The First World Congress of Business History
Session I05: Capital Markets and Business Development
Seung Woo Kim (University of Cambridge / [email protected])
Please do not circulate or cite this paper without author’s permission.
Beyond the Iron Curtain: the Eurodollar market, the Moscow Narodny Bank,
and the communist origin of global finance, 1957~1969
Quite frankly, I am utterly perplexed by the complete absence of any
reference to the U.S.S.R. and to the rest of the Communist bloc …
Paul Einzig1
On 14th October 1964, Oscar L. Altman delivered an introductory speech regarding the
Eurodollar market,2 a nascent offshore market for U.S. dollars, at a conference in New York.3
The staff economist of the International Monetary Fund noted two largest Soviet-owned banks
in Western Europe – the Moscow Narodny Bank (MNB) in London 4 and the Banque
Commerciale de l’Europe du Nord (BCEN) in Paris5 among 400 commercial and private banks
in the Eurodollar business. These communist banks “behind the iron curtain are in the market,
and many of these regularly circularize commercial banks in the West in order to obtain deposit
funds.”6 Cross-border transactions between the Cold War enemies were possible for “[T]he
1
Statement by Paul Einzig regarding communist banks’ Eurodollar transactions. The United
States balance of payments: statements by economists, bankers, and others on the Brookings
Institution study, “The United States balance of payments in 1968”, (Washington D.C.: U.S.
Government Printing Office, 1963), p. 130.
2
On the origins of this market, see Catherine R. Schenk, “The origins of the Eurodollar
market in London, 1955-1963”, Explorations in Economic History, Vol. 35, No. 2, (1998), pp.
221-38; Gary Burn, The re-emergence of global finance, (Basingstoke: Palgrave, 2006).
3
Oscar L. Altman, “Euro-Dollars and the New York Money Market,”, (October 14, 1964).
DM/64/60, the International Monetary Fund Archives, (hereafter IMFA).
4
The Soviet merchant bank was established in London in 1917. Two years later, it was
registered as a British company and facilitated financing trade of the Soviet Union in foreign
markets. From 1959, it assumed the role of the main correspondent for Soviet foreign trade
and most communist bloc central banks. “Moscow Narodny Bank Limited”, (15 November
1962), OV 111/12, Bank of England Archives (hereafter BEA).
5
The BCEN was founded in Paris in 1921 by a group of wealthy Russian émigré. In the
immediate post-World War II period, the bank experienced a rapid growth for the confidence
that Moscow had in the bank’s manager Charles Hilsum, who was closely linked with the
French Communist Party. Intelligence report: Soviet-owned banks in the West, (October,
1969), ER IR 69-28, CIA Historical Review Program release.
6
Altman (1964).
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The First World Congress of Business History
Session I05: Capital Markets and Business Development
Seung Woo Kim (University of Cambridge / [email protected])
Euro-dollar knows no politics”,7 he emphatically stated.
Scholars in many disciplines pay attention to the history of Eurodollar market as a
symbol of the re-emergence of global finance which enabled the cross-border capital
movements and challenged the sovereignty of nation-states since the 1960s.8 In its formative
years, the Bank of England is credited to have encouraged the development by providing a
regulatory space for Eurodollars to revive the City of London as the international financial
centre, despite their perturbing effect upon the domestic monetary policy.9 From the squaremile financial district, Eurodollar transactions connected national financial markets,
establishing the transnational network of finance. 10 However, the scholarship tends to
marginalise the non-Western actors, focusing on the role of British and American banks in the
development of Eurodollars.11
7
Ibid. Italics added.
Burn (2006); Edwin Dickens, “The Eurodollar Market and the New Era of Global
Financialization,” in Gerald A. Epstein, eds., Financialization and the World Economy,
(Northampton, Mass: Edward Elgar Publishing, 2005), pp. 210-219; Chris O’Malley, Bonds
without borders: a history of the Eurobond market, (Chichester: Wiley, 2015); Carlo Edoardo
Altamura, European banks and the rise of international finance, (London: Routledge, 2016).
9
Catherine R. Schenk, “Crisis and opportunity: the policy environment of international
banking in the City of London, 1958-1980”, in Youssef Cassis and Éric Bussière, eds.,
London Paris as international financial centres in the twentieth century, (Oxford and New
York: Oxford University Press, 2005), pp. 207-228; Jeremy Green, “Anglo-American
development, the Euromarkets, and the deeper origins of neoliberal deregulation”, Review of
International Studies, Vol. 42, Issue 3, (July, 2016), pp. 425-449; Seung Woo Kim, ““Has
Euro-dollar a future?” – the formative years of the Eurodollar market, 1959-1964”,
Proceedings of The Economic History Society Annual Conference 2016, pp. 161-165.
10
Author’s PhD dissertation titled The Euromarket and the making of the transnational
network of finance, 1959~1979, (University of Cambridge).
11
Mae Baker and Michael Collins, “London as an International Banking Centre, 1950-1980”,
in Youssef Cassis and Éric Bussière, (2005), pp. 247-264; Stefano Battilossi, “Banking with
Multinationals: British Clearing Banks and the Euromarkets’ Challenge, 1958-1976,” in
Stefano Battilossi and Youssef Cassis, eds., European Banks and the American Challenge:
Competition and Cooperation in International Banking under Bretton Woods, (Oxford and
New York: Oxford University Press, 2002), pp. 103-134; Niall Ferguson, “Siegmund
8
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The First World Congress of Business History
Session I05: Capital Markets and Business Development
Seung Woo Kim (University of Cambridge / [email protected])
This paper provides the unexplored aspect, the role of communist banks, particularly
the MNB, in the re-making of global finance with the Eurodollar market.12 Their engagement
began simultaneously with the invention of the new practice and was immanently political
during the Cold War era. Then the Cuban Missile Crisis of 1962 provoked the anti-communist
sentiment and resulted in U.S. policy measures to limit the U.S. dollar transactions by the MNB.
In response to the contestation that would halt the on-going expansion of the Eurodollar market,
London bankers defended Eurodollars as financial means not only to contain communists’
aggression but also educate them a capitalist way of life. Moreover, the Bank of England
protected interests of the MNB as a member of the City, regardless of its ideology. The central
bank’s cosmopolitanism was the key to the expansion of Eurodollars beyond the Iron Curtain.
The Soviet bank also sought to earn the membership in the London banking community. At the
same time, the Soviet bank contributed to the integration of the Middle East in the network of
Eurodollar business. The research on the MNB in the capitalist financial system problematises
the Anglo-American centred narratives and sheds light on the agency of communists and the
‘interconnectedness’ in the history of global banking in the late 20th century. It also offers an
intersection of business history and the Cold War studies.
Warburg, the City of London and the financial roots of European integration”, Business
History, Vol. 51, No. 3, (May, 2009), pp. 364-382.
12
Scholars have paid attention to the debt crisis of communist countries in the 1980s. See,
Harold James, International monetary cooperation since Bretton Woods, (Oxford: Oxford
University Press, 1996), pp. 361-362.
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The First World Congress of Business History
Session I05: Capital Markets and Business Development
Seung Woo Kim (University of Cambridge / [email protected])
***
By the late 1950s, communist banks were renowned pioneers of Eurodollars in the
global financial community. The terminology ‘Eurodollar’ was a derivative of the ‘Eurobank’,
the telex address for the BCEN. Contemporary financial journalism and reports attributed the
origin of Eurodollars to the communist countries’ U.S. dollar holdings:13 the transfer of U.S.
dollars owned by the Communist China to the BCEN before the freezing of assets in the U.S.
during the Korean War; the fear of the Soviet Union concerning the U.S. policy to block its U.S.
dollar holdings since the invasion of Hungary in 1956. AS Sanchez-Sibony documents, the
Soviet intended to avoid the American reprisal in the hope for more friendly financial relations
with Europe.14 For this purpose, the MNB’s status of a registered British bank was beneficial.
When it placed a fund, e.g. Hungary-owned U.S. dollars, in other London banks which would
lend it on by making deposits with others, the origin of it appeared to be London, not Hungary.15
Indeed, communist countries capitalised the unknown end-user problem in Eurodollars – the
untraceable identity of original lenders due to re-depositing of funds. Moreover, they were in
need of currencies of capitalist countries to finance the trade with the West as the Ruble was de
facto unacceptable.
According to a 1975 article in the Moscow Narodny Bank Quarterly Review,16 the
13
For example, Alan R. Holmes and Fred H. Klopstock, “The market for dollar deposits in
Europe”, Federal Reserve Bank of New York Monthly Review, Vol. 42, No. 11, (November,
1960), pp. 197-202. Also see, Howard M. Wachtel, Money mandarins: the making of a
supranational economic order, (London: Pluto Press, 1990).
14
Oscar Sanchez-Sibony, Red globalization: the political economy of the Soviet Cold War
from Stalin to Khrushchev, (Cambridge: Cambridge University Press, 2014), p. 73.
15
“The Euro-Dollar market”, (20 April 1961), EID10/21, BEA, p. 2.
16
K. J. H. Robbie, “Socialist banks and the origins of the Eurocurrency markets,” Moscow
Narodny Bank Quarterly Review, Vol. 26, No. 4, (Winter 1975/1976), pp. 21-36.
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The First World Congress of Business History
Session I05: Capital Markets and Business Development
Seung Woo Kim (University of Cambridge / [email protected])
Soviet merchant bank began to participate in the Eurodollar market around 1957, when it
opened an account for foreign currency deposits with a London merchant bank. 17 In the
following year, the MNB opened a USD 5 million deposit account with its name. By 1959, the
business turnover rose sharply, and the number of banks with business relations increased.18
The MNB “was able to aid the establishment of the London market, placing a large new source
of deposits on the market and also in 1959 giving access to major takers of funds in the Socialist
countries.” 19 During the formative years of the Eurodollar market, communist countries
constituted a part of the Eurodollar network, inscribed in the balance sheet of London banks.
In the following decade, communist banks deepened their participation in the
nascent market. In 1961, Altman observed that they now became net takers of Eurodollars.20
The MNB and BECN conducted operations as “prime commercial names, good for very large
deposits of Euro-dollars.”21 The borrowing amounted to USD 200 million. While the rationale
for such transactions was economical for both the depositors and takers, the staff economist
understood that communist countries had political reasons for their Eurodollar business –
“anonymity and security from the risk of attachment of funds in the United States.”22
The uncertainty from the Soviet Union under the Cold War in the early 1960s could be
perceived substantial as the popular culture reflected conspiracy theories regarding the
communists’ engagement with the capitalist economy. 23 For instance, Ian Fleming’s 1959
17
Ibid., p. 29.
Ibid., p. 34.
19
Ibid., p. 36.
20
Oscar L. Altman, “Summary report of European trip,” (24 April 1961), S811, Box: 278,
File 33, IMFA.
21
Ibid., p. 2.
22
Ibid., p. 3
23
Nicky Marsh, Money, speculation and finance in contemporary British fiction, (London:
18
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The First World Congress of Business History
Session I05: Capital Markets and Business Development
Seung Woo Kim (University of Cambridge / [email protected])
novel Goldfinger24 depicts a speculator named Auric Goldfinger whose plot attempted to steal
the gold reserves in Fort Knox. The Bank of England warns James Bond, a secret operative for
the British intelligence agency, of the danger of the leakage in gold “[B]ecause gold and
currencies backed by gold are the foundation of our international credit.”25 The British agent
realises that Goldfinger is indeed a conspirator who had financed murders by communists and
was making money “for the conquest of the world!” 26 For contemporaries, the conspiracy
theory could easily be applied to Eurodollars. The melted gold bars for the purpose of
smuggling by Goldfinger were analogous to Soviet-owned U.S. dollars.27 Eurodollars were
disguised as ‘British’ or ‘French’ not carrying “any official marks of origin whatsoever.”28
However, British banks continued the business with communist partners. The Midland
Bank, the pioneer of Eurodollar innovation, 29 was one of Soviet Union’s main banks. 30
Another leading bank in the Eurodollar market, the Bank of London and South America
(BOLSA) also increased exposure to two communist banks in Europe, as Table 1 indicates. By
the end of 1963, the MNB was “in a position to raise a substantial volume of funds at highly
competitive rates.”31
Continuum, 2007), pp. 19-22.
Ian Fleming, Goldfinger, (London: Vintage Books, 2015 [1959]).
25
Ibid., p. 78.
26
Ibid., p. 98.
27
In a conversation between the M and Bond, a business of dollar balances in Beirut is
briefly mentioned. Ibid., p. 72.
28
Ibid., p. 91.
29
Schenk (1998).
30
Sanchez-Sibony (2014), p. 314.
31
“London branch dollar deposits”, (17 December 1963), F/2/D/Rep/8, Lloyds Banking
Group Archives (hereafter LBGA).
24
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The First World Congress of Business History
Session I05: Capital Markets and Business Development
Seung Woo Kim (University of Cambridge / [email protected])
Table 1 – Bank of London and South America London branch’s re-deposits of U.S. dollars (USD)
Iron Curtain
12 Jul
Countries:
1958
Moscow
%*
31 October
%
19 March 1960
%
%
1959
4,000,000 (3%)
2,500,000 (1%)
7,250,000
Narodny Bank
Eurobank**
25 June 1960
(3%)
13,200,000
12
(9%)
37,500,000
22
(21%)
26,450,000
16
(13%)
* Percentage of the total.
** Banque Commerciale de l’Europe du Nord, Paris.
Source: London Branch US Dollar Deposits, (21 December 1961), F/D/2/Com/4.5 Lloyds Banking Group
Archives (hereafter LBGA).
Not before long, the Eurodollar business by communist banks was contested in 1962,
when the Cuban Missile Crisis caused alarms of political implications of U.S. dollars in the
hands of the ‘enemy’. The 13-day long confrontation between two superpowers of the Cold
War ended without head-to-head violence but left psychological impact enough to kindle
suspicions on the communist threat to the free world. Then it was escalated into a transatlantic
conflict, as the U.S. Treasury questioned the MNB’s business with American banks. The
contestation politicised the on-going but clandestine development of Eurodollar market by the
enemy.
What was the response from practitioners in London? Immediately after the Cuban
crisis, in a report to the Board of BOLSA, the Chairman George F. Bolton explained the dangers
that lay in the Soviet-owned U.S. dollars. First had been “the takeover of a free enterprise
country by the Communist.”32 The leading proponent of Eurodollars dismissed it less likely
after the recent episode, for the world witnessed the compromise by leaders of superpowers to
avoid a catastrophe. Another, but a more substantial risk was the increasing volume of business
32
“Currency deposits”, (13 December 1962), F/2/D/Com/4.6, LBGA.
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The First World Congress of Business History
Session I05: Capital Markets and Business Development
Seung Woo Kim (University of Cambridge / [email protected])
with Russia and socialist countries, which demanded their prudent management of financial
relations. Still, his position was optimistic. Moreover, he projected political implications:
“Russia will become closer to Europe and in so doing will acquire the habits and characteristics
of a capitalist country.”33 The business relationship was politically desirable for the Soviet’s
increased exposure to the international banking would synchronise its interests with that of
trading partners. In this sense, the expansion of East-West trade was to bring advantages to both
sides in “establishing a degree of interdependence and increasing points of contact … lessening
of tension and mistrust.”34
More fundamentally, Bolton’s confidence was from his scepticism or what he believed
“one of many contradictions of in the Marxist system.”35 Bolton thought that the Cold War
tended to break down the differences between paper monies of industrial countries and result
in “the unification of currency systems and the decline of national states.”36 The Soviet and its
satellite countries failed to adopt such a trend because of the Marxist dogma which held them
to retain the Ruble for internal consumption. The irony was that their ever-expanding
international trade priced and settled in reserve currencies – U.S. dollars and sterling: “[T]he
denial of the value and transferability of money forces the communists to use the capitalist
currencies and trading systems in foreign trade.”37 Thus Russia would gravitate erratically but
33
Ibid.
“Speech by Sir George Bolton K.C.M.G., at the American Chamber of Commerce
Luncheon, held on Wednesday, 8th February 1961,” C160/56, BEA.
34
Ibid.
35
“The world after Cuba”, in George F. Bolton, A banker’s world: the revival of the City
1957-1970; speeches and writings of Sir George Bolton, (London: Hutchinson, 1970), pp.
105-125., p. 112.
36
Ibid., p. 115.
37
Ibid., p. 112.
34
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Seung Woo Kim (University of Cambridge / [email protected])
inevitably to the West, “making practical arrangements to meet current emergencies.”38
The appropriation of world peace through financial means was indeed international
bankers’ answer to the Cold War conflict. Re-establishing banking operations would make
belligerents pursue the common interests. It was also a way to marginalise the political tension
that had discomforted the burgeoning economic relations between the two. Moreover, it did not
require sophisticated negotiations to achieve a peaceful world, but merely to keep the logic of
the market. It was imperative for the Eurodollar market too, for the relaxation of stalemate was
an essential prerequisite for its operation by the ‘supply and demand’.
However, the anti-communist sentiment galvanised by the Cuban crisis was never
absent in London. A conspiracy theory was cultivated by the most vocal patron of the Eurodollar
market – Paul Einzig. The émigré from the Central Europe and one of the leading financial
journalists in the City of London stressed the danger of the transformation of Eurodollars in the
hands of Kremlin into a financial weapon against the free world. Such a perception lay on the
unreliable enemy who would readily repudiate trust for the sake of its political goal. In a letter
to Roy Bridge of the Bank of England in June 1963, Einzig conveyed “a more sinister
purpose” 39 of communists with Eurodollars from his various sources. He suggested the
possibility of another Cuban crisis under which the Soviet Union could leverage its position in
the negotiation with U.S.: it would instruct “all Communist banks to call in all their short Eurodollar deposits. The next step would be to block all Euro-dollar deposits borrowed by the
Communist banks, pending the settlement of its claim.”40 Their good reputation was fragile for
38
39
40
Ibid., p. 123.
Paul Einzig to Roy Bridge, (8 June 1963), C20/5, BEA.
Ibid.
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Session I05: Capital Markets and Business Development
Seung Woo Kim (University of Cambridge / [email protected])
“major decisions of policy are made in the Kremlin and these bankers will have no choice but
comply.” 41 Furthermore, Einzig proposed central bank’s policy responses: monitoring
maturities of deposits borrowed and lent by communist banks and any inquiry from official
quarters to “produce a salutary effect by putting the market on its guard and discouraging most
banks from committing themselves too heavily in the direction of Communist banks.”42 Such
attempts to contain communist banks contested the expanding parameter of Eurodollars beyond
the Iron Curtain.
Unfortunately for Einzig, his demands were clearly in conflict with the ‘open door
policy’ of the Bank of England regarding the City of London.43 If it acknowledged the political
risk, London banks would refrain from the Eurodollar market. Moreover, any gesture of official
scrutiny over transactions between banks inevitably exposes the information of customers. It
surely would harm the historically established reputation of the central bank as the guardian of
the financial district and undermine the goal to revive it as an international financial centre. As
it did on many challenges during the Eurodollar market’s formative years,44 the Bank dismissed
anti-communist sentiment. It also regarded Eurodollars being widely used to finance Iron
Curtain trade “a proper use of Euro-dollars to finance short-term trade movement.”45
In fact, the Bank of England had supported the Soviet merchant bank. In April 1963,
Chairman A. I. Doubonossov of the MNB informed the Bank of its intention to open a branch
41
Ibid.
Ibid.
43
Burn (2006).
44
The contestation was international as central bankers sought to introduce a regulatory
framework at the Bank for International Settlements. Kim (2016).
45
“Euro-dollars”, (31 May 1963), C20/5, BEA.
42
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Seung Woo Kim (University of Cambridge / [email protected])
in Beirut.46 The plan was to expand the business further into the Middle East with a clearing
business for various bilateral trade agreements between Lebanon and the communist bloc
countries.47 By 1961, Beirut had become a centre for Eurodollars in the Middle East when
Japanese banks offered high rates to attract local holdings of U.S. dollars.48 The Lebanese
government had already granted bankers a greater freedom of operation with the enactment of
a Swiss-type banking secrecy law in 1956.49 The Beirut branch would assume the Eurodollar
business for the Communist bloc.
The Bank of England reported the plan to the Foreign Office, due to the recent scandal
with the Bank of China in London, whose Kuala Lumpur office had been shut down for its role
in financing the local community party. Naif Haan Fadel, the local representative for the MNB,
was known for his anti-American and anti-Communist attitude.50 While the central bank asked
the Foreign Office to probe Doubossonov about the objectives of the bank, it emphasised that
the Russian bank was an independent British bank. Regardless of its subservient relations to its
parent, the MNB was a registered bank which was entitled the protection from the local central
bank – “if the Narodny Bank had made a decision we should just have to live with it.”51 The
government agency agreed and saw advantages in more banking contacts between the Russians
and the Western world.
46
“Moscow Norodny Bank to open a branch in Beirut”, (10 April 1963), FO 371/170355,
The National Archives (hereafter TNA).
47
A report from the British Embassy in Beirut, (21 June 1963), FO 371/170355, TNA.
48
“The Euro-Dollar market”, (20 April 1961), EID 10/21, BEA. Also, trade in the Middle
East and Southeast Asia has been financed with Eurodollars, often through Beirut. Alan R.
Holmes and Fred H. Klopstock (November, 1960), p. 200.
49
“Central bank required”, Financial Times, (23 May 1963), p. 7.
50
Ibid.
51
Ibid. The Bank of China was not a registered British company.
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Session I05: Capital Markets and Business Development
Seung Woo Kim (University of Cambridge / [email protected])
By the end of 1963, the London banking community acknowledged the MNB’s
membership. No longer was it a hermit communist bank, but an international merchant bank
with about 90 correspondents from 40 countries throughout the world. Most of its employees
were British or Commonwealth citizens not necessarily members of the Communist party.52 In
December, it paid for a 16-page ‘pink sheet’ supplement in The Banker, a London banking
magazine, under the subtitle of “[T]he Bank for East-West Trade”,53 which provided its 45
years of history and detailed business operations. Its public relations strategy was no different
from other City banks with publications of reports to ‘shareholders’, and weekly financial news
bulletins and quarterly economic reviews to customers. As a City journalist for the Wall Street
Journal observed:
Narodny obeys the unwritten rule of The City, the London counterpart of Wall
street, such as not continually trimming interest rates to lure new borrowers.
“They seem to be guided by the market,” says one London financiers, “so if a
deal involving Moscow Narodny comes up, we respond as if it was just any other
bank.”54
Indeed, the MNB demonstrated that “[C]ommunists can succeed in the capitalist world of high
finance.”55
52
Clyde H. Farnsworth, “London shift set by Moscow bank”, New York Times, (2 February
1964), p. 41. Soviet citizen employees were one economist, a secretary to the chairman, and
board members.
53
“Moscow Narodny Bank Limited, 4 Moorgate, London E.C.2”, The Banker, Vol. 113, No.
454, (December, 1963).
54
Robert Keatley, “Soviet-operated bank flourish in London’s world of capitalism”, Wall
Street Journal, (22 January 1964), p. 1.
55
Ibid.
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Seung Woo Kim (University of Cambridge / [email protected])
<Plate 1. The ‘pink sheet’ supplement in December 1963 issue of The Banker>
Still, another grave challenge was yet to come; it would have halted Eurodollar
transactions of the MNB. In the aftermath of the Cuban crisis, the U.S. Department of the
Treasury issued the Cuban Assets Control Regulations on 8 July 1963.56 It intended to deny all
U.S. facilities of any kind, including banking, currency and trade services unless licensed by
the government. Regarding the financial sector, it required all U.S. domestic banks to block all
accounts and prohibit U.S. dollar transactions of any kind in which Cuban interests existed. On
6 October 1964, the U.S. Treasury blocked the account of the MNB in the Chase Manhattan
Bank of USD 3,119,349.90, when it received information that an indirect interest of Cuba had
existed since 8 July 1963 in an account of the Russian bank. Specifically, from its “confidential
but reliable”57 source, the U.S. Treasury believed that the bank had engaged in U.S. dollar
56
“Blocking of Sum in Account of Moscow Narodny Bank at Chase Manhattan Bank”, (6
October 1964), Bureau of European Affairs, Office of Northern European Affairs, Box 3, RG
59 General Records of the Department of State, National Archives and Records
Administration at College Park. (hereafter NARA)
57
Ibid.
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Seung Woo Kim (University of Cambridge / [email protected])
transactions on behalf of the National Bank of Cuba and the Government of Cuba.58 In fact,
Cuba had placed her entire reserves in the West in response to American threats to banking
transactions. As the Soviet managed them, it was administered as ‘Russian funds’.59 Three days
later, the MNB was informed of additional blockings of USD 2,295,547.35 at another American
bank, the Manufacturers Hanover Trust Company. 60 Soon, other accounts from New York
banks were to be closed, totalling USD 6.1 million.61 These actions were justified because “all
dollar transactions must eventually reflect in the American balance of payments.”62
The U.S. Treasury rejected the immediate protest calling for the unblocking of
accounts from the Russian ambassador in Washington. It stubbornly defended its decision as
non-discriminatory for the regulations had been applied to all persons, including Western banks.
It advised a customary procedure for the policy revision, which required the MNB to submit
records of its U.S. dollar transactions involving Cuba or its nationals, so that the U.S. Treasury
would examine “(1) the full nature and extent of all such transactions by the bank, and (2)
whether the bank had reasonable cause to believe that it was engaged in transactions involving
58
Ibid.
a. received U.S. dollar payments for the account of the National Bank of Cuba in payment for
Cuban exports to countries outside the Western Hemisphere in the first quarter of 1964;
b. opened a number of U.S. dollar Letters of Credit on behalf of the National Bank of Cuba in
payment for Cuban purchases in Europe since July 8, 1963;
c. engaged in other U.S. dollar remittances for the Government of Cuba.
59
“Cuba’s foreign exchange holdings”, (15 October 1964), T312/689, TNA.
60
“Moscow Narodny Bank,” (14 October 1964), Office of Northern European Affairs, Box 3,
RG 59 General Records of the Department of State, NARA.
61
Ibid., The MNB had accounts at following banks in New York: Bankers Trust Company,
Chemical Bank New York Trust Company, First National City Bank, Société Générale. The
letter of credit outstanding in September 1964 totalled around USD 90 million. “Cuba’s
foreign exchange holdings”, (15 October 1964), T312/689, TNA.
62
Untitled letter, (30 October 1964), T312/689, TNA.
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Seung Woo Kim (University of Cambridge / [email protected])
Cuban interests.”63 The disclosure condition was not acceptable64 for it would reveal relevant
information and breach the code of secrecy in the banking affairs.65 It was a violation against
the fundamental nature of banking – the ‘trust’ with customers. The U.S. government signalled
a warning sign to U.S. banks which had business relations with Soviet banks. Now, no longer
could the communist side of the network of finance stretch further across the Atlantic. 66
Interestingly, however, American banks could obtain Eurodollars from other banks via their
London branches, presumably without awareness of the fund’s origin. The unknown end-user
problem in Eurodollars helped capitalist and communist bankers alike.
The U.S. Treasury informed the U.K. government the decision in consideration of the
MNB’s residence in London. U.K. Treasury immediately contacted the Bank of England. The
central bank had already advised Russians to “play it cool”67 and concluded that any quasidiplomatic support against the U.S. decision unnecessary. It decided not to help the MNB “just
because they are a London bank.”68 However, it did not imply that the British central bank
succumbed to the external pressure. Within it authority, it protected the MNB’s position
regarding its U.S. dollar transactions in the U.K. First was whether the central bank would allow
the MNB to buy U.S. dollars in London to replace the blocked money. An official of the Bank
63
Untitled memo, (12 October 1964), Office of Northern European Affairs, Box 3, RG 59
General Records of the Department of State, NARA.
64
“United States Exchange Control – Cuba”, T312/689, TNA.
65
On the code of secrecy, see Mary Poovey, “Writing about finance in Victorian England:
disclosure and secrecy in the culture of investment”, in Nancy Henry and Cannon Schmitt,
eds., Victorian investments: new perspectives on finance and culture, (Bloomington: Indiana
University Press, 2009), pp. 39-57.
66
In 1967, in an interview with The Banker, A. I. Doubonossov commented regarding the
U.S. East-West trade, “at this stage we are, of course, only speculating as we have no plans in
this direction.” The Banker, Vol. 117, No. 493, (March, 1967), pp. 190-197., p. 197.
67
Untitled report, (8 October 1964), T312/689, TNA.
68
Ibid.
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The First World Congress of Business History
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Seung Woo Kim (University of Cambridge / [email protected])
opined that “M.N.B. might go to the market if it were necessary to honour their obligations to
Cubans.”69 The Soviet bank was able to procure US dollars through the Eurodollar market
under the implicit approval from the central bank. Furthermore, it accepted the use of official
U.S. dollars for the London bank. In principal, the Old Lady at Threadneedle Street sought to
render the issue in any case “a banking matter,”70 stressing the status of MNB as an authorised
dealer. Another problem was MNB’s taking of UK reserves to offset the USD 3 million blocked
in the U.S.71 The Governor of the Bank of England objected to the Treasury proposal to reduce
the limit on the dollar balance, which he considered a violation against an authorised dealer.
Once again, the Bank of England confirmed that the MNB was its member bank.
The episode indicates the distinctive philosophy of Bank of England on the City of
London. Against the external pressure from the international politics of Cold War, the central
bank firmly guarded rules it had established and maintained with member banks. Its
cosmopolitanism sought to depoliticise the MNB’s Eurodollar transactions to preserve the
autonomy of banks, despite the ideological background. It was an embodiment of the
historically established ‘trust’ relationship between the authority and member banks that had
sustained the financial district as the international financial centre. In this case, it contributed to
the integration of the Communist bloc into the global finance.
In the following years, the development of the Cold War favoured the place of MNB
in the Eurodollar market – the expansion of the U.K. East-West trade.72 In 1964, the volume
69
Ibid.
Ibid.
71
“Moscow Narodny Bank”, (12 October 1964), T312/689, TNA.
72
“[C]onservative and Labour governments alike supported the development of non-strategic
trade with the Eastern bloc”. Geraint Hughes, Harold Wilson’s Cold War: the Labour
government and East-West politics, 1964-1970, (Woodbridge: Boydell Press, 2009), p. 121.
70
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The First World Congress of Business History
Session I05: Capital Markets and Business Development
Seung Woo Kim (University of Cambridge / [email protected])
increased faster than that of world trade accounting for about one-twelfth of the latter. In
addition to the increased total amounts of trade between the U.K. and communist countries,73
a GBP 30 million contract by Russia with a group of British companies stimulated interests of
British industrialists in the Soviet market.74 The increased trade with the East provided more
business opportunities for the MNB. Its Beirut branch also facilitated the East-West trade in the
Middle East. 75 The Chairman of MNB proudly declared “we have built up a substantial
business and a good reputation and I feel that we have earned our title The Bank for East-West
Trade.”76
By the mid-1960s, the MNB firmly rooted in the Eurodollar market. Statist observed
in 1965; “even more important factor has been the success of the bank’s efforts to turn to
account the upsurge in Euro-dollar and similar short-term money activity.”77 The Soviet bank
apparently exploited its “excellent position to pick up the business which the Soviet itself and
its Eastern Bloc satellites wanted to do in the widening international hot-money markets to put
their liquid funds to best use.”78 Its capability to attract deposits from banks in non-communist
countries at competitive interest rates proved the creditworthiness of itself and the Soviet Union
in the capitalist world. In late 1966, Bolton also celebrated his bank’s strong relation with
73
Albania, Bulgaria, China, Cuba, Czechoslovakia, G.D.R., Hungary, Korean P.R.,
Mongolia, Poland, Rumania, U.S.S.R., Vietnam D.R., and Yugoslavia. “An analysis of world
East-West trade,” Moscow Narodny Bank Quarterly Review, Vol. 6, No. 3, (Autumn, 1965),
pp. 32-44.
74
John Dunkley, “Faster expansion for Anglo-Soviet trade,” The Banker, Vol. 114, No. 465,
(November 1964), pp. 702-708.
75
“Progress of the bank,” Moscow Narodny Bank Quarterly Review, Vol. 6, No. 2, (Summer,
1965), pp. 3-8., p. 7.
76
Ibid., p. 8.
77
The Statist, Vo. 187, No. 4549, (14 May 1965), p. 1357.
78
Ibid.
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The First World Congress of Business History
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Seung Woo Kim (University of Cambridge / [email protected])
Eastern Europe through Eurodollars:
… Eastern Europe appeared in the market primarily as lenders and were prepared
to accept rates of interest fractionally lower than the prevailing norm in order to
gain the confidence of the European banks. However, once they had established
their connections they turned borrower, and the banks with whom they had
frequently left deposits eventually developed a two way traffic. These contacts
may have contributed towards easing the tensions between East and West.79
When Alexei Kosygin, the Russian Prime Minister, visited the U.K. in 1967, Doubossonov
pompously announced its Eurodollar business:
… this type of activity, which is directly linked with our basic business, is an
important part of our operations and we are undoubtedly large operators in the
Euro-currency markets. It has been stated by an independent financial observer
in a leading national newspaper, for example, that we are rated as among the big
four Euro-currency operators in London.80
Now another escalation of the crisis in the East-West relations, the invasion of Red
Army into Czechoslovakia in 1968, did not sabotage the established trust relationship in the
network of Eurodollars. 81 While the BOLSA temporarily cut down personal contacts and
further business with all the satellite countries of the Warsaw Pact, the bank’s committee
79
“International money markets – 1958/66,” (23 November 1966), an address by Sir George
Bolton to a conference on “The Future of the European Capital Market” arranged by the
Federal Trust for Education and Research.
80
“Interview: A. I. Doubonossov”, The Banker, Vol. 117, No. 493, (March, 1967), pp. 190197.
81
An executive of the Russo-British Chamber of Commerce mentioned, “[W]e’re not too
worried about trade prospects. The Soviets have indicated to us they see no reason why
politics should affect trade, and British companies feel the same way.” Ray Vicker, “Experts
say Soviet invasion won’t affect long-term expansion of East-West trade”, Wall Street
Journal, (23 August 1968), p. 4.
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The First World Congress of Business History
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Seung Woo Kim (University of Cambridge / [email protected])
determined to continue the business with Eastern Europe.82 In September, upon the request
from the Obchodni Bank of Czechoslovakia, the MNB approached BOLSA for a USD 25
million syndicated loan for five years with British banks such as Chartered and the Barings.
Bolton affirmed the maintenance of foreign trade financing and transactions with Yugoslavia
and Rumania. He concluded, “little commercial risk in dealing directly with Russia, particularly
through their two banks, the Banque Commerciale pour l’Europe du Nord in Paris and the
Moscow Norodny Bank in London, as these represent Russia’s essential windows on the outside
world”.83 In the following year, BOLSA formed an international consortium for an industrial
project Eurodollar loan of USD 15 million over five years to the Hungarian Aluminium
Corporation 84 and intermediated Eurobond, long-term Eurodollar loans, issues to Eastern
European countries.85
***
By the end of the 1960s, communist banks were normal constituents of the Eurodollar
market. The Bank of England’s cosmopolitanism regarding the City of London played a pivotal
role in the development by depoliticising the practice of Eurodollar mobilisation by the MNB.
Increased Eurodollar flows and syndicates for Eurobond issues86 formed the expanding web of
exchanges, intensifying the interconnectedness between the two sides of the Cold War. In a
82
Executive Committee, (24 September 1968), F/2/D/Com/2.6, LGBA. Proposed interest rate
𝟏
was 1 % over the 6 month Eurodollar inter-Bank rate. It was a prototype of the LIBOR, the
𝟒
London interbank offered rates.
83
George F. Bolton, “Eastern Europe,” (11 September 1968), F/2/D/Com/3.9, LBGA. These
two banks had USD 1,490 million, largely from the Western sources.
84
F. A. Bickneslsl, “Budapest, new frontier”, Euromoney, Vol. 1, No. 2, (July, 1969), p. 30.
85
“Eastern Europe”, (22 October 1969), C48/156, BEA.
86
“London branch U.S. dollar deposits”, various reports, LBGA.
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The First World Congress of Business History
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Seung Woo Kim (University of Cambridge / [email protected])
sense, it served interests of capitalists as Bolton understood the development “the Achilles heel
of Russian finance”87 that would peacefully proselyte enemies. The MNB was an acclaimed
participant in the globalising financial market, not a conspirator against the capitalist order: it
organised syndicated issues for Eurobonds with capitalist banks and facilitated the integration
of the Middle East into the network of Eurodollars. Unlike vicissitudes of the Cold War
international politics, the global finance was increasingly interconnecting countries behind the
Iron Curtain, ironically utilising the U.S. dollar. That is, the MNB forged the re-emergence of
global finance with its ‘comrade’ capitalist banks in the City of London.
Archival sources
Bank of England Archives
Federal Reserve Bank of New York Archives
International Monetary Fund Archives
Lloyds Banking Group Archives
National Archives and Records Administration at College Park, U.S.A.
The National Archives, U.K.
Newspapers and periodicals
Euromoney
Financial Times
Moscow Narodny Bank Quarterly Review
New York Times
The Banker
The Statist
Wall Street Journal
(5,996 words)
87
A confidential report by BOLSA, (26 July 1968), Box No. 617000, Federal Reserve Bank
of New York Archives.
20