Oscar L. Altman *
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.