Financial Resource

sterling and the City of London to counter, (at least in theory), the effects of balance of payments deficits. Once it became clear that, de Gaulle would not sanction UK entry to the Community, Britain was caught in a bind and was forced to pin its economic hopes on the revival of the City of London.

In the 19th century, it was the competitiveness of “British industry” which led to the international use of sterling. However, by the late 1950s, the lack of competitiveness of Britain’s industrial base (particularly “via” Europe) now meant that the international use of sterling could quickly turn from an asset to a liability. As sterling was made convertible, short-term capital inflows and outflows increased in volatility. In these circumstances, the Bank of England found it increasingly difficult to defend the exchange rate – where the slightest “rumour” could lead to a massive speculation against the pound, destabilising the domestic economy. Although these pressures were seen to exist even as early as 1956 (when sterling was only partially convertible) over the first two days of Britain’s invasion of Egypt there was a massive outflow of million – (they became more acute over the next 20 years). From the early 1960s, the “British economy” was dominated by a pattern which saw rising levels of imports, falling exports, and when the balance of payments surplus diminished the introduction of high interest rates to attract short-term capital (hot money) to London.

On entering office in 1964, Wilson found that convertibility and the establishment of the Euro-dollar markets had produced a situation whereby financial markets could validate or disapprove of policy measures within hours. In many ways, the story of the Wilson’s government is one of speculative action against the pound followed by international rescue operations to shore up the sterling exchange rate. Deflationary measures pursued throughout 1965, and 1966 failed to stem the tide of speculation, forcing the government to devalue in November 1967 and to negotiate a ,5 billion standby credit from the IMF. Wilson agreed with the Bank of England and the Treasury that devaluation was a strategy to be avoided unless the Labour Government was willing to destroy confidence in sterling and the City as the premier financial centre.

So relatively, the development of the Euro-dollar market coincided with the recoveries of the capitalist economies and the growing pressure of the US economy. The shortage of dollars gradually changed into dollar saturation. This market took over aspects of a developed domestic credit system, which was operating globally and independently from the central banks. Speculative capital assumed the function of national and international institutions, financing budget and balance of payments deficits. Such “money” existed as a claim on central bank money in national states on unregulated financial markets. The global role of the City foresaw the result as the dominance of financial over industrial capital. To the sense that although Britain was a low-wage and low-productivity country, it was a centre of global finance (due to the contribution of the Euro-dollar market). However, this did not mean that British industry had been undermined as a consequence of financial interests and policies favouring the concerns of financial markets, although the global role of the City “has had” a detrimental effect on British industrial development. Rather, the development of London as the centre for the global circulation of capital expressed the organisation of “British” capital at the most developed level of global capitalist relations. However, this development of the dominance of financial capital over productive capital must be treated with caution, since it was high interest rates that attracted money capital to London and the fact that the UK is one of the main countries attracting productive investment (particularly from US-based multinationals).

So what can we learn from the British experience? The British case illustrates that there is nothing simple about the choice between government and the market: both are flawed mechanisms in terms of maximising efficiency and both require a deeply rooted underlying consent about their manner of operation and acceptance of their distributional outcomes. Lever later acknowledged in 1974/75 that, “modern governments, overestimated their ability to shape and manage the complex drives of a mature economy. They wrongly assumed that they understood all the reasons for its shortcomings and so, not surprisingly, were all too ready to lay hands on superficial remedies for overcoming them. And all this without any attempt to understand the economies of an increasingly interdependent world” .

It remains to be said that that the nation-state provides the domestic political underpinning for the stability of global capitalist relations. Therefore in order to maintain the position of a nation state’s integration into the “world market” nation states are under constant pressure to make more efficient use of available resources. Failure to achieve this will result in a loss of reserves, precipitated by balance of payments difficulties, and inflationary pressure, provoking global exchange instability and financial crisis.

ENDNOTE

* Here are two very similar definitions of the term Euro-dollars:

Robert Gilpin, (The Political Economy of International Relations, Princetown University Press, 1987, p. 314-315), states that: The Euro-dollar market received its name from American dollars on deposit in European (especially in London) banks yet remaining outside the domestic monetary system, and the stringent control of national monetary authorities.

Enzig and Quinn (The Euro-dollar System: practice and theory of international interest rates, MacMillan Press, 6th edition, 1977, p. 1) state that: the Euro-dollar system is a term used to describe the market in dollar deposits and credits which exists outside the United States of America.

FCO 59/212: Economie Affairs (External), International Monetary Matters, Euro-dollar Market, (1/11/1967-8 /5/1968) (Foreign Office – Economic Relations Department), File Number: UE 4/44

Marx Karl, Contribution to the Critique of Hegel’s Philosophy of Law, in Marx/Engels 1975, vol: 3, p32.

E. Wayne Clendenning, Euro-dollars: The problem of control, The Banker, April 1968

PRO file FCO 59/212: Economie Affairs (External), International Monetary Matters, Euro-dollar Market (Jan 1967- December 1967)

PRO File IR/40/17474: Memo from J.G. Littler to Mr. Andren on foreign currency Borrowing by local authorities, 31 March 1969.

PRO File IR/40/17474: Confidential letter, from Mr. J.G. Littler to Mr. Andren titled foreign currency borrowing by local authorities, 14 March 1969.

PRO File IR/40/17474: Confidential letter from G.B.N. Hartog to Mr Elliston, titled Finance Bill: Eurobond issues by local authorities, 31 March 1969.

T 308/11: Use of “Windfall” Dollars To (A) Improve UK Balance of Payments Position (B) Reduce UK Dollar Indebtedness, (December 1960)

T 236/6260: IBRD- Placing of Dollars Funds in London, 18th August 1960

PRO File T 230/1056: UK submission to working party No. 3 of OECD Economic Policy Committee 1969 (28/01/69 – 11/11/69). File Number: 2EAS 549/188/02

PRO File T 230/1056: UK submission to working party No. 3 of OECD Economic Policy Committee 1969 (28/01/69 – 11/11/69). File Number: 2EAS 549/188/02

Burgess S and Edwards G, The Six plus One, International Affairs, no: 64, 1988, p407.

Camps M, Britain and the European Community 1955-63, Oxford University Press, Oxford, 1964.

PRO file T234/720, Memorandum titled, What went Wrong? Was prepared by the Treasury, July 1959

Harold Lever, The cabinets of 1964-70 had highly gifted individuals. Why then was so little achieved?, The Listener, 22 November 1984, p24-25.

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