How Milton Friedman Changed Foreign Exchange


Editor’s Note: This fall, a new PBS series, Testing Milton Friedman, celebrates a century since the birth of the influential economist and Nobel prize winner. CME Group board member Bill Shepard shares his thoughts on Friedman’s role in launching foreign exchange markets

In May 1972 the Chicago Mercantile Exchange established the International Monetary Market (IMM), the world’s first in foreign currencies. By now, many know the story. Former CME Chairman Leo Melamed, inspired by professor Friedman’s argument for flexible exchange rates, came up with the idea for a futures market in currencies. Friedman wrote the paper that allowed Leo to sell the idea for a new kind of exchange, and the paper’s message echoed through just about any office where economic policy decisions were being made. This was the biggest change to the market in decades and, I would argue, the most significant change in markets of any time since.

I was starting out as a trader at the time, not quite familiar with the idea of floor trading, let alone trading a financial product. This was something revolutionary indeed.

In those early days, it was difficult to trade currencies due to their newness and lack of volume.  But those of us who believed in them went to great lengths to see that they succeeded. Some CME members even badged up young employees, and told them to go into the pit to make bids and offers rather than go on their break, just in case any customer business came by.

It was a fascinating experiment, which soon found tremendous success and paved the way for all sorts of other financial futures. But to many of us this wasn’t just about trading a financial product. It was the idea behind it. The idea, which Milton Friedman had advocated for decades, that foreign exchange rates ought to be decided by market fundamentals the way other commodities were.  In a 1953 paper on the subject, Milton summed up his point by comparing exchange rates to daylight savings time:

Isn’t it absurd to change the clock in summer when exactly the same result could be achieved by having each individual change his habits? All that is required is that everyone decide to come to his office an hour earlier, have lunch an hour earlier, etc. But obviously it is much simpler to change the clock that guides all than to have each individual separately change his pattern of reaction to the clock, even though all want to do so. The situation is exactly the same in the exchange market. It is far simpler to allow one price to change, namely, the price of foreign exchange, than to rely upon changes in the multitude of prices that together constitute the internal price structure.

It is this kind of relatable, and to me irrefutable, argument that made Milton a genius. He took what is to most a complex knot of economic and monetary policy, and explained to anyone why Bretton Woods was destined to fail, and why free markets should determine the value of currency.

Like any fan of free markets, my admiration for professor Friedman goes beyond his great advocacy for foreign exchange markets. His promotion of free markets and freedom as a counterpoint to government intervention and inflationary policies has changed the way people think about the world, and indeed the way the world works.

Everything from the removal of the gold standard to the establishment of a volunteer army can be traced back to Milton Friedman. His advice to Presidents and financial leaders is one of the key reasons we saw a move away from Keynesian policies to market-based solutions for most of the last 40 years.

And his writing in great books like Capitalism and Freedom and Free to Choose makes his ideas not only timeless, but accessible. It is for these reasons that I’m a supporter of Milton Friedman’s ideas, and his legacy.

This year, Milton Friedman would have been 100 years old. To mark the occasion, PBS is re-airing portions of his fascinating Free to Choose television series from the 1980s, and coupling it with discussion from contemporary thinkers in a new series called Testing Milton Friedman.

The series provides a great discussion about the man who I believe was the greatest economic influencer of my lifetime. You can watch a trailer here.  CME Group is a sponsor of the series, and  launched a site with information about the program, and links to articles on the creation of foreign exchange markets.

I’ve been fortunate to have a career shaped by Friedman’s ideas, and to have met him. My hope is that the series will introduce Friedman’s ideas to a new generation of thinkers, leaders and market participants, so the great change of the next 40 years might also come from his leadership.


Bill Shepard is a member of the CME Group board of directors. He has been a member of CME for more than 30 years, and is founder and President of Shepard International, Inc., an introducing broker.

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