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How The Eurodollar Brought About The Rise Of London Banking

The following is an excerpt from ALL THE PRESIDENTS’ BANKERS: The Hidden Alliances that Drive American Power by Nomi Prins.  Reprinted with permission from Nation Books.

How the Eurodollar brought about the Rise of London Banking

Under the Marshall Plan, the US government had posted $13 billion to facilitate Europe’s recovery. Given that extra backing for their client countries, American bankers were assured that this time, unlike after World War I, their loans would be repaid. That was one of the main reasons they were so keen on the Marshall Plan. Additionally, the Truman and Eisenhower Doctrines extended US economic support to nations that adopted US ideology and were military allies. This meant more potential customers who would require private bank loans in their own drives to grow.

By the late 1950s, the inevitable clash between rich and poor nations was intensifying, and international inequality was growing. Developing nations didn’t want their prosperity dependent on western aid but on fair trade and prices and open markets for their raw materials (the pure definition of a “free market”). That was not what the Marshall Plan, the IMF, or the World Bank had accomplished for them. So many of these nations made the grave decision to secure private loans from the international banking community, from which they believed less policy strings would be attached. This action would generate its own problems—uncontrollable lending terms—that would prove devastating in other ways. Meanwhile, the number of National City Bank offices overseas tripled to 208, as the bank expanded from twenty-seven to sixty-one countries to accommodate the private loan demand. Other major banks followed suit.

National City’s W. Randolph Burgess had left his post in the Treasury Department when he was appointed US permanent representative to NATO in 1956; he served in that role until 1961, noting that “the shine of postwar NATO was getting a little dull.” By the turn of the decade, the stronger European countries felt less threatened by Soviet aggression. This made them less pliable to US policies. As a result, their banks began spreading their wings globally again.

Burgess moved to take a position at the Organization for European Economic Cooperation (which he later renamed the Organization for Economic Cooperation and Development), with the aim of “maximizing its service to the Atlantic community.” From that vantage point, he was instrumental in developing the “common market” to bring in the British, under a common financial umbrella to augment NATO. This focus on a new world order common market platform was a boon to US banks and helped bring British and other European banks back into the global financial fold.

London hadn’t yet become a major international financial center again, but Eurodollars (dollars outside America) were on their way to becoming a dominant global trading and lending currency. As a result, London was resuming its position as the epicenter of global finance, the trading hub of Eurodollar-backed loans.

In the late 1950s, the entrenchment of NATO and beginnings of the European Community encouraged Burgess’s alma mater, National City Bank, to lead the big banks back to Europe alongside a host of enthusiastic American multinationals. In 1958, most western countries (except Britain) had agreed to allow their currencies to be convertible into dollars for the first time since the war, which provided freer flow across borders. But because dollars were converted into gold at the fixed rate of $35 an ounce, foreigners began dumping dollars and extracting gold, causing a massive outflow of US gold reserves and raising US interest rates.

As interest rates rose, they exceeded the rates banks could pay on demand deposits. Under the Depression-era Federal Reserve Regulation Q, interest rates on those savings accounts were capped. As a result New York banks lost more than $1 billion in deposits as depositors rushed to the Eurodollar market, where rates could be as high as the market dictated. The United States lurched into a deficit. Dollars flowed quickly into Europe, as Eurodollars could earn higher interest. That’s what brought London back as a financial banking center.

Bankers who took up their business in the Square Mile of London’s banking heart could smell the Eurodollars in the air. As Anthony Sampson wrote, “Young British bankers and their foreign counterparts began to earn higher salaries than other bankers. Skyscrapers shot up by the old classic architecture near St. Paul’s Cathedral. Far Eastern and Arabic banks appeared, as did Mercedes and Cadillacs to cart bankers around the thin London streets.”

The US bankers still called the shots, not least because the US government did too. As Eisenhower approached his final year in office, the core power emanating from New York City remained backed by US foreign and military policy.

But the bankers would have to find new ways to compete with a strengthening European banking network by opening more offices there and by eliminating New Deal regulatory restrictions on their operations, so they could grow domestically and use their larger size as a global competitive weapon. Those campaigns would come.

*    *    *

In the early 1960s, there were two main sources of growth bankers could tap: the growing certificate of deposit market and the Eurodollar market. Chase did both. Chase’s asset base tripled through the 1960s, as did its domestic loans and deposits.

Domestically, CDs provided huge pools of domestic money for banks. Introduced by First National City Bank of New York (now Citigroup) in 1961, CDs enabled banks to raise money from investors, thereby circumventing Regulation Q, the Federal Reserve’s restriction on interest rate payments. Since the late 1950s, corporate and individual depositors had been transferring money from banks into higher-yielding investments, such as commercial paper (for business borrowing) and bankers’ acceptances (used in international trade). Since banks were prohibited under Regulation Q from paying interest on checking and savings accounts held for less than thirty days and limited in their ability to pay interest on accounts held for more than thirty days, CDs provided a way to get money in the door at market interest rates and lend it to keep foreign expansion buzzing.

Companies didn’t mind tying up their capital for the longer periods these forms of deposits required, provided they enjoyed higher interest rates. But there was a roadblock: new unrestricted money market funds could pay higher rates and drain deposits from commercial banks. This troubled Chase’s George Champion and all his banker compatriots.

There was a solution though. Across the Atlantic, the Eurodollar market was a more dependable source of funds. The Cold War provided an extra kick to US banks in London. The Soviet Union and other Eastern Bloc countries needed dollars for trade but wanted to avoid adverse US policy by not keeping or borrowing money in the United States. So they stuck funds in the London offices of British and American banks, causing the City of London to grow as a banking center and recoup some prewar financial glory.