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Published by EH.NET (October 2003)

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Stefano Battilossi and Youssef Cassis, editors, European Banks and the American Challenge: Competition and Cooperation in International Banking under Bretton Woods. New York: Oxford University Press, 2002. x + 228 pp. $74.50 (cloth), ISBN: 0-19-925027-8.

Reviewed for EH.NET by Steven Tolliday, School of History, University of Leeds.

This is a dense and complex but ultimately rewarding and thought provoking book. It focuses on the rise of eurocurrency and eurobond markets between the late 1950s and early 1970s, examines the causes and effects of these innovations on European and American banking systems, and argues that these developments constituted a watershed in international financial history. The book contains a great deal of detailed archive-based scholarship, but it is skillfully integrated and given perspective by Stefano Battilossi’s introductory essay, and subsequently held in shape with the help, in particular, of impressive chapters by Battilossi on the impact of the U.S. challenge on British clearing banks and by Richard Sylla on the dynamics of the U.S. banks, both of which haul the big themes back to the fore whenever there is danger of them slipping out of sight.

The story the book tells is one of a long difficult prelude in which the integration of banking in Europe and the U.S. had a limited and checkered history before the 1960s, and then (from quite unlikely origins) took off dramatically to reshape international financial markets. As is relatively well-known, U.S. banks were slow starters in international markets before the First World War, before launching briefly into precocious international dominance in the 1920s on the back of the strength of the dollar and the fragility of the old international financial centers in London, Paris and Berlin. But this new-found enthusiasm was excessive and came to a sick end with defaults and losses during the Depression. This wave of American activity left little institutional legacy in the form of branches or networks in Europe. Instead, in the U.S. as in Europe, regulatory responses to banking crises created constraining frameworks and nationalist retrenchment that seriously inhibited international financial innovation for many years.

The U.S. banks were slow to return to Europe after the Second World War. Europe retained trade and exchange controls for more than a decade after the war and prioritized domestic recoveries over restoring convertibility or a liberal international order. Yet in this period, almost by default, the dollar became the dominant currency for international payments and reserves as American support for European recovery accompanied sterling’s partial withdrawal from its highly vulnerable international exposure. This era produced a growing glut of dollars held in non-U.S. banks, particularly in Europe, which became the basis for eurodollar deposits and loans by non-U.S. banks.

These internationally mobile dollar funds exposed critical asymmetries in international financial markets and offered opportunities for financial innovation. At first, somewhat ironically, the U.S. banks themselves seemed to be unable to capitalize on the opportunities offered by these plentiful dollar funds. In the 1950s and 1960s, U.S. domestic banking was still held in the tight embrace of Glass-Steagall regulations dating from the Depression, tellingly described here by Richard Sylla as “the craziest patchwork quilt of banking regulations ever devised by the mind of man.” Deposits were subject to strict rate ceilings under Regulation Q, inter-state branching was largely prohibited, and U.S. capital markets were highly regulated and wary of foreign lending (except to a handful of prime institutions like the World Bank or the European Coal and Steel Community). Instead it was European banks, especially in London, that moved first to mobilize these funds, and escape from their own constraints. They could pay higher rates than U.S. domestic banks for dollar deposits, and they could therefore attract deposits that might otherwise have flowed to U.S. banks. Open and tolerant U.K. regulatory policies enabled London to attract a great deal of this business. The London banks and others could thereby tap into pools of mobile funds not otherwise available at a time when European government borrowing was squeezing out private borrowing in national capital markets and cross-border capital outflows were strongly discouraged by most governments. European banks thus used the international power of the dollar and its worldwide liquidity to pose a challenge the U.S. banks.

Chapters by Catherine Schenk, Duncan Ross and Battilossi show that the British banks (hitherto rather sleepy organizations) performed well in devising new institutions and vehicles for these funds. But their advantage was short-lived. U.S. banks soon responded by rushing to create their own branches in London and entering this business. This was, as several chapters in the book observe, in part an invasion and in part an escape from the constraints of the U.S. domestic system. The U.S. banks circumvented national controls by moving international lending offshore.

A further theme of the book is that this highly significant development in international finance provided a temporary way out of some immense and growing internal contradictions within broader U.S. international financial hegemony. U.S. governmental institutions at times resisted and at times abetted these new developments. U.S. Cold War policies, on the one hand, dictated huge capital outflows in the form of military aid and foreign investment resulting in rapidly growing deficits. In consequence, particularly under the Johnson presidency in the 1960s, the U.S. government sought to restrict wider foreign lending by commercial banks in order to sustain high rates of domestic growth and full employment. At the same time, the federal government remained committed to historic policies of antitrust and regulatory control of domestic banking that limited the pace of bank expansion. On the other hand, the Federal Reserve Bank more or less openly tolerated the banks’ new Eurodollar ventures — perhaps as a quid pro quo for over-regulation of the home base. It prioritized an agenda that saw foreign branching as helpful in promoting U.S. trade and competitiveness, and in bolstering the role of the dollar and its strength as an international reserve currency. As a result, it became easier for New York banks, for example, to create branches in London or Frankfurt than in Omaha or Texas: the international route to expansion by-passed the domestic roadblocks.

The American banks quickly achieved a massively dominant position in Eurocurrency markets and rivaled European banks in Eurocredit and Eurobonds. They challenged European banks in hoovering up mobile dollars in the 1960s (notably from European savers and from growing revenues of oil producing countries). They helped the big U.S. multinationals in Europe to evade Johnson’s capital controls by borrowing in offshore eurodollar markets, and they even found ways to channel funds back into lending in the U.S. via their London branches.

The European banks were overtaken by this American tide, but still clung on to sufficient presence in these markets to make themselves major players. Prudently, they did not resist the American tide but worked with it. As Sylla puts it, this was not wholly an invasion: like the Hanoverian kings of England, the incomers were invited in by their hosts. The U.K. banks in particular undertook a remarkable transformation and internationalized themselves at great speed in the 1960s (even though hampered by an attachment to old imperial connections and newer competition and credit controls). As Ross shows, attempts in the early days of euromarkets to create international collaborative ventures to pursue this sort of business proved to be a wrong turning, but this was quickly rectified, and by the late 1960s both British and German banks (as Ulrich Ramm shows) were pursuing their own direct internationalization strategies.

Thus the ‘Euro-American cross-challenge’ described in this book saw the U.S. banks turn the innovations of London and European bankers into a launch pad for their own accelerated internationalization and worldwide dominance (notwithstanding its tonic effects on the European banks). The euromarkets became central elements in the new international strategies of the U.S. banks from the 1960s — in Sylla’s words, U.S. banks “thought little about Europe before 1963 and thought about little else in the decade thereafter.” However, although Europe, as the volume correctly shows, was briefly the central focus of the emergence of this new wave of international banking, the euromarkets were only briefly centrally concerned with Europe. They never became places for U.S. banks to invest in Europe and few U.S. banking services were targeted at Europe. Rather, they became places to gather resources to invest worldwide, and served, for example, as the prime platform for U.S. participation in the petrodollar recycling boom and bust in the 1970s.

The studies in this volume for the most part end before the collapse of Bretton Woods and the arrival of floating exchange rates, as well as the explosion of international lending and petrodollar recycling in the 1970s. The focus of the book is intensively (and with good justification) on origins of the system. But by the early 1970s, it had become a system of international lending in the hands of U.S. and European bankers that had largely escaped any framework of international control or regulation by central banks or international institutions such as the IMF. As such it was strongly biased towards liquidity and credit creation and quite exposed to new categories of risks, especially sovereign risk and rapid inflation, of which it took little account. As such it pitched at full sail into the winds of petrodollar recycling in the 1970s and ran aground in the debt crises of the early 1980s. Thanks to Battilossi and Cassis’ excellent volume we now have a much-improved picture of the emergence of this new arena of international finance, and also a study that highlights the need for further studies of the course and consequences of these developments in the 1970s.

Steven Tolliday is Professor of Economic and Social History, University of Leeds, U.K.. He is the author of Business, Banking and Politics (Harvard University Press, 1987) and co-author or editor of several books on the international automobile industry, including Between Imitation and Innovation (Oxford University Press, 1999) and Ford: The European History, 1903-2003 (Plage, 2003).

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