physical handover of the bond certificates by the borrower, once it had confirmation that the lead manager had paid over the issue proceeds. This would usually involve a small ceremony, followed by a gourmet lunch. French tax law precluded Paris as a venue for closings, while stamp taxes ruled out London. In the search for an alternative, one banker approached the head of Morgan Guaranty's securities department in Belgium to see if Morgan might be able to host closings in Brussels. The city possessed the requisite standard of cuisine and had good transport links with major European cities. Thus, in 1965, Morgan Guaranty began to host closings in Brussels.
By 1966, in the face of the paperwork crisis in New York, executives at Morgan Brussels began to consider offering a service whereby it would hold the bonds until maturity and facilitate settlement in-house between buyers' and sellers' accounts at Morgan Guaranty. This would eliminate the costs of transporting bond certificates between different locations and reduce the risk of failed settlements. With the enthusiastic support of then president of the Morgan Guaranty Trust Co. in New York, John M. Meyer Jr., the service was launched in July 1967. By December 1969, this had evolved into Euroclear.
Euroclear was the first international central securities depository (ICSD). ICSDs play a critical role in global securities markets through a number of functions. First, they serve as a depository for the safekeeping of securities. Second, they facilitate secure settlement between buyers and sellers by way of book entries in their respective accounts, obviating the need to physically transfer the certificates. Third, because the ICSD holds a range of securities in a client's security account as well as cash deposits in the client's cash account, where there is a shortfall in cash to settle a purchase, the ICSD is able to provide a loan collateralised against the client's other securities in order to settle the trade, thereby avoiding settlement failure. Finally, ICSDs facilitate the placing and acceptance of securities as collateral between third parties which, among other things, has enabled the growth of the now $1 trillion per day US ‘repo’55 market that is a fundamental source of liquidity in global capital markets.56
Stanley Ross was an enthusiastic early adopter of this service and Kidder Peabody became the first major trading firm to insist that anyone wanting to deal with it would have to become a member of Euroclear. The ICSD quickly became a significant profit centre for Morgan, since it paid little interest on the large and stable amounts of cash held in its clients' cash accounts and was able to invest this cash to reap substantial income.
Concerned that Euroclear would give Morgan Guaranty key insights into its competitors' activities, a group of Luxembourg and foreign banks established Cedel in Luxembourg in September 1970. Bitter competition and rivalry between Euroclear and Cedel would serve to drive down settlement fees further, much to the benefit of customers.
To allay the competitive concerns, Morgan Guaranty sold Euroclear to its users in 1972, though it continued to profit from providing credit to Euroclear's customers until Euroclear set up its own bank in 2000. Cedel was fully acquired by Deutsche Börse in 2002 and is now known as Clearstream.
Meanwhile, to deal with the continuing paper jam in the US market, the New York Stock Exchange (NYSE), the American Stock Exchange and the National Association of Securities Dealers (NASD) cooperated to set up The Depository Trust Company (DTC) in 1973. John M. Meyer Jr., who served as chairman of Morgan Guaranty from 1969 to 1971, was again an instrumental influence behind this development.
In a contemporaneous and not-entirely-unrelated development, 239 banks from 15 countries began cooperating to establish the Society for Worldwide Interbank Financial Telecommunication (SWIFT) in 1973. SWIFT is a not-for-profit cooperative that was founded to standardise payment instructions between financial institutions. Up until SWIFT's launch in 1977, payment instructions between banks had been communicated via telex. Often, it would require up to 10 messages back and forward in order to effect a single transaction. The problem was that message formats differed between institutions, making the system costly and prone to error. The Brussels-headquartered Society is not a bank or a settlement institution and does not hold or operate accounts on behalf of customers; it is simply involved in the organisation and distribution of data, providing a secure and trusted telecommunications network for the transmission of sensitive financial information. Within a year of SWIFT's launch, 10 million messages had been sent. By 2020, the system was facilitating cash and securities transfers for over 11,000 users located in more than 200 countries around the world.57
The arrival of these international payments and settlement infrastructures solved the paperwork crisis for traders like Stanley Ross in the late 1960s and came just in time to foster the continued growth of the nascent Eurobond market. That market in December 2019 was estimated to be around $25 trillion in size, around 24 percent of the total bonds outstanding globally.58 This harnessing of savers' capital for use by governments and corporations has created jobs, supported public services and provided for the development of public infrastructure around the world. For savers and investors, it also opened up new international investment opportunities that could improve their returns and help diversify their exposures.
These organisations, colloquially known as the ‘plumbing’ of the world's financial markets, enabled unprecedented growth and globalisation of the international capital markets by driving down the costs and increasing the reliability of cross-border transactions. With the dollar already the predominant currency of international borrowing and investment, they provided a network that would allow it to further extend its reach. In turn, this would further amplify the transmission of US economic and monetary policy to other countries via global investment and liquidity, in addition to trade. This is a trend that would be accelerated further still by a series of shocks in the 1970s.
Niksonu Shokku
Richard Milhous Nixon's most celebrated foreign policy achievement was the initiation of Sino-US rapprochement, the highlight of which was his February 1972 visit to China to meet with Chairman Mao Zedong (毛泽东). This diplomatic masterstroke fundamentally reshaped the Cold War balance of power in America's favour. It forced the Soviet leadership to the negotiating table on détente and paved the way for America's exit from a demoralising Vietnam War. For US allies in East Asia though, this sudden and unexpected development following Nixon's enunciation of the Guam Doctrine in 1969 was unsettling.59 For none was it more so than Japan, whose government received only two hours' notice before Nixon's 15 July 1971 announcement that Henry Kissinger had made a clandestine visit to China to meet with Zhou Enlai (周恩来). This was one of a series of US diplomatic blows to Satō Eisaku's government that the Japanese media dubbed the Niksonu Shokku, or ‘Nixon Shocks’. However, it was not just in the realm of foreign policy that the 37th president was to create long-lasting tremors. The financial shocks he delivered also left a profound legacy in global capital markets.
The better known of these financial shocks was the suspension of the dollar's convertibility to gold in 1971. This effectively brought an end to the Bretton Woods system.
Though the US had been running a current account surplus of around one percent of GDP throughout the 1950s, it was running an overall balance of payments deficit due to the flow of American capital into investments overseas. By the latter part of the decade, foreigners saw that the dollar was overvalued and began to exercise their rights to convert their dollar holdings into gold. Between the end of 1957 and the end of 1959, US gold reserves fell by around 15 percent. Fears of inflationary government spending under a Kennedy presidency led to a further nine percent decline in US gold reserves in 1960.60 In short, more and more dollars were being backed up by falling reserves of gold.
When
