Question

(4pts) Briefly explain why euro dollar market (in the international money market) had been so developed in 1960s and 1970s. 1960s (2pts): & 1970s (2pts)

Answer 1

The development of the Euro-dollar market* (see endnote) can arguably be described as one of the most important transformations in international financial activity. However, very little is known or written about its origins. This paper will explain some of the controversies that have surrounded the market?s development. What are the factors and the main issues that appear to have been relevant to the market?s development? Using an analytical framework, several concepts will be introduced involving, the size of the Euro-dollar market, the factors responsible for the growth of the Euro-dollar market, and a brief history of international finance, looking at the historical perspective from the late 1950s to the early 1970s. As it seems that these very concepts has important implications for how factors are interpreted when considering the ?actual? origins of its early development..

Many developments in the 1960s-1970s coincided with the birth and expansion of the Euro-markets. This had became a key means through which the City of London could sustain its position as an international financial centre, as well as a means for US banks to develop their international business and avoid many of the capital controls imposed in the USA in the 1960s. The Euro-markets were the first relatively free international capital and money markets, to be created after the Second World War, and the emergence of the market has been crucial to the internationalisation of money capital. As both Susan Strange and Jeffry Frieden have shown that, the creation and growth of this market was a product of the US and UK government policy. The off- shore governments now constitute a huge wealth of mobile capital, which is serving to erode the ?international and domestic, economic and political underpinnings of the post-war world order? . Political support for the off-shore markets in the 1960s stemmed from their growing importance in the short and long term financing of the operations of the international multinational firms, many of whom had influence in US politics in the 1960s. Due to the openness of the City of London, the markets grew quickly, creating a similarity of interests between the City and New York finance. However, Helleiner argues , that the Euro-dollar market was a means for the US government to allay fears concerning ?seigniorage? gains accruing from the dollar, because the market was outside the direct control of the USA. Also, the Euro-dollar market became attractive to the oil-exporting states, who deposited their massive increased earnings in the London offshore markets, whose value expanded ?to over $1 trillion ($1000 billion) by 1994. Its appeal for the oil states was that it was apparently beyond the reach of the US government; it was movable, it was secret; and it paid a handsome and floating rate of interest? . The growth of the markets was paralleled by an enormous exploitation in the demand for and supply of credit, even when real interest rates rose dramatically in the 1980s. A key time was in the early 1970s, between the USA and the other major states . The USA wanted to implement a more fully liberal financial system, whereas the others favoured collective action and more substantial international co-operation. The USA sought to devalue its foreign debts by a dollar depreciation, and force other countries