The Contribution of the Euro-dollar Market to the Modern Financial World
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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 $1,884m 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
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 $1,884m 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
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