Foreign Markets for Dollars, Sterling, and Other Currencies
Author: Oscar L. Altman

THE PURPOSE of this article is to describe and evaluate developments in foreign markets for dollars, sterling, and the major currencies of Western Europe.

Abstract

THE PURPOSE of this article is to describe and evaluate developments in foreign markets for dollars, sterling, and the major currencies of Western Europe.

THE PURPOSE of this article is to describe and evaluate developments in foreign markets for dollars, sterling, and the major currencies of Western Europe.

The U.S. dollar is the most important currency dealt with on foreign markets, i.e., markets outside the United States in which deposits denominated in dollars are accepted and placed. The most important foreign markets for dollar deposits are in Montreal, Toronto, London, and a number of cities in continental Western Europe. The Eurodollar market, the London dollar market, and the continental dollar market, to mention a number of terms which have been widely used in describing the gathering together and investing of short-term dollars, are included in the term “foreign markets for dollars.”1

Similarly, the term “foreign markets for sterling” refers to those markets outside the United Kingdom which accept and place deposits denominated in sterling. Practically all of the business of accepting and placing deposits denominated in sterling takes place in Western Europe.

There are, in addition, foreign markets in London and continental Western Europe for practically all other Western European currencies, notably the Swiss franc, the deutsche mark, the lira, and the guilder.

Dealings in U.S. dollars are larger than those in all other currencies combined. The major emphasis in this article is, therefore, on foreign markets for dollars. Nevertheless, in most respects, what is said about dollars is applicable to other currencies.

The dollars which are dealt with on external markets may, for purposes of convenience, be treated as if they were handled in two separate ways, though in practice bankers and exchange dealers shift from one way to the other. An owner of dollars may make them available through a financial intermediary, or through a series of financial intermediaries, to someone who wants to borrow dollars. The dollars that are borrowed are then loaned; in the language of the foreign dollar market, dollar deposits are first accepted and then placed. On the other hand, dollars may be obtained through the exchange market. In this case, they may be obtained by borrowing, or accepting deposits in, some other currency, which is then sold for dollars, with or without forward cover. Such transactions involve at least one other currency besides the dollar, and sometimes two or three currencies. They take place when there are opportunities for profitable arbitrage and exchange dealing; these opportunities also involve the constellation of spot and forward rates in relation to domestic interest rates, as well as speculation.

I. Foreign Markets for Dollars

Euro-dollars and other dollars

A deposit of Euro-dollars, or continental dollars, or foreign market dollars, gives the holder a claim to dollars which are the same as any other dollars.2 The term “Euro” has significance in that it describes operations on dollars, and foreign markets for dollars, even though it does not reflect differences between dollars.

In the normal course of events, an owner of a dollar deposit (as distinguished from currency) would keep it in a U.S. bank in his own name in the form of a demand deposit or a time deposit. The bank would employ these deposited funds in its operations.

Euro-dollar operations involve two departures from this practice. First, there is a chain of ownership—consisting of a number of intermediaries—between what may be called the “final” owner of a dollar deposit and the U.S. bank. Thus, a foreign industrial enterprise or bank may deposit dollars (i.e., transfer the title to its existing dollar deposit in the United States) in a London bank; the London bank may, in turn, deposit the dollars with an Italian bank; and the Italian bank may lend the dollars to an Italian customer. If the dollars are deposited with a Japanese bank instead of an Italian one, the chances are that the dollars would be swapped for yen, i.e., sold spot and repurchased forward. The dollars may be bought spot by another Japanese commercial bank or (if the yen is at its exchange limit) by the Japanese Special Account. Up to this point, the owner of record remains a foreigner, though different from the one who first deposited his funds in the Euro-dollar market. The total amount of foreign dollar deposits in the United States has not been affected, although the deposits involved in these particular transactions may be shifted from one bank to another, or changed from a time to a demand deposit classification.3 Second, operations in Euro-dollars, involving a chain of financial intermediaries, result in a shift of control over the use and investment of these funds. When the dollars enter the Euro-dollar market, decisions about using them are made by the links in the Euro-dollar chain. The funds made available through the Euro-dollar market may be used by a foreign importer as a substitute for a U.S. banking credit in the form of a loan or a trade or bankers’ acceptance.

From the point of view of a U.S. bank, therefore, the results of Euro-dollar operations take the form of a smaller volume of business, or of a less profitable volume of business, or both.

From the point of view of a foreign bank, the results of Euro-dollar operations take the form of a larger volume of business, or of a more profitable volume of business, or both. The foreign bank may act merely as an intermediary in the Euro-dollar chain, helping to collect funds for investment or to invest funds that others have collected. In either case, it earns what may be regarded as a commission, equal to the difference between the interest it pays on funds deposited with it and the interest it earns on funds it deposits with another bank. But the foreign bank may also act at the end of the Euro-dollar chain, lending the funds to some business enterprise or individual, either in the form of dollars or in the form of some other currency. In the latter event, it may assume all, part, or none of the exchange risk involved in the currency conversion. The borrower may use the dollars to pay a U.S. exporter or a foreign exporter. In the former case, the ownership of the deposit, from the point of view of U.S. statistics, changes from foreign to domestic; in the latter case, from one foreigner to another.

From the point of view of the individual who borrows funds through the Euro-dollar market, the process appears to be one by which dollars are mobilized in banks outside the United States, with the result that dollar credits can be obtained outside the United States.

Euro-dollar operations are conducted by banks and financial institutions, and are described in terms of receiving and making dollar deposits. They might equally be described in terms of borrowing and lending dollars. A bank that receives dollar deposits (with more or less active solicitation) is in reality borrowing dollars; a bank that places dollar deposits in another bank is lending dollars.

Euro-dollars and reported ownership of deposits

Euro-dollar operations significantly affect the reported ownership of dollar deposits. When a German bank transfers its dollar deposit to a London bank, reported dollar liabilities of the United States to the United Kingdom increase and those to Germany decrease.

In general, Euro-dollar transactions change reported ownership in three ways: between one country and another; between official and nonofficial holders; and within the nonofficial sector, among individuals, business enterprises, and banks. These changes have reduced the significance of current statistics on short-term dollar liabilities to foreigners. They have also pyramided the total of short-term dollar assets (the obverse of these dollar liabilities) reported by foreigners, showing larger amounts of official international reserves and private international liquidity. Since every link in the Euro-dollar chain reports the ownership of dollars in its own balance sheet, the total reported ownership is necessarily increased.4

Some of the funds in the Euro-dollar market consist of deposits owned by U.S. corporations and individuals. These deposits are nevertheless reported by U.S. banks as liabilities to foreigners. Since the most common measure of the balance of payments deficit of the United States is based upon the loss of gold plus the growth of short-term dollar liabilities, an increase in deposits made abroad increases the stated deficit.

Types of Euro-dollar transactions

It may be useful at this point to consider some of the more common types of transactions in Euro-dollars.

(1) Dollars may be borrowed by a foreign importer from a foreign bank to pay for imports from the United States. The importer will choose to borrow dollars in the Euro-dollar market when this financing is preferable to (generally speaking, cheaper than) other kinds of financing: bank or trade acceptances, direct borrowing from a U.S. bank, or borrowing some foreign currency to be converted into dollars. When Euro-dollars are used to pay for imports from the United States, U.S. deposits to the credit of foreigners are reduced while those to the credit of U.S. residents are increased.5 To liquidate his dollar obligation, the foreign importer will, in turn, eventually have to acquire dollars through the foreign exchange market.

(2) Dollars may be borrowed by a foreign importer to finance imports from a country other than the United States. In this event, the ownership of the dollar deposit will be transferred from a person in one foreign country to someone in another. This sequence may be long—even unending—since the dollar is widely used as an international currency for making payments and for holding cash balances. This type of transaction would include borrowing dollars to buy gold on gold markets or to finance long positions in particular foreign currencies.

(3) A commercial bank may borrow (i.e., accept) Euro-dollar deposits and then make loans in another currency. In this event, the bank will sell dollars spot and, if it wishes to avoid an exchange risk, purchase them forward. These spot and forward transactions may be solely among commercial banks in one or more monetary centers, or they may involve the monetary authorities. The central bank may buy the spot dollars even if it does not participate in the forward market, and it will have to buy them if the exchange rate threatens to move outside of support limits. The central bank may retain the dollars so purchased or it may use them to buy gold from the United States. (To the extent that it used the dollars to pay for gold in London or other markets, the situation would then be of the type described in the preceding paragraph.)

The central bank may be concerned about the amount of Eurodollars borrowed by commercial banks, the terms on which they are borrowed, and the uses to which they are put. These dollars may counteract official attempts to restrict domestic liquidity, or even finance an unwanted increase in it. The latter would tend to increase the future demand for imports and lead to future drains upon international reserves.

(4) Alternatively, central banks may take action expressly to increase the supply of dollars in the hands of their commercial banks, on the assumption or the requirement that the latter would make foreign investments or place deposits in the Euro-dollar market. The usual form of this transaction is to sell dollars against local currency spot, while contracting to buy them back forward. Such transactions have been pursued for some time by the Deutsche Bundesbank and by the Bank of Italy. If the spot-forward transaction is made “flat,” i.e., at the same price, the cost of dollars obtained in this way is the cost of local time deposits, and this may well be less than the interest return on Euro-dollar deposits. The central bank may go further, however, as the Bundesbank did in 1960, and contract to buy dollars back at a premium in terms of deutsche mark. For some time in 1960, this premium was at the rate of 1½ per cent per annum. It constituted a substantial subsidy for the export of short-term capital.

When such spot-forward facilities are used, with or without a forward premium, a number of effects can be distinguished. First, the supply of local currency in private hands is reduced. The result is equivalent to open market sales by the central bank—but of dollars instead of domestic securities. Second, the stated reserves of the central bank are decreased. Spot holdings of dollars are reduced; forward purchases of dollars from the commercial banks are not properly included in official reserves. Third, the short-term export of capital is facilitated without the banks assuming any exchange risk. The German commercial banks that had invested dollars obtained through swaps suffered no exchange loss when the deutsche mark was revalued, though other holders of dollars, including the Bundesbank itself, suffered a stated loss in deutsche mark.

(5) The Euro-dollar market may serve to finance transactions that are purely within the U.S. market. Thus, foreign branches of U.S. banks usually advance the proceeds of their Euro-dollar deposits to their head offices. Likewise, New York agencies of Canadian banks invest in the United States dollar deposits placed with their head offices in Canada or with branches in Europe.

Advantages offered by Euro-dollar market

The existence of the Euro-dollar market depends upon mutual advantages to the final borrowers, to the financial intermediaries, and to the final owners.6

Borrowers may find that they are able to obtain dollars more cheaply through the Euro-dollar mechanism than from a U.S. bank. If for one reason or another they cannot do so, they will borrow elsewhere, perhaps in the U.S. market. If the structure of interest rates again becomes favorable, they can return to the Euro-dollar market.

Though the access of foreign borrowers to credit facilities of U.S. banks has substantially improved in recent years, it is possible that borrowers can obtain funds in the Euro-dollar market when they cannot do so in the U.S. market, or that they can obtain additional funds. The Euro-dollar market covers a wider range of risks than the U.S. market. Its standards are probably more easily applicable to borrowers in different countries. The access of countries in the Soviet bloc to the Euro-dollar market is much greater than their access to the U.S. market. There are other, and less striking, differences in standards for lending and information between the Euro-dollar and the U.S. market. These statements describe the situation, but do not imply that one set of standards is better than the other, though this may be the case.

Moreover, in the U.S. market (and in any national market), information on how much credit has been extended to any one borrower, or to any one country, is a matter of common information or guesswork. Since the Euro-dollar market has many different components in many different countries, comparable information is limited or unavailable. Hence, it is very likely that some borrowers may obtain more credit in the Euro-dollar market plus national markets than they could obtain in national markets alone.

The Euro-dollar market spreads the risk among financial intermediaries. Each can assume the kind or the degree of risk that he finds acceptable. One can assume an exchange risk; another the risk inherent in borrowing short and lending longer; and another the risk of loss inherent in the credit standing of the borrower or the usual risks of doing business. It is even possible to operate in the Eurodollar market with no risk whatsoever, by serving solely as a broker or a channel of communication between financial institutions that carry risk.

The owners of dollar deposits may find that placing their funds in the Euro-dollar market yields better returns than placing them in the U.S. market in the form of time deposits, Treasury bills, or other media. It is as easy to use the Euro-dollar market as it is to use the U.S. money market. There is little (if any) more risk in using the former than the latter. If banks of first-rate financial standing in London, Paris, and other financial centers are willing to pay more for deposits than are banks in the United States, funds will move into the Euro-dollar market.

The supply of dollars for the Euro-money market comes from commercial banks, business enterprises, central banks, and individuals; it comes from European countries, the United States, and many other countries in the noncommunist world; it also comes from communist countries, including the Soviet Union. In most cases, the major incentive to use this market is relative rates of interest.

There are, however, a number of other advantages to owners of dollar deposits. The Euro-dollar market is a highly specialized and competitive one, offering many types of facilities and maturities. In some cases, these maturities may be particularly tailored to the needs of a dollar depositor. Hence, the Euro-dollar market offers excellent facilities for short-term investment. Because of common business hours and cheap communications, these facilities are also very convenient for operations by European borrowers and lenders. Banks in communist countries feel, whether this is justified or not, that their dollar deposits are safer from legal attachment or restriction in a European bank than in a U.S. one. Their dollar deposits in the United States are, therefore, of minimal proportions, and their working balances and temporarily surplus funds are invested in Western Europe. Some of these funds may be in the Euro-dollar market, and the remainder (not necessarily the smaller part) may be in other kinds of investments.7

The international oil companies have, for many years, shifted their funds for investment purposes; and in the last few years, many other industrial companies in the United States and in Europe have discovered the European money market. After World War II, U.S. companies moved into the U.S. Treasury market on a large scale; they now are major factors in it, with the result that they are sometimes referred to as “the second banking system,” and they have moved into the Euro-dollar market and into the U.K. Treasury bill market. European owners of dollars were able to move into the Euro-dollar market as soon as domestic currency regulations permitted it.

Interest margins, differential interest rates, and Euro-dollar market

The Euro-dollar market has offered holders of dollars a higher rate of return, with perhaps more appropriate terms of investment, than competing investment media, at the same time that it has offered borrowers an opportunity to obtain dollars at lower rates of interest than they would have had to pay in the United States. These two conditions necessarily imply that the gross interest margin—specifically, the differential between the rate of interest that must be paid to obtain Euro-dollars and the rate that can be earned on such dollars—is lower than in the United States.

There are three reasons why European and other banks find participation in the Euro-dollar market attractive on these terms. (1) For most banking participants, Euro-dollar activities are a low-cost addition to their normal banking and foreign exchange business. Eurodollar activities are on a “wholesale” basis. The transactions are for relatively large amounts; they do not require additional facilities; and they seldom require additional personnel. There are very few direct costs chargeable to Euro-dollar operations other than interest paid on deposits; even if overhead costs are taken into account, the expenses attributable to Euro-dollar operations are relatively small. Though the gross interest margin between lending and borrowing is therefore smaller than that in the United States, the gross profit margin is not necessarily smaller. Indeed, there is much to support the impression that Euro-dollar operations, despite the competition that prevails in the market, are quite profitable. (2) The advantage to financial intermediaries is not limited to the additional profits resulting from Euro-dollar operations. These operations create or cement banking and correspondent relationships, paving the way for other banking facilities and services. U.S. banks, on the other hand, complain that Euro-dollar operations affect not only their foreign credit activities but also the many other banking services they offer clients. (3) There are some longer-run advantages which are not easily measurable in profit terms. Euro-dollar participation is a convenient and relatively costless way of expanding into international finance and keeping one’s name in the international banking community. From time to time, banks will engage in Euro-dollar operations simply to keep their name in the market.

Since 1959, U.S. banks through their foreign branches have participated in the Euro-dollar market and obtained a sizable volume of Euro-dollar deposits. This result has involved paying higher rates of interest than were paid in the United States, or than could be paid there under Regulation Q. This does not, however, necessarily imply that foreign branches of U.S. banks competing for dollar deposits must pay the same rate of interest as all other banks in foreign centers. While U.S. branches cannot obtain Euro-dollars by paying the interest rates prevailing in the United States, there is some evidence to suggest that they need not in all cases pay the top or even the average rate payable on Euro-dollars abroad.

U.S. banks have some advantages in the Euro-dollar market. There is the feeling in some quarters (other than the communist countries) that it is safer to keep dollars in the United States than abroad. This is related to the feeling—perhaps growing out of the experiences of war, inconvertibility, and exchange control—that countries running into unexpected exchange and balance of payments difficulties may restrict or even prohibit the outpayment of dollars. Hence, the “natural” source of the dollar is considered to have some advantage as a place for investment, though all holders of dollars do not evaluate this in the same way.

Some of this advantage is considered to adhere to foreign branches of U.S. banks. Though a U.S. branch operating in (say) London would, in all probability, be subject to any restrictions applied to a London bank, foreign holders of deposits may still feel that the head office in the United States would supply dollars even if the foreign branch were not permitted to do so. The head offices of U.S. banks are aware of these feelings. They try to make it very clear to dollar depositors in their overseas branches that the withdrawal of these dollars is subject to local currency regulations, and that they are not obligated in the event that local laws restrict or prohibit payment. Depositors of dollars in their foreign branches are generally required to sign an understanding to this effect.

As already noted, the Euro-dollar market depends, in the last analysis, upon financial advantage to all of its participants. The opportunities for gain often reflect policies, or changes in policies, by central banks. The central banks may encourage the investment of dollars in foreign securities or in the Euro-dollar market, or they may discourage it. Hence, the Euro-dollar market is subject to abrupt and large-scale changes. A country may be a net creditor at one time, and a net debtor at another time.

The Euro-dollar market is not dependent upon a continued balance of payments deficit of the United States. Residents in the United States and foreigners have a large supply of dollars. As long as foreign banks and foreign branches of U.S. banks are willing, for one reason or another, to operate with smaller gross interest margins than U.S. banks in the United States, there is good reason for supposing that the Euro-dollar market will continue. It could, in fact, continue even if all funds accumulated through the Euro-dollar mechanism were invested in the United States.

Structure of interest rates on Euro-dollars

The structure of interest rates on Euro-dollars has two aspects: the rates of interest payable on Euro-dollar deposits and those applicable to borrowings of Euro-dollars. The differences between the two constitute the gross interest margins.

Interest rates and margins are determined in a highly competitive market. They constitute a structure which tends to be, but never completely is, equalized in different parts of the market. Rates vary with the period of time for which a deposit is made or borrowed and with the character and standing of the institution involved. As Eurodollars move from the initial depositor toward the final user or borrower, two additional factors become important, namely, the prospective end-use of the Euro-dollars, and the total amount of Euro-dollars borrowed by any individual bank or by all the banks in any one country. These last two elements are clearly measures of risk. They are imprecise measures, since it is difficult to know exactly what amount of Euro-dollars any one bank has accepted and what amount all the banks in any country have accepted.

Rates on Euro-dollar deposits are usually quoted in four time categories—call, seven days, one month, and three months—but many participants are prepared to quote on virtually any time basis that may be convenient to an owner of dollars.

Dollar deposits can be placed for large sums, running into tens of millions. They can be placed in one financial institution or another at slight variations in interest rates. Interest rates on large deposits, and on deposits placed for terms longer than three months, are likely to be negotiated ones. A prospective dollar depositor may inquire about rates from several banks or financial intermediaries and then accept the one which is most favorable. Some banks circulate periodically, at weekly or monthly intervals, the interest rates that they are prepared to pay on dollar deposits of various terms, but even these rates may be subject to some negotiation. Interest rates paid by commercial banks in the major money centers of Europe are generally known by the respective central banks but are rarely published. An exception is the chart published in the Quarterly Bulletin of the Bank of England on representative 90-day Euro-dollar rates in London reported to the Bank.

During 1960 and the first five months of 1961, the rate of interest on 3-month Euro-dollar deposits was consistently higher than that on U.S. Treasury bills and (after February 1960) higher than that on prime bankers’ acceptances (Table 1). Conditions favored putting dollars into the Euro-dollar market, as well as shifting from U.S. Treasury bills to U.K. Treasury bills on a covered basis.8

Table 1.

Three-Month Interest Rates on Euro-Dollar Deposits in London and on U.S. and U.K. Treasury BILLS, last week of month, January 1960-May 1961

(In per cent per annum)

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Sources: Euro-dollar rates are representative rates circularized by one bank in the London market. Rates on U.S. bankers’ acceptances and on Treasury bills (new issues) are from the Federal Reserve Bulletin. Rates on U.K. Treasury bills (tenders) are from Deutsche Bundesbank, Monthly Report. Covered interest rate differential is approximate.

Since interest rates paid on Euro-dollar deposits vary according to the position of the accepting institution and the depositor, and what is known about the prospective use of the deposits, it is not surprising that there are differences in the data reported in various sources.9

The margin between interest rates paid by banks on Euro-dollar deposits they accept and those they earn when they place such deposits with someone else tended to narrow as the Euro-dollar market expanded and as foreign branches of U.S. banks entered it as strong competitors. In 1958 and early 1959, gross interest margins ranging from ½ of 1 per cent to as much as 1 per cent for any one bank were not unusual. At the present time, many margins are of the order of ¼ of 1 per cent, and even lower margins are not unknown.

There is a high degree of specialization in the market. Many banks accept dollar deposits from their customers in order to place them with banks in London, Paris, or Zurich. Some banks feed out dollar deposits on their way to the final borrower through one or more intermediary banks. In Paris, the five or six banks which handle most of the Euro-dollar business seldom adjust their long or short positions by dealing directly with each other. Instead, they deal through six or eight brokers who act as intermediaries. Some commercial banks may accept dollar deposits, while others in the same city or country may place them, with most of the dealings going through London or some other financial center.

More important than the interest margin of any one bank is the combined interest margin of all the banks in the Euro-dollar chain, beginning with the bank that accepts the deposit and ending with the bank that lends the proceeds of the deposit. This gross margin is, as already indicated, variable, because it depends on which bank stands at the end of the Euro-dollar chain, i.e., uses the proceeds to make loans to business enterprises or individuals. For prime borrowers—defining prime in terms of standing in the New York money market10—the interest rate charged by the final lender cannot exceed the prime rate in New York or the rates charged by New York banks on good-sized loans. For the first eight months of 1960, the prime rate was 5 per cent; for the remainder of the year it was 4½ per cent.11 The effective rates of interest paid by prime borrowers would have been 15-25 per cent higher than those quoted because of the need to maintain compensating balances in demand deposit accounts. These data suggest that the maximum gross interest margin of all the banks in the Euro-dollar chain, in relation to foreign borrowers having prime status in the New York market, was about 1½ per cent. This would not allow, however, for the cost of doing business. On the other hand, relatively few borrowers have prime status, so that the average gross interest margins must have been considerably larger.

Table 2.

London: Interest Rates on Dollar Deposits of Various Maturities, End of Month, 1957-May 19611

(In per cent per annum)

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Representative rates circularized by one bank in the London market. Actual transactions may have taken place at somewhat different rates. Rates offered by other bankers would doubtless differ somewhat from these.

Japanese commercial banks are generally assumed to pay premium rates on Euro-dollar deposits. A newspaper report in September 1960, when the Japanese banks were rapidly building up their deposits, stated that two Japanese banks in London offered to pay 5.4 per cent per annum, together with an additional 2 per cent under the counter in cash.12 These figures may be extreme, particularly the cash premium, as an indication of prevailing rates and margins. Nevertheless, rates of 5 per cent, or even somewhat more for longer dated deposits, are altogether likely.13 These rates reflect the high rates paid by borrowers in Japan.

Size of Euro-dollar market

There have been a number of estimates of the size of the Eurodollar market, even though there are no very clear ways of measuring it. Holmes and Klopstock stated that in 1960 deposits placed in the Euro-dollar market were believed to exceed $1 billion.14 More recently, an informal estimate made in Europe suggested that the Eurodollar market might be of the order of $1½-2 billion. The total of Euro-dollars deposited in London was estimated by one source to be about $500-1,000 million.15 All estimates properly stress the tenuous nature of the figures.

It is possible, for example, to define the size of the Euro-dollar market as the amount of dollar deposits initially placed with banks outside the United States (or in Europe, if a more limited definition is desired). A dollar deposit placed with a bank outside the United States would be counted only in the bank where it was first deposited; the subsequent chain of interbank deposits would be disregarded. The total of Euro-dollars in the market would then be the total, at the initial deposit level, standing to the credit of official agencies, business enterprises, and individuals. Unfortunately, such figures are not available for any country—or even for any one bank.

Many banks maintain dollar deposits with other banks. Thus, the sum of the gross dollar deposits in all banks outside the United States involves a large and variable amount of duplication; and the sum of the net dollar deposits, i.e., the difference between assets denominated in dollars and deposits denominated in dollars, presents other conceptual difficulties.16

It is obvious that the size of the Euro-dollar market can be nothing but a guess—perhaps a very wild guess.17 For what it is worth, the writer would guess the size of the Euro-dollar market in the United Kingdom at the end of 1960 as at least $1 billion of deposits, and perhaps as much as $1¼ billion. This is higher than any estimate that has yet appeared. The European dollar market (the United Kingdom plus continental markets) may then be put at a minimum of $2 billion. Deposits denominated in U.S. dollars in Canadian banks have increased by about $1 billion in the last few years, principally for the same reasons that made them move into the European dollar market.

The significance of these or any other estimates of the foreign dollar market rests not on these numbers, which are meaningless after the market has attained a certain operating size, but on the fact that the market is large and diversified, that it consists of many elements which can and will operate on one side or the other, that large amounts can be loaned or borrowed without noticeably affecting the going rates, and that the operations are competitive. These characteristics would not change even if the market were somewhat smaller or much larger than it now is.

II. Position of Individual Countries in Foreign Markets for Dollars

The position of individual countries in the Euro-dollar market, and, more generally, in foreign markets for national currencies, is the result of two elements: (1) the ability and the willingness of commercial and private banks to engage in borrowing and lending operations in foreign currencies; (2) the policies pursued by the monetary authorities with respect to interest rates and capital flows.

United States

New York has become an increasingly important international monetary center in the postwar period, particularly from the point of view of providing short-term credit to foreigners through loans, trade and bankers’ acceptances, and lines of credit. U.S. banks, and especially New York City banks, also provide correspondent services for foreign banks. New York banks, and some others, hold both time and demand deposits for foreign governments, banks, business enterprises, and individuals. They have encouraged foreigners to keep their funds in the form of time deposits, which earn interest and at the same time form a more stable and profitable basis for loan operations than demand deposits.18

The yield earned by foreigners on time deposits is not measured solely by the stated rate of interest. An important element in the effective interest rate on loans by U.S. banks is the arrangement of compensating balances, under which a borrower is expected to maintain some minimum proportion of his loan continuously in his demand deposit account. This proportion may be, for example, 10 or 20 per cent of the face amount of the loan, depending upon the customer and the state of the money market. It reduces the amount of any loan that can be used by the customer and increases the effective interest rate. However, time deposits, more or less continuously maintained, may be considered to satisfy part or all of the compensating balance requirements arising from loans. To this extent, the rates of interest charged on loans are lower, i.e., closer to the nominal rate, than would have otherwise been the case. Alternatively, the calculation may be made in terms of the rate of interest earned on time deposits instead of the rate of interest paid on commercial loans. From this point of view, the rate of interest paid on time deposits is larger than the nominal rate when time deposits are considered as compensating balances against loans.19

This brief description is useful for understanding the operation of Regulation Q, administered by the Federal Reserve Board, which prescribes the maximum rates of interest that may be paid by U.S. banks on time deposits. This Regulation grew out of authority first granted to the Board in 1933. The maximum rates prescribed by the Board have changed only a few times since that date (Table 3). These rates clearly are not adjusted to cyclical changes in the level of interest rates on alternative investment media, such as Treasury bills, acceptances, and prime commercial paper, nor do they appropriately reflect secular changes. Until recent years, however, this inflexibility did not have significant economic effects.20

Table 3.

United States: Maximum Interest Rates Payable Since 1933, Under Regulation Q, on Domestic and Foreign Time Deposits

(In per cent per annum)

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Source: Federal Reserve Bulletin, June 1961, p. 668.

But as Euro-dollar operations grew in 1958, and even more strongly in 1959, some U.S. banks with branches in London and continental centers decided to enter the market. This meant paying rates of interest sufficient to attract such deposits—rates higher than those paid in New York, but not necessarily, or in all cases, as high as those paid by other banks in London and elsewhere.21 The amount and extent of this differential between rates paid in London by U.S. banks and by all other banks have been widely discussed in banking circles, but data are not available on them. U.S. banks generally stress the existence of a differential and minimize the difference between interest rates they pay in countries abroad and in the United States, while non-U.S. banks deny the existence of a differential and insist that U.S. banks obtain deposits by paying the going market rate.

The results of these activities may be estimated from the data on overseas deposit accounts published for the U.S. banks in London. These data show that the current (demand) and deposit (time) accounts of U.S. branches in London in the name of overseas residents (banks and other) have totaled as follows in recent years:22 1955, $105 million; 1956, $96 million; 1957, $145 million; 1958, $189 million; 1959, $361 million; 1960, $812 million; March 1961, $909 million. These amounts include deposits denominated in sterling as well as those denominated in other currencies, principally dollars.

It may confidently be assumed, however, that the increase in overseas deposits in 1959-60 largely represents deposits both made and denominated in dollars. Thus U.S. banks, having decided to participate in the Euro-dollar market, increased their non-sterling deposits by more than $600 million in 1959-60, and by an additional $100 million in the first quarter of 1961. At the beginning of 1959, only one or two U.S. banks solicited or encouraged these dollar deposits. Later, as the efforts of these pioneer banks proved to be successful, other U.S. banks in London undertook similar activities. It may be estimated that in the spring of 1961 U.S. banks held approximately one half of the dollar deposits in London.

The Euro-dollar activities of U.S. branches in London and on the Continent are subject to a high degree of head office control. The rates of interest regularly paid on deposits, as well as rates of interest offered in special cases, are cleared with their head offices. These rates reflect two principal factors. The first is the position of the branches in their local markets and their unwillingness to disturb local competitive positions unduly. The second is the amount of deposits that the head offices wish to obtain in London and other European centers. Since the major use of the Euro-dollar deposits obtained by U.S. branches has been made in the United States, via the transfer of these funds to the head office in the name of the foreign branch, the interest rates paid necessarily have reflected the amount of dollars that the head office thought it could profitably use, in relation to the cost of obtaining funds in other ways.

Foreign branches of U.S. banks have not strenuously solicited dollar deposits, though they have let it be known that they were willing to pay more than the U.S. rate for dollar deposits and that they desired to obtain them. In some cases, branches have obtained such deposits through the activities of their head offices. If the latter had reason to think that they might lose foreign deposits by transfer, they might suggest to the foreign depositor that their branches abroad could pay higher rates than they themselves could pay in the United States. Though there undoubtedly have been such cases, it is impossible to determine how numerous or how important they were.23

The dollar deposits obtained by London branches of U.S. banks have been used primarily to make advances to their head offices in the United States, and secondarily to make loans to business enterprises wishing dollar accommodation. The amount of Euro-dollar deposits converted into sterling has been insignificant. This pattern of use has differed markedly from that of other overseas banks in London, which have invested a much larger proportion of their dollar deposits in sterling assets. As credit conditions and bank reserves began to tighten at the end of 1958, there was particular reason for U.S. branches to transfer funds to the United States.24

It is interesting to note that deposit accounts in U.S. branches to the credit of overseas residents did not increase during the last half of 1960, although those of other overseas banks in London did. This suggests that during this period U.S. branches were operating under one or both of the following conditions: first, the head offices were not interested in obtaining more funds from overseas in view of their easing reserve positions; and second, a larger volume of deposits could be attracted only by paying higher rates on new deposits, thus raising the rates on old deposits. These conditions must have changed in the first quarter of 1961, because nonresident deposits increased by $100 million.

Canada

The New York agencies of Canadian banks, like all other agencies of foreign banks, cannot accept deposits in the United States. Their head offices in Canada, however, can obtain large volumes of U.S. dollar deposits. When a U.S. depositor, or a Canadian or other foreign depositor, transfers his deposit denominated in U.S. dollars from a U.S. to a Canadian bank, the dollars are paid by the U.S. bank to the head office in Canada, or to some branch in Canada, or to the agency of the Canadian bank for an office in Canada. The Canadian head office or branch carries the deposit in the name of the depositor, advances the funds to the New York agency, and shows the asset as due from it. The agency may then invest the funds in New York The New York agencies are not required to maintain statutory reserves against advances. The head offices maintain reserves against these deposits in Canada, but reserve requirements there are lower than in the United States.25

There is nothing unusual in the legal position or powers of Canadian agencies. Other agencies have the same facilities, and they can and do function in the same way as Canadian agencies. But the five Canadian agencies in New York probably make more loans and investments than all other agencies combined.26

The deposit liabilities of the Canadian Chartered Banks denominated in currencies other than Canadian dollars have increased markedly in the past five years—by 140 per cent since 1956, and by 50 per cent since 1958 (Table 4). The greater part of this increase, U.S. dollars converted into Canadian dollars to meet reserve requirements and supplementary liquidity standards, with perhaps a small amount used to make customer loans.

Table 4.

Canada: Deposits and Assets of Chartered Banks in Currencies Other than Canadian, End of Month, 1956-61

(In billions of Canadian dollars)

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Source: Summarized from the statement of assets and liabilities of the Chartered Banks of Canada, published in the Supplement to the Canada Gazette.

The importance of Canadian agencies in the New York securities market is indicated by the following comparison of their “street” loans with those made by New York City banks (in millions of Canadian dollars):27

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Japan

Japanese commercial banks entered the Euro-dollar market in the middle of 1960 as takers of Euro-dollar deposits and are generally considered to have achieved a net debtor position of at least $250 million as of the end of I960.28 These dollar deposits were accepted by branches of Japanese banks in Europe, principally in London. The rapid expansion has given rise to fears inside and outside Japan that the Japanese commercial banks were overextending their foreign exchange positions, or that they were using some of these Euro-dollar deposits for longer term investment. A number of banks that place Euro-dollar and Euro-sterling deposits, and particularly those that specialize in short-term positions, therefore maintain strict limits upon their deposits in Japanese banks.

Japanese commercial banks use their dollar deposits in two ways. Some are sold for yen, which are used for local financing. The banks cover the spot sales with forward purchases of dollars, so that they assume no exchange risks. If the risks assumed in connection with these yen loans are not too great, this kind of operation offers possibilities for substantial profit. In the first quarter of 1961, the discount rate of the Bank of Japan was 6.57 per cent, after having been 7.30 per cent for the first half of 1960 and 6.94 per cent for the second half of the year. The commercial bank lending rate has been at least 8 per cent since the beginning of 1960. This rate is the most common (not the arithmetic average, but the mode) of all rates on new loans secured by bills; though it is typical of the majority of loans made by banks, considerably higher rates of interest (up to 9 per cent or more) are not unusual.29 On the other hand, the rate of interest payable on Euro-dollar deposits obtained in London, even including a premium above the going market rate, would in the first quarter of 1961 have been about 5 per cent, with somewhat lower rates payable on short maturity deposits and somewhat higher rates payable on longer dated deposits.30 Even after the cost of dollar-yen swaps, this constellation of rates, plus the shortage of liquidity in Japan, offers obvious opportunities for the profitable employment of Euro-dollars in the form of yen. It is understood that approximately half of the Euro-dollars placed with Japanese banks is employed in this way.31

The balance of the Euro-dollar funds is used for import financing, or perhaps even for short-term loans to Japanese firms in connection with their foreign operations. These loans are made in dollars; the Japanese borrower repays in dollars, assuming whatever exchange risk is inherent in the transaction. Such loans may replace dollar credits from the United States.

The Euro-dollar (and the Euro-sterling) markets are regarded in many circles as mechanisms which make available to Japanese commercial banks and business enterprises a larger volume of foreign credit than could be obtained through customary banking channels. The conversion of Euro-dollars into yen increases domestic liquidity, and the use of dollars as dollars frees yen resources for other purposes. Both may lead to upward pressure on prices and greater demand for imports.

Italy

The rate of expansion in Italian production and foreign trade in the past decade has been high. Correspondingly, liquidity has been tight, except for the period from mid-1957 through 1959. These conditions have continuously encouraged Italian banks and business enterprises to supplement domestic funds with external funds.

Commercial loans made by Italian banks in lire, whether these lire have been obtained domestically or by the sale of foreign currencies, have been profitable because of the prevailing high rates of interest. As domestic sales and foreign trade expanded, however, business firms put more and more pressure upon Italian banks for loan accommodation at interest rates more closely related to those outside of Italy.

The banks, for their part, were interested in expanding both foreign and domestic operations and in obtaining new customers in the rapidly growing business sector. There are no published data on actual or effective interest rates charged by Italian banks. Rates on commercial bank loans made in lire are set by a gentlemen’s agreement of the major Italian banks; this agreement, revised annually, provides for a basic schedule of minimum rates for prime customers and a series of surcharges for other customers.32 Until late 1960, however, the agreement did not cover loan operations in foreign currencies. Thus, Euro-dollar operations of Italian banks and loans to customers in dollars (and other foreign currencies) were marked by a high degree of competition. Banks competed for existing and new business by offering Euro-dollar facilities; and Italian business enterprises with international connections were able to compel their banks to provide such facilities. The rates of interest charged on foreign currency loans reflected this competition.

For these reasons, Italian banks and business enterprises made use of external borrowing whenever possible. Banks in Italy were, perhaps, the first in Europe to borrow dollars in what has since come to be called Euro-dollar transactions. There are reports that as far back as 1950 or 1951 Italian banks obtained dollar deposits from French banks. These borrowing activities increased substantially in 1957 and 1958, and even more after the lira and other major European currencies were made convertible at the end of 1958.

In September 1960, a gentlemen’s agreement was made covering rates of interest on loans to Italian customers in foreign exchange. These rates are to be adjusted to rates of interest in financial centers outside of Italy.

Published interest rates on loans in foreign currencies (Table 5) understate the amount of competition introduced by loans in foreign exchange. At times, this competition amounted almost to a “price war.” Rates charged on loans made in currencies other than lire were occasionally 3½ per cent or even less. Clearly, loans made in dollars or in sterling at such rates were made at a direct loss. The cost of borrowing these currencies in London or in Paris was, for long periods of time, higher than these rates; in addition, Italian banks had the direct expenses attributable to borrowing and lending operations. But there may have been compensating advantages of another character. Moreover, the extremely low rates were probably applicable to loans made in currencies other than the dollar and sterling, perhaps Swiss francs and guilders, particularly if the loans were used in those forms or converted into dollars or sterling without forward cover.

Table 5.

Italy: Commercial Banks’ Domestic Loans in Foreign Exchange, December 1959, December 1960, and March 1961

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Source: Bank of Italy, Annual Report, I960, p. 141.

Since 1959, dollar deposits in commercial banks in Italy have grown by 50 per cent, while Swiss franc deposits have declined by 50 per cent and sterling deposits have changed very little.33 At the end of March 1961, nonresident deposits denominated in currencies other than lire totaled $708 million. Of this total, 58 per cent was denominated in dollars, 21 per cent in sterling, 11 per cent in Swiss francs, 5 per cent in deutsche mark, and 5 per cent in guilders, French francs, and other currencies.

As shown in Table 6, nonresident deposits in foreign convertible currencies increased from $442 million at the end of 1958 to $676 million at the end of September 1959, or by $234 million; at the same time the net liability position of the banks in these currencies increased by $103 million, reaching a maximum of $320 million. These data suggest that, during this period, approximately 40-50 per cent of nonresident deposits denominated in foreign convertible currencies were loaned to residents; the balance was invested abroad. As already noted, these loans were not subject to the rates in the gentlemen’s agreement. This is not to imply that borrowers may not have converted part of these loans into lire. Neither does it imply that foreign financing was necessarily done in the currencies which had been deposited.

Table 6.

Italy: Commercial Banks’ Assets and Liabilities in Foreign Convertible Currencies, End of Month, 1958-61

(In millions of U.S. dollars)

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Source: Istituto Nazionale per il Commercio Estero, Movimento Valutario, March 1961, Table 4.

By November 1959, the Bank of Italy had become concerned about the large net debtor position of Italian commercial banks in foreign currencies, and the fact that foreign borrowing increased domestic liquidity, at a time when domestic liquidity was already high. Therefore, the Exchange Office offered to make dollars available to commercial banks in swap transactions, selling dollars for lire at the prevailing rate and offering forward cover at the same rate. The objectives of this policy were fourfold: to halt the expansion of domestic liquidity and then to reduce domestic liquidity by requiring the surrender of lire in order to obtain foreign currency; to stimulate the short-term export of capital, to discourage capital imports, and thus to reduce the surplus in the balance of payments; to reduce official reserves by selling these reserves to commercial banks; and, finally, to make foreign exchange available to banks without recourse to foreign borrowing. The commercial banks, for their part, could use these dollars to acquire additional foreign assets, or to reduce foreign liabilities. In either case, the banks would reduce their net external liability position denominated in foreign exchange.

The effects of this policy can be inferred by comparing the positions in September 1959 and in September 1960. Nonresident deposits decreased by $160 million; foreign assets increased by $190 million; a net liability of $320 million was changed to a net asset of $18 million. The latter figures imply that the banks swapped $340 million of lire for dollar’s.

In August 1960, the Bank of Italy stimulated the use of swap facilities by requiring each commercial bank to move toward a balanced external position. The objective of the new regulation was to compel each bank to maintain assets in convertible currencies equal to its liabilities in such currencies, though the regulation did not necessarily require a balanced position in each currency.

In the six months following the adoption of this regulation, foreign deposits increased by $190 million; foreign assets increased by $360 million; and dollar swaps increased by $170 million. Thus, the swap policy, reinforced by the policy of balancing individual external positions, was notably successful.

In the 18 months following September 1959, the commercial banks’ external position in foreign exchange was changed from a net liability of $320 million to a net surplus of $190 million, and the Exchange Office swapped $510 million of dollars for lire. Foreign assets of commercial banks, including deposits in the Euro-dollar market, increased by $560 million.

Germany

The large and continuing surplus in the German balance of payments, due in part to the inflow of capital, has built up German holdings of dollars. Nevertheless, commercial interest rates in Germany in the past few years have been relatively high—higher than those in most other countries of Western Europe and clearly higher than those in the United States. These factors suggest that the German banking system supplemented its credit resources in deutsche mark with additional liquidity based on borrowing dollars, using these dollars either to obtain additional resources in deutsche mark or to meet some of the demands for deutsche mark with dollars.

On the other hand, widespread borrowing of dollars and conversion of these dollars into deutsche mark increased official reserves. The German authorities did not regard this with favor and took a number of steps to stop the inflow of capital. Moreover, to encourage the export of dollars, the German authorities, shortly after external convertibility was announced at the end of 1958, provided swap facilities. According to these arrangements, the Bundesbank offered spot dollars in exchange for deutsche mark at the going market rate—not at par—with a commitment to buy back the dollars at the same rate at a future date.

These swap operations were designed to stimulate the conversion of deutsche mark into dollars for purposes of short-term capital export, as well as to discourage the borrowing of dollars abroad, thereby checking the growth of reserves and the expansion of domestic liquidity. However, interest rate differentials between Germany and other countries often militated against such an export of capital, even with these swap facilities. Consequently, in 1960 the Bundesbank began to subsidize swaps of deutsche mark for dollars by adding a premium, i.e., by agreeing to buy back the dollars at a premium in terms of deutsche mark.34 This premium was introduced in August 1960, and subsequently adjusted as follows:

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Swap facilities, and later the premium, were extended on the understanding that the German banks would use the dollars so acquired to make time deposits abroad or to buy foreign Treasury bills or acceptances.35 The forward premium was a substantial incentive to make dollar investments abroad. If the yield on dollar investments during this period was of the order of 3 to 4 per cent, the forward premium constituted a sizable addition to this yield, for an investment that was entirely without exchange risk.36

Dollar swaps reduced the domestic supply of deutsche mark and reinforced the tight money policy of the Bundesbank. Indeed, these swaps may be considered a “fifth” monetary weapon supplementing the discount rate, open market operations, changes in reserve requirements, and individual regulations applying to particular segments of the economy.

The participation by German commercial banks and industrial enterprises in the Euro-dollar market, both as lenders and as borrowers of deposits, was dictated by commercial considerations. Banks and business enterprises had been increasing their dollar holdings for a number of years, and investment abroad offered many favorable opportunities. The Euro-dollar market, and national money markets in the United States, the United Kingdom, and Canada, frequently offered facilities for diversification, short-term investment, and liquidity greater than those offered by the German market. Commercial banks had a long tradition of making medium-term and even long-term loans. The short-term investment of dollars, possibly through participation in the Euro-dollar market, offered the possibility of balancing long positions in Germany with short positions outside the country.

Private financial advantage would thus inevitably have resulted in some investment of capital on short term, including placing deposits in the Euro-dollar market. The Bundesbank understandably wished to increase this outflow of capital, in view of the large German balance of payments surplus. The Bundesbank did not apply moral or regulatory pressure to increase this flow, though the private banking community generally understood what it hoped for; but the Bundesbank employed financial incentives, including swap facilities. However, given the basic conditions that were creating the payments surplus, it was difficult to find any combination of financial incentives that would substantially increase net short-term capital exports. The swap premium was eliminated in March 1961, after domestic interest rates declined. Nevertheless, the balance of payments surplus continued despite the revaluation of the deutsche mark, and another form of financial incentive was introduced in the form of a regulation that commercial banks could deduct foreign assets from their required reserves.

Soviet Union and other countries in the Soviet bloc

“The original impetus for the postwar development of the Continental dollar market,” according to Holmes and Klopstock, “is believed to have arisen from the desire of several banks in Eastern Europe to leave their dollar balances with their correspondents in France and England rather than carrying them in their own name in the United States.”37 Though there may be some question as to this primacy, there is no doubt that the Soviet Union and other Soviet bloc countries have been in the market more or less continuously for many years. Originally, these countries were net suppliers of dollars; more recently, they broadened their Euro-dollar activities, and they now operate on both sides of the market. They keep surplus working balances on deposit in London, Paris, and other centers, and may even place them in investments denominated in local currency. They also accept dollar deposits, operating through well-known agents in Europe, principally the Moscow Narodny Bank in London and the Banque Commerciale du Nord in Paris. In addition, they directly solicit deposits of dollars, sterling, and other Western European currencies, by circularizing banks and finance houses in Western Europe. The Moscow Narodny Bank and the Banque Commerciale du Nord are regarded in Europe as prime commercial names, good for large deposits of dollars and other currencies at competitive rates. The deposit of funds in these banks may also reflect the view that trade between the Soviet bloc countries and the United States and Western Europe should be facilitated as an encouragement to interdependence and world peace and that the extension of credit on reasonable terms (including the deposit of dollars) will encourage this expansion.38

The U.S.S.R. and other countries in the Soviet bloc, having built up their credit standing in the Euro-dollar market, in part by depositing dollars, have now reached the position where they are, on balance, borrowing dollars. The net position of the Soviet Union and other countries in this group may be estimated very roughly at $200 million in the spring of 1961. The division of this total between the U.S.S.R. and the other countries is not known, nor is the extent to which the U.S.S.R. may be acting as an agent for other countries.39

Funds obtained in the Euro-money market by the Soviet bloc countries may serve several purposes. To some extent, they represent an addition to the trade credit which these countries are otherwise able to obtain in the West; as such they facilitate imports. On the other hand, these funds may replace other kinds of credit or, temporarily, sales of gold.40

The Moscow Narodny Bank and the Banque Commerciale du Nord obtain dollar deposits in a going market, but the precise schedule of interest rates paid by these banks is not known. The rates offered by the State Bank of the U.S.S.R. (Gosbank) are stated in circulars to prospective depositors. For example, the circular dated March 25, 1960 quoted the following rates: current accounts, 2¾ per cent; 30-day deposits, 3¾ per cent; 3-month deposits, 4 per cent. There is no information on the dollar deposits obtained at these rates, which in each category were lower than those offered by London banks. For 90-day deposits, the rate in London was reported by one source as 4¼ per cent, and by another as 4.36 per cent. The difference was larger for shorter dated deposits, the London rate for current deposits being 3⅞ per cent. Under these circumstances, it was unlikely that current dollar deposits would be made with the Gosbank. The circulated schedule of rates was, therefore, probably only an indication of minimum rates, with actual rates determined by negotiation. This may be the significance of the following from the Gosbank circular: “If you are interested to open with us a deposit we would ask you to contact us by cable so as we might offer you the best interest rate.”41

The central banks of other Soviet bloc countries also circularize banks in Western Europe. For example, the circular of the State Bank of Eastern Germany (Deutsche Notenbank) of October 17, 1960 set forth the following schedule of rates on dollar deposits: call deposits, no quotation; 7-day deposits, 3½ per cent; 30-day deposits, 4⅛ per cent; 90-day deposits, 4⅞ per cent. In contrast to the rates offered by the Gosbank, each of these rates was above the corresponding rate quoted in London. For example, the London rate on 90-day dollars was approximately 3.90 per cent, so that the Deutsche Notenbank offered a premium of 1 per cent.

United Kingdom

London is now, and has been for many years, the largest market for Euro-dollars. More than any other market, London attracts dollar deposits from a wide variety of sources, and in turn places these on a broad international basis. It is a true international market. The London dollar market consists of banks and financial agencies that draw together dollar deposits from all parts of the world (including the United States) and lend these dollars to all parts of the world (including the United Kingdom and the United States). The amount of deposits denominated in U.S. dollars held in Canada by the head offices of the Canadian Chartered Banks is probably larger than that held by all banks in London. The Canadian market for dollar deposits, however, is a relatively simple one that depends entirely upon the close economic relationships between the United States and Canada and the ability of Canadian agencies to manage funds profitably in the New York market. The London market for Euro-dollars, on the contrary, does not depend upon such associations and relationships.

The London market for dollars and other foreign currencies is a highly structured one. It has more components, which in turn are more specialized, than any other market. It consists of British overseas banks, merchant banks, branches of U.S. and Canadian banks, branches or affiliates of other foreign banks, and acceptance and discount houses. The position of U.S. branches in London has been discussed above (p. 331); that of Canadian branches is similar to the U.S. branches, but on a very much smaller scale. All the other elements in the market also accept deposits of dollars, sterling, and other currencies. The role of the clearing banks is considered to be relatively small. The British overseas banks, merchant banks, and acceptance houses, however, are extremely active in the market for dollars and other foreign currencies. They are energetic in attracting deposits, and world-wide in their approach to placing deposits in the hands of branches of foreign banks in London, banks in foreign countries, and foreign business enterprises. Deposits in sterling may be loaned to foreign business enterprises, or, when accepted by branches of foreign banks, transferred to their respective head offices for investment. Part of the deposits in currencies other than sterling is invested directly or indirectly in sterling assets, i.e., bills, securities, commercial paper, advances to enterprises engaged in hire-purchase financing,42 or loans to local councils for housing purposes. The proportion of such deposits invested in sterling assets is not known, and will in any event change in response to interest rate differentials. A large percentage is invested in foreign assets, either by placing deposits with banks outside the United Kingdom, which will use the funds in the ways already outlined, or by lending dollars and other currencies directly to foreign businesses.

III. Foreign Markets for Convertible Currencies

Section I of this article discusses the activities of foreign markets for dollars arising from the acceptance and placing by banks of deposits denominated in dollars. That discussion did not, however, cover the procurement by banks of dollars (or other currencies) impersonally through the exchange markets.

Basis for external dealings in sterling and other European currencies

Before 1914 and in the 1920’s, banks in every European country accepted deposits in every European currency, whenever conditions permitted. The principal difference between those periods and the present is that sterling then was the most important currency, so that attention was centered upon obtaining sterling deposits and credits. Consequently, the interest rates payable in foreign markets on sterling deposits, in conjunction with spot and forward exchange rates of sterling, were the major determinant of the interest rates that could be paid on deposits denominated in other currencies. Under the conditions that emerged in the 1950’s, the dollar increasingly became the major currency for international trading and, apart from the sterling area, the major medium in which exchange reserves were held.

As monetary conditions improved in Europe, and de facto convertibility of the major European currencies was replaced at the end of 1958 by de jure convertibility, there was strong reason for the development of external markets in all European currencies. At present, London, Paris, Zurich, Frankfurt, Milan, and other European financial centers accept deposits in all major currencies. External markets have developed for sterling, Swiss francs, deutsche mark, and other currencies. However, transactions in Euro-dollars, or more properly foreign market transactions in dollars, are more important than foreign market transactions in sterling and all other European currencies. It would appear that, in the financial markets as a whole, transactions in Euro-dollars account for at least 90 per cent of all Euro-transactions; transactions in Euro-sterling constitute perhaps 5 per cent of the total43 and transactions in all other European currencies constitute the remaining 5 per cent.44 This division of the market by currency is responsive to the level of interest rates prevailing in various countries, as well as the structure of spot and forward exchange rates, which reflects both interest differentials and speculative activity.

External markets in national currencies develop when these currencies can be used profitably in any one of three forms: (1) without conversion into another currency; (2) with conversion into another currency but without forward cover; and (3) with conversion and with forward cover. One or more of these conditions has prevailed in the past few years for every major European currency. In particular, since the cross rates of the most important continental currencies are considered on the Continent to be quite firm—this was even more the opinion before the revaluation in March 1961 of the deutsche mark and the guilder—there is considerable scope for uncovered dealings.

The national structures of interest rates charged on overdrafts and on loans reflect domestic monetary policy considerations, as well as operating rigidities and gentlemen’s agreements. The gentlemen’s agreement among Italian banks with respect to loans in lire and, subsequently, loans in dollars has been referred to above (p. 337). But in every country, understandings or market leadership or similar factors affect the level, the flexibility, and the structure of interest rates.

It is therefore inevitable that external markets for national currencies should emerge. The impetus comes from both banks and borrowers. The Euro-money market makes it possible for any bank to supplement its domestic business by accepting and placing deposits in foreign currencies. Participation in such markets is a source of extra profits and is free (or, at least, freer) of domestic interest rate limitations and operating rigidities. This business can be, and in fact is, conducted on margins lower than those prevailing in national markets. Moreover, the expansion of business on an international scale makes it increasingly easy for firms to borrow in different countries and in different currencies. To forestall such borrowings, banks are virtually compelled by their customers to enter the Euro-money market. For if one bank will not borrow dollars or Swiss francs for a powerful customer, another bank will; if not, the customer will himself borrow.

In addition to these general factors, particular factors may operate in individual national markets. In 1957, the British monetary authorities limited the use of sterling in external transactions and, in particular, forbade two kinds of foreign loans in sterling: extensions of trade credits beyond the normal financing periods, and sterling financing in export/import operations to which the United Kingdom was not a party. These limitations created a demand for Euro-sterling as well as for dollars and other currencies.

External transactions in convertible currencies

Paris is the most important market for transactions in Euro-sterling, but there have been dealings in other continental centers, as well as in London. It is likely that the volume of Euro-sterling deposits in Paris and other continental centers is small; in other words, most owners of external sterling deposits keep them in London. These Euro-sterling deposits, like dollar deposits, come from all parts of the world, particularly Europe, the Middle East, and South America, and they represent both private and official funds. Euro-sterling activities appear to be based on a relatively small amount of Euro-sterling deposits. A relatively small amount of the sterling loans by continental banks are made in sterling which has been deposited with them; in large part, these loans are made with sterling that has been purchased with other currencies.

Transactions in Euro-sterling (and, even more, transactions in other European currencies) are uncomplicated when compared with those in dollars. The banks that accept sterling deposits generally use them themselves rather than deposit them in some other bank. The banks in the market for sterling deposits are fewer than those for dollar deposits, and the length of the banking chain is shorter.

External transactions in other European currencies are almost entirely confined to Swiss francs, deutsche mark, guilders, and lire, though most banks are prepared to accept deposits of any convertible currency, and to place deposits or make loans in any convertible currency.

In most cases the exchange risk involved in switching from one currency to another is taken by the borrower, who can cover forward if he wishes. Most banks use forward cover in such switches, but there have been a considerable number of cases in which banks have taken uncovered positions.

Interest rates on Euro-sterling and other currencies

All currencies are equally acceptable in Euro-money operations, but all of them do not carry the same interest tag. Since the dollar is now the most important currency in such operations, the interest that will be paid for any other currency varies with the cost of the dollar swapping operation. When the dollar spot and forward rates for any currency are equal, the rate of interest that will normally be paid on deposits in that currency will be equal to that paid for dollars. For several years, however, most continental currencies have prevailingly been at a forward premium relative to the dollar. Hence, the interest rates paid in London and continental markets on deposits of guilders, Swiss francs, etc., have been lower than those paid on dollars. Correspondingly, forward sterling since 1960 has been at a discount relative to the dollar, so that interest rates paid on Euro-sterling deposits have been higher than those on Euro-dollar deposits.

Data on the various rates of interest offered on 90-day deposits in London in February 1961 show that this rate was highest on sterling, at 4.625 per cent per annum, and lowest on guilders, at 1.50 per cent (Table 7). Nevertheless, the covered interest cost involved in using each of these currencies, assuming a swap into dollars, was approximately the same. In these calculations, the maximum rates of interest that could be paid on European currencies, assuming forward cover, were derived from the rate on dollar deposits. The relationship is, however, interdependent rather than one way. Money market conditions in any currency (assuming that the currency may be used for external transactions) affect the level of interest rates paid in Euro-money markets on all currencies, including the dollar, through capital movements and changes in spot and forward rates. It is only that, at present, the factors determining the rate of interest on dollars are much broader than those affecting the rates on all other currencies. The rate on dollars, therefore, affects other currencies more than the rate on other currencies affects the dollar.

Table 7.

London: Actual and Covered Interest Rates on 90-Day Deposits of Six Currencies, February 21, 1961

(In per cent per annum)

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Representative rates as circularized by one bank in the London market.

Based upon the conversion of each currency into dollars and the cost of repurchasing that currency forward.

The role of individual currencies in Euro-money markets may vary widely from one period to another. During the sterling flurry in March 1961, the forward premium on the Swiss franc, the deutsche mark, and the guilder against both the dollar and sterling widened to such an extent that no rates were quoted in London on deposits of these currencies. On the other hand, there was an increase in the demand for sterling, and derivatively for dollars, to finance long positions in other currencies, as well as to reverse, or cover forward, earlier uncovered sales of these currencies for sterling. The result was that the interest rates offered for sterling deposits increased, and those for dollars rose sympathetically; for a short period, rates offered on the Continent rose relative to those in London.

The factors that determine the structure of interest rates on deposits of various currencies in London and other Western European financial centers also operate in countries in the Soviet bloc, but to a lesser extent. The result is a somewhat different structure of rates. The Gosbank circular of March 25, 1960, referred to above (p. 344), also quoted interest rates on 90-day deposits of sterling, Swiss francs, and deutsche mark. Given the spot-forward quotations between each of these currencies and the dollar, it would appear that the Gosbank was paying more for deutsche mark, and less for sterling and Swiss francs, than for dollars. Under these circumstances, the Gosbank might be offered deposits of deutsche mark but not of the other currencies.

IV. Conclusion

The developments in foreign markets for dollars and other currencies have had a number of significant effects.

First, they have strongly influenced the structure and the level of interest rates in a number of countries. They make it more difficult to maintain, within any one country, operating rigidities and customary and cartel arrangements with respect to interest rates paid and charged. In general, they act to bring interest rates in different countries closer together.45 These external deposit markets exist because, as far as many countries are concerned, the rate of interest that can be earned internationally is higher, while the rate that must be paid internationally is lower, than the domestic rates. Strong companies in (say) Italy pay less for financing in Euro-dollars than they would have to pay for dollars in New York or for lire in Italy, while, for some time, all other companies continue to pay the higher domestic rates. This widens the existing differential between interest rates paid by prime borrowers and all others. Nevertheless, the continuing competitive pressure tends to reduce the average of domestic interest rates and to bring this average closer to the international level, specifically, the Euro-dollar and Euro-money rate. It thus tends, after a time, to reduce the differential between classes of borrowers, despite the initial increase.

Second, foreign markets for dollars, sterling, and other currencies have reduced the cost of foreign trade financing and probably increased the amount of such financing available to some countries, particularly Japan.

Third, the development of foreign markets for dollars has increased the importance of the dollar as an international currency.46 The dollar is now held and used more widely by commercial banks and other financial institutions. To this extent, and also when official reserves are sold to or deposited in commercial banks, the conversion of dollars into gold is reduced. On the other hand, the management of these funds passes out of the hands of U.S. banks, with the exception—and it is a large exception—of those funds returned to the United States by foreign branches of U.S. banks. This development has also enhanced the international importance of other currencies. The enhancement has been small so far, but it is not unlikely that a number of European currencies will move toward international, key currency status, and that they will be held in larger amounts outside their country of origin.

Fourth, the development of foreign markets for dollars, sterling, and other currencies, interconnected as they are with the domestic money markets of their respective countries and with exchange markets, improves liquidity. Within any one country, the development of these markets blurs the distinction between loans in foreign currency and loans in domestic currency, and adds the former to the latter. Internationally, this development can be viewed as adding speed and efficiency to existing liquidity, or as increasing the amount of liquidity. Whether the effects will be good or bad depends upon how the liquidity will be used. It may be used with constraint to finance desirable ends. It may also be used to exaggerate speculative movements and to finance large movements of capital which are disturbing or meaningless.

Finally, by bringing interest rates in various countries into a new alignment and by stimulating the forces of international financial integration, the development of foreign markets for dollars and other currencies may modify the role of domestic monetary policy. For this as well as other reasons, it may become increasingly difficult for any country to change its own interest position in the international structure. This would make it more difficult to rely very heavily upon a domestic monetary policy, and make it necessary to place more weight upon complementary policies. Should this be the case, the virtues of a flexible interest rate policy, so much appreciated during the past decade, may fade during the present one.

*

Mr. Altman, Advisor in the Research and Statistics Department, is a graduate of Cornell University and the University of Chicago. He taught economics at Ohio State University and was on the staff of the National Resources Planning Board and of the French Supply Council. He was Director of Administration of the Fund until 1954. He is the author of Savings, Investment, and National Income and of a number of papers published in technical journals

1

A comprehensive survey of the Euro-dollar market in 1960, based on interviews and field investigations in six countries, was made by Holmes and Klopstock, who published their findings in a much quoted article, “The Market for Dollar Deposits in Europe,” Monthly Review (Federal Reserve Bank of New York), November 1960. The New York Clearing House Association issued in July 1960 a report entitled A Study of Regulation Q as It Applies to Foreign Time Deposits. There has been a considerable amount of comment in the daily press and in periodicals on the Euro-dollar and Euro-sterling markets. The subject has also been briefly discussed in the Annual Reports of the International Monetary Fund, the Bank for International Settlements, and a number of other official bodies.

This article has made extensive use of published materials, but it is for the most part based upon a three weeks’ visit in Europe by the author in March 1961. Discussions were held in London, Paris, Basle, Zurich, Rome, and Frankfurt with officials in central banks, commercial banks, and private banks. In addition, discussions were held with officials in commercial banks in New York and with staff members of the Federal Reserve System in New York and Washington.

2

Current operations in foreign markets for dollars (and other currencies) take place as if a deposit denominated in dollars in a foreign country is virtually the same as a dollar deposit in the United States. The depositor in a foreign country may in some circumstances (for example, the insolvency of the bank or the imposition of exchange controls) recover only local money. (See F.A. Mann, The Legal Aspect of Money, 2nd ed., Oxford, England, 1953, Part II, especially Chap. IX.) This distinction, insofar as it affects the competitive position of foreign branches of U.S. banks in the Euro-dollar market, is discussed below (p. 322).

3

There are a number of serious statistical difficulties in measuring any such change, and the reporting system was modified in the spring of 1961 to cope with some of them (Federal Reserve Bulletin, June 1961, p. 655). Time and demand deposits of foreign governments and banks will be more clearly reported under the new system; those owned by foreign corporations and individuals cannot be determined under either system. Moreover, the data do not include—because they are not defined as deposits—the advances made by Canadian head offices to their New York agencies or the advances made by U.S. branches abroad to their head offices in New York.

4

Reconciliations of foreign exchange liabilities as reported by the United States, the United Kingdom, and others, with foreign exchange assets as reported by their owners, are regularly published by the International Monetary Fund in International Financial Statistics. The excess of reported assets over liabilities increased in 1959 and then jumped sharply in 1960. Part of this growing excess undoubtedly reflects Euro-dollar operations; another, but much smaller, part reflects transactions in Euro-sterling.

5

In the spring of 1961, European, especially German, exporters borrowed dollars, both in the Euro-dollar market and in New York, to buy their own domestic currencies spot. Given the forward discount on the dollar, this was cheaper than buying their domestic currencies forward.

6

See Paul Turot, “Le Marché des Capitaux à Court Terme en Europe et I’Euro-Dollar,” Banque (Paris), April 1961, pp. 215-18.

7

For example, it was reported that a local council in the United Kingdom had borrowed £230,000 from the Moscow Narodny Bank in London, explaining that money was cheaper at the Moscow Narodny. See The Times (London), March 6, 1961.

8

The persistence of sizable net differentials for more than a year is puzzling. Two factors may help to explain it. First, the comparison between Treasury bills is imperfect because there are other kinds of investments, including commercial paper and Euro-dollar deposits. Secondly, as the Bank for International Settlements (BIS) has suggested, part of the explanation is that “a substantial part of the funds that came to London in 1960 may not have been covered forward” (BIS, Annual Report, 1960, p. 151).

9

The representative rates reported to the Bank of England and charted in its Quarterly Bulletin differ somewhat from those shown in Tables 1 and 2, while rates that have been published in various articles on Euro-dollars differ somewhat from one or both of these. See, for example, H. Heymann, “The Euro-Dollar Market,” Swiss Review of World Affairs (publication of the Neue Zürcher Zeitung, Zurich), January 1961, pp. 6-7, and The Economist (London), October 1, 1960, p. 78.

10

This is an important qualification. A business enterprise may be a prime risk in its own country but not in New York or in other markets outside its own country; moreover, it may be a prime risk when credit conditions are easy, and not when they are tight.

11

The average rate of interest charged by New York City banks on loans of $200,000 and more was somewhat higher: in March and June 1960, 5.10 per cent; in December 1960, 4.66 per cent; in March 1961, 4.64 per cent.

12

The Times (London), September 15, 1960.

13

The Monthly Circular of the Mitsubishi Economic Institute for December 1960 (p. 12) gave the rate of interest on Euro-dollar deposits as 4.75-5.00 per cent. These averages must have included short-dated deposits.

14

“The Market for Dollar Deposits in Europe,” loc. cit., p. 197. P. Einzig said that Euro-dollars “are estimated to have long passed the billion dollar mark”; see Commercial and Financial Chronicle (New York), April 20, 1961, p. 11.

15

The Times (London), September 15, 1960. Another estimate, placing Eurodollar deposits in London at $500 million, was given in “The Trend Against Sterling,” Bankers’ Magazine (London), January 1961, pp. 40-41.

16

The Bank of Italy calculated the Italian Euro-dollar position as the difference between short-term dollar assets held by Italian authorities and banks as reported directly to the Exchange Office and as reported by U.S. banks to the Federal Reserve. According to this, the Euro-dollars (net) placed in the market by Italy as at the end of 1960 totaled $274 million. (See Bank of Italy, Annual Report, 1960, p. 135.) On the basis of revised U.S. figures, this total would be $368 million.

17

It may be helpful to summarize briefly the data concerning claims of, and liabilities to, nonresidents which are available for countries whose commercial banks are known to participate in the Euro-dollar market. (1) Only Italy has published data on commercial banks’ foreign assets and liabilities for the account of nonresidents denominated separately in dollars and in various other currencies. (2) Some countries (e.g., Canada, Greece, Iceland, and Italy) publish data, covering all of their commercial banks, showing foreign assets, liabilities, and net position in all foreign currencies combined. (3) Some countries publish data, covering all of their banks, showing foreign assets, liabilities, and net position denominated in foreign currencies plus their own currency. This group includes Austria, Denmark, Germany, and Norway. The United Kingdom would also fall in this group, except that it publishes these data only for overseas banks in London and does not publish such data for the clearing banks. (4) Some countries do not publish any data on foreign assets and liabilities of commercial banks, but publish data only on the net foreign position in all currencies plus domestic currency. (5) Finally, some countries (e.g., France, Belgium, and the Netherlands) do not publish any data on the foreign position of their banks.

18

Time deposits carry lower reserve requirements than demand deposits. Reserve requirements against demand deposits of New York City banks were reduced from 21 per cent in mid-1954 to 19½ per cent at the beginning of 1958 and to 16½ per cent as at December 1960. Those against time deposits have remained at 5 per cent since mid-1954.

19

This additional “return” on time deposits is naturally influenced by the difference between the rate of interest on time deposits and market rates of interest. When the latter are markedly higher, part of the differential may sooner or later be passed on to the customer as additional “return.”

20

New York City banks have complained that the growth of foreign markets for dollars is the result of Regulation Q. Though the Euro-dollar activities of their overseas branches have, in effect, partially emancipated U.S. banks from Regulation Q, they continue to press for the abolition of the Regulation, so that they can compete more effectively. It has been suggested that this view should be given serious consideration by the U.S. authorities; see, for example, the recommendation by the Bank for International Settlements in its Annual Report, 1960, p. 138.

The growth of Euro-dollar operations, the large capital outflow in 1960, and the balance of payments deficit of the United States, have focused attention upon levels of interest rates required to keep funds in the country. It should be recognized in this connection that U.S. markets are not without their operating rigidities. Thus, for many years, New York City banks did not pay interest on the time deposits of domestic corporations. This encouraged the investment of these domestic corporate funds in short-term securities, first domestic, and more recently foreign. New York City banks are now trying to obtain some of these corporate funds by selling certificates of deposit with stated redemption periods. As at June 1961, approximately $700 million had been issued in New York and $600 million in other major cities; see Wall Street Journal, February 27 and June 27, 1961.

There have been suggestions that special securities be offered to foreign official holders of dollar balances at attractive rates of interest. On the other hand, questions have been raised on whether it is possible to distinguish between foreign private and foreign official holders of dollars, and between foreign investors as a group and domestic investors—for example, by Roy L. Reierson of the Bankers Trust Company in A New Money Market Instrument (mimeographed, March 24, 1961). There have also been objections that such proposals would be discriminatory, raise the domestic level of interest rates, and result in higher interest outpayments to foreigners (see New York Times, April 12, 1961, and Wall Street Journal, May 8, 1961).

21

Paying these competitive rates implied that the Federal Reserve Board would not view this with disfavor. There is no published record on this point.

22

Calculated from the Bank of England, Quarterly Bulletin, June 1961, Table 11.

23

U.S. banks suggested this to foreign customers only when it was thought necessary to retain their accounts. The banks apparently tried even more to discourage their domestic customers from making deposits in London. The extent to which these attempts have been successful is not known.

24

The prime rate rose from 3½ per cent in the second quarter of 1958 to 5 per cent toward the end of 1959. The movement of “free” reserves (the difference between reserves held and the sum of required plus borrowed reserves) is indicated by the data in the following table:

Monthly Average of “Free” Reserves of New York City Banks

(In millions of US. dollars)

article image
Source: Federal Reserve Bulletin.

25

Since 1954, the reserve requirements of the Chartered Banks have been set by the Bank of Canada at 8 per cent against deposit liabilities payable in Canadian currency. The Bank Act of 1954 (Chap. 48, Sec. 71) also requires “adequate reserves against liabilities payable in foreign currencies.” In practice, the Chartered Banks have maintained the same reserves against both types of deposit. Since 1956, the banks have also maintained, by voluntary agreement, a supplementary liquidity reserve of 15 per cent against deposits. This reserve is invested in day-to-day loans and Canadian Treasury bills.

26

From a study, as yet unpublished, by Fred H. Klopstock, A New Look at Foreign and International Banking in the United States.

27

Canadian figures from the supplement to the Canada Gazette; New York City bank figures from the Federal Reserve Bulletin.

28

Some estimates have placed this amount at $300-400 million. An article on “Japanese Banks’ Success Story” in the symposium “Japan—An Economic Survey” in The Statist (London), June 3, 1961, p. 12, estimated the inflow of Euro-dollars and Euro-sterling as of the spring of 1961 at $500 million.

29

The corresponding rate on overdrafts (as distinguished from secured loans or loans on notes) would be 10 per cent or more.

30

In comparison, interest rates paid by commercial banks on yen notice deposits were 2.9 per cent. On yen time deposits, they were as follows: 3 months, 4.3 per cent; 6 months, 5.5 per cent; and 12 months, 6.0 per cent.

31

The Times (London), however, stated on September 15, 1960 that between 65 and 75 per cent of these Euro-dollar deposits are being turned into yen.

32

These agreed rates are given in the Bank of Italy, Bolletino, February 1961, Table 13. In practice, actual minimum rates have been above these agreed minima. Some years ago, the differential was about 2-2½ per cent; at present, however, it is very low.

33

Bank of Italy, Annual Report, I960, p. 140.

34

When this premium arrangement was introduced, the forward dollar was at a discount in terms of deutsche mark. This discount was 1.05 per cent on an annual basis at the end of September 1960 and 0.6 per cent at the end of the year.

35

These dollars could also be used to finance transit operations involving third countries and, during the period August-October 1960, to finance domestic operations.

36

The forward premium on dollars in terms of deutsche mark looked even more impressive when compared with the discount which had been charged by the Bundesbank in connection with swap transactions in 1959. This discount went as high as ⅞ of 1 per cent in August 1959. In the open market the forward dollar was at a discount for most of 1959.

37

“The Market for Dollar Deposits in Europe,” loc. cit., p. 197.

38

For a recent statement of this general view, see Sir George Bolton, “United States Trade with Eastern Europe,” Quarterly Review (Bank of London & South America Limited), April 1961, pp. 165-68.

39

The Soviet Union and other countries in the Soviet bloc are traditionally extremely secretive about their financial dealings, and they are adept in hiding their true positions, including those relating to gold production, stocks, and sales. See also 0. L. Altman, “Russian Gold and the Ruble,” Staff Pavers, Vol. VII (1959-60), pp. 416-38.

40

This may explain part of the large sales of Russian gold reported in the first five months of 1961, which were larger than in any corresponding period since the end of World War II. Some of these sales were probably for the account of Mainland China.

41

The Gosbank circular is in both Russian and English. The passage quoted is from the English text.

42

Many of the larger finance companies are associated with, or partially owned by, clearing banks or merchant banks. See “Instalment Credit in the United Kingdom,” The Statist (London), June 3, 1961, pp. 918-19.

43

Compare the following independent estimate published in The Economist (London), May 27, 1961, p. 920: “The turnover in the market, for these funds, which some people call Euro-sterling, remains small—probably not much over 10 per cent of the European market in dollar deposits.”

44

In order of size of external transactions, the currencies after the dollar and sterling would be Swiss francs, deutsche mark, guilders, and lire.

45

On this and other effects of foreign markets for currencies, see the speech by Guido Carli to the Italian Banking Association, reported in Mondo Economico (Milan), May 6, 1961.

46

See “The Market for Dollar Deposits in Europe,” loc. ext., pp. 201-02, and Bank for International Settlements, Annual Report, 1960, p. 138.