Financial Resource

The Euro-dollar market* had caused many changes to the modern financial world in which, the open competitive effect of the international money market caused the liberalization by almost all industrialized countries of domestic money and banking markets. The market acted as a fully international mechanism for attracting deposits and offering loans, over a broad range of maturities and at highly competitive rates. The first important development of Euro-dollar business came after the Second World War, when Soviet bloc holders of dollar balances wanted to keep them in a form not subject to control by the US authorities. They kept them with London banks. However, the development of the market as a large-scale international structure really dates from 1957. It was given its impetus then by a rise in UK Bank rate to 7% and the imposition of restrictions on sterling credits to finance trade between non-sterling countries. At that time, banks in the US were limited (by Regulation Q) as to the amount of interest they might pay on deposits. Banks outside the US were able to offer a higher rate for dollar deposits, and yet, by operating on finer margins, to offer competitive terms for dollar loans. Many banks were well placed to take advantage of this situation. This was because of their wide overseas connections, long experience of international business and variety of outlets for making international loans. The first substantial development of the market took place in London, and London conducted much of the largest share of the business, which contributed considerable invisible earnings to the UK balance of payments.

The role of sterling has been a central point to the development of the Euro-dollar market. To the sense that, the control of sterling has not only been a central preoccupation of British governments, but largely determined Britain’s strategy towards the international financial market. Since 1958, governments have found themselves in a “dilemma” by the pressures of which the international use of sterling had placed on the British economy where “depleted” reserves of the entire sterling area constituted the most significant constraint on achieving economic growth. The management of sterling was the heart of governing Britain until conditions allowed the convertibility of the currency in the late 1950s. The central point that, throughout the postwar period, the British government sought agreements that enabled US dollars to flow to Britain whilst restricting the convertibility of sterling in domestic and foreign hands, (the Washington Loan Agreement, the Marshall Plan, and military assistance programmes encouraged a flow of dollars to Britain).

The UK government placed particular emphasis on exports to the dollar area (dollar-earning exports), with sterling area exports deemed next in importance. As early as the 1950s, Conservative governments, set about reasserting the international status of sterling and the importance of the City of London as the world’s premier financial centre. In 1953, commodity markets and exchanges for raw materials were re-opened in London. March 1954 saw the long awaited return of London Gold Market (open to all non-residents of the sterling area). Changes were made in currency regulations in 1955, which allowed the partial convertability of the pound for non-sterling area residents and non-dollar area residents. This was followed finally by the full convertability of sterling in December 1958, and by the Bank of England’s decision in 1962 to provide cheap foreign exchange cover and allow non-residents to hold dollar balances with the Bank of England (thus signalling the beginning of the Euro-dollar market). Dollars could now be deposited with the Bank of England in an external account, thereby escaping US exchange regulations and earning a higher rate of interest than obtainable in the US. The aim here was well calculated. London’s position as the main financial centre would be re-established and the City would quickly become the world’s leading Euro-dollar market.

However, the real significance of the Euro-dollar market lay in the fact that it originally drew its funds from non-bank suppliers and ultimately lent them to non-bank users, in which the established market was not dependent upon the existence on the USA remaining in deficit. As, the market soon become an integrated international money market providing its own specialised service which had shown considerable powers of survival. Merchant banks simply turned to the expatriate dollars, and used them in the way they have used sterling, operating freely on a global scale in the financing of international trade and the arrangement of longer term loans. American and other foreign banks wanting to take advantage of the paucity of financial controls in the UK soon joined this new market that was dominated by the merchant banks. Hence, between 1967-1978 the representation of foreign banks in London grew from 113 to 395. As, for the City’s banks, the establishment of sterling convertability in 1958 “was arguably the most important event of this century”, for it heralded the rise of the London Euro-dollar market. The table below shows how dramatic the Euro-dollar market had indeed become. A total of 91 international Euro-currency issues totalling the equivalent of ,884m took place in 1967. The firms shown below are ranked in order of the aggregate amount of issues for which they acted either as managers or as co-managers. Apart from those listed, there were 45 firms active in such management .

Euro-dollar Bond League

Firm – Total Dollar Equivalents (000)- Number of Issues:

Banque de Paris et des Pays-Bas – 490,000 – 21

Banca Commerciale Italiana – 445,000 – 19

S.G. Warburg & Co – 385,700 – 21

Deutsche Bank A.G. – 367,500 – 17

Kuhn, Loeb & Co – 295,000 – 15

White Weld &Co – 285,200 – 14

Lazard Freres & Co – 265,000 – 14

N.M. Rothschild & Sons – 260,000 – 11

Morgan & Cie International S.A. – 260,000 – 8

Lehman Brothers – 250,000 – 9

Banca Nazionale del Lavoro – 194,000 – 9

First Boston Corporation – 168,000 – 8

Banque Nationale de Paris – 152,500 – 6

Societe Generale de Banque – 135,000 – 7

Amsterdam-Rotterdam Bank N.V. – 135,000 – 6

Credit Commercial de France – 131,200 – 7

Kredietbank – 130,200 – 9

Smith, Barney & Co Inc. – 130,000 – 8

Societe Generale – 125,000 – 5

Credit Lyonnais – 122,200 – 5

(Source: The Times, the Euro-dollar bond league 29 December 1967)

The City of London proved to be a highly successful international commercial banking and financial centre, despite growing fears of competition from other centres. It presented strength, derived largely from the generalised “trust” with which the world views the City. The survival and revival of London as an international financial centre after the disruptions of the Second World War and the weakness of sterling as an international reserve currency had been largely based upon the development of the Euro-currency markets. In specific the growth of new or “parallel” markets alongside the old “classic” discount market, which with the relative decline of sterling as an international currency, had become a domestic concern. These new markets had revitalised the foreign exchange markets in response to the emergence of barriers of various kinds between ultimate borrowers and lenders. On the one hand, the domestic parallel money market in sterling evolved out of responses which were intended to evade the credit restrictions which successive British governments had attempted to impose during the 1960s through their participation in the old discount market. On the other hand, the decline of sterling and the difficulties associated with the US governments’ restrictions on the use of the dollar as an international currency gave rise to new markets in Euro-dollars and other Euro-currencies. New money markets where money is lent and borrowed between banks, companies and other organisations without the control of the monetary authorities (governments and central banks). It was a measure of the City’s autonomy that such developments took place.

The development of the Euro-dollar Market can be described by using a Marxist analysis of capitalism, in particular, the workings of the capitalist economy and its political and social implications. In specific, to the theory of the state in advanced capitalism, and on the basis of the materialist conception of history and Marx’s general theory of capitalist production. As any attempt to develop a theory of the state, must deal with a Marx’s works on the state. In the sense that, capitalism is analysed predominantly as “civil society”, as a more or less self-contained sphere in which all citizens, including capitalists and workers, confront each other as competing individuals on the market. Using this conception, the state occupies another sphere standing outside civil society, which purports to represent universality or the community between people, but is constantly undermined by the antagonistic individualism of its basis, namely civil society.

Karl Marx claimed that, “the abstraction of the state as such belongs only to modern times. The abstraction of the political state is a modern product” . The Euro-dollar market inherently being a new phenomenon proved some uncertainty to the British Labour government during the mid-1960s,

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