17 he rate of inflation in the United States has moved steadily upward over the 1 past three decades. It averaged 2.1 percent per year in the 1950s, 2.7 percent per year in the 1960s, and 7.2 percent per year in the 1970s. At the last rate, the general pricqlevel would double every ten years. While the effects of inflation could be virtually ignored when it hobbled along at 2 percent, today's relatively high rates make it imperative for institutions to study the effects of inflation on their operations.' Futures markets are no exception.
It has often been noted that high and variable rates of inflation have been partly responsible for the tremendous growth in the use of futures markets since the mid-1970~.~ Considerably less attention has been devoted to the ways in which inflation negatively affects futures markets and, specifically, the way in which inflation affects the rules which govern the operations of these markets.
Each exchange has a set of rules which address everything from trading floor attire to the precise characteristics of each commodity contract being traded. While the format and style of rules vary among exchanges, the basic activities covered by each set of rules are quite similar. This article will examine the rules of a single exchange, the Chicago Mercantile Exchange, and discuss the ways in which inflation has affected these rules. It will also attempt to explore alternative rule formulations to make the rules more resistant to the effects of inflation.
The Chicago Mercantile Exchange is governed by a 389-page rulebook. It is a small, but important, portion of these rules which is affected by inflation.
'Some analysts feel that the U S . economy may be headed for a deflation in the near future. A sustained deflation would generally affect exchange rules in just the opposite fashion as an inflation. All of the proposals made in this article would still be appropriate in a deflationary situation.
'Periods of rapid infladon also tend to be periods of highly variable differences in the price increases of individual items or commodities. On the positive side, this price uncertainty has increased the demand for both the hedging and speculative opportunities afforded by futures markets. On the negative side, this price uncertainty has made it much more difficult for the exchanges to project their own operating costs.