some of this came about.
Let me dwell only on one or two salient aspect of that story.
It is important to understand at the outset that in 1967, when
I was first elected to the board of directors of the Chicago
Merc, the exchange was a rather secondary, even meaningless
institution that dealt in butter and eggs. It had a terrible
reputation, it had antiquated rules—some would say it had no
rules—it allowed underhanded schemes and chicanery to exist
in the conduct of its affairs. It might be of special interest
to all ladies in the audience that my first action on the board
was to propose and enact a rule that removed a old prohibition
that discriminated against women becoming members of the CME
or even work on its floor. I am very proud of this achievement
because the CME was one of the first exchanges in the U.S. to
adopt this policy. I say "work on its floor" because
in those days, all futures markets in the U.S. were by open-outcry—where
its members would gather in a ring, which we called a pit, and
shout out their orders in auction style to buy and sell. Today,
of course, although we still have some markets that are conducted
through open-outcry, 50 percent of the business is conducted
through GLOBEX, our electronic transaction system that was
conceived in 1987. And of course we are a global institution
with 99 percent of its transactions in financial instruments.
I am getting ahead of the story. When I was elected CME chairman
in 1969, my first order of business was to reorganize the structure
of the exchange. I created a legal department, an economics department,
as well as a rule enforcement department. Rule enforcement, as
I said, was a brand-new undertaking at the Merc and to make
it work we needed a modern rule book. This was a process that
took the next year and a half and resulted in the framework
of a book of rules for trading in futures that is still the
foundation of our present exchange and the model for the rest
of the world.
we had rules, and the ability to ensure their enforcement, I
looked at our product line. Our origin, as you know, was in butter
and eggs, but both of those markets had long lost their attraction.
The production of butter and eggs had changed dramatically over
the years, and with that change so did the need for futures markets
in those products. We were now a "meat" exchange—pork bellies,
cattle, and hogs. And although we had great hopes for these product,
I realized that a successful exchange cannot rely on one product
line. To be successful, I believed, an exchange had to diversify.
So I began a search for new and different products. I tried everything,
potatoes, shrimp, apples, chickens, and even turkeys. None of
must now digress again and tell you a little more about my travels
as we were escaping from the horrors of the Holocaust. Every
time we crossed a border, my father, who was a teacher, would
sit me down and explain how the money changed with the different
government. First we had zlotes in Poland, then we had lit in
Lithuania, then rubles in Russia, yen in Japan and finally dollars
in America. My father was careful to explain that the value of
each of these currencies was different and that their value kept
changing. It was my first lesson in economics, and it made a
great impression on me as a child.
in life, when I was already chairman of the CME, I was reading
book after book on economics. I was especially attracted to the
writings and teachings of a well-known economist at the University
of Chicago, the now world-famous Nobel laureate, Milton Friedman.
His ideas about free markets resonated in my mind, and I became
an avid advocate of this philosophy. The late 1960s and early
1970s, you may recall, was a time of great change in world markets.
The economies of those countries that had been destroyed during
the war—England, Germany, and Japan—had been totally rebuilt
and were now entering into a new competitive world structure.
The system of fixed exchange rates—the so called Bretton Woods
Agreement instituted in 1945 after the war—where all currencies
were valued on the basis of the value of the American dollar
was by then outdated. The first infant sounds of globalization
were beginning to be heard. New technologies were allowing information
to flow around the world at a speed that was previously impossible.
Where it used to take days if not weeks to learn of a new action
by, say, the government of Japan that affected the value of the
yen relative to the dollar, now that information was available
in minutes. Today, of course, that information is instantaneous
around the world. So the change in value of a currency could
no longer wait until the ministers of finance met once a year
to officially proclaim a changed value in a given currency. Value
change was impacted by the speed of information.
those days, Milton Friedman was advocating the idea that currency
should float. In other words, he was saying that Bretton Woods
was an antiquated idea that could no longer serve the modern
marketplace. I believed him, and all of a sudden the currency
lessons I experienced firsthand as a child came to my mind.
I started to think, here I was chairman of a futures exchange
in Chicago looking to diversify the products of the Chicago Mercantile
Exchange. What if Milton Friedman is right and the currencies
of the world floated and changed their values every day instead
of maintaining a fixed value? Wouldn’t that require a futures
market in currencies?
was an epiphany. I became obsessed with the idea. Wouldn’t that
be a great market? A market in currency where commercial users
as well as speculators could send their orders to buy and sell.
A marketplace that would give the world a place to hedge their
foreign currency exposure. A place to manage the risk of finance.
could think about nothing else day or night. But at the same
time I realized that the idea was revolutionary. Futures markets
were exclusively used in agriculture: rice, soybeans, wheat,
eggs, butter, cattle. For the thousands of years of futures markets,
why, I wondered, had no one ever tried to use them for financial
instruments? Maybe, I thought, futures markets would not work
in finance. Perhaps, I said to myself—because I am not an economist
by profession—I don’t fully understand some underlying principles
involved. Surely someone else would have tried it if it were
possible to trade a financial instrument in a futures market.
Am I therefore about to make a foolish mistake. Am I about to
lead the Chicago Mercantile Exchange into a path of ridicule?
One that might bring ruin to the institution? The idea would
not let me rest and the worry would not let me sleep.
I decided there was only one way I could answer the dilemma.
I had to ask Milton Friedman what he thought about my idea. Could
a futures market support financial products? Could a market in
foreign currency work? Was such a market a good thing for the
met with the great man in November of 1971 and posed to him the
question. He did not hesitate with the answer. "What a wonderful
said. "The new world will need a futures market in currency."
was ecstatic. Here was the great man of the University of Chicago, the
Deng Xiao Peng, but of global economics, saying to me
that the concept of a currency futures market was a wonderful
idea. That financial instruments can be applied to futures
markets. That such a market was needed. However, fearing that
no one would believe me, I asked him if he would put his answer
in writing. He smiled and responded that he was a capitalist.
I said, "how much?" He said for $7,500 he would write a feasibility
paper on the subject. I accepted the offer.
course, for the idea to work, currency values would have to float.
Little did we know how quickly that would happen. A month later
U.S. President Nixon closed the gold window and the Bretton Woods
system of fixed exchange rates was forever gone. The world of
finance was never again the same. At the CME I moved quickly.
Sensing that I needed a specialized market for instruments of
finance, I organized a financial division called the International
Monetary Market—the IMM. It was designed to trade only financial
instruments. It opened its doors on May 16, 1972. The first instrument
was currency futures.
course, opening the doors on financial futures is one thing.
Getting the world to accept the idea was quite another. I quickly
learned how skeptical the world was about the idea. How much
the world distrusted futures—especially in Chicago—especially
at the Chicago Mercantile Exchange. As Mr. Donohue, the CME CEO
said this morning, "We faced skepticism and indeed, criticism." The
idea was labeled unnecessary, dangerous, and tantamount to gambling.
It took years of work, years of education, hundreds, maybe thousands,
of speeches and lectures, a nearly Herculean effort by myself
and many people at the CME. Of course, the support of Nobel laureate
Milton Friedman and later Merton Miller and Myron Scholes were
the idea took root, so much so that it was copied in every corner
of the globe. From Moscow to Singapore, from Chicago to Shanghai,
from London to Mumbai—to manage modern financial risks, the marketplace
needed exchange-traded financial futures and over-the-counter
(OTC) derivatives as these markets are called today. Their
economic function to provide a mechanism to manage inherent
business risks in a globalized world was universally accepted
and developed not only on centralized world exchanges but in
over-the-counter markets as well. As a consequence capital
markets have been strengthened, national productively has improved,
and standards of living have grown. In 1986, Nobel laureate,
Merton Miller, bestowed upon the IMM of the CME the greatest
honor: He called the invention of financial futures, the
greatest innovation in business of the past twenty years.
no mistake about it! In our global market environment—driven
by constant and changing market risks, instantaneous information
flows, and sophisticated technology—futures markets and OTC
derivatives are essential instruments of finance. And for emerging
economies that represent the ocean of the future, they are
indispensable tools in the development of free and efficient
learn how all of that happened, I guess you will have to read Escape
to the Futures. Thank you.
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