Recent Developments in Foreign Markets for Dollars and Other Currencies

APREVIOUS paper, “Foreign Markets for Dollars, Sterling, and Other Currencies,” was concerned with the structure, operations, characteristics, and implications of foreign markets for dollars, sterling, and the major currencies of Western Europe in the spring of 1961.1 The present paper describes subsequent developments in these markets through the summer of 1962. It emphasizes the effects of operations in foreign currencies, largely U.S. dollars, upon interest rates and short-term capital markets in Europe and elsewhere, and the significance of these operations for monetary policy.2


APREVIOUS paper, “Foreign Markets for Dollars, Sterling, and Other Currencies,” was concerned with the structure, operations, characteristics, and implications of foreign markets for dollars, sterling, and the major currencies of Western Europe in the spring of 1961.1 The present paper describes subsequent developments in these markets through the summer of 1962. It emphasizes the effects of operations in foreign currencies, largely U.S. dollars, upon interest rates and short-term capital markets in Europe and elsewhere, and the significance of these operations for monetary policy.2

Oscar L. Altman *

I. Size of Foreign Markets for Dollars and Other Currencies

As noted in the earlier paper, “the size of the Euro-dollar market can be nothing but a guess—perhaps a very wild guess.” First, data for some financial centers are either not reported (e.g., Amsterdam, Paris, and Zürich) or are seriously inadequate (e.g., London and Montreal/Toronto). Second, a large but unknown amount of overlapping and duplication is created when statistics or estimates of foreign currency deposits of financial centers are added together, since banks accept deposits from, and place them with, each other.3 And third, there are both duplications and omissions in the data reported for any one financial center.

The foreign currency market in London is the largest in Europe. Data published for this market by the Bank of England cover overseas banks in London (British, U.S., and other foreign) and accepting houses, but not clearing banks; in September 1962, the coverage was expanded to include 25 additional foreign banks operating in London. These data do not distinguish foreign assets and liabilities denominated in sterling from those denominated in foreign currencies. They do, however, distinguish between assets and liabilities of residents and those of nonresidents. The amount and trend of foreign currency deposits to the credit of nonresidents in London (those of U.K. residents may be disregarded) must thus be an estimate. Such an estimate must be based on the assumption that the increase of deposits over some base date (e.g., the end of 1958, or some earlier date, suitably adjusted) yields a meaningful figure of foreign currency deposits held by nonresidents. This estimate would have to be adjusted for incomplete coverage, duplications, and the increase in sterling deposits included in the figures. Fortunately, an estimate made by the Bank of England for June 1961 can serve as a bench mark. According to this estimate, foreign currency deposits of overseas and foreign banks in June 1961 were nearly £500 million, equivalent to nearly $1.4 billion.4 Inclusion of the accepting houses, clearing banks, and certain foreign banks, allowing for the increase in their sterling deposits held by nonresidents, would raise this to a minimum of $2 billion.5 Foreign currency deposits in June 1962 may be estimated at approximately $2½ billion.

Foreign currency deposits of nonresidents in Paris banks were about $800 million in the spring of 1962. They were perhaps one third larger than those a year earlier. In addition, these banks held about $400 million of foreign currency deposits for the account of residents. Foreign currency deposits for the account of nonresidents in Italy were $1.0 billion in March 1962,6 and were thus slightly larger than those in Paris. Foreign currency deposits in other European financial centers were considerably smaller than in Paris. For example, those in Germany were about $450 million in June 1962.7 Of all the financial centers in continental Europe, Paris had the widest range of market operations, as regards the number of currencies involved and the diversity of sources and uses of funds. As a market Paris was thus more akin to London than were the other continental centers.

It may be estimated that the size of foreign markets for dollars, sterling, and other currencies in Europe increased somewhat in 1961 and then increased more rapidly in the first half of 1962. Funds in these markets in June 1962, after allowance is made for the pyramiding of deposits among financial centers, were probably more than $3 billion, without taking into account the foreign currency deposits of Canadian banks.8

The operations of Canadian banks in U.S. dollars increased substantially during 1961. Foreign currency deposits placed with Canadian banks increased by $680 million in 1961 and by $330 million in the first half of 1962, reaching a total of $3.7 billion. (These figures are stated in U.S. dollars. They are reported in Canadian dollars in Canadian statistics, which showed $4.0 billion of deposits in June 1962.) Foreign currency deposits placed by Canadian banks with other banks increased by $430 million in 1961 and by $86 million in the first half of 1962, reaching a total of $1 billion.9 The largest part of these foreign currency deposits (apart from working balances) was placed with banks in London, though substantial amounts were placed with banks in continental financial centers. Such deposits would be included in the totals reported for these centers. Foreign currency deposits with financial institutions other than banks in these centers (e.g., finance companies in London), and with European banks outside these centers, would constitute additions to the total for Europe, as would loans made to nonfinancial enterprises.

A world total of dollars and other foreign currencies used in foreign markets would also include dollar deposits accepted by Canadian banks, with the proceeds invested outside Europe. This would include the large amounts of U.S. dollars invested in the United States in the form of securities, “street” loans, and other loans, and the investments in Canada and in countries outside Europe and North America. Such a world total would be of the order of $4 billion to $5 billion.

It is thus impossible to make precise estimates of the size of the foreign markets for dollars and other currencies. Nevertheless, the significance of operations in foreign currencies can be evaluated without respect to such estimates. As already noted, “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.”10

II. Currencies in Foreign Markets

Foreign market operations in foreign currencies in 1962 were conducted, as they had been in 1961, largely in U.S. dollars. Continental European currencies, particularly the Swiss franc and the deutsche mark, were held and used in larger amounts in 1962 than in 1961, but they did not increase greatly in relative importance since operations in dollars were also larger. Deposits of sterling in foreign markets (Euro-sterling) continued to be relatively small. Much of the sterling used in foreign markets was purchased ad hoc with other currencies.

Foreign currency deposits with banks in London and Canada are almost exclusively made and denominated in dollars. Foreign currency deposits in Paris for the account of nonresidents in the spring of 1962 were about two thirds in dollars, 15 per cent in Swiss francs, 12 per cent in sterling, and δ per cent in deutsche mark. In June 1962, more than two thirds of the German banks’ short-term liabilities to foreigners (deposits and short-term bank borrowings) in foreign currencies were in dollars.11 In March 1962, 70 per cent of the foreign currency deposits of Italian commercial banks were in dollars (Table 1).

Table 1.

Italy: Currency Composition of Nonresident Deposits in Foreign Currencies Held by Commercial Banks, 1959–62

(In per cent)

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Source: Based on Banca d’Italia, Relazione del governatore sull’esercizio 1961, Table M 8, p. 225.

Data are not available on the distribution by currency of foreign deposits in such other financial centers as Zürich and Amsterdam. The proportion of dollar deposits to total foreign currency deposits in these centers was probably higher than in Italy and Germany.

On the whole, deposits in dollars probably constituted about 85 per cent of all deposits in foreign currency markets in Europe. This percentage was slightly lower than in 1961. Sterling represented a smaller percentage, and Swiss francs and other continental currencies a larger one, in 1962 than in 1961. The greater use of continental currencies stems from the smaller forward premium on the dollar, which made it possible, as discussed more fully in a later section, to pay rates of interest on such deposits which were closer to those paid on dollar deposits. This in turn made it possible to obtain and use a larger amount of continental currencies in foreign market operations.

III. Structure of Foreign Currency Markets

Euro-money operations are conducted almost entirely by commercial banks. Banks obtain supplies of dollars and other foreign currencies from their respective central banks, other central banks, other commercial banks, their customers, and anyone else who wishes to deposit foreign currencies. They use these currencies directly, or convert them into other currencies, including their own domestic currency. They may deposit these currencies with (i.e., lend them to) other banks in the same country or banks in London, Paris, and other money markets. At one end of foreign currency operations is a bank that obtains dollars or other foreign currencies from what may (somewhat vaguely) be called “final” owners. At the other end is a bank which lends these currencies to “final” borrowers, which may be other banks, industrial and commercial enterprises, individuals, and governments. International companies, such as large oil, shipping, and industrial enterprises, are active in these markets both as depositors and as borrowers. Many companies that are large but not international are in the market, especially as borrowers.

Deposits are transferred from one bank to another at small interest margins in the process of moving funds from someone who wants to lend to someone who wants to borrow. Market operations in dollars and other foreign currencies are numerous. It may appear that funds are churned needlessly from one bank to another, and that the amount of froth is out of proportion to the work done. The structure and operations of the market may thus appear to be unnecessarily complicated and expensive. Yet, for the most part, the complexity of the market and the numerous transactions in it merely reflect the many facets of the markets in dollars and other foreign currencies, and the specialized nature of the banks that deal in them.

Some banks prefer to serve as financial intermediaries in foreign currency markets. These banks prefer a minimum of contact with commercial or industrial borrowers, and since they deal with banks, they operate with a minimum of risk. When such banks have prime status, they may secure deposits at a rate perhaps below the market average. They place their funds with prime banking names and are content to earn commissions (on an annual basis) of 132 per cent, 1½per cent, 116 per cent or ⅛ per cent.12 Along with the policy of placing funds only with prime names goes that of maximum diversification of risk, which involves limiting the amount of deposits placed with any one bank, in any one market, and at any one maturity. In some cases, this also takes into account the probable use of funds by the prime recipient.

Many banks seek foreign currency funds for their own commercial operations, and use these funds to augment their own capital and deposits. Obtaining foreign currency deposits may be the quickest and most convenient way to secure additional funds—and in the short run it may also be the cheapest. This action, however, increases the risks involved in bank operations by reducing the ratio of capital funds to total assets. It bases an expanded volume of business on funds whose availability and interest cost may vary greatly with the state of the market.

Relatively few banks that deal in foreign currency markets are clearly of either of these two types. The great majority do a diversified business, placing deposits with other banks, making loans to industrial or commercial customers, and investing in securities and commercial paper. Nevertheless, the relative importance of these activities varies greatly from one bank to another. To a considerable extent, banks are specialized with respect to areas of investment, types of customers, size of commitments, and maturities. The foreign currency markets are, in fact, less homogeneous than might at first appear. Even the money that is dealt with differs with respect to maturity, prospect of renewability, and other factors.

In addition to the large number of banks that are active in dollar and other foreign currency markets, there are many organizations in the market which are not strictly banks. This, of course, complicates the problems of obtaining complete statistics on foreign currency operations in large and highly specialized markets, such as London. There are probably several hundred organizations in the market, counting as separate organizations branches and affiliates that operate with some, though by no means complete, autonomy. The major part of the operations in foreign currencies is carried on by a much smaller number, however, which probably totals no more than 50 if a head office, its branches, and affiliated corporations are counted as one organization. These numbers make for a large and complicated market, in which participants are linked by telephone, telex, and cable. Inevitably, subsidiary groupings have developed in the form of correspondent relationships, customary channels for funds, and the like. Thus, branches of U.S. banks have some advantage in attracting U.S. owned funds, some European companies or banks prefer to deal with their correspondents, and many communist banks have a policy of not dealing with U.S. banks.

Brokers have become an important mechanism for organizing the market as the number of participants has increased. Brokers follow carefully the movements of funds and of interest rates. They keep in close touch with banks and other organizations that may wish to place or to obtain deposits. Brokers act as agents and not as principals. Their job is to put would-be lenders and borrowers of foreign funds in touch with each other. After this has been done, the arrangements are worked out by the principals themselves and the broker is paid a commission.

The most important brokers in Europe are located in Paris, London, and Lausanne. Some 15 firms in Paris do brokerage, and five or six do the bulk of the business. These firms intermediate between the Paris banks, which prefer not to deal directly with each other; they also intermediate between the banks in Paris and those elsewhere on the Continent and in London. Brokerage operations in London are likewise on a substantial scale. This is not surprising since there are at least 35 organizations in the City that are active in the Euro-dollar market, and several times that number that take part on a small scale, either regularly or under suitable conditions. Brokers are useful for the London banks, particularly the smaller ones, in dealing with other banks in London and on the Continent.13 There are six major brokers in London. Finally, one firm in Lausanne conducts an active brokerage business. It has developed lines of communication with many banks in Europe, and regularly advises clients and prospective clients by circular of prevailing rates of interest on deposits of different currencies.

Many banks use the facilities of brokers for part of their transactions. The larger banks in the market, and particularly those with prime names, take pride in arranging their foreign currency operations directly with principals, though they too may use the services of brokers for some transactions. The proportion of banks that use brokers in any period of time is much larger than the proportion of Euro-money turnover arranged through brokers.

Brokers’ charges apparently vary somewhat with the size of the placement and the standing of the principals. The charge is usually 116 per cent; it may occasionally be smaller but is seldom larger.

IV. Sources of Dollars and Other Currencies

A large proportion of the dollars dealt with in foreign markets, but only a modest proportion of the other currencies, is directly or indirectly owned by central banks and other monetary authorities. Official funds reach the money markets in three ways.

(1) Central banks and monetary authorities provide their respective commercial banks with dollar funds through swap operations, with a general or a specific understanding that these dollars will be used to acquire foreign currency assets. Thus, for some years, the Deutsche Bundesbank has sold dollars to German commercial banks, and German branches of foreign banks, at the going market rate, with a forward commitment to reacquire dollars at the same rate (”flat”) three months later.14 The Bundesbank employs such swap transactions, varying their terms and conditions and using interest premiums or discounts, to carry out its monetary policy; the commercial banks engage in swaps to increase their earnings and improve their portfolio of investments. The amounts involved in swap transactions are large and variable. For example, outstanding swap engagements totaled DM 4 billion in August 1961, DM 1 billion in December 1961, DM 4.2 billion in January 1962, DM 2.6 billion in May 1962, and DM 1 billion in October 1962. Similarly, the Ufficio dei Cambi has provided Italian commercial banks with large amounts of dollars through swap operations. These totaled more than $500 million for several months in 1961. They decreased to $400 million at the end of the year as they were replaced by dollar deposits, and rose to $670 million in March 1962 as dollar deposits were reduced.15

Official swap operations are more advantageous for commercial banks than operations in the open market. While there is no advantage in the spot rate offered by the monetary authorities, the forward rate is generally more favorable than that in the market. The dollar position of the commercial banks is always covered forward in terms of local currency, so that the monetary authorities carry the risk of any losses that would follow from a change in exchange parities.

(2) Central banks and monetary authorities deposit dollars in domestic commercial banks without requiring the surrender of the local currency equivalent. In some instances, such deposits are made to earn higher rates of interest than could be earned in New York. But in Italy, where there have been the largest deposits of dollars with domestic commercial banks, the most important consideration was internal monetary policy. To increase domestic liquidity without interfering with the international credit operations of Italian commercial banks, the monetary authorities made large deposits of dollars, partly to replace the dollars paid back when swap transactions were completed. These deposits increased the resources at the command of the banks. At the end of 1961, these deposits, on which the Italian monetary authorities earned interest at the rate of 3½ per cent, totaled $300 million.16 In the first quarter of 1962, when domestic liquidity increased, deposits were partly replaced by swaps and decreased to $110 million.

In August 1962, the Federal Reserve Board sold $50 million to the Swiss National Bank against Swiss francs.17 The dollars were, in turn, made available with an exchange guarantee to the Swiss commercial banks, which used them to buy U. S. Treasury bills. These Treasury bills, in all probability, released other commercial bank holdings of dollars to the Euro-dollar market.18 A similar arrangement between the Federal Reserve Board and the Bank for International Settlements, for $60 million, was negotiated at the same time.

(3) Central banks in Europe, Latin America, the Middle East, and the Far East deposit dollars with commercial banks in London, Paris, Canada, and other money markets. The Bank for International Settlements receives dollar deposits from its members, which are central banks. Its currency deposits (as distinguished from its gold deposits, which are covered by gold, spot and forward) have grown rapidly in recent years. Its time deposits alone increased from $125 million in March 1959 to $300 million in March 1962, and a large part of these must have been placed with banks participating in the Euro-dollar market. The intermediation of the BIS undoubtedly earned for its member central banks higher rates of return than they would care to earn themselves through direct operations.

Although precise data are not available, it is probable that the central banks or monetary authorities of 20 or 25 countries have deposited dollars or sterling outside the United States and the United Kingdom, respectively. The proportion of the funds in foreign currency markets which are owned directly or beneficially (in the form of deposits and swap counterparts with domestic commercial banks) by central banks and monetary authorities can be estimated only very roughly. It would be conservative to assume, however, that two thirds of all the funds in European markets in the summer of 1962 were of this character. This estimate does not include foreign currency deposits made by international organizations other than the BIS, e.g., the European Investment Bank.

The remaining one third represented deposits of funds owned by commercial banks, largely in continental Europe, and of funds owned by business enterprises and individuals in many countries, including the United States.19 Corporations and individuals in the United States have made substantial time deposits in Canada and Europe in order to earn interest at higher rates than can be earned at home. Business enterprises and individuals in many other countries, e.g., Canada, Germany, and Switzerland, are allowed to hold dollars and other foreign currencies without restriction as to amount, time, or purpose. Some have themselves deposited funds in the Euro-dollar market, or they have placed them with domestic banks which have done so. In a number of industrial countries where there is a residue of exchange control, as in France, business enterprises can hold dollars and other foreign currencies for limited periods of time through authorized banks.

Individuals and business enterprises may wish to hold dollars because they can earn higher rates of interest on deposits in dollars than on deposits or available investments in domestic currency, because dollar deposits offer great flexibility with respect to amounts and maturities, and because holding dollars (assuming they are to be needed later) avoids costs of conversion.

V. Uses of Dollars and Other Foreign Currencies

Banks and other business enterprises borrow the major part of the dollars and other foreign currencies made available through foreign markets, although governments and official agencies use significant amounts.

Local authorities in the United Kingdom have been important borrowers in the London Euro-dollar market. They borrow sterling funds, largely on very short term. The Euro-dollar market provides sterling through sales or swaps of dollars. Indeed, some participants in the Euro-dollar market accept dollar deposits in order to convert them into sterling to lend to local authorities. The market is wide and generally advertised.20 Investment of funds with local authorities has become a well-recognized medium for interest arbitrage, sometimes (as in the latter part of 1961) on an uncovered basis.21 The availability of short-term funds through the Euro-dollar market has had important effects upon the debt structure of the local authorities and has encouraged a shift to short-term debt.22

Governments may be affected, directly or indirectly, by Euro-money markets. Thus, it is generally understood that Belgian banks have accepted substantial amounts of dollar deposits, in part to lend to the Central Government.23 The chartered banks of Canada, in the 18 months ended June 1962, increased their holdings of short-term U.S. securities by $400 million, largely as a result of dollar deposits placed with them.24

Most of the dollars and other foreign currencies obtained through the Euro-money market are, however, used by the private sector.

The commercial banks of a large number of countries accept deposits in dollars and other foreign currencies in order to finance export-import operations, or domestic operations, or both. When foreign currencies are borrowed by industrial and commercial enterprises for their own use, they are as a rule first borrowed by those engaged in international trade.25 Importers may borrow dollars or other foreign currencies to pay for imports from the United States or from other countries. Exporters may borrow such currencies to finance their exports. Interest rates on loans in dollars are often lower than those on loans in domestic currency. When exports or imports are invoiced in dollars, the need to cover forward is eliminated except for the profit of the operation. This reduces the cost of forward cover. When the dollar is at a discount, borrowing dollars saves the exporter the disagio on the dollars he would otherwise have to sell forward.

It has been observed that “now firms in many countries are looking more and more to foreign credits as a substitute for, or a complement to, the credit facilities in their domestic markets. Differences in the cost of credits are not the only incentive for so doing; often the ready availability of credit facilities abroad is the decisive factor.”26 Banks may also lend local currency purchased with dollars and other foreign currencies.

The number of countries involved in financing production and trade with dollars and other foreign currencies has increased as Euro-money operations have become more familiar and as the size of the Euro-money market has grown. In Europe, as has already been noted, foreign currency deposits are accepted and used by banks in Belgium, France, Germany, Italy, the Netherlands, Switzerland, and the United Kingdom.27 Banks in Norway have accepted significant amounts of dollar deposits, of which the major part was loaned to the shipping industry.28 Banks in Denmark have accepted dollar deposits to finance export and import trade. Many countries in the communist bloc, including the U.S.S.R., Hungary, and Bulgaria, actively solicit deposits of dollars and European currencies from banks in Western Europe; in addition, they borrow from the Moscow Narodny Bank and the Banque Commerciale pour l’Europe du Nord, which are themselves in the Euro-money market. A number of countries in the Middle East, including Israel, have accepted foreign currency deposits. Some Eurodollar deposits have been placed with banks in South America, the Far East, and Australia. The commercial banks in Japan accept large deposits in dollars and smaller amounts in sterling and other currencies; in the spring of 1962, such deposits probably totaled about $400 million.

An accurate list of all the countries that accept foreign currency deposits cannot, of course, be drawn up without a detailed knowledge of the customers of each bank. Nevertheless, it may be conservatively estimated that commercial banks in 25 or 30 countries accept and use foreign currency deposits. Banks in many other countries would undoubtedly wish to do the same, but cannot do so because of government regulations on foreign borrowing or the unwillingness of banks to lend.

The number of countries that benefit from operations in foreign currency markets is considerably larger than the number whose banks accept deposits in such currencies. Many British, U.S., Canadian, French, and Italian banks have branches or affiliates in foreign countries. The head offices may accept funds which their branches lend in many different countries, sometimes in convertible currencies and sometimes, after swaps, in local currencies. Thus, the Bank of London & South America, which is generally considered to be a large taker of dollars and other foreign currency deposits, employs part of its funds to finance production and trade in many Latin American countries.

Commercial banks are themselves important users of dollar deposits, which serve as an important money market instrument. A bank that temporarily needs additional liquidity may accept dollar and other foreign currency deposits instead of discounting with its central bank or selling assets in the open market. This role of the Euro-money markets in transferring funds from one bank to another is analogous to that of the federal funds market in the United States.29 Commercial banks may also borrow funds to increase their resources and their ability to extend credit. If they are loaned up to the limit of their resources, or if they are subjected to a domestic credit squeeze by their monetary authorities, they can obtain additional liquidity by accepting dollar deposits.

Moreover, since deposits can be accepted or placed in a wide range of maturities and qualities, banks use them very flexibly. A bank may be on both sides of the Euro-money market at the same time, depending upon its liquidity needs, the kind of balance sheet it wishes to present, and the character of the domestic market for short-term government securities and commercial paper. A commercial bank may prefer to place part of its liquid funds in short-dated Euro-dollar deposits rather than to invest all such funds in short-term government securities, particularly if the latter are less liquid or yield lower rates of return. Alternatively, a bank may improve its liquidity position by simultaneously accepting dollar deposits for one or three months and placing dollar deposits at call or seven days, thus improving its balance sheet at small cost. Such a transaction permits it to operate with less liquidity in domestic currency, or to lengthen somewhat the maturity of its other investments.

Part of the dollar deposits obtained by U.S. banks in Europe is used to make dollar investments there, such as loans to European companies and to branches and affiliates of U.S. companies. The relative importance of such activities depends upon bank policy, and varies from one bank to another; it also reflects the interest rate that a U.S. branch can charge in relation to the prime rate charged by its head office in New York. But the major part (probably three quarters) of the dollar funds obtained by the branches in Europe is made available to their head offices. For example, in June 1962, U.S. branches in London reported $1.1 billion of nonresident deposits (largely dollars) and $780 million of advances to overseas banking offices (largely to their head offices).

VI. Interest Rates Paid on Dollar Deposits

Interest rates on dollar deposits are determined on a highly competitive basis. Rates are usually quoted for periods of 1, 2, 7, 30, 60, 90, and 180 days. Most of the dollar deposits are dealt with on the basis of 90 days or less, but deposits can be arranged for periods up to 18 or 24 months. At any one time there is a range of rates in the market rather than one unique rate. This range, which may be as much as ¾ per cent, reflects the status of the borrowers and their particular need for funds, as well as other factors which are difficult for any outside observer to appraise.

Rates of interest paid by U.S. banks on time deposits, and those that can be earned on other short-term investments in the United States, e.g., Treasury bills and bankers’ acceptances, help to determine the amount of dollars offered in foreign markets by foreigners and by Americans, and thus are one of the factors affecting Euro-dollar interest rates and operations.

The rate of interest on 90-day deposits of Euro-dollars in London is necessarily higher than the rates on competing investment media in the United States. In 1961, the Euro-dollar rate in London averaged 3.58 per cent, compared with 2.35 per cent on new issues of U.S. Treasury bills and 2.80 per cent on prime bankers’ acceptances in New York. In the first ten months of 1962, the Euro-dollar rate averaged 3.73 per cent, compared with 2.70 per cent on new issues of U.S. Treasury bills and 3.02 per cent on U.S. bankers’ acceptances (Table 2).

Table 2.

Rates of Interest on Three-Month Euro-Dollar Deposists in London and on Other Investments, 1961–62

(In per cent per annum)

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Rate on last working day of month, as reported in Bank of England, Quarterly Bulletin. Data for January and February 1961 were estimated independently.

Rate in last week of month, Federal Reserve Bulletin.

Rate on new issues, last week of month, Federal Reserve Bulletin.

Tenders, last week of month, from Deutsche Bundesbank, Monthly Report.

Bank of England, Quarterly Bulletin.

International Monetary Fund, International Financial Statistics. Computed from end-of-month rates (average of buying and selling) for spot and 90-day forward exchange, the resulting percentage being expressed as an annual rate.

It should not be assumed that these differentials between interest rates on Euro-dollar deposits in London and interest rates on various investment media in the United States are necessary or permanent. The Euro-dollar market is only a few years old. Interest differentials required to attract investors to a new market, and particularly to a new international market, are higher than those required to attract investors to a seasoned one; moreover, interest differentials required to attract investors are higher than those required to retain them. It follows that the Euro-dollar market could flourish on interest differentials lower than those that have been experienced to date. This would be consistent with the growing internationalization of short-term capital markets.

There would be no demand for Euro-dollars unless they could be used profitably. The range of opportunities to use dollars determines the maximum interest rates that can be paid on dollar deposits.

Covered interest arbitrage, in the pure sense of borrowing cheap to invest dear, is a factor, though not a major one, in the demand for Euro-dollars. In the past few years such arbitrage has taken place between Euro-dollars and investments in sterling. Interest rates on Euro-dollars have consistently been too high to permit covered interest arbitrage in U.K. Treasury bills, though not too high to rule out uncovered arbitrage. There have been periods in the last few years—for example, in the latter half of 1961—when there was a substantial movement of uncovered funds into sterling. During such periods it is possible that some Euro-dollars were used to finance the purchase of Treasury bills. Deposits of funds with local authorities and finance houses in the United Kingdom in 1961–62 were often attractive on a covered basis and always so on an uncovered basis. Interest rates paid on 90-day deposits by local authorities averaged 6.18 per cent in 1961 and 5.03 per cent in the first ten months of 1962 (Table 2); and those paid by finance houses were even higher. On the average during this period, the covered yield on deposits with local authorities, allowing for the cost of dollar-sterling swaps, was virtually the same as interest rates on Euro-dollars. This is not surprising, since dollar funds swapped into sterling were an important source of financing for the local authorities. These averages, however, suggest smaller investment opportunities than in fact existed. The spread in interest rates on Euro-dollar deposits, and the spread in interest rates paid by local authorities, make it reasonable to infer that it was practically always possible to use some dollars profitably in this way.

Rates of interest that can be paid on dollar deposits in the major financial centers are for the most part related to the rates that can be charged on loans to commercial and industrial borrowers (and on deposits placed with other banks that make such loans), as well as to the gross interest margins on which banks are willing to undertake such operations. A detailed discussion of interest rates charged on loans to customers, and applicable gross interest margins, is reserved for Section VIII; but a few general considerations may be noted at this point. Rates of interest charged to customers on dollar loans vary greatly from one country to another; and within any one country they vary greatly from one class of customer to another. Gross interest margins earned by banks, i.e., the differences between the rates they must pay to obtain dollar deposits and the rates they charge for dollar loans, also vary widely. Banks cannot charge higher rates of interest on loans in dollars and other foreign currencies than those charged on loans in domestic currency. Under special conditions they may be able to charge as much as the applicable domestic rate. In most cases, however, they are compelled to undercut the domestic rate, either to meet domestic competition or, more particularly in the case of companies that have access to credit in other countries, to meet international competition. Gross interest margins applicable to operations in dollars and other foreign currencies reflect the fact that individual transactions are large and that the business is wholesale rather than retail.

For this kind of wholesale banking, applicable overhead costs and direct expenses other than interest are both small. Even a bank engaged in large Euro-dollar operations seldom has more than several hundred accounts, considering both the suppliers and the users of funds. Additional personnel requirements are minor, since these banks already have international lending officers and exchange and interest arbitragers. A modest gross interest margin may thus yield a comfortable profit, entirely apart from allied benefits: the possibility of additional commercial loan business and of additional exchange operations and trust and registrar functions, and the undoubted advertising value of keeping one’s name in the market. These possible benefits account for the fact that much of this prime business is done on gross interest margins lower than 1–2½ per cent. Commercial banks may borrow dollars for three months in London at, say, 3½ per cent and consider it profitable, even normal, to lend them to their best customers at 4 or 4¼ per cent. A margin of ½ per cent, or even of 1 per cent, between the cost of money to a bank and the price of money charged by a bank is, of course, virtually unknown in domestic banking operations. However, many foreign currency transactions between banks and commercial or industrial businesses take place at very low gross interest margins. There is intense competition for this business, which from time to time has taken on the character of cutthroat competition.

Euro-dollar operations, however, are by no means confined to channeling funds to borrowers who may be entitled to the prime rate in New York. Foreign currencies are loaned to borrowers who are entitled to the prime rate only in their own countries, as well as to borrowers who cannot command the prime rate anywhere. In such cases, the upper limit that can be charged on foreign currency loans is not the effective prime rate in New York but the effective domestic prime rate, or some domestic rate which may be substantially higher.

Accurate statistics on effective rates of interest charged on commercial loans and on overdrafts are not available for the European countries that are large borrowers of Euro-dollars.30 Comprehensive statistics on the structure of interest rates and supplementary charges would be very helpful in determining how high interest rates really are and how rates in different countries compare with each other. Among other things, such statistics would suggest how high rates on Euro-dollar loans can go and still remain competitive, and how large gross interest margins are in different countries and for different groups of customers. Nevertheless, it is known that nominal prime rates on local currency loans vary widely from one European country to another, that the prime rates in every European country except the Netherlands and Switzerland are as high as, or higher than, the prime rate in New York, and that other domestic rates are very much higher than the corresponding prime rate.31 Even in such low-interest countries as Switzerland and the Netherlands, rates for prime customers are in many cases higher than the New York prime rate.

There are various reasons why this situation prevails. Every country has its own structure of interest rates, which reflects to a great extent domestic credit conditions and monetary policy. There are inherent rigidities in what is called a “customer” or “banking” relationship. Banking structures and money market procedures and instruments vary from country to country for legal and historical reasons. These elements have created patterns of interest rates which vary in terms of customary levels and margins. The effects of a prolonged period of inconvertibility, capital scarcity, and balance of payments difficulties, marked by controls on capital movements and exchange transactions, have not yet been completely liquidated. In practically every country, moreover, there are agreements and understandings among banks, or regulations for banks, that govern rates of interest paid on deposits and charged on loans.32

VII. Interest Rates Paid on Deposits of Other Currencies

One of the interesting developments in foreign currency markets in the latter part of 1961 and in 1962 has been the greater use of continental currencies, which is related to the greater strength of the dollar in forward markets. For example, as the forward premium on Swiss francs was reduced in this period, the arbitraged rate of interest that could be paid in foreign markets on Swiss franc deposits increased. This brought forth additional supplies of Swiss francs. An Italian importer who needed dollars to pay for imports from the United States might borrow Swiss francs, which cost 3.20 per cent in London, and use these to buy spot dollars, rather than borrow dollars, which cost 3.75 per cent.33 The cost of dollars was the same if he bought forward cover, but the Swiss francs were cheaper if he did not. After 90 days, he would buy Swiss francs with lire. Spot lire and spot Swiss francs were both at the ceiling with respect to the dollar and were expected to remain there. Since both currencies were at similar premiums with respect to the dollar, the rate for forward Swiss francs in terms of lire was close to par. Hence, there was little reason to buy Swiss francs forward, even if the cost was small.

In general, rates of interest paid on deposits of sterling and other non-dollar currencies are closely related to those paid on dollars. Published data tend to understate the closeness of this relationship, because they do not report precisely the prices at which transactions are carried out.34

In the first ten months of 1962, the difference between the actual interest rate on sterling deposits in Paris (4.95 per cent) and the calculated cost of sterling obtained through swapping dollar deposits (4.98 per cent) was negligible (Table 3). In 1961, considerable amounts of sterling were sold without forward cover in the first half of the year, and considerable amounts were bought without forward cover in the latter half of the year. Even so, the difference between the rate of interest on sterling deposits (6.60 per cent) and the calculated cost of sterling obtained by swapping dollar deposits (6.50 per cent) was only 10 basis points.

Table 3.

Rates of Interest on 90-Day Sterling Deposits in Paris, and on Sterling Obtained Through Dollar Swaps, 1961–62

(In per cent per annum)

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In Paris, as reported in Bank of England, Quarterly Bulletin.

In London, as reported in Bank of England,Quarterly Bulletin.

International Monetary Fund,International Financial Statistics.

Similarly, the interest rate that can be paid on any other non-dollar currency tends to correspond to the dollar rate adjusted for swap costs. Thus, analysis of the interest rates paid by one bank on deposits of various currencies showed that when the interest rate on 90-day dollars was 3.75 per cent, the calculated cost of dollars obtained via other currencies was as follows: Swiss francs, 3.61 per cent; deutsche mark, 3.72 per cent; and guilders, 3.52 per cent.

These relationships hold for any one institution, whatever the rate it pays for dollar deposits in relation to the prevailing range of market rates. Thus, when the National Bank of Hungary offered (on February 5, 1962) to pay 4.38 per cent for 90-day dollar deposits, or at least ¾ per cent over the London rate, its rates on other currencies were correspondingly above their market rates: dollars via Swiss francs cost 4.22 per cent, and via deutsche mark, 4.35 per cent. In general, however, the rates of interest on deposits of different currencies paid by the banks in the communist bloc appear to be less closely arbitraged than those in Western Europe. 35

Although the preceding discussion has emphasized forward cover (swaps and covered interest arbitrage), it should not be inferred that all transactions are continuously covered. Banks may carry open positions for considerable periods. They have been known to carry short positions in particular currencies over a long string of weekends when they expected changes in exchange parities. On the whole, there is a greater incentive for banks and other business enterprises to cover when transactions are for short periods than when they are for long periods, and when the costs of cover are moderate rather than large. Published reports invariably understate the extent to which banks operate with uncovered positions, since banks window-dress on reporting dates. Nevertheless, commercial banks and exchange dealers arbitrage and cover to such an extent that unarbitraged differentials are reduced to very small proportions.

According to Einzig, arbitrage is undertaken now on much smaller margins than before World War II. In normal conditions, banks and foreign exchange dealers “are now content with a profit margin of116 per cent or even less. Very often they are prepared to operate without a profit, just in order to be in the market….”36

Thus, when commercial and industrial enterprises borrow foreign currencies, they are faced with a structure of interest rates which is implicitly arbitraged. Many such enterprises do not cover forward, preferring to carry the exchange risk themselves. A continental European importer may prefer to maintain an uncovered (short) position in dollars; and, indeed, the risk of doing so is small relative to the expected profit from his commercial transactions. Moreover, it should be remembered that the cost of forward cover is larger for commercial and industrial enterprises than for banks and exchange dealers, because of differences in the forward rate, in applicable stamp taxes, and the like.

VIII. Interest Rates and Interest Margins on Loans

Interest rates charged on dollar loans, and interest margins earned by banks in borrowing and lending Euro-dollars, may conveniently be described with respect to four kinds of transactions: (1) between one bank and another, both being of prime status; (2) other transactions between one bank and another; (3) between banks and commercial or industrial business enterprises having prime status or its near equivalent in one or more foreign money markets; and (4) between banks and other commercial and industrial customers.

(1) The activity of a bank in attracting deposits of dollars and other foreign currencies, for the purpose of placing them with other banks of prime status, is conducted, as has already been noted, on narrow margins. Gross interest margins, on an annual basis, may range from 132 per cent to ⅛ per cent or perhaps ¼ Per cent; margins greater than ¼ per cent are rare. It is clear that a bank cannot accept Euro-dollar deposits with the intention of lending them to banks with prime status unless it itself has a prime name in the market. Indeed, only by capitalizing on its reputation, which enables it to secure deposits at rates somewhat below the market average, can it successfully operate in this way.

(2) When a bank places deposits with other classes of banks, or with banks in other kinds of situations, interest margins vary with estimates of risk, including appraisals of how the borrowing bank will use the funds. Thus, dollar deposits have been placed with banks in some of the countries of the communist bloc at interest rates for 90-day dollar deposits ranging from 4½ to 5½ per cent, i.e., at a premium of ¾ per cent to 1¾ per cent over the prevailing London rate.37 The U.S.S.R. accepts deposits of dollars and other foreign currencies, and apparently pays lower interest rates than any other country in the communist bloc.

Japanese banks accept large amounts of dollars and other foreign currency deposits, paying interest rates 2–2½ per cent higher than those prevailing in the London money market. The usual (and first) explanation of such large interest premiums is greater risk.38 This explanation, however, is not so convincing as may appear at first glance. Risks involved in placing deposits with Japanese banks do not appear to be substantially greater than those attached to deposits with banks in many other countries, in view of Japan’s economic and political importance, its high rate of growth, and the close supervision exercised by the Japanese Ministry of Finance over the short-term obligations of Japanese commercial banks. The premiums paid by Japanese banks ever since they entered the Euro-dollar market appear to be attributable in large part to two factors other than risk. First, the banks that place dollar deposits with Japanese banks limit their total commitments to Japan in line with their policy of diversification, so that premium interest rates do not bring forth much larger supplies. Rather, they are interpreted as additional evidence of risk. Second, because of the high rates of interest that they can charge Japanese borrowers, Japanese banks compete vigorously for the limited amount of deposits that are available. Since the yield on capital in Japan is high, there is continuous pressure on loanable resources to finance production and foreign trade. A substantial part, perhaps as much as one half, of the foreign currency deposits is swapped into yen and used for domestic financing.

Most other banks outside Europe pay rates of interest within the range of those paid by banks in the communist bloc and in Japan, though a few are thought to pay even higher rates.

(3) A commercial or industrial company with international connections has increasingly become able to borrow dollars or other foreign currencies outside its own country. Under these circumstances, it can compel the domestic commercial bank with which it regularly does business (or one of its competitors) to make loans in dollars or other foreign currencies at rates of interest lower than those charged on domestic currency loans. In many cases, such a company can compel domestic banks to lend dollars at less than the prime rate in New York.

The prime rate in the New York market has been 4½ per cent for some time. But “a canvass of a small number of large U.S. banks known to be important in international business indicates that prevailing rates charged prime foreign corporate borrowers on short-term loans (July 1962) range from 4¾ to 5 percent, or about one-fourth to one-half percent higher than rates charged U.S. companies of prime credit standing.”39 If allowance is made for the requirement that borrowers must keep compensating balances of 10–20 per cent (say, 15 per cent) against their loans, the effective prevailing prime rate in New York must be about 5¾ per cent. In comparing these rates with those in Europe, it must be kept in mind that the U.S. credit is made available in the form of a loan rather than, as in Europe, an overdraft, which more precisely reflects the needs of the borrower.40

The maximum gross margin which foreign banks (including foreign branches of U.S. banks) can earn by dealing in loans to prime name borrowers in New York is thus the difference between the rate on (say) 90-day Euro-dollars, viz., 3½-4½ per cent, and a lending rate of some 5¼–4⅞ per cent. In fact, however, competition limits banking opportunities with respect to “blue chip” industrial and commercial customers to those banks that are willing to engage in large-scale operations offering a substantially smaller margin than this maximum. A bank may well be satisfied with lending dollars to such customers at a markup of ½ of 1 per cent over the cost of obtaining dollar deposits. Some “blue chip” customers can borrow dollars at the same interest markups as those paid by banks with prime names. Even smaller markups are not unknown. Very low markups are associated with attempts by banks to secure new customers; alternatively, they may constitute one element in a well-rounded customer relationship in which the bank expects to make more money on other kinds of transactions.

(4) Finally, there is a broad range of transactions in which banks accept deposits of dollars and other foreign currencies in order to lend them to enterprises that are intermediate between those with international standing and those that cannot borrow foreign currencies because they lack bargaining power, because they are too small, or because they are prevented from doing so by gentlemen’s agreements or exchange control regulations.

For foreign currency loans to such intermediate customers, an exceptionally good interest markup, from the point of view of the lending bank, would be 2 per cent, and a profitable one would be 1–1½ per cent. In many cases, interest margins are undoubtedly lower than these.

Minimum interest rates established by the gentlemen’s agreements of Italian commercial banks implied interest markups for foreign currency loans to domestic clients in the spring of 1962 that ranged from 1.56 per cent for dollars to 2.40 per cent for Swiss francs (Table 4).

Table 4.

Italy: Minimum Agreed Interest Rates and Estimated Interest Markups on Foreign Currency Loans by Italian Banks to Domestic Customers, March 1962

(In per cent per annum)

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From Banca d’ltalia, Relazione del governatore sull’esercizio 1961, Table M 9, p. 230. These minimum rates, stated in the gentlemen’s agreement between Italian banks (see below, p. 76), were reported as virtually unchanged since June 1960, though Euro-dollar interest rates changed frequently from June 1960 until March 1962, and varied between 3.31 per cent and 3.86 per cent.

Rates on dollars (London) and sterling (Paris) are from Bank of England, Quarterly Bulletin.

Average of rates quoted privately by a number of participants in foreign currency markets.

Average of rates on deutsche mark and guilders quoted privately by a number of participants in foreign currency markets.

Assuming (as is likely) that the minimum rate on loans in deutsche mark and guilders was 5.25 per cent.

These agreed minima are subject to severe competition among Italian banks and from foreign banks, and the opinion is widespread in Italy that they tend to overstate actual rates of interest charged, particularly to prime customers. It is likely that many dollar and other foreign currency loans are made at considerably smaller markups, perhaps of the order of ¾ per cent to 1 per cent. The relatively high markup on Swiss francs is noteworthy; it more than offset the exchange loss sustained by the banks in buying Swiss francs, when they were at a spot premium, with dollars obtained from the Ufficio dei Cambi.41 Their commercial borrowers were probably willing to pay a higher markup on Swiss francs than on dollars because they repaid their Swiss franc loans with francs they acquired by selling lire. As compared with a dollar-lira transaction, this arrangement either did not call for forward cover or involved forward cover at a much smaller cost.42

Data relating to other countries suggest a similarly wide range of interest markups on loans in foreign currencies; the markup tends to be smallest for dollars, which are subject to the broadest and most intense competition. It may be concluded that an interest markup of ¾ per cent to 1½ per cent would apply to the vast majority of dollar loans. Markups of ½ per cent would be on the low side but are not uncommon, and markups as large as 2 per cent are unusual and explained by particular factors of risk and bargaining power.

Rates of interest on loans in dollars and other foreign currencies are competitive both with the prime rate in New York and with loan rates everywhere in Europe, particularly in view of the willingness of individual banks to adjust their dollar rates to individual situations.43 In many countries, the cost of loans in dollars and other foreign currencies is lower, and often substantially lower, than the cost of loans in domestic currency. In Switzerland, the prime rate agreed by one of the major commercial bank associations is about 4½ per cent for overdrafts, yet foreign banks have made dollar loans in Switzerland at this rate, as well as at rates fractionally lower. In the Netherlands, the prime rate is equal to the bank rate plus 1½ per cent. From 1958 to April 1962, the bank rate was 3 ½ per cent; it was then increased to 4 per cent, and the prime rate went to 5 ½ per cent. It was possible to lend dollars profitably at prime rates of 5–5½ per cent, and only the competitiveness of the larger banks, and their willingness to reduce their interest rates on guilder loans, prevented the wider use of dollar facilities. In France, interest rates on loans are set by the Conseil National du Crédit. Trade bills in francs can be discounted at 4 per cent but loans may cost 6–8 per cent. Any company that cannot finance via trade bills, and that is eligible to borrow dollars, finds it cheaper to borrow dollars than to borrow French francs. In Germany, overdraft rates for prime customers are about 5½ per cent to 6½ per cent,44 and those for other customers, about 7½ per cent.45 The level of interest rates in Norway is suggested by the news report that interest rates on credits in Euro-dollars extended to shipowners by commercial banks in the spring of 1962 were about 1½ per cent below normal domestic market rates.46 In Denmark, where the rediscount rate has been 6 ½ per cent since the early part of 1961, commercial bank rates range from 7 to 8 ½ per cent, plus, in most cases, a commission fee.

The major change in the commercial credit markets between 1961 and 1962 is the increased interest rate competition between loans in foreign currency and those in domestic currency. This competition has created a larger and more widely distributed volume of loans in foreign currency, and evoked statements in many European countries that foreign currency loans disturb and threaten the domestic loan market. In some cases, such competition has led to the view that loans in dollars and other foreign currencies constitute unfair competition and that they should be regulated.

Foreign currency loans in Europe have thus carved out an important role on a competitive basis. This role would be larger if existing limitations and special interests did not restrict it.47

IX. Limitations on the Use of Euro-Dollars

Loans in dollars and other foreign currencies are limited or regulated in three ways.

First, attempts have been made to regulate (i.e., increase) the rate of interest charged on loans in dollars and other foreign currencies. Italy is the clearest example of this, but similar tendencies are apparent in other countries.

Although it is clear (despite the fact that there are no authoritative data) that commercial interest rates in Italy on lira loans have declined substantially in the past decade, the demand for loans in dollars and other foreign currencies is great, because rates on these loans are highly attractive. At the end of 1961, outstanding loans made in foreign currencies totaled $860 million, including $550 million in dollar loans; this is equal to almost 7 per cent of short-term credits extended by all Italian banks to the domestic private sector ($12.4 billion).48 Agreements among banks which for many years have set minimum rates of interest charged on loans in lire were supplemented in the summer of 1961 by two agreements covering rates of interest on loans in foreign currencies. One schedule of rates, agreed by the large commercial banks in Italy, is revised weekly. Another schedule of rates, agreed by a much larger number of banks, is revised infrequently. Each schedule specifies minimum rates of interest applicable to loans made in dollars, sterling, and ten other foreign currencies. The minima are related, through a system of stated margins, to rates of interest on these currencies in London and other foreign markets.

How effectively these schedules limit competition with respect to interest rates charged on loans in dollars and other currencies is questionable. Nevertheless, the attempt to limit competition by agreement is clear.

Second, under the stress of competition, it is agreed or understood by the banks in some countries, e.g., Germany, that loans in foreign currencies should be made only to the import or foreign trade sector, where they are considered to be “natural,” and not made to the domestic sector, where they are considered to be “unnatural.” This view would divide the domestic loan market, charging an internationally competitive rate in one part and a domestically regulated rate in the other. Such a division inevitably involves problems of administration and competition for commercial banks, as well as complaints and shopping around by customers. It is probably basically unstable. Under the force of competition, such arrangements are modified for strong companies or industries. Even when an attempt is made to set up such a two-price market—one for importers and one for everyone else—exporting companies, international oil companies, and other large companies have in many cases won for themselves the right to be accorded loans in foreign currencies, with the lower rates of interest applicable to them. In some cases this right spills over to other companies.

Third, in many European countries, the competitive effect of foreign currency loans and, therefore, of lower interest rates is restricted by exchange or capital control regulations.49 Under such regulations, it is impossible for any company in the United Kingdom, France, Italy, the Netherlands, Norway, Denmark, or other European countries to borrow foreign currencies, except with the permission of the authorities. In France, for example, only a restricted class of companies is permitted to borrow dollars or other foreign currencies: the major importing companies (including the wool and cotton importers), the oil companies, and some companies engaged in exporting. In most European countries with exchange controls, exceptions are made to finance shipping and transportation companies, exports and imports, and domestic companies engaged in foreign trade and construction. In the United Kingdom, however, exceptions under the Exchange Control Act regulations are much more limited.

The size of the Euro-dollar market is thus artificially limited by gentlemen’s agreements, competitive restraints, and exchange and capital controls. Elimination of any or all of these impediments could greatly increase the demand for dollars and other foreign currencies and intensify the pressure upon domestic interest rates in all the industrial countries of Europe.

X. Regulation Q and the Euro-Dollar Market

It is often argued that the Euro-dollar market developed because commercial banks in the United States were forbidden by Regulation Q to pay rates of interest on time deposits which were competitive with those paid on dollar deposits in Europe. Two conclusions have been drawn from this proposition: first, that the Euro-dollar market is temporary, and exists only by reason of the limitations on interest rates imposed by Regulation Q;50 and second, that the United States should abolish Regulation Q, or at least raise ceiling rates substantially on all foreign time deposits, in order to limit or “kill” the Eurodollar market.51

In February 1961, the President of the United States, in his Message to Congress on the “U.S. Balance of Payments and the Gold Outflow from the United States,” recommended that Regulation Q be amended so that the Federal Reserve Board could set maximum rates of interest on time deposits held by foreign governments and monetary authorities which would be different from those on time deposits held by others.52 A bill to exclude rates of interest paid on foreign official time deposits from the general ceilings of Regulation Q failed to pass in 1961 but, after extensive hearings, was enacted into law in October 1962.53

It was expected that, after this legislation was approved, the greatest increases in interest rates would be on time deposits with maturities of 30–90 days, or 30–180 days, since rates on such maturities showed the greatest disparities compared with those on competitive investment media (Table 5). For maturities of less than 180 days, the rates that banks could previously pay were below those on Treasury bills, so that, as Under Secretary of the Treasury Roosa testified, “there would be increases ranging from 1 to 2½ percent above present levels.”54 Mr. Roosa also estimated that foreign governments and international institutions held more than $2 billion of time deposits and that, with higher interest rates, this amount might gradually be doubled.

Table 5.

Interest Rates on Time Deposits, Certificates of Deposit, and Treasury Bills in the United States, and on Euro-Dollar Deposits in London, August 1962

(In per cent per annum)

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Revised maximum rates set under Regulation Q, effective January 1, 1962, for all deposits, domestic and foreign. Since October 1962, these do not apply to foreign official deposits. Interest cannot be paid on time deposits for periods of less than 30 days.

Rates for 180 and 360 days are estimated. Rates of 3⅛ per cent for 180–270 days by New York City banks and of 3¼ per cent for 180 days by one bank in San Francisco were reported in The Wall Street Journal (September 14 and October 17, 1962). See also Chase Manhattan Bank, Business in Brief, May–June 1962.

Rates quoted are by a large New York dealer.

Rates in London quoted by one large participant in the market.

By December 1962, a few banks had increased their rates on foreign official deposits to 2¾ per cent on 30-day deposits, 3 per cent on 90-day deposits, and 3¼ per cent on 180-day deposits.55 The effect upon the total volume of foreign official time deposits in the first three months after the amendment of Regulation Q was small, but it was still expected to increase as foreign official liquid assets of all kinds were adjusted to the new opportunities.56 The rates quoted on time deposits for 180 days and longer were the same for foreign and domestic funds, and continued unchanged. At 3¼ per cent for 180 days and 3½ per cent for 360 days, they remained below the maxima set by Regulation Q.

The proposition that it is feasible and desirable to raise interest rates on time deposits for foreign governments and monetary authorities may conveniently be discussed under four interrelated headings: (1) the level and structure of domestic interest rates; (2) the ownership and use of foreign-owned liquid dollar assets; (3) the effects upon the U.S. balance of payments; and (4) the implications for interest arbitrage of interest rate differentials between the United States and Europe. Two collateral but less direct questions are not discussed in this paper: the extent to which rates of interest influence foreign governments to convert dollar holdings into gold;57 and the extent to which there is a fairly regular relationship between balance of payments deficits (or surpluses) and gold outflows (or inflows),58

First, eliminating interest ceilings on foreign official time deposits would not necessarily increase the actual rates of interest paid by commercial banks. The rates set under Regulation Q are not mandatory; they are maxima. Few large banks have raised their rates on deposits of 180 days and more to the maxima permitted by Regulation Q. Commercial banks have succeeded in their attempts to sell certificates of deposit (usually for a period of one year), which have brought in more than $2 billion of time funds. These certificates in December 1962 were sold to yield approximately 3¼ per cent for six months and 3½ per cent for one year.59 Moreover, the large New York City banks have been able to attract large amounts of Eurodollar deposits in London and other foreign markets, most of which are advanced to their head offices in the United States. In general, U.S. banks paid the lowest rates of interest in these markets. When they wanted additional funds for their domestic or other operations they paid, when necessary, rates somewhat higher than those that they paid in the United States.60

From the point of view of the 50 or 60 larger U.S. banks with foreign accounts, the legislation resulted in three sets of rates on deposits instead of two: a domestic rate for domestic customers and foreign corporations; a higher domestic rate for foreign governments and central banks for deposits up to 180 days; and one or more rates in London and other foreign markets for depositors of Euro-dollars, including domestic customers and foreign corporations.

It is, however, unreasonable to expect that commercial banks will pay a higher rate to foreign governments and central banks than they would have to pay to secure an equivalent amount of funds from anyone else.61 The amount of funds they can attract with domestic rates lower than the permissible maxima set under Regulation Q, and with certificates of deposit, limits the amount of time deposits they may wish to attract from foreign governments and monetary authorities at special rates, and the amount of Euro-dollar deposits they may wish to attract from anyone.

There may be persuasive reasons for wishing to realign the structure of interest rates in the United States on time deposits and other forms of savings, and on loans, mortgages, and bonds, to present national and international conditions. This is a complex subject beyond the scope of this paper. But differential increases in the domestic rates of interest on time deposits are not very effective for this purpose. Indeed—though this is considered a virtue—to the extent that additional funds can be obtained in this way, rates of interest on the bulk of time deposits will be unaltered. This will minimize the effects of the cost of money upon rates of interest charged on commercial loans and on securities generally.

Second, if higher rates of interest are paid on dollar deposits of foreign governments and central banks, foreign commercial banks in some countries may be able to deposit dollars with their central banks, and share in the higher interest returns.62 On the other hand, dollar funds that central banks now make available to their commercial banks, by swaps and deposits, and that are invested in Euro-dollar deposits and commercial loans, might be placed with commercial banks in the United States as time deposits.63

Increases in interest rates on time deposits must be considered in the light of alternative investment opportunities in the United States. Foreign governments and their official agencies, foreign commercial banks, other foreigners, and international agencies other than the International Monetary Fund, hold large amounts of demand deposits, Treasury bills, and other money market instruments. In May 1962, their holdings totaled approximately $20.8 billion, distributed as follows: deposits with Federal Reserve Banks, $0.2 billion; deposits with other banks, $10.6 billion; government securities, $8 billion; other liquid assets, $2 billion.64 Of the $10.6 billion of deposits, about $3.0 billion was in the form of time deposits, including $2.2 billion held by foreign governments and international institutions. Of the $8.0 billion of government securities held by foreigners, about $6 billion was owned by foreign governments and official agencies.65

Rates of interest on U.S. Treasury bills and on prime commercial and banking paper are lower, for all maturities, than rates on Eurodollar deposits. If rates on foreign official time deposits are raised above those on Treasury bills, foreigners will tend to shift funds out of Treasury bills into deposits. Such shifts could take place on a very large scale without affecting Euro-dollar deposits very much. On the other hand, if interest rates on time deposits are raised to a much greater extent, i.e., enough to affect Euro-dollar deposits substantially, the disinvestment in Treasury bills could be enormous.

Third, the case for raising interest ceilings under Regulation Q, or excluding interest rates paid to foreign governments and central banks from the Regulation, or abolishing the Regulation, has a strong international justification. Such action would add another degree of freedom to the international money market which has been evolving in the United States, and would therefore be desirable.66

But the argument is often extended beyond this. It is argued that higher domestic rates on time deposits, by attracting funds that would otherwise go to the Euro-dollar market, will improve the U.S. balance of payments. This argument is not justified. Higher interest rates on time deposits will have little or no effect on the U.S. balance of payments unless rates of interest on commercial loans and on bonds are also raised. Foreigners have acquired most of their dollar deposits because the United States has had a balance of payments deficit; and they will continue to acquire dollar funds if the deficit continues.67 Once foreigners own the dollars, the place where they deposit them makes no difference to the U.S. balance of payments. When they transfer their deposits from a New York bank to a London bank, they do not draw out capital—they merely transfer ownership of an existing dollar deposit to another foreigner. When they transfer their deposits from a London bank to a U.S. one, they reacquire the claim on the United States that the London bank had previously. Neither of these transactions affects the balance of payments.

Nevertheless, payments of higher rates of interest on already existing foreign-owned dollar balances may well increase the balance of payments deficit in the future. For if the U.S. banks attract more time deposits, they will seek out more loans and investments. Some of these will inevitably be foreign.68 These will create increases in foreign-held deposits—as a minimum, to the extent of compensating balance requirements—which will be counted as negative items in the balance of payments as reported by the U.S. Department of Commerce. The fact that the commercial banks will acquire offsetting foreign assets does not change this statistical result.

Fourth, to the extent that a higher rate of interest is paid on time deposits in the United States, and the supply of funds in the Eurodollar market is reduced, rates of interest paid on Euro-dollar deposits will also rise. To increase interest rates on Euro-dollar deposits, while maintaining unchanged the rates of interest paid on time deposits to U.S. residents, will stimulate an outflow of capital on the part of U.S. residents. The result would be two-way interest arbitrage. Foreign official funds would move from Euro-dollar markets into U.S. time deposits, and U.S. funds would move into the Euro-dollar market. The net effect on the U.S. balance of payments, as reported by the U.S. Department of Commerce, would certainly be adverse. The transfers by U.S. residents would be counted as a capital outflow, while the additional time deposits in U.S. commercial banks acquired by foreigners would not be considered as capital inflow.

But there is a far more important consideration. To the extent that an increase in the rate of interest on time deposits in the United States increased interest rates on Euro-dollar deposits, loans made with these dollars would lose some of their competitive edge in Europe over loans in domestic currencies. This would reduce—and if carried far enough, would eliminate—the pressure of loans in Euro-dollars upon interest rates in Europe. Raising interest rates on Euro-dollars would thus slow down the further reduction of interest differentials between the United States and Europe. It would throw a larger part of such a realignment of interest rates, which is generally considered desirable, upon the United States. To assume otherwise is to assume that banks will absorb the full effect of higher rates on Euro-dollar deposits in their profit margins. It is impossible to estimate what effect smaller gross interest margins would have on the operations of European commercial banks (and on the growing operations of European branches of U.S. banks). Once in the business of making loans in dollars and other foreign currencies—a business which in any case is conducted on small margins—they may well be prepared to continue on even smaller margins. But this is not self-evident. Gross interest margins have fallen substantially in the past few years, and there is much question about how much further they can fall without reducing the scope of Euro-dollar operations in Europe.

XI. International Markets and Domestic Monetary Policy

The preceding discussion has emphasized the extent to which short-term money markets in the major industrial countries have become internationalized and unified since 1958. These developments have affected the private cost of credit and the availability of credit for financing both domestic trade and international trade. They have mobilized liquid capital on a large scale, which is often as important in determining the source and direction of financing as favorable rates of interest. Euro-money deposits, by providing a new and extremely flexible monetary instrument, have supplemented the investment media open to banks in their respective countries.

Euro-dollars have provided a number of central banks with a powerful and flexible monetary instrument which can be used to control domestic liquidity and the import or export of short-term capital. At the same time, the increasing “oneness” of money markets has facilitated the movement of private capital in response to interest rate differentials.

The Deutsche Bundesbank adjusts domestic liquidity by open market operations with dollars, as well as by operations with domestic assets. It has frequently varied the terms of dollar swap transactions, most often by modifying premiums or discounts. These variations reflect changes in the domestic credit situation, changes in rates of interest at home and abroad, and the state of the balance of payments. In the past 18 months, the Bundesbank made more changes in the terms of swap transactions than in those of all other monetary instruments combined. This does not imply that open market operations in dollars were a substitute for other monetary instruments, such as changes in reserve requirements, definition of reserves, and discount rates. Rather, open market operations in dollars are a supplementary instrument, which can be used to achieve a finer adjustment of instruments to policy.69

The Banca d’Italia has similarly used dealings in dollars to carry-out or reinforce its domestic monetary policy. But, as noted by Guido Carli, Governor of the Bank, “the effects of all this went far beyond domestic liquidity control; they served also to intensify our banking system’s international business and to adapt the average cost of borrowing on the Italian market more closely to the rates on the principal financial centres abroad. As a result, Italian banks have been able to improve and to cheapen their service to their clients.”70

Some of the recent swap transactions between the Federal Reserve Board and European central banks serve similar domestic purposes, although they are often considered only as a way of adding currencies to the international reserves of the United States. One important purpose of the Swiss authorities served by the swap of $50 million in the summer of 1962 between the Federal Reserve Board and the Swiss National Bank was the reduction of Swiss domestic liquidity. The parallel swap for $60 million with the Bank for International Settlements had the same effect. Under both arrangements, the Swiss francs came from deposits made by Swiss commercial banks.71

On the other hand, the Euro-dollar market, and the growing internationalization of short-term and long-term capital markets, will probably make it more difficult to carry out large changes of monetary policy.72 It is easy to expand liquidity and encourage domestic commercial banks to supplement their domestic assets with foreign assets. It is quite another matter to reverse the process. An attempt to tighten liquidity will stimulate the repatriation of funds. An increase of domestic interest rates at home will permit both domestic and foreign banks to make loans on the home market in dollars and other foreign currencies at international rates.

This suggests that the extent to which domestic situations can be corrected by sharp movements of interest rates has become much more limited in the past few years. The use of large changes of interest rates has not only become limited—it has perhaps become dangerous because it stimulates capital flows on a large scale without any long-run purpose. Such capital flows may be so large that countries may find them increasingly difficult to finance with their own reserves. In this event, unless they resort to direct controls, they will have to rely upon drawings from the International Monetary Fund and ad hoc borrowing arrangements. This compulsion may be even greater if interest arbitrage is accompanied by speculative capital movements which are large enough to cast doubt upon the existing exchange parities. The benefits achieved by the Bank of England in raising the bank rate to 7 per cent in 1960 were considerable and immediate. But the effects upon international capital flows, confidence in its gilt-edged market, and the shifting of U.K. local authority financing toward the short end of the market were also considerable.

XII. Foreign Currency Markets: Stability and Speculation

Other important aspects of the markets for foreign currencies are their stability, and the extent to which they foster or facilitate speculation. These aspects are vitally important for central banks, since it is they and not commercial banks who are responsible for the proper functioning of the domestic and the international monetary systems.

On the first point, there has as yet been no evidence that the market for Euro-dollars has been, or could become, very unstable, or that attempts by banks and other participants in the market to reduce or unwind their positions could be very damaging.73 On the contrary, operations of the Euro-dollar market have shown surprisingly moderate fluctuations in interest rates despite the very large movements of funds into and out of the market.

On the second point, misgivings have been expressed that the operations of the Euro-dollar market facilitate, if indeed they do not encourage, speculation and unsound credit. It is, indeed, quite likely that the major part of speculation in gold is financed with bank credit. Gold can be purchased in major European markets with a down-payment as small as 5 per cent. The amount of the downpayment varies with the closeness of the customer relationship as well as with the price of gold. As the purchase price rises over $35 an ounce, the amount of the downpayment increases, in line with the greater risk that the price may fall. The rate of interest charged on the unpaid balance is moderate, and is often related to the rate on Euro-dollars, which constitute funds for some of this financing. But there was speculation in gold financed by bank credit long before there were Eurodollars. Commercial banks in many countries have substantial resources which can be and are used to finance speculations in gold. Interest differentials are not decisive in gold speculation, which is undertaken in the hope of wide gains.

Views on the relationship of Euro-dollars to gold speculation are purely conjectural. There is no information as to the total volume of gold purchases financed with bank credit, let alone with funds obtained from the Euro-dollar market. In the interests of completeness, it might be added that, while gold production in the free world is known, while Russian sales of gold can be estimated fairly well, and while the gold additions to monetary reserves are known with a high degree of accuracy, there are only estimates ranging from fair to indifferent about the volume of hoarding, the amount of gold turnover on the London and other markets, and the quantities of gold bought and sold at any price in any market. For example, no exact data have ever been made public, if indeed they exist, on the volume of gold that changed hands at different prices during the speculative bubble on the London gold market in the last quarter of 1960.

Somewhat different considerations apply to the question whether the Euro-dollar market facilitates speculation against sterling or the dollar. It is fairly difficult to measure leads and lags in international payments with any precision and, even more, to evaluate the extent to which Euro-dollar and Euro-sterling dealings influence them. In one sense, it may be said that anyone who borrows dollars or sterling is speculating in that currency unless he covers forward. It is reasonable to suppose that some speculation against the dollar and sterling can be facilitated by Euro-money operators. It is important, however, to keep this possibility in perspective. The fact that dollars are placed in the Euro-dollar market rather than used to buy gold for official reserves indicates that somebody is not speculating against the dollar. Moreover, the pressure on the dollar that could be caused by even a minor shift in the rate of payments to and from the United States (leads and lags) would be greater than the amount of speculation that could be financed by the Euro-dollar markets.

XIII. Summary

An earlier article (written in 1961) concluded that operations in foreign markets for dollars, sterling, and other currencies had (1) influenced the structure and the level of interest rates in a number of European countries; (2) reduced the cost of foreign trade financing, and probably increased the amount of such financing available to Japan and perhaps a few other countries; (3) increased the importance of the dollar as an international currency used in trade and finance; (4) increased liquidity, both national and international; and (5) limited or, at the least, modified the scope of domestic monetary policy, by bringing interest rates in various industrial countries into a new and closer alignment.74 Recent developments in these markets have strengthened these findings.

The size of foreign currency markets, already substantial in 1961, has increased further. In June 1962, deposits in these markets in Europe were at least $3 billion. Canadian banks also have large operations in U.S. dollars. When allowance is made for duplications between Canadian and European markets, the world market for foreign currencies may have reached $4–5 billion in June 1962. U.S. dollars constituted about 85 per cent of the funds in European markets, and a much higher percentage of those in Canadian markets.

Foreign currencies were borrowed, often to finance foreign trade, in 25 to 30 countries, including practically every country in Western Europe and many countries in the communist bloc. At least two thirds of the funds in European markets were made available directly or indirectly by central banks and monetary authorities in 20 or 25 different countries, with the largest amounts from Germany and Italy.

Foreign markets for dollars and other currencies in mid-1962 did not appear to be overextended; instead, they were artificially limited. If these limitations were reduced, the demand for dollars and other foreign currencies would increase, with intensified pressure upon interest rates in Europe.

Foreign markets for dollars and other currencies are a logical development of the convertibility of all major currencies and the growing internationalization of capital markets. Elimination of the balance of payments deficit of the United States would not eliminate these markets, but would bring more European currencies into them. If we disregard increases in official restrictions and in bank agreements to limit competition, the major factor that could limit the demand for loans in foreign currencies, and therefore the markets for them, would be a closer alignment of interest rates and credit availabilities in Europe and the United States.

In October 1962, the United States freed foreign official time deposits from the ceilings on interest rates imposed by Regulation Q. Ceilings applicable to deposits up to six months had been far below interest rates on U.S. Treasury bills and bankers’ acceptances, which in turn were below those on Euro-dollar deposits. To increase the amount of time deposits held by foreign official agencies, a substantial increase in these interest rates would be required. Such an increase would divert funds from other U.S. investments. It would also divert funds from the Euro-dollar market. This would weaken an important force that is reducing commercial interest rates in Europe, and it could easily worsen the U.S. balance of payments, as currently measured, by stimulating the outflow of U.S. funds.


I. Overseas Deposit Accounts and Advances of Overseas Banks and Accepting Houses in London, 1955–621

(In millions of U.S. dollars)
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Source: Bank of England, Quarterly Bulletin, December 1962, Tables 11A, 11B, 11C, and 12, and notes to them. The following definitions apply to the terms used in these tables: (1) Current and Deposit Accounts: bank customers’ funds whether transferable or withdrawable on demand (current accounts) or lodged for a definite period or subject to agreed notice of withdrawal (deposit accounts). Data include deposits denominated in sterling and the sterling equivalents of foreign currency deposits. (2) Overseas Banking Offices: all banking offices located outside the United Kingdom, irrespective of the locations of the registered (or head) offices. (3) Other Overseas Residents: governments, companies, persons, etc., whose registered address or permanent domicile is outside the United Kingdom. These tables do not include the London clearing banks or the Scottish or Irish banks. (4) The contributing institutions to the tables are those which, at the dates shown, were members of the following groups: Overseas Banks Association, American Banks in London, Foreign Banks and Affiliates Association, and the Accepting Houses Committee. The banks included under each heading are described in Quarterly Bulletin, September 1961, pp. 230–31. The statistics for September 30,1962 differ to a certain extent from those for earlier dates, as explained in Quarterly Bulletin, December 1962, pp. 267–69.

Data include components in sterling as well as those denoiminateed in foireign currencies

A group of 33 banks, including the Bank of London & South America Limited and all the Canadian banks with offices in the United Kingdom.

Eight U.S. banks with branches in London.

A group of 19 foreign banks other than U.S. and British overseas. The list does not include all the foreign banks in the United Kingdom. Published statistics do not include data for the Bank of Tokyo, the Sanwa Bank, the Moscow Narodny Bank, and the London agency of the Banca Nazionale del Lavoro, and a number of other foreign banks.

The accepting houses cover 17 companies, including Brown, Shipley & Co. Ltd., Samuel Montagu & Co. Ltd., and Hambros Bank Ltd.

II. Foreign Currency Deposits in London, June 1961

The data presented in Appendix I cover the deposits to the credit of nonresidents—classified as overseas banks and other nonresidents—denominated in sterling and foreign currencies. The latter are included at their sterling equivalent. The data do not separate deposits in sterling from those denominated in dollars and other foreign currencies.

Deposits of nonresidents increased sharply after 1957. Part of this increase is attributable to deposits made and denominated in sterling. However, as the Bank of England observed, “most of the steep rise shown since 1958 has occurred in foreign currency deposits, predominantly in U.S. dollars or Euro-dollars.”75 It may be that, if complete statistics were available, part of the increase of $470 million in 1958 would be accounted for by deposits denominated in foreign currencies.

Gross deposits of the clearing banks, which are overwhelmingly sterling deposits of residents of the United Kingdom and the rest of the sterling area, increased by 4 per cent between 1957 and 1958 and by 6 per cent between December 1958 and June 1962 (Appendix III). Deposits of U.K. residents with the overseas banks and accepting houses, also in sterling, increased more than this, largely because these enterprises paid higher rates of interest on time accounts than did the clearing banks. For the same reason, sterling deposits for the account of nonresidents with overseas banks and accepting houses might also be expected to increase. Thus, the nonresident deposit figures of overseas banks and accepting houses, which include deposits in sterling and in other currencies, should be adjusted for the increase of deposits denominated in sterling in order to obtain estimates of deposits denominated in foreign currencies.

The Bank of England’s estimate of nearly $1.4 billion of foreign currency deposits with the overseas banks in June 1961 was based on a special survey.76 According to regularly published figures, deposits of nonresidents with the overseas banks increased from $1.7 billion in 1958 to $3.3 billion in June 1961, or by $1.6 billion. If the end of 1958 is assumed to mark the beginning of Eurodollar operations by overseas banks, these figures suggest that sterling deposits increased by $200 million (12 per cent) from December 1958 to June 1961. There may be some question, however, whether 1957 is not a more appropriate starting point, and whether part of the $300 million increase of nonresident deposits in overseas banks in 1958 may not also represent deposits of dollars. If 1957 is a more appropriate starting point than 1958, the Bank of England’s estimate of $1.4 billion would be too low by at least $250 million.

In the same way, the data covering accepting houses suggest that their foreign currency deposits in June 1961 totaled at least $300 million. Use of end-1957 as a starting date instead of end-1958 suggests a minimum of $350 million.77

There are other omissions in the estimate of $1.4 billion for June 1961. The clearing banks accept foreign currency deposits and at least one of them is active in the Euro-dollar market. A number of foreign banks, notably the Moscow Narodny Bank, the Sanwa Bank, and the Bank of Tokyo, are not included in the regularly published totals or in the survey. The Bank of England recently expanded its coverage of overseas banks, and reported that 35 banks not previously included in the statistics held £255 million of current and deposit accounts for overseas residents on September 20, 1962.78 Comparable figures for earlier dates were not given. It may be estimated, on the basis of the analysis in this Appendix, that these new contributors held about $300 million of deposits denominated in currencies other than sterling for overseas residents in June 1961.

On the whole, an estimate of $2 billion for foreign currency deposits (largely in dollars) in June 1961 in London is conservative.

III. United Kingdom: Deposits of Oversers, Accepting Houses, and Clearing House Banks, 1957–62

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Deposits by overseas banks and other nonresidents, from Appendix I. Data are rounded, and may not add to totals.

Bank of England, Quarterly Bulletin, December 1962, Tables 11A, 11B, 11C, and 12.

From Central Statistical Office, Economic Trends (London).

Faits nouveaux survenus récemment sur les marchés étrangers du dollar et des autres monnaies


Les faits nouveaux qui sont intervenus récemment sur les marchés étrangers du dollar, de la livre sterling et des autres monnaies corroborent les conclusions exposées dans un article qui a été publié dans le numéro des Staff Papers de décembre 1961. Les marches de devises en Europe ont vu leurs opérations s’accroître en 1961–62. En juin 1962, les dépôts y ont atteint au minimum $3 milliards, et selon toute probabilitéle chiffre de $3,5 milliards serait plus exact. De même, le volume des opérations en dollars E.U. des banques cana-diennes a augmenté. Sil’on tient compte des chevauchements entre les marchés canadiens et européens, la somme des opérations sur monnaies étrangères effectuées sur le marché mondial a peut-être atteint $4–5 milliards en juin 1962. Le pourcentage de dollars E.U. par rapport au total des fonds sur les marchés européens a été d’envi-ron 85 pour cent, et ce chiffre est encore supérieur sur les marches canadiens.

Des monnaies étrangéres ont été empruntées, souvent pour financer le commerce extérieur, par 25 à 30 pays, dont pratiquement tous les pays d’Europe occidentale et de nombreux pays du bloc communiste. Les banques centrales et les autorités monétaires de 20 ou 25 pays ont accordé, directement ou indirectement, au moins les deux tiers des fonds utilisés sur les marchés européens, l’Allemagne et l’Italie four-nissant les sommes les plus importantes.

L’activité des marchés étrangers du dollar et des autres monnaies est la suite logique du retour à la convertibilité de toutes les monnaies principales et témoigne du caract ère de plus en plus international des marchés de capitaux. La suppression du déficit de la balance des paiements des Etats-Unis n’entraînerait pas la disparition de ces marchés mais accroîtrait le volume de monnaies européennes qui pourrait y être traité. Si l’on néglige l’augmentation du nombre des restrictions officielles et des accords conclus par les banques en vue de limiter la concurrence, le principal facteur susceptible de limiter la demande d’emprunt en monnaies étrangéres, et par suite les opérations sur ces monnaies, serait d’aligner plus étroitement les taux d’intérêt et les disponibilités de crédit en Europe et aux Etats-Unis.

En octobre 1962, les Etats-Unis ont supprimé la restriction imposée par le Réglement Q sur le taux de l’intérêt applicable aux dépôts officiels à terme de l’étranger. En effet, les taux d’intér êt maximum en vigueur pour les dépôts d’une échéance n’excédant pas six mois étaienttres inférieurs à ceux qui étaient appliques aux bons du Trésor des Etats-Unis et aux acceptations de banque, lesquels à leur tour étaient en deçá des taux pratiqués pour les dépôts en Eurodollars. Pour accroitre le montant des depôts à terme détenus par les organismes officiels étrangers, un relèvement substantiel de ces taux d’intérêt serait nécessaire; il aurait pour effet de détourner des fonds des autres investissements américains et également du marché de l’Euro-dollar. Il en résulterait un affaiblissement du mouvement en faveur de la réduction des taux d’intérêt commerciaux en Europe, voire une aggravation du déficit de la balance des paiements des Etats-Unis tel qu’il est actuellement calculé, car les sorties de capitaux américains ne feraient que s’accroître.

La reciente evolución de los mercados extranjeros del dólar y otras monedas


La reciente evolución registrada en los mercados extranjeros del dólar, la libra esterlina y otras monedas, viene a corroborar las conclusiones expuestas en un artículo publicado en el número correspondiente a diciembre de 1961 de Staff Papers. Durante el periodo 1961–62 se incrementó la magnitud de los mercados europeos de divisas extranjeras. Los depósitos en esos mercados alcanzaron en junio de 1962 un total de por lo menos US$3.000 millones; la cifra de US$3.500 millones constituiría con toda probabilidad un cálculo más exacto. También los bancos canadienses acrecentaron sus operaciones en dólares de los Estados Unidos. Si se toma en consideración la duplicación de transacciones que pudiera haber ocurrido entre el mercado de Canadá y los mercados europeos, el mercado mundial de divisas extranjeras puede muy bien haber llegado en junio de 1962 a una cifra de US$4.000 millones a US$5.000 millones. Alrededor del 85 por ciento de los fondos de los mercados europeos estaba constituido por dólares de los Estados Unidos y en los mercados canadienses el porcentaje de dólares era mucho más elevado.

Se obtuvieron préstamos en monedas extranjeras, a menudo para financiar el comercio exterior, en 25 a 30 países, entre los cuales se encontraban prácticamente todos los países de la Europa Occidental y muchos del bloque comunista. Dos tercios, por lo menos, de los fondos de los mercados europeos fueron suministrados, directa o indirectamente, por los bancos centrales y autoridades monetarias de unos 20 a 25 países, habiendo sido los más cuantiosos los suministrados por Alemania e Italia.

Los mercados extranjeros del dólar y otras monedas constituyen la consecuencia lógica del restablecimiento de la convertibilidad extena de todas las monedas más importantes y de la creciente internacio-nalización de los mercados de capital. La eliminación del déficit de la balanza de pagos de los Estados Unidos no acabaría con esos mercados, sino que implicaría un aumento de las monedas europeas que a ellos concurrieran. Haciendo caso omiso de la imposición de nuevas restricciones oficiales y de la concertación de nuevos acuerdos entre los bancos con el fin de restringir la competencia, el factor que mayor influencia ejercería en coartar la demanda de préstamos en monedas extranjeras y, por ende, en limitar los mercados de dichas monedas, sería una aproximación más estrecha entre las tasas de interés y las disponibilidades de crédito en Europa y en los Estados Unidos.

En octubre de 1962 los Estados Unidos suprimieron la limitación que la Regulación Q imponía a las tasas de interés pagaderas sobre depósitos a plazo de organismos oficiales extranjeros. Las tasas máximas de interés pagaderas sobre depósitos a un plazo máximo de seis meses eran mucho más bajas que las que se pagaban sobre las letras del Tesoro de los Estados Unidos y sobre aceptaciones bancarias, y estas tasas eran a su vez más reducidas que los intereses devengados sobre depósitos de “Eurodólares.” Para poder incrementar el monto de los depósitos a plazo mantenidos por los organismos oficiales extranjeros habría que incrementar substancialmente las tasas de interés sobre dichos depósitos. Tal aumento lograría atraer fondos de otras inversiones norteamericanas y también del mercado del “Euro-dólar.” Esto debilitaría una fuerza importante merced a la cual se están ahora reduciendo las tasas de interés comercial que rigen en Europa y podría fácilmente contribuir a agravar el déficit de la balanza de pagos de los Estados Unidos, tal como éste se calcula en la actualidad, al estimular la salida de fondos de dicho país.


Mr. Altman, Advisor in the Research and Statistics Department, and Fund Historian, is a graduate of Cornell University and of 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.


Staff Papers, Vol. VIII (1960–61), pp. 313–52. This is hereafter referred to as “Foreign Markets, 1961.”


Like its predecessor, this paper is for the most part based upon discussions with officials in central banks and commercial banks. These took place in April-June 1962 in London, Paris, Basle, Zürich, Frankfurt, Bonn, Amsterdam, Rome, and Montreal. 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.

Canadian banks conduct large operations in U.S. dollars. These are described in a related paper, “Canadian Markets for U.S. Dollars,” Staff Papers, Vol. IX (1962), pp. 297–316.

The present paper and the one on Canadian markets for U.S. dollars are included in U.S. Congress, Joint Economic Committee, Factors Affecting the United States Balance of Payments (87th Congress, 2nd Session) 1962, pp. 485-540.


The extent of this duplication depends upon three characteristics of the market: the “one-way” length of the foreign currency chain, since there may be a number of financial institutions between the “real” owner of the deposit and the final user; the circular movement of deposits among financial centers, since a London bank may place a deposit with a Paris bank which may subsequently be redeposited in London; and the desire of many banks to be on both sides of the market, accepting and placing deposits at the same time.


“The Overseas and Foreign Banks in London,” Bank of England, Quarterly Bulletin, September 1961, p. 20.


See Appendix II below, “Foreign Currency Deposits in London, June 1961.”


Banca d’Italia, Relazione del governatore sull’esercizio 1961, Table M 8, p. 225.


Estimated from Deutsche Bundesbank, Monthly Report, August 1962, p. 15.


“Foreign Markets, 1961” estimated the U.K. total at the end of 1960 as at least $1 billion, and perhaps as much as $1¼ billion, and the European dollar market at a minimum of $2 billion (p. 328). In the light of the figures given here, these estimates were probably too low.


“Canadian Markets for U.S. Dollars” (cited in footnote 2), pp. 300, 305–6, and Appendix I to that paper.


“Foreign Markets, 1961,” pp. 328–29.


Estimated from Deutsche Bundesbank, Monthly Report, August 1962, p. 15.


Commissions as high as ¼ per cent are spoken of, but these are unusual and would probably cover brokerage expenses. Yet, accepting a deposit of $5 million for 30 days at one interest rate and placing it simultaneously with another bank at a rate ¼ of 1 per cent higher yields a gross profit of only $1,000.


In addition, a specialized service is rendered by some organizations to foreign investors who may wish to invest funds in the United Kingdom other than in the form of deposits. For example, some merchant bankers act as agents for a commission, arranging for the conversion of foreign currencies into sterling and or the investment and management of the proceeds.


The commercial banks also had a reciprocal obligation to sell dollars, i.e., reacquire deutsche mark, at the end of the swap period.


Banca d’Italia, op. cit., pp. 216–18.


Ibid., pp. 217–18. The term of these deposits was not given, but the rate of interest paid appears to be close to the rate on Euro-dollar deposits for 1–3 months.


In general, swap arrangements between the Federal Reserve and a European central bank protect each party against a change in the relative value of the other party’s currency, but they do not protect either party against the effects of a parallel devaluation or of a uniform change in the price of gold.


The Swiss banks distribute their dollar assets among various investment media, including Euro-dollar deposits. These additional U.S. Treasury bills resulted in their freeing other funds for investment in the Euro-dollar market, where they would earn higher rates.


See European Monetary Agreement, Annual Report, 1961, pp. 50–59.


For example, The Financial Times (London) in May 1962 listed the following six categories of investments for sums not less than £20,000: 2 and 7 days notice without minimum periods of deposits; and 7 days’ notice for minimum periods of 1, 3, 6, and 12 months.


The Bank of England’s Quarterly Bulletin charts only two arbitrage media: U.K. Treasury bills compared with U.S. Treasury bills, covered, 3 months’ basis; and interest on London Euro-dollars compared with ILK. local authority rates, covered, 3 months’ basis. The Bank of England estimated that some 10 per cent of the foreign currency deposits in London in June 1961 was swapped into sterling (Quarterly Bulletin, September 1961, p. 20); this estimate may well be on the low side.


Short-term debt, with a maturity of one year or less, increased from 11 per cent in 1958 to 22 per cent in 1961, of which three eighths ($1.4 billion) was repayable at call or in 7 days. Maturities have been shortened further since 1961. London’s merchant banks, overseas banks, and foreign banks are important lenders to local authorities. The Economist (London) estimated that “perhaps over a half of the increase in temporary borrowing of the local authorities in the first quarter of 1962 was of foreign origin” (August 25, 1962, p. 720). See also The Statist, February 9, 1962, p. 410, and July 13, 1962, p. 119; and Bank of England, Quarterly Bulletin, June 1962, pp. 98-99.


Compare the comment in National Bank of Belgium, Report for 1961, p. 37, η. 1; and European Monetary Agreement, op. cit., p. 61.


“Canadian Markets for U.S. Dollars” (cited in footnote 2), p. 306.


To this rule borrowings of U.S. dollars in Canada are an outstanding exception.


European Monetary Agreement, op. cit., p. 60.


For example, “The hire purchase companies, when they became associated with or controlled by the Clearing Banks, also found that their credit standing was such that they could compete for this kind of money [sterling funds arising from the conversion of dollars and other foreign currencies], and very large sums have been deposited with them through the operations of the international money market.” Sir George Bolton, “International Money Markets,” Bank of London & South America Limited, Quarterly Review, July 1962, p. 117. See also “Sources of Funds of Hire Purchase Finance Companies, 1958-62,” in Bank of England, Quarterly Bulletin, December 1962, pp. 257-58.


It has been estimated that a large part of the foreign exchange debt of Norwegian commercial banks on April 30, 1962—which was about NKr 1,100 million ($154 million)—probably consisted of Euro-dollars; and that about 80 per cent of this was passed on in loans to Norwegian shipowners. See International Monetary Fund, International Financial News Survey, Vol. XIV (1962), p. 229.


This market deals with borrowing and lending deposit balances in the Federal Reserve Banks. See Board of Governors of the Federal Reserve System, The Federal Funds Market—A Study by a Federal Reserve System Committee (Washington, 1959), and “The Federal Funds Market,” Federal Reserve Bank of St. Louis, Monthly Review, April 1960.


Such data as are available, namely, rates of interest on commercial paper, Treasury bill yields, high-grade bond yields, or (as in Italy) the agreed schedule of minimum rates for loans in lire with its complicated schedule of surcharges, are misleading as indications of rates of interest actually paid on commercial loans of various qualities.


See, for example, the survey of prime rates in February 1962 published by the First National City Bank of New York in its Monthly Letter, March 1962. Effective prime rates are frequently higher than the stated rates by reason of commissions, stand-by fees, or other supplementary charges.


The Bank for International Settlements surveyed this field in 1957 in Credit and Its Cost (C.B. 268). It would be most helpful if this question could now be resurveyed. It is even more important now to obtain adequate continuing statistical series, on an over-all or sample basis, describing nominal and effective interest rates paid on various kinds and sizes of loans in domestic and foreign currency. Compare the comment of the Banca d’Italia on the need to obtain and compare the effective debtor and creditor rates of interest in different countries (Relazione del governatore sull’esercizio 1961, p. 416).


The rates paid to Italian banks would be higher than the London rates quoted, but the differential would not necessarily be eliminated.


Published data on interest rates and on spot and forward exchange rates are not compiled for exactly the same points in time. Neither can they take proper account of the range of deposit rates and of spreads between the buying and selling rates of both spot and forward exchange.


This is not trae of the two communist-run banks in Western Europe: the Moscow Narodny Bank in London and the Banque Commerciale pour l’Europe du Nord in Paris.


A Dynamic Theory of Forward Exchange (London, 1961), p. 50 and Chapter 5; see also his “The Relations Between Practice and Theory of Forward Exchange,” Banca Nazionale del Lavoro, Quarterly Review (Rome), September 1962, pp. 227–39.


Deposits are also placed with these communist bloc banks by the Moscow Narodny Bank and the Banque Commerciale pour l’Europe du Nord. These two communist-dominated banks have excellent standing in Western markets and can attract dollar and other foreign currency deposits at going rates, so that they can do a profitable business with banks in the communist bloc at the rates charged by other banks in Western Europe.


Compare the comments of the Nederlandsche Handel-Maatschappij (Netherlands Trading Society) in its Annual Report, 1961 (p. 10): “… a limited part of our investing [in 1961] was transacted in Japan. At a later date we reduced the latter investments in view of a deterioration in the Japanese balance of payments. In general, of course, the amount of our foreign investments is partly determined by the maximum risks we feel we can properly run in each country, while paying close attention to the political circumstances in the countries concerned as well as to the state of their balances of payments.”


Data supplied by W. McC. Martin, Chairman of the Federal Reserve Board, in U.S. Congress, House, Committee on Banking and Currency, Higher Interest Rates on Time Deposits of Foreign Governments: Hearings … on H.R. 12080 (87th Congress, 2nd Session), July 1962 p. 87.


For a convenient summary of the significance of the prime rate and its relation to other lending rates, see Federal Reserve Bank of New York, Monthly Review, April and May 1962.


A premium on forward Swiss francs for 90 days at 1¼ per cent was reported by the Banca d’Italia (op. cit., p. 226); the premiums reported for 1961–62 in International Monetary Fund, International Financial Statistics, were much smaller. It should be noted that not all Swiss francs loaned by the banks were obtained from dollars. From June 1961 to March 1962, outstanding loans in Swiss francs by Italian banks to domestic clients increased from $179 million to $379 million. The banks’ foreign assets in Swiss francs increased from $97 million to $123 million, while their deposit liabilities increased from $91 million to $138 million. Thus, of the increase of $226 million of assets denominated in Swiss francs, $47 million was borrowed abroad, and the balance of $179 million was financed by buying Swiss francs with dollars. With respect to the former amount, the commercial banks retained the entire interest markup without sustaining an exchange loss incident to buying Swiss francs with dollars.


Outstanding loans in Swiss francs to Italian customers as a proportion of all domestic loans made in foreign exchange rose from 21 per cent in 1960 to 37 per cent in March 1962, when they totaled $379 million (Banca d’Italia, op. cit. pp. 226 and 229). The borrowing customers must have converted a large part of this into other currencies, largely dollars, since imports from Switzerland in 1961 were $150 million.


It should be re-emphasized that if nominal rates in the United States must be adjusted for compensating balance requirements, nominal interest rates in Europe must be adjusted for such additional costs as stand-by charges and fees.


This is roughly equivalent to the Lombard rate (rate for central bank advances on securities) of 4 per cent plus 2–2½ per cent. The Lombard rate is equal to the central bank discount rate (now 3 per cent) plus 1 per cent.


David Rockefeller, President of the Chase Manhattan Bank, which has a branch in Germany, testified in 1962 that “I would say that they [interest rates in the Federal Republic] would be perhaps 2 percent higher than ours for loans. Money market rates are little if any higher than in the United States.” Higher Interest Rates on Time Deposits of Foreign Governments (cited in footnote 39), p. 44.


International Monetary Fund, International Financial News Survey, Vol. XIV (1962), p. 229.


In considering the role of foreign markets for currencies in countries other than the industrial countries of Europe, and in Canada, additional factors come into play. In nonindustrial countries, the demand for any kind of capital, including foreign currency deposits, is very large. Substantial exchange and other risks, however, severely limit the amounts that the market is prepared to lend, not only at market rates but at substantially higher ones.


Banca d’ltalia, op. cit., Table S 1, p. 370.


For example, the U.K. Exchange Control Act of 1947 provides: “Except with the permission of the Treasury, no person, other than an authorised dealer, shall, in the United Kingdom, and no person resident in the United Kingdom, other than an authorised dealer, shall, outside the United Kingdom, buy or borrow any gold or foreign currency from, or sell or lend any gold or foreign currency to, any person other than an authorised dealer” (Chap. 14, Pt. I, par. 1(1)). In France, Decree 47–1337 of July 15, 1947 provides: “Any natural person having his usual residence in France, any French juridical person or any foreign juridical person insofar as its agencies in France are concerned, shall be forbidden, except upon authorization of the Minister of Finance, to enter into a contract with a party … when the obligations originating from said contract would be stipulated in terms of a currency other than the franc” (Art. 59). And in the Netherlands: “It is illegal for residents, otherwise than by virtue of a licence, to obtain under onerous title … foreign means of payment” (Royal Decree on Foreign Exchange Control, October 10, 1945, Chap. II, Art. 17, par. (1)(c)).


See the statement of Sir Charles Hambro, Chairman of Hambros Bank and a director of the Bank of England, reported in The Economist (London), May 26, 1962, p. 821, and his speech to the Annual Meeting of Hambros Bank Ltd., reported in The Financial Times (London), June 15 1962, p. 4. The contrary view is strongly stated by Sir George Bolton in “International Money Markets,” Bank of London & South America Limited, Quarterly Review, July 1962, pp. 113–19; and in an article in The Times (London), May 22, 1962, p. 18.


For example, “Dollar Defense Now Aims at Killing ‘Eurodollars’,” in The Journal of Commerce (New York) July 17, 1962. Less dramatic comments have referred to “the challenge of the Euro-dollar market” and the need “to mount an offensive” against it.


Part I, Section 3. The Secretary of the Treasury had had the authority for many years to issue securities to foreign governments and monetary authorities at special rates.


See U.S. Congress, House, Committee on Banking and Currency, Higher Interest Rates on Time Deposits of Foreign Governments: Hearings … on H.R. 12080 (87th Congress, 2nd Session), July 1962, and Report, August 1962; and U.S. Congress, Senate, Committee on Banking and Currency, Interest Rates on Foreign Official Time Deposits: Hearings … on H.R. 12080 (87th Congress, 2nd Session), September 1962, and Report, September 1962.


See U.S. Congress, House, Committee on Banking and Currency,Higher Interest Rates on Time Deposits of Foreign Governments: Hearings … on H.R. 12080 (87th Congress, 2nd Session), pp. 3, 13–14, and 16.


The Economist (London), December 29, 1962, p. 1296; and The Wall Street Journal (New York), October 22 and 23,1962.


All time deposits held for foreigners—governments and official agencies, international institutions, foreign banks, and certain foreign branches of U.S. banks—by leading banks in New York City were $1.74 billion in mid-December 1962, compared with $1.55 billion at the beginning of October, when Regulation Q was amended, and $1.68 billion one year earlier.


For a recent article suggesting that foreign official institutions do not appear to adjust their holdings between gold and dollars in response to short-term or cyclical movements in interest rates, see R. F. Gemmill, “Interest Rates and Foreign Dollar Balances,” The Journal of Finance, Vol. XVI (1961), pp. 363–76.


For a recent statement that gold inflows and outflows in the period 1946–61 were regularly and closely correlated with balance of payments surpluses and deficits, see O. L. Altman, “Quelques aspects du problème de I’or,” Cahiers de l’Institut de Science Economique Appliquée, Series R, No. 8 (Paris, July 1962).


These certificates are negotiable and are generally issued in denominations of $1 million. They are actively traded, and four large dealers now make a market in them. Certificates with a wide range of maturities are traded in the open market.


For example, in the summer of 1962, the Chase Manhattan branches in Europe paid ¼ per cent more there than in the United States on deposits with terms up to 180 days. See Higher Interest Rates on Time Deposits of Foreign Governments: Hearings (cited in footnote 54), pp. 62–63.


Unless, of course, they obtained some unusually profitable additional business as a consequence.


Thus, David Rockefeller, President of the Chase Manhattan Bank, in testifying on Regulation Q, said that “it is often difficult to draw a line between central bank deposits and other foreign deposits, particularly those of foreign commercial banks. If special rates were offered to central banks, one might well find certain foreign commercial banks lending their dollar deposits to the central bank to gain advantage of the special rate. Such relations between central banks and commercial banks do exist in some countries.” Consistent with this view, he recommended “freeing from restrictions the interest rates which can be paid for time deposits from all foreign sources, central banks and other.” Higher Interest Rates on Time Deposits of Foreign Governments: Hearings (cited in footnote 54), pp. 40–41.


Alternatively, central banks might require higher rates of interest from their commercial banks.


From International Monetary Fund, International Financial Statistics, December 1962.


Federal Reserve Bulletin, July 1962, p. 862 (as reported by Weekly Reporting Banks), and Higher Interest Rates on Time Deposits of Foreign Governments: Hearings (cited in footnote 54), pp. 3, 14, 16, 32–33, 51–52, and 143.


This general point was made by Under Secretary Roosa. Ibid., pp. 2–6.


Unless, as is unlikely, all the dollars paid out to finance the deficit are converted into gold and/or paid over to the International Monetary Fund in connection with a U.S. drawing of foreign currencies.


In May 1962, for example, deposits of all foreigners (including international institutions) were about $11 billion, whereas commercial loans to foreigners (including those with an original maturity of one year) were more than $6 billion. See Federal Reserve Bulletin, October 1962, pp. 1366–72.


Swap transactions and allied instruments are discussed in the Deutsche Bundesbank’s Report for the Year 1961, and in its Monthly Reports for January, April, July, and October 1962. As one German bank stated it, “The Bundesbank deliberately encouraged this export of money by the banks; it did so by letting them fix the forward exchange rate on cheap terms, sometimes even allowing a premium on the employment of funds abroad.” (Berliner Bank A.G., Report … for the Year 1961, p. 11.)


“An Active Control of Bank Liquidity,” Supplement to The Statist, April 6, 1962, p. 6.


See Neue Zürcher Zeitung, July 29, 1962; International Monetary Fund, International Financial News Survey, Vol. XIV (1962), pp. 245 and 288; and Federal Reserve Bulletin, September 1962, pp. 1148–49.


See, for example, Paul Einzig’s “Statics and Dynamics of the Euro-Dollar Market,” The Economic Journal, September 1961, pp. 592–95, and “Towards an International Money Market,” The Statist, November 17, 1961, pp. 925–26.


Paul Einzig has discussed “the perturbing potentialities of foreign currency deposits in general and of Euro-dollars in particular,” in his “Dangerous Possibilities of Euro-Dollar System,” Commercial and Financial Chronicle (New York), January 25, 1962, p. 11.


See footnote 1, page 48.


Bank of England, Quarterly Bulletin, September 1961, p. 19.


Ibid., p. 20.


Hambros Bank, which is classified in the Bank of England statistics as an accepting house, was the first important financial institution in London to distinguish publicly between its deposits in sterling and in foreign currencies. Its Balance Sheet at March 31,1962 showed that deposits in sterling were £80 million in 1962 and £72 million in 1961, and that deposits in foreign currencies were £28 million and £9 million, respectively (as reported in The Financial Times, London, June 15, 1962). Total deposits in all currencies in earlier years were as follows: 1960, £74 million; 1959, £67 million; 1958, £57 million; and 1957, £50 million. On the assumption that Hambros’ Euro-dollar operations began after March 31, 1958, these figures show that in the next four years sterling deposits increased by £23 million (40 per cent), and foreign currency deposits by £28 million. If these figures were representative, the accepting houses reported in the Quarterly Bulletin increased their Euro-dollar deposits in the same period by only $210 million. This increase is probably too small, since it is unlikely that Hambros Bank held as much as 13 per cent of the Euro-dollar deposits held by all accepting houses in March 1962.


Quarterly Bulletin, December 1962, pp. 267–69.

IMF Staff Papers: Volume 10, No. 1
Author: International Monetary Fund. Research Dept.