The History of the Eurodollar Market in the 1960s
Written by admin on May 18th, 20111964. As, there was, a considerable surplus of highly volatile sterling in world markets because of the balance of payments deficit .
Since the Chancellors statement, both the PM and the Chancellor received a daily tally of the movements on foreign exchange markets, recorded not only by the exchange rate, but the amount of money which the Bank of England had to throw into the market to stabilise the sterling rate, together with payments on government account. This was regular right until 1969. Day by day, the government listened to demands for immediate cuts in government expenditure, and faced heavy drain on the reserves. It was a situation where 50 million pounds could have been lost, sometimes more, and the UKs total gold reserves and convertible currency reserves barely totalled 1,000 million pounds. Short-term central bank assistance was near exhaustion, and there was no immediate prospect of the IMF borrowing on which the UK decided. The pound was at its support level. On the 25th November 1964, the Governor of the Bank of England stated to the PM that ,000 millions was successfully raised by the central bankers. It seemed that sterling was safe, for a time. Long enough, to strengthen exports to the point where day-to-day speculation was not reinforced by a chronic balance of payments deficit .
Euro-dollars a prominent force in the market?
It was clear in 1964 that a large international money market in short-term dollars had developed outside the US. These transactions were made possible because Americans and foreigners deposited dollars with banks outside the US, which had profitable uses for them. It was estimated with some assurance that dollar deposits come from at least 25 countries and that the final users of dollars reside in at least 35 countries .
About 400 commercial and private banks were in the Euro-dollar market. Many of these banks were in the market all the time, and they were on one side or the other, depending upon profits that may be earned from interest rate differentials and arbitrage possibilities. Other banks were in the market irregularly in order to deal with the financing needs or the savings accumulations of particular clients. The Euro-dollar market held no bar to politics. The two large communist banks in Western Europe – the Moscow Narodny Bank in London and the Banque Commerciale de lEurope du Nord in Paris were important components in the market, sometimes to place deposits with other banks (lend) but more often to accept them (borrow) . The states banks behind most of the countries behind the iron curtain were in the market, and many of these regularly circularize commercial banks in the West in order to obtain funds. Brokers play an important specialised role as intermediaries among banks, and two of them one in Paris and the other in Lausanne, with their branches do a large international business . The market in Euro-dollars was a wide and complicated one spread over six continents and bound together by a network of cable, telex, and telephone communication. The paper work in the market tended to confirm rather than to initiate transactions. The financial standing of the banks in the market was such that transactions were based on names and did not involve collateral and guarantees.
As the market progressed, the movement of Euro-dollars became an important financial activity and it was clear from the City that there were three major uses for Euro-dollars: First, a large part of these dollars was used to finance external commercial transactions, i.e. exports and imports. Indeed many countries in Europe and elsewhere tried to restrict Euro-dollar activities to those business enterprises that were engaged in foreign trade. These restrictions operated through systems of capital controls, or exchange controls, or moral persuasion by central banks. Even European countries with convertible currencies may restrict or prohibit business enterprises not engaged in foreign trade, e.g. hotels and department stores, from borrowing Euro-dollars, even though borrowing dollars may be cheaper than borrowing local currency. This was, for example, the situation in France. In 1961-63, with the expansion of issues of long-term securities denominated in dollars in European capital markets, underwriters and syndicate members have used Euro-dollars to finance their inventory positions. Italy made a large and noteworthy use of the Euro-dollar market in 1962-63, borrowing more than 0 million from abroad, of which about half came from the Euro-dollar market . These funds were used to finance external transactions and to make possible a continuing increase in domestic liquidity, which in effect, reduced the drain upon official reserves. Acting under instructions from the Bank of Italy, the commercial banks began to reduce their net external liabilities in the fourth quarter of 1963 and had gone a long way toward reversing their position.
Second, some Euro-dollar funds were used to finance commercial loans and other domestic transactions either in the form of dollars or in local currency purchased with dollars. There has been a large amount of such transactions in Germany, Italy, Japan and smaller amounts in many other countries, including Switzerland. In the UK, a substantial amount of Euro-dollars has been swapped into sterling and then placed with local authorities and instalment finance companies. The Kingdom of Belgium has, directly or indirectly, financed part of some of recent b
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