The state, the City and the Euromarkets

Abstract

The Eurodollar market, which was established in the City of London in the 1950s, can be considered the progenitor of the global financial system which exists today, for it marked the beginning of a movement away from the restrictions placed by the Bretton Woods system on international capital movements, and a return to the liberal internationalism and laissez-faire order of the private and central bankers that ended with the collapse of the gold standard in 1931. Explanations as to why this development should have taken place in London rely, for the most part, on two contending theses: (1) that it was the direct consequence of the market mechanism inevitably overcoming official obstruction, or 'friction'; (2) that deliberate state action created the conditions which allowed the market to evolve and operate. Adherents of the former claim that the Eurodollar was the innovation of the City's merchant and overseas bankers, looking to finance the rapid increase in international trade that took place at the end of the 1950s, in a world still constrained by the restrictions imposed as a consequence of placing the international economy on a war footing in 1939. Adherents of the latter claim that it was a direct consequence of deliberate action taken by the British state to re-establish the City of London as the world's foremost international financial centre. This article, which is based on archival evidence and interviews with state and private sector figures involved in the development of the Euromarkets, argues that the City's position at the centre of the Eurocurrency system was a direct consequence of it having evolved within an institutional framework established over 100 years earlier. This seeks to challenge simple state/market dichotomies and suggests that the origins of the Euromarkets can be better understood with reference to the 'governance of regulatory space'- whether by states, markets or various associational forms. Only by examining the historical occupation of 'regulatory space' can we have a more realistic view of how financial innovation evolves.

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