Development of an International Financial Center

Many factors are essential to the development of an international financial center. First, there is need for a stable and sound currency system. A national monetary unit will not be widely used as an international medium of payment unless it is normally stable either in terms of gold or in terms of a number of other currencies. A large reserve of gold helps to maintain the stability of the monetary unit. Such a reserve creates confidence in the currency, since it can be employed directly by the central bank or through the operation of an exchange stabilization fund to minimize fluctuations in foreign exchange rates.

These results are achieved when the position of the currency is so strong that it is made freely convertible into gold or other foreign currencies which are, in one form or another, convertible into gold. This does not mean that the currency must be convertible into gold for domestic purposes. It does mean that foreigners, primarily central banks and treasuries, must be given the opportunity to convert their balances at a fixed rate into gold for exportation or into other currencies. This requires the existence of a free foreign exchange market. Foreign exchange restrictions seriously interfere not only with normal transfers of funds between nations incident to commercial transactions but also with arbitrage and other specialized activities which are common in an international financial center. Restrictions on foreign trade are also detrimental to the operation of a world financial center.

A second prerequisite is that there must be a substantial and constant demand for and supply of funds in the national currency of the country where the center is located. The demand and supply may reflect many different factors, particularly an extensive foreign trade, shipping and insurance services, willingness and ability to lend abroad, and willingness to receive on deposit foreign short-term funds. These factors not only narrow fluctuations but also render the national currency an international medium of exchange because of its worldwide acceptability in making payments between nations.

The balance of payments of the country in which an international financial center is located should be reasonably well adjusted over a period of time. Otherwise, the country either gains or loses gold in excessive amounts, and this may create disturbances not only in the money center itself but also in other countries.

Finally, an international financial center must be the seat of financial institutions capable of handling the business transacted in such a center. This requires the existence of large banks of international reputation with well-established foreign departments and with overseas branches, correspondents, and representatives. Usually, the center is the domicile of the principal office of the nation's central bank. There must also be a number of agencies or branches of foreign financial institutions that can perform their normal functions without being hampered by legal restrictions or discriminations. Also needed are specialized institutions which supplement the commercial banking system in financing foreign transactions. These include acceptance and discount houses, foreign exchange dealers, investment banking houses with international connections, brokerage firms, investing institutions, and insurance companies.Institutions such as these can be developed only gradually over a period of years.