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How A Pork Bellies Trader And Milton Friedman Created "The Greatest Trading Casino In World History"
"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 superstructure."
Nixon's estimable free market advisors who gathered at the Camp David weekend were to an astonishing degree clueless as to the consequences of their recommendation to close the gold window and float the dollar. In their wildest imaginations they did not foresee that this would unhinge the monetary and financial nervous system of capitalism. They had no premonition at all that it would pave the way for a forty-year storm of financialization and a debt-besotted symbiosis between central bankers possessed by delusions of grandeur and private gamblers intoxicated with visions of delirious wealth.
In fact, when Nixon announced on August 15, 1971, that the dollar was no longer convertible to gold at $35 per ounce, his advisors had barely a scratch pad’s worth of ideas as to what should come next.
Its first attempted solution was a Burns-Connally hybrid known as the Smithsonian Agreement of December 1971. The United States needed precisely a $13 billion favorable swing in its balance of trade. This was not to be achieved the honest way—by domestic belt tightening and thereby a reduction of swollen US imports that were being funded by borrowing from foreigners. Instead, America’s trading partners were to revalue their currencies upward by about 15 percent against the dollar.
Connally’s blatant mercantilist offensive was cut short in late November 1971, however, when the initially jubilant stock market started heading rapidly south on fears that a global trade war was in the offing.
As it turned out, a few weeks later Connally’s protectionist gauntlet ended in an amicable paint-by-the-numbers exercise in diplomatic pettifoggery. The United States agreed to drop the 10 percent import surtax and raise the price of gold by 9 percent to $38 per ounce.
Quite simply, the United States had made no commitment whatsoever to redeem paper dollars for gold at the new $38 price or to defend the gold parity in any other manner. At bottom, the Smithsonian Agreement attempted the futile task of perpetuating the Bretton Woods gold exchange standard without any role for gold.
During the next eight months, further international negotiations attempted to rescue the Smithsonian Agreement with more baling wire and bubble gum. But the die was already cast and the monetary oxymoron which had prevailed in the interim, a gold standard system without monetary gold, was officially dropped in favor of pure floating currencies in March 1973.
Now, for the first time in modern history, all of the world’s major nations would operate their economies on the basis of what old-fashioned economists called "fiduciary money." In practical terms, it amounted to a promise that currencies would retain as much, or as little, purchasing power as central bankers determined to be expedient.
In stumbling to this outcome, Nixon’s advisors were strikingly oblivious to the monetary disorder they were unleashing. The passivity of the "religious floaters" club in the White House was owing to their reflexive adherence to the profoundly erroneous monetarist doctrines of Milton Friedman.
A Friedmanite Fed would keep the money growth dial set strictly at 3 percent, year in and year out, ever steady as she goes.
Friedman’s pre-1971 writings nowhere give an account of the massive hedging industry that would flourish under a régime of floating paper money. This omission occurred for good reason: Friedman didn’t think there would be much volatility to hedge if his Chicago-trained central bankers stuck to the monetarist rulebook.
Most certainly, Friedman did not see that an unshackled central bank would eventually transform his beloved free markets into gambling halls and venues of uneconomic speculative finance.
It thus happened that Leo Melamed, a small-time pork-belly (i.e., bacon) trader who kept his modest office near the Chicago Mercantile Exchange trading floor stocked with generous supplies of Tums and Camels, found his opening and hired Professor Friedman.
THE PORK-BELLY PITS: WHERE THE AGE OF SPECULATIVE FINANCE STARTED
Leo Melamed was the genius founder of the financial futures market and presided over its explosive growth on the Chicago "Merc" during the last three decades of the twentieth century.
At the time of the Camp David weekend that changed the world, the Chicago Merc was still a backwater outpost of the farm commodity futures business.
The next chapters in the tale of Melamed and the Merc are downright astonishing. In 1970, Melamed made an intensive inquiry into currency and other financial markets about which he knew very little, in a desperate search for something to replace the Merc’s rapidly dwindling eggs contract. The latter was the core of its legacy business and was then perhaps $50 million per year in annual turnover.
Four decades later, Leo Melamed’s study program had mushroomed into a vast menu of futures and options contracts—covering currencies, commodities, fixed-income, and equities, which trade twenty-four hours per day on immense computerized platforms. The entire annual volume of the old eggs contract is now exceeded in literally the blink of an eye.
The reason futures contracts on D-marks and T-bills took off like rocket ships is that the fundamental nature of money and finance was turned upside down at Camp David. In effect, Professor Friedman’s floating money contraption created a massive market for hedging that did not have any reason for existence in the gold standard world of Bretton Woods, and most especially under its more robust pre-1914 antecedents.
When currency exchange rates were firmly fixed and some or all of the main ones were redeemable in a defined weight of gold, exporters and importers had no need to hedge future purchases or deliveries denominated in foreign currencies. The spot and forward exchange rates, save for technical differentials, were always the same.
Even more importantly, the newly emergent need of corporations and investors to hedge against currency and interest rate risk caused other fateful developments in financial markets; namely, the accumulation of capital and trading resources by firms which became specialized in the intermediation of financial hedges. Purely an artifact of an unstable monetary régime, this new industry resulted in prodigious and wasteful consumption of capital, technology, and labor resources.
The four decades since Camp David also show that the Friedmanite régime of floating money is dynamically unstable. Each business cycle recovery since 1971 has amplified the ratio of credit to income in the system, causing the daisy chains of debt upon debt to become ever more distended and fragile.
Currently, the daily volume of foreign exchange hedging activity in global futures and options markets, for example, is estimated at $4 trillion, compared to daily merchandise trade of only $40 billion. This 100:1 ratio of hedging volume to the underlying activity rate does not exist because the currency managers at exporters like Toyota re-trade their hedges over and over all day; that is, every fourteen minutes.
Due to the dead-weight losses to society from this massive churning, the hedging casinos are a profound deformation of capitalism, not its crowning innovation. They consume vast resources without adding to society’s output or wealth, and flush income and net worth to the very top rungs of the economic ladder—rarefied redoubts of opulence which are currently occupied by the most aggressive and adept speculators. The talented Leo Melamed thus did not spend forty years doing God’s work, as he believed. He was just an adroit gambler in the devil’s financial workshop—the great hedging venues—necessitated by Professor Friedman’s contraption of floating, untethered money.
THE LUNCH AT THE WALDORF-ASTORIA THAT OPENED THE FUTURES
According to Melamed’s later telling, by 1970 he 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."
Thus inspired, Melamed sought to establish a short position against the pound, but after visiting all of the great Loop banks in Chicago he soon discovered they weren’t much interested in pure speculators: "if you didn’t have any commercial reasons, the banks weren’t likely to be very helpful."
The banking system was not in the business of financing currency speculators, and for good reason. In a fixed exchange rate régime the currency departments of the great international banks were purely service operations which deployed no capital and conducted their operations out of hushed dealing rooms, not noisy cavernous trading floors. The foreign currency business was no different than trusts and estates. Even Melamed had wondered at the time whether "foreign currency instruments could succeed" within the strictures designed for soybeans and eggs, and pretended to answer his own question: "Perhaps there was some fundamental economic reason why no one had before successfully applied financial instruments to futures."
In point of fact, yes, there was a huge reason and it suggests that while Melamed might have audited Milton Friedman’s course, he had evidently not actually passed it. There were no currency futures contracts because there was no opportunity for speculative profit in forward exchange transactions as long as the fixed-rate monetary régime remained reasonably stable.
Indeed, this reality was evident in a rebuke from an unnamed New York banker which Melamed recalled having received in response to his entreaties shortly before the Smithsonian Agreement was announced. "It is ludicrous to think that foreign exchange can be entrusted to a bunch of pork belly crapshooters," the banker had allegedly sniffed.
Whether apocryphal or not, this anecdote captures the essence of what happened at Camp David in August 1971. There a motley crew of economic nationalists, Friedman acolytes, and political cynics supinely embraced Richard Nixon’s monetary madness. In so doing, they opened the financial system to a forty-year swarm of "crapshooters" who eventually engulfed capitalism itself in endless waves of speculation and fevered gambling, activities which redistributed the income upward but did not expand the economic pie.
As it happened, Melamed did not waste any time getting an audience with the wizard behind the White House screen. At a luncheon meeting with Professor Friedman at the New York Waldorf-Astoria on November 13, 1971, which Melamed later described as his "moment of truth," he laid out his case.
After asking Friedman "not to laugh," Melamed described his scheme: "I held my breath as I put forth the idea of a futures market in foreign currency. The great man did not hesitate."
"It’s a wonderful idea," Friedman told him. "You must do it!"
Melamed then suggested that his colleagues in the pork-belly pits might be more reassured about the venture if Friedman would put his endorsement in writing. At that, Friedman famously replied, "You know I am a capitalist?”
He was apparently a pretty timid capitalist, however. In consideration of the aforementioned $7,500, Melamed got an eleven-page paper that launched the greatest trading casino in world history. It made Melamed extremely wealthy and also millionaires out of countless other recycled eggs and bacon traders that Friedman never even met.
Modestly entitled "The Need for a Futures Market in Currencies," the paper today reads like so much free market eyewash. But back then it played a decisive role in conveying Friedman’s imprimatur.
In describing the paper’s impact, Melamed did not spare the superlatives: "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 superstructure."
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Looking GOOD Billy Ray!
Feeling good Louis!
And don't forget Hillary Clinton "somehow" managed to miraculously parlay $1,000 into $100,000 by playing the cattle futures - with NO experience at all!
If you think through what Stockman is saying, you should be terrified. We are all fucked, this is going to end very very badly some day.
And you just figured this out? /sarc
Fucked is a relative term. Plan for the best, prepare for the worst. Have you got 6 months worth of food and water at the house? Own a safe with guns and PMs in it? Do you have a really good relationship with your neighbors? Do they have all of the aforementioned stores? Then you'll do okay. If you don't have those things, get busy.
Greenspan and Keynes basically shut up about Liberty after becoming Zionist tools for plunder.
Friedman continued the charade.
"Free to Choose"...tyranny or tyranny.
Liberty is a demand. Tyranny is submission.
If you own a car, but not a garage, you can order any color you like, as long as it's black.
Those 2 natal charts: Nixon shut the gold exchange window, August 1971, and FDR makes the dollar-oil-deal with warlord Sultan Abdulaziz bin Saud, February 1945...hold the key to the next 50-60 yrs.
You've got Yalta and Harry S Truman "the Habberdasher" in there too.
Damn right he and Clark Clifford agreed to recognized the State of Israel.
"Gave birth to the CIA, the Joint Chiefs of Staff, the National Security Agency, the "X" telegram, etc..."
Yep...no Adolf Hitlers in that town.
Lessons Learned indeed...
The Federal Reserve and its political control of interest rates on a fiat, unbacked currency are now the foundation of the American welfare-warfare state and progressive plans for government.
At this point, the US Government would collapse without the ability to print money, suppress interest rates, and engage in financial repression.
At this point, the US Government would collapse without the ability to print money, suppress interest rates, and engage in financial repression.
Correct. But what would you have done?
If you would "install sound money", please describe what that is ... how it is created? ... how is it put into circulation? ... how it is removed from circulation and destroyed? ... what does it stand for and how does it work? ... does interest exist, if so how is it determined? ... does inflation of the money exist, if so how is it measured and what should it be?
Inquiring minds want to know.
see how it all evolves ? Fabian socialists are an extremely patient bunch.
I am so tired of these Hollywood stories about the mystic of the commodity pits.
These guys should have a used a mask and a gun, they were thieves by and large.
Hahaha, for the FIRST time I see a post here on ZH where the "profoundly erroneous monetarist doctrine" of Milton Friedman gets blamed for what follows : the greatest monetary sin of the West (after the gold exchange standard according to Jacques Rueff).
The Friedmanite floating rate regime is what started the instability in the world monetary casino and yes the futures market did the rest.
Yipeeee, we have it right there. The monetary SIN laid out here at ZH and it had NOTHING to do with Keynesian plays. The Casino was a PURE product of the CHICAGO school so dear to Hayek. Who approved the supply side "liberalisation" of Reaganomics that followed.
ZH has vindicated that very important piece of the puzzle in the global financial time line of our present age.
Now Keynes's ghost can rest in piece. Monetarism will have to carry its own Cross on its Golgothan march.
I think there may be a middle you're excluding...
May be a middle called Nixonian petrodollar anchoring. But that did not change the Casino mantra. It just anchored "our money your problem" to Saud's Oil guzzler.
All that did was to suck the Oil into the fiat bonanza world.
Something the Sauds don't appreciate anymore as the Fiat pile is making Pax Americana fragile and it cannot zero hedge its support of Sunni Saudi hubris. It has to HEDGE with IRAN...now having showed its resilience after 40 years of confronting the USA.
C'mon Genius don't just mumble in your libertarian beard, put up or shut up.
The biggest gas guzzler ON THE PLANET are the American Governments.
You don't see any of them driving Tesla's...SO DONT BLAME THE AMERICAN CONSUMER.
Everyone has a plan to "repay the debt" BUT ONLY HAYEK SAID BY NOT HAVING ONE IN THE FIRST PLACE DO YOU.
So now I guess we'll see how the world's vaunted "political classes" deal with ISIS.
Ain't like anyone is weeping over Syria or Yemen!
Not all monetarists are chicagoan. They became book cookers for Keynesian discretionary policy... Hence NK's, New Classicals, "market monetarists," et cetera. Friedman's been reduced to the guy in the back room, wearing a green visor and rigging up Keynes' insane monetary system.
Check it out
The Perversion of Monetarism
Agreed, but only because you know more than I do when it comes to Economics, and because I always thought that cocksucker Freidman, and the Chicago School, were crooked snakes-in-the-grass all along. And frankly, Z/H does kind of beat on Keynes a bit too much sometimes, but the SOB is dead, so who cares anyhow. Historiography has a nothing to do with reality in this day and age, methinks.
1946 Keynes dies. 1965 De Gaulle starts talking about "exorbitant privilege" and US hubris.
At the end of the 60s the London Gold club that tries to bridge French concerns about US spending profiglacy (Vietnam war, great society) and US balance of trade deterioration, collapses. Harold Wilson caves in to "gnomes of Zurich" and London loses pivotal role with a devalued £.
By 1969 the French have put the fear of God up Nixon when a french gunboat arrives reclaiming French gold deposited in NY. SO...1971 and Nixon makes the plunge.
You can say what you like about Keynes. He had nothing to do with Nixon/Johnson's spending spree which made gold revoke inevitable. It was not his philosophy which was à la mode in 1969 but the Chicago school.
From what I have read about Keynes he was appropriately characterized as 'brilliant'. Of course, no amount of Keynesian Stimulus could have shut down the Bear Stearns bear raid, or the Lehman Bros. Chapter 11. Ergo, the downfall of Freidman's orthodoxy was bound to occur as soon as Glass-Steagall deregulation provided the leverage via the FCC. Since the exemption on leverage for Bear Stearns it took five years to melt down to a systemic Worldwide intractable problem. Keynes was right about CB intervention, but he had no way of knowing that certain fundamentals would be altered beyond logic of failsafe.
p.s. thanks for going into detail on history. I always appreciate historical background given my background in Experimental Psychology/Personality/Biography/Historiography and Sociology.
Nixon's estimable free market advisors who gathered at the Camp David weekend were to an astonishing degree clueless as to the consequences of their recommendation to close the gold window and float the dollar.
Oh really? What would you have done ... with the street price of gold at over $70, the official price at $35, and the French choosing to be compensated in gold rather than dollars, as they were supposedly the same thing.
What would you have done?
In practical terms, it amounted to a promise that currencies would retain as much, or as little, purchasing power as central bankers determined to be expedient.
A manipulated policy oriented currency rather than a properly managed Medium of Exchange where:
When we have governments used to living by counterfeiting (having long exhaused public support via taxes), what should we expect?
Management of the MOE needs to be returned to traders and the marketplace. Governments can't be trusted with the responsibility.
You do love talking out your ass, don't you.....
"money is created by traders getting their trading promises certified".......funny.
Another reason the Chitown Loop banks were not supportive of Melamed's currency futures ideas was that the Harris primarily was at the time "the" Bulge Bracket Big Swinging US Based Dick of the cash and forward 4X markets as well as one of the largest financers of the futures businesses on the CME and CBoT. They saw Leo not as a product extension, but a threat to their dominance.
When currency exchange rates were firmly fixed and some or all of the main ones were redeemable in a defined weight of gold,
With, then as now, less than an ounce of gold per person on Earth, a third grader had arithmetic skills enough to know this was a ridiculous claim.
Everybody acts like Nixon closing the gold window was the beginning of something. It wasn't. It was the end. At that point the US had been spending money like water overseas for everything from the Marshall Plan, Volkswagens and Japanese transistor radios to the Korean and Vietnam wars. There was a net inflow of gold during the depression and WW2, but after that there was a steady outflow all through the fifties and sixties.
The whole world wanted American dollars, and a lot of it got turned in for American gold. The gold was nearly gone. At the rate it was going, the last ounce would leave Fort Knox in less than two years. They had no choice but to end the convertability of gold - sooner or later. Nixon's only choice was to take action and make a smooth transition or let everything go to hell at once.
Hey! I liked my little 9v Motorola 7 transistor red plastic AM radio with an ear plug. Thank God for Tricky Dick
(Still got it and works to this very day!)
Tricky Dick could have backed the dollar with Real Estate or a basket of currencies. Fiat is not backed appropriately, and Nixon knew it all along.
Just want to know where yellen is storing delivery of feeder cattle and live cattle contracts.
Few are buying beef at stores, but price remains high - lower demand is going for moving prices up in the fucked up Fed world we live in.
FUCK YOU YELLEN!!
https://miltonchurchill.wordpress.com/2015/07/21/in-defense-of-milton-friedman/
"The Great Deformation by David Stockman" ... This is the most remarkable treatise on economic history ever written. If you haven't read it you are still in the dark.You will continue to see many excerpts from this book on ZH ... and well deserved.
David Stockman should be given a Nobel Prize for Economics ... for exposing Economics as the insanity it is and fully captive to politics.
Mr. Stockman, I value your insights, but why do you insist on saying 'they' when you damn well know you should be saying 'we'.
It all started very small in the 1600s. By Nixon's time, Dick was just another front (agent) for the Snakes In Suits that make up The Great Red Dragon. The circus continues; the clowns change, and the paying audience keeps getting bigger.
hehehehe
gotta love our Talmudic Overlords
They have massively succeeded at enslaving us all more or less
Just as an epitaph to this thread :
It is ironic to see that the fiercest critics of Nixonian BW revoke, and the subsequent neo-liberal age of financialized Reaganomics benefiting from the CME it spawned, are the two stalwarts who helped build the intial model of Reagan's gift to the Oligarchs :
PCR and Dave Stockton!
Supreme irony ! The anointed poachers of welfare state wealth transferring it to "supply side shenanigans" have now turned virulent gamekeepers of the Republic who condemn the unilateralist ethics of that age (of which they were undoubtedly the initial stone cutters).