Financial Resource

which had to approach the new market through an analysis of the world in which the Labour Party sought to govern. Such an analysis posed a variety of questions. Firstly, why particular institutions and processes posed such a set of problems for the individual Labour governments? Secondly, why particular issues come to preoccupy political debate in one period only for it to dwindle in importance in the next? Finally, why particular patterns of political and social cleavage prove so tenacious? With such questions, and a new market developing, the British Labour Government had to respond with a set agenda in order to control specified targets including the sequence of booms and slumps, the differing strengths of the national economy, the rise and significance of multinational corporations, the role of international financial agencies, and the changing role of the government in economic and social life. Such a task seems a formidable one, but one that was not considered impossible. As what holds the analysis together is the recognition that the world during the 1960s was capitalist to the sense that Marx used the term. The law of value still operated throughout the major economic and social processes. Due to this reason, the preceding outline of Marx’s analysis remains relevant, as it provides the means by which the true nature of the British government’s dilemmas can be explained and understood.

To Marx, the executive of the modern state is portrayed as “a committee for managing the common affairs of the whole bourgeoisie”. However, there is a problem, which must confront any contemporary theory of Marxism, namely the relation between appearance and reality. The state appears as independent from the sphere of market exchange, but in reality it is a different matter. The Euro-dollar is an example of such a case, in essence a phenomenon of the 1960s, an international money market where commercial banks undertook wholesale transactions involving foreign currencies. It had been a growing market, which has often involved conflicts with the state. As governments change, the market had been growing at a rapid pace, which had proved to be difficult to regulate. It seems that the Euro-dollar market was one of the initiating processes, which led to what is known today as globalization. To the sense that, the market had caused many changes to the modern financial world which, evolved on a global scale. The open competitive effect of the international money market had caused the liberalization by almost all industrialized countries of domestic money and banking markets. Where, successful participants in the money market of today, have a far more sophisticated understanding of financial risk, and the tools to manage them. As the changes in the markets have required many banking institutions to change in the way of financial regulation.

However, when examining the Euro-dollar market, one has to turn to the 1960s which witnessed the focus of the changing relationship between the national state and the global financial markets, where the policies of Keynesian sought to bring “economic forces” under control. The idea was that the state should assume responsibility for the economy, intervening where the market fails to stimulate economic growth. In times of a recession, the state should stimulate demand through deficit financing (such as, state expenditure based on credit). The state was thus charged with creating demand through an increase of the money supply. Keynesian raised these means to the principle of capitalist reproduction. Governments used these methods in a form of expansionary policies. Keynesianism depended upon the use of money for expansive industrial development and the management of “sound” finance.

One major question arose, throughout the paper: what are the risks and problems of the Euro-dollar market, and is the growth of this market a “welcome tonic or a slow poison” to the international financial system (with particular emphasis to the United Kingdom)?

There was no doubt that the growth of the Euro-dollar market had contributed spectacularly to the easing of the world liquidity problem. In less than a decade, the market grew from nothing to ,000 million compared with an increase in official world reserves of only ,000 million from 1951 to 1965. However, the growth of this market merely “put-off” the evil day when the reserve currency countries, and in particular the United States, had to adjust their payment situations to the facts of life. On the technical level the growth in the Euro-dollar market exposed the world in general and Britain in particular to every similar dangers to those experienced in the early thirties. Of its nature it was a market notable for its lack of regulation and control. No one country could exercise control over it. Euro-dollar deposits were no longer used solely for trade finance, and hence were not self-cancelling. Although individual banks observed limits to the amount of dollars they were to lend to individual “names”, countries or areas, deposits passed through many hands before they had reached the final user. It was almost impossible to tell the extent to which any country or individuals were committed to repaying Euro-dollars. If a serious breakdown occurred anywhere in the system, the strain would be transmitted to the centre. Britain’s involvement in this market was so extensive with £2,773 million liabilities and £2,487 million credits, by 1968, that a breakdown would inevitably throw doubt on Sterling .

The risks and problems associated with the Euro-dollar market made themselves felt at three levels: the individual bank, the individual country, and at the level of the international financial system as a whole. For an individual bank the main risk was the possibility that a borrower may not repay his Euro-dollar loan. The borrower for any number of purposes – over which because of their unsecured nature, the lending bank had very little control, may use Euro-dollar funds. For an individual country, the problems created by the Euro-dollar market were two-fold: Firstly, the danger that the domestic banks involved in the market may over-extend themselves and thereby place demands on the official foreign exchange reserve. Secondly, the fact that the existence of the Euro-dollar market had provided another channel through which short-term capital can flow internationally and, hence, had tended to increase the volume of short-term capital moving into or out of any particular country”.

There were difficulties in establishing a mechanism that could bring about the necessary degree of international control over the Euro-dollar market. The most important was the fact that there was no single institution, either national or international, that could control the market, and act as an international lender of last resort in the same way that a national central bank can in the case of a national money market. There seemed to be a system of informal understanding among the central banks, developing probably as part of their co-operation in fighting exchange crisis, under which substantial volumes of US dollars could be mobilised quickly to meet any serious destabilising forces in the Euro-dollar market. In circumstances where the needs of the Euro-dollar market did conflict with other policy objectives, however, it was doubtful the national central banks would give priority to the Euro-dollar market. This was the basic weakness. As, in order to avoid this situation, the US dollar funds needed to stabilise the Euro-dollar market would have had to be made available on a more formal basis – such as by means of pre-arranged swap and stand by arrangements between the national central banks and the BIS. In this situation the BIS would be free to call on these swap funds in accordance with the needs of the Euro-dollar market. In addition, to meet these requirements during a period of crisis the volume of US funds at the disposal of the BIS would have had to be substantial. Undoubtedly, the major portion of these swap funds had to originate from the Federal Reserve System.

Generally, however as far as the international financial system was concerned, one heard nothing but good of the Euro-dollar market and of its rapid expansion. Whitehall had generally welcomed it as a means of financing the UK’s overseas mandate (investments) without putting undue strain on sterling. The City of London virtually created the market and had made a good deal of business out of it. The Chancellor of the Exchequer stated way back on the 8th December 1960, of using US dollars to improve the UK balance of payments, and to improve the UK dollar indebtedness. Throughout the end of the 1960s, it was apparent that the Euro-dollar market not only financed the UK economy, but assisted in the UK’s balance of payment’s problems. The British government foresaw the Euro-dollar Market as a way for advancing its own interests and concerns. The role of the public authorities and the nationalised industries proved to be very crucial to the UK government. These industries became a way for the UK government to raise foreign currency on a medium and long-term basis in order to finance its repayments of shorter-term debt and to improve the UK reserves. Both the Inland Revenue and the Treasury agreed on one thing that, something had to be done to “helping local authorities to obtain access to the Euro-dollar market” . To the sense that, both parties considered it desirable to include a provision in the Finance Bill of 1970 to the effect that “the interest on securities issued by a local authority in the currency of a country outside the scheduled territories shall be payable in full without deduction of tax at source, and be exempt from income tax

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