It's Good Enough for Milton"
By Leo Melamed
The Milton Friedman Commemoration
University of Chicago
January 29, 2007
I did not know it at the time, my first introduction to Milton
Friedman occurred in 1940 when I was but seven years old. We
were on the first leg of our escape from the Nazis at the outset
of World War II and arrived from Bialystok, the city of my
birth, to Vilna—that’s Vilnius, for those
who don’t know the Yiddish name of this venerable Lithuanian
city. My father, who was first and foremost a mathematics teacher,
sat me down to provide my first lesson in economics. The circumstances
made the moment historic and memorable. Years later I had
the privilege of relating this story to Milton and Rose.
one hand my father held up a Polish zloty, in the other a
Lithuanian lit. “Do you know what these are?” he
I answered, proud to show off my deep understanding of such matters.
he agreed. “And do you know how much each of them is worth?”
shrugged my shoulders, having exhausted my expertise in high
father then carefully explained that the value of those two
units of currency could be determined only by what they can
buy in the marketplace. What followed was my first exposure
to the logic of Milton Friedman. I learned that while the
official rate of exchange between the zloty and the lit was
one for one, in fact it would take two zlotys to buy a loaf
of bread but only one lit. “The government’s
official rate doesn’t mean a thing,”
my father admonished.
was the start of our two-year odyssey, as my parents with
me at their side miraculously outwitted the Gestapo and KGB
in a danger-filled escapade that spanned three continents,
six languages, Japan, and happily concluded in the United
States. The lessons in Milton Friedman’s free market
economics continued as we chased around the world, and as
the lit changed to a ruble, the ruble to a yen, and finally
a yen to a dollar. It left an indelible impression, one that
resonated some 30 years later when I became chairman of the
Chicago Mercantile Exchange.
1970, the world was still chained to the failing fixed exchange
rate regime agreed to in 1945 at Bretton Woods in the mountains
of New Hampshire. Thereafter, foreign exchange trading was
allowed only at the officially established rate of exchange. An
individual, regardless of his standing, wealth, or businesses
was barred from participation. In a well-publicized story,
when Milton Friedman attempted to go short the British pound,
a bank refused him the right to do so on the basis that “Friedman
did not have the necessary commercial interest to deal in
chairman of the CME, I was acutely aware that the idea of
a futures market in currency, where everyone has sufficient
commercial interest, was sheer heresy, akin to suggesting
monotheism to a pagan. Knowledgeable people implored that
the CME reject such a nonsensical idea. Most of our board
of directors warned that futures markets were suited for
traditional agricultural products and little else. The orthodox
financial community was also vehemently opposed. At best
we were considered an “unwelcome” and very distant
relative of the mainline financial family. Futures markets,
they predicted, would never be utilized for the sophisticated
needs of world banks and commercial enterprises. Besides,
Chicago was the wrong place. That was the habitat of Al Capone.
Matters of finance belonged in the holy centers of finance—London
and New York.
is nearly impossible today to understand or visualize the world
before Milton Friedman’s ideas revolutionized the
planet and became orthodoxy. What is self-evident today was
heretical then. Much of the world was still suffering the pains
of command economics. The Iron Curtain was still intact. The
Berlin Wall had not yet fallen. The dollar did not freely fluctuate. “Free
to Choose” had not yet become the road map for the international
was another overriding issue which plagued me then. How could
I, a lawyer-turned-trader cum financial innovator really
be certain that foreign currency instruments could succeed
within the strictures designed for soybeans and eggs? Perhaps
there was some fundamental economic reason why no one had
before successfully applied financial instruments to futures.
Indeed, on the eve of our currency launch, a prominent New
York banker stated: “It’s ludicrous to think
that foreign exchange can be entrusted to a bunch of pork
belly crapshooters.” Who could I turn to for advice?
Who could overcome the weighty objections by so many? Who
could give me courage to proceed?
me there was but one person in the whole world capable of
settling the issue. By 1970, I had become a committed and
ardent disciple in the army that was forming around Milton
Friedman’s ideas. He had become our hero, our teacher,
our mentor. I even had the temerity to sneak into his lectures
at the U. of C., although I was not a student, to listen
to the great man expound on the free market. What I heard
made my spirits soar. Here was the voice of supreme economic
authority saying that the system of fixed exchange rates
was wrong. That it was time for its demise. Here was the
fount of economic logic and vision saying that what I experienced
as a child was true: That real value could be determined
only by the free flow of supply and demand in an open competitive
I mused, a marketplace like a futures exchange.
the inevitable came to pass—the stresses resulting from
the dysfunctional fixed exchange rate system was more than
the U.S. could bear. On August 15, 1971, President Nixon
canceled the Bretton Woods Agreement and dropped the U.S.
dollar convertibility to gold. It was what Milton Friedman
had advised Nixon to do from the beginning. For the world
it unleashed a financial tsunami whose reverberations would
be felt a decade later. For me it represented the moment
met for lunch on Saturday, November 13, 1971, at
the New York Waldorf Astoria.
began by asking that he promise not to laugh. (At the time
I had no understanding of what Alan Greenspan has described
as Milton Friedman’s utter disregard to status.) I
held my breath as I put forth the idea of a futures market
in foreign currency. The great man did not hesitate.
a wonderful idea,” he said emphatically. “You
must do it!”
I pursued, “Is there any reason foreign currency might
not work in futures markets?”
I can think of,” he replied.
a moment his words hung in the air.
my voice returned, I said, “No one will believe you
chuckled. “Sure they will.”
I boldly said. “I need it in writing.”
smiled. “Are you suggesting that I write a paper on
the need for a futures currency market?”
know I am a capitalist?” Milton ventured.
shook hands and settled on the amount of $7,500 for a feasibility
study on “The Need for a Futures Market in Currencies.”
friendship and bond was formed that lasted a lifetime.
a month, I held in my hand the Holy Grail for the Chicago
Mercantile Exchange. The most influential economic mind of
the twentieth century provided the CME with the intellectual
foundation upon which to build its financial futures superstructure.
He said all he needed to in 11 pages.
rest, as they say, is history. On May 16, 1972, the IMM,
the financial division established by the CME, ushered in
the modern era of financial futures. Coincidentally,
the following year, the Black-Scholes model provided the
foundation for exchange-traded equity options. Both events
occurred in Chicago. During the first decade of its existence
the IMM initiated a series of innovations in foreign exchange,
interest rates, and equity indices. In 1986, precisely 14
years after the IMM’s inception, Nobel Laureate in
economics Merton H. Miller declared financial futures as “the
most significant financial innovation of the last twenty
we were lucky. Sure our timing was great. Sure the idea was
invincible. But the major difference was the paper written
by Milton Friedman. It was the equivalent to an unvanquishable
secret weapon. With it in hand, we crisscrossed the nation
innumerable times, visited every nation on the planet, addressed
audiences large and small, faced government officials, bank
presidents, corporate treasurers, and the brokerage community
and convinced them that a market in currency futures—a
market in financial instruments—was an idea whose time
was magical. For when we said the IMM was a great idea, the
world yawned or laughed. When we told them Milton Friedman
said so, the world took notice. When we were told fixed exchange
rates were coming back, we responded: Friedman said they
are not! When we were told Chicago is the wrong place, we
responded: Friedman is a Chicagoan! When we were told that
we were crazy, we responded: Friedman is one of us! And each
and every time, his name made the difference!
the years, this magic escalated. As his “Capitalism
became the watchword for economic philosophy, as his logic on
behalf of individual choice, free markets, and personal responsibility
gained adherents, as his beliefs in individual liberty infused
freedom around the globe, his name assumed near mythical proportions.
finance ministers, central bankers, businessmen who would
otherwise not have given us the time of day, or allowed us
near their door, because of his name, opened the door for
us. In the winter of 1975, Alan Greenspan instantly embraced
our next iteration, Treasury bill futures. He had read Friedman’s
currency paper. When the CFTC required U.S. Treasury approval
for the T-bill contract, at my behest, Milton Friedman telephoned
William Simon, the Secretary of Treasury. Our contract was
approved the same day. Milton Friedman rang the opening bell
in January of 1976.
perhaps the reaction of George P. Shultz is emblematic of
the value of Milton Friedman’s paper and tells the
whole story. Shultz was the first American government official
I visited after the launch of the IMM’s currency market.
He had just been appointed Secretary of Treasury. Secretary
Shultz had no way of knowing that this was my first visit
to Washington, DC, or that my knees were shaking as I entered
his imposing office. Wisely, I had sent Milton’s feasibility
paper to the Secretary before I arrived. There was very little
conversation between us. Shultz listened to my explanation,
smiled, and with a wave of the hand said, “Listen,
Mr. Melamed. If it’s good enough for Milton, it is
good enough for me.”
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