Excerpt
After the Second World War the victorious allies under the auspices of the United States and the United Kingdom set out to create an international financial system that should be more stable than the liberal financial system that existed between the First and the Second World War, which proved to be quite crisis-prone – the stock market crash of 1929 and the Great Depression it triggered being the most striking examples of this turbulent period. In 1944 the Bretton Woods Agreement was signed by fourty-four countries, which formed the International Monetary Fund (IMF) and the World Bank (also known as the International Bank for Reconstruction and Development).
The essential element of this multilateral agreement was that the US dollar was backed by gold at a certain rate and all the currencies of the participating countries were pegged to the dollar at fixed exchange rates. This should facilitate international financial stability, which was seen as a prerequisite for growth of the devastated national economies, as well as for the expansion of international trade. Another important aspect of the Bretton Woods Agreement was that the use of capital controls by the national governments was approved of. John Maynard Keynes[1] and Harry Dexter White, the two chief negotiators from Britain and the USA at the Bretton Woods summit emphasized financial stability and protection from speculative and ‘disequilibrating’ financial flows – such as those experienced in the 1920s – capital controls were seen as a corollary to this.[2]
With these measures private financial actors were in effect restricted to their respective domestic market. This stood in sharp contrast to the situation experienced in the inter-war years, where rentiers and speculators operated on an international scale and the international financial order was characterised by ‘laissez-faire’ – which maintains the basic idea that less government interference in ecomonic affairs makes for a better system.[3] The introduction of capital controls and fixed exchange rates show that in the time directly after the Second World War the responsibilty to organise and regulate international finance was clearly seen as to belong to the public realm and not to the private one.
The emergence of the so-called ‘Eurodollar market’ in London in the late 1950s marked the first episode towards increased liberalisation of the international financial markets. The City of London – the financial district located around the Bank of England – became an ‘offshore’ financial centre in the respect that it was made possible to conduct non-sterling transactions nearly completely without state regulations. Most of the transactions were carried out in dollars, therefore the term ‘Eurodollars’ emerged.[4] However, this was also possible with other currencies, such as the Swiss franc or the Deutschmark, hence a more general term is ‘Euromarkets’.
This loophole was first discovered by merchant banks from the City of London, who searched for alternative sources of finance, because the sterling-crisis of 1957 had cut them off their traditional ones. They found their new way of financing in non-resident currencies – the Euromarkets were born.[5] This innovative way of financing, developed by the merchant banks, was only possible by the ‘abjuration’ of sovereignty by the British state. The fact that the British state placed all transactions in foreign currencies outside the oversight of British authorities – mainly exchange rate and reserve regulations – created a paradoxical situation, because as these transactions were carried out within British territorial boundaries, they were protected from regulation by any other state. In fact, this decision of the British authorities had the effect, that these transactions were outside the regulation of any state. In this way the Euromarkets created a whole new kind of money in the respect that the money was held and used outside the country where it has the status of legal tender (e.g. the United States or Switzerland) and traded in a market which exists and operates outside any national banking regulation – outside the system of state sovereignty.[6] The development of the Euromarket has, as Burn writes, ‘(...) punctured a hole in the regulated banking system out of which capital could escape offshore.’[7]
There are two popular theses about why the Euromarket emerged in the City of London. The first claims that innovation by market operators, wishing to transcend unwanted state regulation of the international financial system, lead to the creation of the offshore Euromarkets.[8] A second point of view holds that the Euromarket was to a large extent the result of actions by the British state.[9] Gary Burns has argued that this simplistic dichotomy of ‘market operators’ vis-à-vis ‘state officials’ has to be overcome in order to explain the origins of the Euromarkets. He suggests instead to move towards a more realistic model by ‘(...) articulating the governance of regulatory space – whether by states, markets or various associational forms.’[10] For Burns, this first ‘offshore’ market was not a ‘spontaneous’ development as often claimed by others, but was created and developed on the one hand by market operators, some of whom were Directors of the Court of the Bank of England, and on the other hand by officials from the Bank of England who were closely affiliated with the banking community from the City of London. These two – closely intertwined – groups worked together in a non-regulatory vacuum in the City of London.[11]
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[1] Keynes originally proposed a different kind of scheme for the IMF, featuring a really international currency to be created called ‘bancor’, around which all the other currencies should move and in which they should be valued. This ambigious plan for a truly global currency stood no chance against the pragmatic American plan proposed by Harry Dexter White.
[2] Cf. Helleiner, Eric: Explaining the globalization of financial markets: bringing the states back in, in Review of International Political Economy, 2(2) 1995, p.318
[3] Cf. Burn, Gary: The state, the City and the Euromarkets, in Review of International Political Economy 6:2, 1999, p.226
[4] Cf. Helleiner: Explaining the globalization of financial markets, p.320
[5] Cf. Palan, Ronen: The Offshore World – Sovereign Markets, Virtual Places, and Nomad Millionaires, London: Cornell University Press, 2003, p.28
[6] Cf. Ibidem
[7] Burn: The state, the City and the Euromarkets, p.226
[8] Cf. Hampton, Mark: The Offshore Interface : Tax Havens in the Global Economy, Basingstoke: Macmillan, 1996, p.38
[9] Cf. Helleiner, Eric: States and the Reemergence of Global Finance, Ithaca, NY: Cornell University Press, 1994, p.82, cited in Burn: The state, the City and the Euromarkets, p.227
[10] Cf. Burn: The state, the City and the Euromarkets, p.253
[11] Cf. Ibidem, p.252