INFORMATION to USERS the Most Advanced Technology Has Been Used to Photo Graph and Reproduce This Manuscript from the Microfilm Master

INFORMATION TO USERS The most advanced technology has been used to photo graph and reproduce this manuscript from the microfilm master. UMI films the original text directly from the copy submitted. Thus, some dissertation copies are in typewriter face, while others may be from a computer printer. In the unlikely event that the author did not send UMI a complete manuscript and there are missing pages, these will be noted. Also, if unauthorized copyrighted material had to be removed, a note will indicate the deletion. Oversize materials (e.g., maps, drawings, charts) are re produced by sectioning the original, beginning at the upper left-hand comer and continuing from left to right in equal sections with small overlaps. Each oversize page is available as one exposure on a standard 35 mm slide or as a 17" x 23" black and white photographic print for an additional charge. Photographs included in the original manuscript have been reproduced xerographically in this copy. 35 mm slides or 6" x 9" black and white photographic prints are available for any photographs or illustrations appearing in this copy for an additional charge. Contact UMI directly to order.

Accessing the World's Information since 1938

300 North Zeeb Road. Ann Arbor. Ml 48106-1346 USA

The world system in transition: Information technology and transnational banking

Al-Muhanna, Ibrahim A., Ph.D.

The American University, 1987

UMI 300N.ZeebRd. Ann Arbor, 3VH 48106

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. THE WORLD SYSTEM IN TRANSITION: INFORMATION TECHNOLOGY AND TRANSNATIONAL BANKING By Ibrahim A. Al-Muhanna submitted to the Faculty of the College of Public and International Affairs of The American University in Partial Fulfillment of The Requirements for the Degree of Doctor of Philosophy in International Relations Signatures of Committee: Chairman: ___

7 t I9 T '7 Date

1987 The American University Washington, D.C. 20016 l/l D I

THE AMERICA! UUIYERSITY LIBRARY

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. Dedicated to My brother Abdullah for his teaching, encouragement, and humanist values

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. THE WORLD SYSTEM IN TRANSITION: INFORMATION TECHNOLOGY AND TRANSNATIONAL BANKING BY Ibrahim Al-Muhanna ABSTRACT A close relationship between information and transnational banking industries has existed for over a century. However, the recent development in information technology, where computer and telecommunications converged and which is known as transborder data flows, TDF, has changed the nature of this relationship and the structure of international political economy. TDF makes time, space, and distance meaningless in the process of storing and transferring data. More than any industry, the banking industry is very sensitive to these three elements. Utilizing TDF, transnational banks and other financial establishments have created a variety of communication networks. These networks are used for different purposes which range from personal management to money and fund transfers. Thus, the financial market is internationalized, making the concept of national borders of little relevance.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. The impact of TDF goes beyond the international ization of banking. As soon as this new technology came into use around the mid-1960s, Western banks began a period of across-the-border expansion. Therefore, by the beginning of the 1970s, the old financial system, which was based on state supervision, started to break down. Currencies were floated, and financial markets were gradually deregulated. At the same time, many financial phenomena such as Euromarket and off-shore financial centers are becoming an integral part of world finance. These phenomena are made possible by TDF, and they further globalized the financial market. By the 1980s, Western governments were losing their power over financial transactions, socialist countries were moving toward more integration with the world capitalist economy, and transnational financial establishments became the master of international financial relations. This structural change has produced many results: Barter becomes an important part of international trade, labor organizations, and third world countries' statures are weakened. Perhaps the most important part in transnational banking is the diminishing role of the state. Since the emergence of the national state system, the state role in political economy was increasing over the years. This

iii

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. role, however, is going through a period of reverse in the last fifteen years. The study concludes that the current transforma tion in the world system is not over yet. It might lead to the emergence of conflicting economic blocs, or perhaps a total collapse of the world financial system.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. ACKNOWLEDGMENTS

A friend once asked if my dissertation is about Saudi Arabia. I told him not. He then asked if it is about the Gulf, the Middle East, Islam, or the Arabs. Again, my answer was negative. Hereafter, he looked at me with a peculiar face, wondering "then what?". I told him that it is about information technology, transnational banking, and the transformation of the world system. His look became more eccentric. I tried to explain, but I doubted that he understood. The standard, which I do not know by whom or how it came to be, is that social science graduate foreign students should, or perhaps have to, specialize and write about their respective countries, or at least their regions. In other words, foreign students should not write about the world system or at least the countries where they study. The cited reasons are many: It is easier to write about one's own country, it is more interesting, and/or it will help their societies. However, it seems meaningless and odd for us foreign students to specialize and write about our own societies in the West. Moreover, the information which we collect and analyze is unlikely to be used by our governments, but more by the host country and its v

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. specialists. Still worse, we go home with little knowledge about the country where we studied and the world system where we are peripheries. In this study, I have not followed this standard. In the task of writing this study, I have been helped and encouraged by many admirable people. My advisor, Professor Hamid Mowlana, has been very inspiring since I started my Ph.D. program, and indeed before. Professor Nicholas Onuf was very supportive and offered many valuable and detailed suggestions. Professor Eric Novotny was encouraging and gave many helpful comments. Many of my teachers at the School of International Service have contributed to my learning experience and merit my appreciation: Gary Weaver, Larman Wilson, and Johan Richardson. I owe lasting debts to Gail Homesack, Medlej M. Medlej, and Yahia Ashari for their encouragement, assistance, and, above all, friendship. I would like also to thank Stephanie Reich for her skillful editing and Laurie Smith for her careful typing. Some friends have made my life and study in the United States enjoyable, rewarding, and full of experi ence, and I appreciate knowing them: Muhammed S. Abanumay, Awadh al-Badi, Abdulrahman al-Banyan, Nora Bawa, Ibrahim Beayeyz, Dr. Stuart Bullions, Nasser al-Khallifa, Arthur Fern, Lynne Grail, Aqil Kazim, Dr. Abas Malik, Daniel

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. Masis, Andrea Pedersen, Sallah al-Rajai, Abdulrahman al- Rashed, Dr. Abdulmonem Said, Dr. Hamad al-Saloom, Abdulaziz Ben-Salamah, Dr. Ahmed H. Senani, Nancy Sherman, Hassan Wajeeh, Laurie Wilson, and Prodrous Yennes.

vii

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. TABLE OF CONTENTS

ABSTRACT...... ii

ACKNOWLEDGMENTS...... V LIST OF TABLES...... X ILLUSTRATIONS ...... xii Chapter

I. INTRODUCTION: COMMUNICATION TECHNOLOGY AND THE WORLD SYSTEM...... 1 Theory and M e t h o d ...... 21 II. POLITICAL ECONOMY OF TRANSBORDER DATA FLOWS: A REVIEW OF LITERATURE...... 23 The Legal and Policy Studies...... 24 Management Studies ...... 27 International Relations/World System S t u d i e s ...... 29 S u m m a r y ...... 48 III. COMMUNICATION AND INTERNATIONAL POLITICAL ECONOMY: THE SOCIOCULTURAL DIMENSION...... 51 Currency and the Socialization Processes . . 53 Money Holders and the Mass M e d i a ...... 64 Conclusion...... 78 IV. THE EVOLVING RELATIONSHIP BETWEEN COMMUNICA TION TECHNOLOGY AND TRANSNATIONAL BANKING . . 80 The Organized Industrial Stage ...... 81 The Telecommunication Stage ...... 86 The Automated S t a g e ...... 92 Financial Communication Networks ...... 100 International Financial Databases ...... 134 Conclusion...... 136 V. THE SIGNIFICANCE OF TDF FOR TRANSNATIONAL BANKING ...... 138

viii

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. The Position of TDF in Transnational Banking ...... 139 The Usefulness of TDF for Transnational B a n k i n g ...... 145 Transnational Financial Activities Supported by TD F ...... 171 Conclusion...... 184 VI. THE IMPACT OF TDF ON TRANSNATIONAL BANKING AND INTERNATIONAL FINANCE ...... 185 The Expansion S t a g e ...... 189 The Rules-Supercession Stage ...... 200 A New World Financial System...... 213 Conclusion...... 257 VII. CONCLUSION...... 259 The Future...... 272 The Unfinished Agenda ...... 280 BIBLIOGRAPHY...... 283 GLOSSARY...... 300

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. LIST OF TABLES

1. Foreign Investment by Major Lending Countries, 1825-1913 ...... 87 2. Sample of Raw Data Transmission (BAI Standard) and the CAD Interpretation...... 96 3. SWIFT Membership Connections...... Ill 4. SWIFT Bank Members by Country, 1985-1986 . . . 112 5. NASDAQ Worldwide Distribution and Level of Terminals ...... 121 6. Worldwide Distribution of Foreign NASDAQ Companies...... 122 7. The Number of Countries and Terminals with Reuters S e r v i c e s ...... 131 8. Percentage of Reuters Revenue by Market in 1985 ...... 132 9. Percentage of Reuters Revenue by World's Area 1985 ...... 132 10. Transnational Computer-Communication System in Japan, by Type of User, 1974, 1978, 1980 (Number) ...... 142 11. Transnational Computer-Communication Links of Brazil, by Type of user, 1982 and 1985 (Number) ...... 143 12. The Overlapped Working Hours Between the World Major Financial Markets (8 A.M. - 5 P.M.)...... 151 13. Foreign Branches of U.S. Banks During the Expansion Stage ...... 192 14. International Investment (U.S. and the World) During the Expansion Stage ...... 194 15. Known Foreign Acquisition of U.S. Commercial Banks During the Expansion Stage ...... 195 x

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 16. Number of Transnational Banks by Country of Origin...... 196 17. Banks' External Liabilities and Claims by Economic and Geographical Areas, 1985 .... 216 18. The Development of the Eurobond Market .... 222 19. Foreign Exchange Trading— By Market— 1986/7 . . 225 20. The World Current Balance, 1980-86 228 21. Banks Failures in the United States...... 252

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. ILLUSTRATIONS

Figure 1. Position of Information Systems in Various Types of Companies...... 140

Diagram 1. Socialization Process, Finance, and the World System...... 52 2. The Macro Level Data Transmission System . . . 98 3. The Micro Level Data Transmission System . . . 99 4. Bipartite Personal Network ...... 101 5. Multi-party Personal Network...... 103 6. A Multi-Structure City's Network...... 105 7. Macro-Structure of Central Bank Network . . . 108 8. Chase Manhattan's Private Communication N e t w o r k ...... 117 9. Chase's Master Payment S y s t e m ...... 118 10. The Changing Stages of Transnational F i n a n c e ...... 188

xii

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. CHAPTER I

INTRODUCTION: COMMUNICATION TECHNOLOGY AND THE WORLD SYSTEM

In the last two decades, the world system has experienced an important evolutionary change. This change is quite apparent in communication/information technology and finance, as well as the combination of the two. Although the change has been realized, its magnitude and impact have not been fully studied and understood. This change occurs slowly but is ever evolving. And though it is new, it is connected to the past. Therefore, the change is likely to affect to a great degree other aspects of the world system: political, trade, labor, and ideolo gies. However, evolutionary change in any system does not occur in a vacuum. It takes place as a result of ideological1 or technological innovation or a combination of both. When a new innovation appears, the degree of adaptation by a society varies according to time, place,

^•Ideology is loosely defined here. It refers to a system of belief and thought which organizes and influ ences a society's behavior and operations; the relations among individuals in that society; and interaction between members of that society and outsiders. Capitalism, socialism, and various religions are all examples of ideologies. 1

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 2 needs, and capability. The more innovation is adapted, the more it influences the structure of human behaviors and relations. Since human history was first recorded, and probably before, technological and ideological innovations have had both positive and negative effects on people's lives. In the past, changes spread slowly and were mostly limited to a specific geographical location. Currently, however, the diffusion of innovations is very rapid and reaches all parts of the globe in a short period of time. It took Christianity, for example, more than fifteen centuries to reach every part of the world; but it has taken Marxism a little more than fifty years to spread throughout the world. The same can be said of technologi cal innovations. Thousands of years passed before numerical numbers were diffused around the world. But computer languages became known everywhere just fifteen years after they were invented. Technological innovations, like ideological ones, are connected with many, if not all aspects of life— from military adventures to children's games. Part of techno logical innovation is in the communication field, where communication can be defined as the process by which human, as well as other organisms, create, send, receive, store, and interpret information in order to adapt to and affect their environment. Communication technology or

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 3 innovation, therefore, can be defined as any tools which assist the production, distribution, storage, reception, exposition, or manifestation of information.2 Unlike other innovations, communication technolo gies can be agents of power, change, diffusion, and integration. This is due to their attributes which are manifested in their important role of the structure and process of human relations. Undoubtedly, those who produce and disseminate information have power over those who need them. Susan Strange traced the relation between power and information sources and communication channels in modern Europe. She outlines three distinguished developmental stages.3 First, "knowledge structure"4 was controlled by the Church in the early seventeenth century and before. During that time, the Church was the most powerful authority within Europe, because it had a firm

2The definitions of communication and communica tion technology are adapted from Brent D. Ruben, Josephine R. Holz, and Janice Hanson, "Communication Systems, Technology, and Culture," and in Howard F. Didsbury, Jr., Communications and the Future (Bethesda, MD: World Future Society, 1982), pp. 255-266. Also from Brent D. Ruben, Communication and Human Behavior (New York: MacMillan, 1983). 3See Susan Strange, "A New Knowledge Structure: Or How International Political Economists Might Think About the Information Revolution," paper presented at the International Studies Association, 27th Annual Conference, Anaheim, California, March 1986. 4The terms 'information' and 'knowledge' are used interchangeably.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. control of belief in such areas as law, education, and life and death.

In the last half of the seventeenth century, with the rise of the "scientific state," information resources started to shift from the church to the state. The state became the source of information in areas such as health, commerce, agriculture, legal, and other fields. Moreover, the state directly or indirectly controlled transportation and communication channels such as the railroad and the telegraph. The state was therefore the most important center of power and control. However, with the introduc tion of new communication technologies and telecommunica tions in the last twenty years, this has started to change. Therefore, the third developmental stage is currently taking place, as Susan Strange argues: Authority and control over the direction of the new technologies has passed from the state to the major private market operators, the large transnational corporations (TNC) whether they are private enter prises or, in some cases now, publicly owned state enterprises. And whereas the earlier technological innovations enlarged markets but did not fundamentally alter the other major structures of power in the international political economy, this time, there have been major and far-reaching consequences for the security structure, for the production structure, and, above all, perhaps for the financial structure.5 Relating to communications as a power tool is their role as a vehicle of diffusion of knowledge and ideas. Throughout human history, powerful communication

5Susan Strange, "A New Knowledge Structure," p. 21.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 5 mechanisms can easily diffuse ideas and thus gain influ ence.® In the past, and to a lesser extent today, churches, mosques, and bazaars have played an important role in the process of information diffusion. Currently, however, radios, televisions, the printed media, video texts, satellites, telephones, computers, videocassettes, electronic mail, and telex, among others, are playing a crucial role in the diffusion process. The intensity and expansion of diffusion will, in turn, affect the structure and conduct of human relations at all levels. At the national and international levels, the impact of new communication technology on the diffusion process in such areas as economic, political, social, and military has already been recognized.7 Thirdly, communication has been viewed as an agent of integration at national, regional, and international

®The role of communications of diffusion at the national and international levels has been a major subject of study, theoretically and descriptively. See, for example, Wilbur Schramm and Daniel Lerner (ed.), Commu nication and Change: The Last Ten Years and the Next (Honolulu: The University Press of Hawaii, 1978). Also see Harold Lasswell, Daniel Lerner, and Hans Speier, eds. Propaganda and Communication in World History, vol. 1 (Honolulu, Hawaii: University of Hawaii Press, 1980). 70n the role of traditional and modern communica tion on diffusion and change, see Hamid Mowlana, "Technol ogy Versus Tradition: Communication in the Iranian Revolution," Journal of Communication 29 (Summer 1979):107-112. For a more comprehensive synthesis of this subject at the international level, see also Hamid Mowlana, International Flow of Information: A Global Report and Analysis. Reports and Papers on Mass Communica tion, No. 99, UNESCO, Paris, 1985.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 6 levels. According to this view, when communication networks (e.g., railroad, telephone lines, satellites, etc.) are comprehensive and information exchanges (e.g., mail, telephone calls, and the like) are intensive in any given system, the system is moving toward a higher level of integration.8 Finally, communication technology is a vehicle of change in any given system. This should not be confused with the role of communication technology as a tool of power and as a vehicle of diffusion, although they are related. "Change" has a broader meaning and alters a larger aspect of human life. It is not a matter of altering the power structure and method of diffusion. It is a slow process, perhaps taking centuries, with a lasting impact. It is manifested in the way information is coded, transferred, and stored, which results from new communication technology. This, in turn, changes the process and the structure of interaction and the relation within a system. This change, as we said, is lasting, cumulative, and usually slow. For example, the early pictographic writing appeared about 1000 B.C. However, paper was not invented until about 100 A.D. Also, modern newspaper and mail services appeared in their current

8See C. Cioff-Revilla, R. L. Merritt, and D. A. Zinnes, Interaction and Communication in the Global International System (Beverly Hills, CA: Sage Publica tions, 1986).

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. forms more than one hundred years after Johann Gutenberg invented the moveable printing machine. We can easily recognize three revolutionary changes which were caused by communication technology. The first change was when humans learned how to code their sounds in written forms. symbols and letters were invented. Ideas were then able to be transferred from one place to another and from one generation to the next. Thus, pioneers and great ancient civilizations appeared in India, China, and the Mediterranean areas, where these communications technologies took place. Secondly, in 1486, Johann Gutenberg invented the first moveable printing machine. Information became more available in easier and cheaper ways. The Renaissance began. Europe became the center of the world. The powerful European states became the world hegemonical powers. Within Europe, great changes in education, trade, the sciences, health, politics, finance, and others, took place and expanded later to some other parts of the world. These changes did not happen overnight, or immediately after the invention of the printing machine. They were slow processes— lasting more than five centu ries— supported and encouraged by other inventions, including communication technologies such as the telegraph and radio.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 8 Now, in the second half of the twentieth century, we are witnessing the beginning of a third major change in the structure of human relations and the world system. The major factor behind this current change has been the emergence of new communication technology where time, distance, and space are irrelevant in transferring and accumulating information. This new structural change has been given a variety of names such as: information society, information age, information industry, informa tion civilization, information and/or communication revolution, electronic age, electronic revolution, post industrial society, service economy, and third wave. The full impact of the new communication technol ogy has not been completely realized nor understood. This is due largely to the fact that the process of change is always slow to be realized. Also, the changes vary from one sector to another sector, and from one place to another. However, in the last few years, communication and its impact have received considerable attention from scholars, traders, financiers, managers, and governmental policymakers. It is expected that such attention will increase in the future due to the increasing impact of the new communication technology on almost every sector and every society.9 For example, the new technology affects

9Beside communication scholars, "futurist" scholars have given considerable importance to communica tion technology and its impact on relations within

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 9 such things as personal privacy, labor-management rela tions, the discovery of natural resources in the sea and desert, the observation of guerrilla and troop movements, money transfers and management, and printed and broad casted media.10 A second reason for the attention increase is the continuing improvement and innovations in communication technology such as the fifth computer generation and fiber optics and, more recently, the wireless computer networks.11 While communication technology has a clear impact on almost all of the structural aspects of the interna tional system (e.g., military, trade, labor, science, etc.), its impact on international finance is of the greatest magnitude. As a New York Citibank report observes: . . . The postwar revolution in information process ing and communication has an impact similar to the drastic decline in transport costs— both for overland and ocean carriers— in the nineteenth century. With

societies and between one society and another. 10For example, on the role of telecommunication technologies on the Chernobyl nuclear accident, see Nell Henderson, "Civilian Satellites Penetrate Soviet Secrecy, Photograph Plant: Space Competition Takes New Direction,” Washington Post. 2 May 1986, p. A22. 11The fifth computer generation is a computer with artificial intelligence, which thinks and plans by itself. Fiber optics are hair-thin strands of glass which transmit data and visual communications efficiently, at very low cost, high speed, and use little space in digital light waves. Wireless computer networks are the use of air waves (e.g., radio waves) to connect computers and terminals.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 10 the development of rail networks and steamship ser vices, price for goods increasingly came to be set in international markets and the influence of local and national conditions began to weaken. Similarly, in the contemporary financial arena, international credit flows have tended to disintegrate the regulatory and monopolistic barriers that once delineated national financial markets.12 Walter Wriston, the retired chairman of Citibank and one of the world’s leading financial experts, is more to the point when he says, "Mankind now has a completely inte grated international financial and informational market place, capable of moving money and ideas to any place on this earth in minutes."13 The impact of the changing structure and conduct of international finance caused by communication technology goes beyond simple money trans fers. It already has had a clear impact on such issues as national sovereignty, personal security, government power, labor-management relations, and trade and investment at both national and international levels. Although this fact has already been recognized, its full consequence on the whole world system will be greater in the near future, as this study will attempt to show. In order to have a clear picture of the relation between communication technology and international finance, a distinction must be made between different

12 Global Financial Intermediation (New York: Citibank, 1980), p. 7. 13Quoted by Michael Moffitt in World's Money (New York: Simon and Schuster, 1983), p. 43.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 11 types of financial systems, financial markets, and communication technologies. In international finance, there are three related and interacting systems: the banking, monetary, and fiscal systems. Thanks to communi cation technology, transnational banking in the last two decades has become the most important element in the international financial system. Transnational banks are the lenders, speculators, and pioneers in international finance. They are also greatly responsible for changing the structure of international finance, and indeed, of international and national economics as well.14 Howard M. Wachtel describes the situation precisely in his book, The Money Mandarins: Aided by a revolution in information and communica tions technology, private bankers now preside over an integrated network of global finance, leap-frogging national boundaries in the same way as the communica tions satellite which recognizes no borders. The corporation has become dominated by financial wizards who know little about production, but everything about leveraged buy-outs and takeover strategies. In government, policy makers, trained to deal with the real problems of employment, economic growth, and productivity, have been swept aside and replaced by officials from the Federal Reserve and Treasury Departments, whose expertise is in money and finance. Public money mandarins, therefore, comport with their private counterparts in banks and corporations to to govern the symbols of a world economy, while real human needs are neglected.15

14See Anthony Sampson, The Money Lenders: Banking and a World in Turmoil (New York: The Viking Press, 1981). 15Howard M. Wachtel, The Money Mandarins: The Making of a New Supernational Economic Order (New York: Pantheon Books, 1986), p. 3.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 12 Jorg Becker wrote: The current changes in international relations have been essentially accelerated by the internationaliza tion of capital innovation and the enormous momentum of technological innovation. . . Technological innovation and the internationalization of capital cannot be discussed separately.16 The new technological innovation in communication is in the process of transforming the structure of the world's economic,17 social, and political systems.18 However, communication technologies can be, and have been, divided into different categories. Moreover, each kind of innovation in communication technology is related and associated with specific international human activities. Communication and information transfers are generally divided into four types: voice, picture, information, and data.19 Yet these four types seem to

16Jorg Becker, "Information Technology and International Politics in the 1980s," Media Development 30 (Fall 1983):8-ll. 17The most important issue currently in interna tional trade which has been debated dissidently in the last five years in GATT is the issue of trade in service, where communication technology trade (e.g., soft wear) is the most important area within trade in service debate. 18See William J. Drake, "Structural Power, Telematics, Telecommunication Institutions," paper presented to the Annual Meeting of the International Studies Association, Anaheim, California, March 1986. 19Data are conventionally defined as the raw material of information. Computer and telecommunication data commonly mean electronic signals which flow in arrangements of binary pulses (digital numbers). Informa tion, on the other hand, is the meaningfully structured and combined data, commonly in written or spoken form.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 13 have converged in the last few years; this distinction is useful mainly for technical reasons. On the other hand, there is a trend to associate specific communication and information terms with specific activities. For example, videotext or video data is usually associated with educa tional and scientific activities; Direct Broadcasting Satellite (DBS} with commercial and propaganda; interna tional television broadcasting and remote sensing with military activities. The term 'transborder data flows' has been commonly used in the last few years by students of communication, economics, finance, international law, and international political economy, as well as by decision makers in the private and public sectors. This term, •TDF', which first appeared in the mid-1970s, can be defined as simply the process of transferring, storing, and analyzing data and information across national boundaries by connected computers, with telecommunica tions. 20 When the computer was invented in the 1950s, it was viewed merely as an expensive instrument too large to

20The terms 'telematics' and/or 'informatics' are used by some authors to mean transborder data flows. However, 'telematics' and 'informatics' have a broader meaning, including such things as facsimile and teletext, and do not necessarily involve computers in the process of data and information transfer. Also, these two terms cover both national and international production and transfer, while TDF is mostly limited to the latter.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 14 store and analyze information for administrative and scientific purposes. It was not intended to be a part of communication infrastructure. In the mid-1950s, in fact, IBM estimated the market potential for the entire United States to be fewer than ten computers. However, by the beginning of the 1960s, computers were becoming less expensive and more practical, with a variety of uses. The banking industry in countries like the United States, West Germany, and Japan has led the way in the use of computers. Initially, their application was limited to mechanizing the bookkeeping and accounting within banks. Later, computers were connected to other computers and terminals throughout telecommunication channels (e.g., telephone, special wires, satellites, etc.). Their use increased in many financial areas, and financial service networks were created. Since then, this process has been called at the national level 'Electronic Funds Transfer System' (EFT).21 In the second half of the 1960s, electronic computer/communication networks were being used at the international level by many transnational banks. By the 1970s, these networks were expanded greatly in terms of their numbers, members, and activities. Currently, Transborder Data Flows have been described as the "life

21See Kenneth W. Colton and Kenneth L. Kraemer, Computers and Banking: Electronic Funds Transfer Systems and Public Policy (New York/London: Plenum Press, 1980).

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 15 blood" of international finance and banking.22 It is unimaginable that transnational banks, in particular, and international finance, in general, could be functioning at the same level and same impact today without the aid of TDF. As an OECD document stated: "It would not be an exaggeration to say that the international banking system, and therefore international trade, could not function in anything like its present form without transborder data flows.1,23 The term 'Transborder Data Flows' was initially used in the mid-1970s to refer to some issues involving the transmission of personal data across boundaries. By the 1980s, however, this term was expanded to cover such issues as computer and telecommunication policy, trade barriers, economic protectionism (in hard and soft computer products), cultural identity, security, and

2 2 Such descriptions have been made by many individuals in government, international organizations, private financiers, and telecommunications specialists, such as F. A. Bernasconi, the Director General of I.B.I. (the Intergovernmental Bureau for Information). For more detail, see Brenda Paulic and Cees Hamelink, The New International Economic Order: Links Between Economics and Communications Reports and Papers on Mass Communication, No. 98, UNESCO, Paris, 1985. Also see Ibrahim Al-Muhanna, "The Political Economy of Information: Transborder Data Flows and the World Financial System," a paper presented at the International Studies Association Annual Conven tion, Washington, D.C., March 1985. 23Quoted by Edward Regan, "Global Banking Data- Dependent," Transnational Data and Communication Report, March 1986, p. 16.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 16 national sovereignty.24 Nevertheless, the connection between TDF and international economic and financial activities has persisted through time. As Arthur A. Bashkin has asserted: "Very often, the central concern is not the transborder data flow of data per se. but rather the economic activity or policy issues that arise from the flow in either the sending or the receiving country."25 The connection between the two— TDF and international financial relations— springs from the fact that they go hand in hand, influencing each other and international economic and political systems as well. Brenda Paulic and Cees Hamelink best describe this connection in their study of the link between the New International Economic Order and the New International Communication Order when they assert: The two vital sources of the new order— money and information— are rapidly becoming more and more intertwined. [There is] the technical convergence that creates the digital transfer of all kinds of information. Money flows and information flows converge into digital data flows.26

24See Edward J. Regan, "Emerging Transborder Data Flow Issues and Their Impacts on International Banking" (Masters thesis, Stonier Graduate School of Banking, American Bankers Association at Rutgers University, New Brunswick, New Jersey, June 1984). 2 5 Arthur A. Bushkin, Transborder Data Flow: Evolution of the Issues and Impact on Banking (Washington, D.C.: American Bankers Association, 28 March 1983), p. 1. 26Paulic and Hamelink, The New International Economic Order: Links between Economics and Communica tions . p. 53.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 17 In the midst of this, the State has to be given great consideration.27 Martin Carnoy wrote in The State and Political Theory; The State appears to hold the key to economic develop ment, to social security, to individual liberty, and through increasing weapons 'sophistication', to life and death itself. To understand politics in today's world economic system, then, is to understand the national State in the context of that system; is to understand a society's fundamental dynamic. (Emphasis original.)28 Currently, as never before, the State has affected and been affected by the recent developments in informa tion. As George Schultz, the United States Secretary of State, notes: Geography and borders have always constrained everyday life. Today, the information revolution is undermin ing their ancient dictates. It is shifting the balance of wealth and strength among nations, chal lenging established institutions and values, and redefining the agenda of political discourse.29 The State, in the West, in the East, and in the Third World, has been deeply involved in TDF and interna tional finance. Its involvement springs from their importance at home and abroad for the State's power, independence, economic development, and, indeed, its

27The 'state' here refers to the structure and process of political decision at the national and interna tional level of a given country. 28Martin Carnoy, The State and Political Theory (Princeton, NJ: Princeton University Press, 1984), p. 3. 29George P. Schultz, "Consequences of the Age of Information," Transnational Data and Communications Report (May 1986):16.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 18 existence. However, the State is subject to the influence of inter- and intra-class conflict and interest, ideology, and economic, political, and military statutes and historical development within the world system. This, of course, complicates the picture, but it seems necessary to understand the current change in the world system as it relates to change in informatics and international finance. However, not all nations are equal in terms of their roles and positions in the current world system. Therefore, more attention will be devoted in this study to the State in advanced western countries than in other nations. Therefore, the main purpose of this study is to find out the character of the relationship between information technology and transnational banks, and the impact of this relationship on international finance in particular and the world system in general. It is based on the assumption that the state role and the nation/ states order, which existed for over four centuries, is facing a serious challenge. This challenge is a result of innovation in communication/information technologies, and the leading actors are transnational financial establish ments which have been using these technologies generously. Moreover, this challenge may lead to the transformation of the world system, where financial establishments become the superior and dominant actors in the system.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 19 A transformation of the world system, however, is not going to be an easy one. There will be resistance, questions of survival, and conflict of interests among and between different actors such as states, labor unions, and nationalist and special interest organizations. The success or the failure of this transition depends on the outcome of the conflict and the power of different actors not only to resist the change but to direct it for their own interests. Equally important for the outcome of the transfor mation is the creative use of the human dimension of communication by different actors for their advantage. That is the use of "non-technological" channels of communication such as speeches, symbols, and conferences for the purpose of socialization, prescription, and legitimization of the existing or emerging order.30 After reviewing relevant literature, this study will analyze the subject of socialization. It will illustrate how different systems have used different media of communication to legitimize an existing order. Therefore, transnational financial establishments are developing their own media to further their interest and

30Hamid Mowlana makes a distinction between the technological orientation and human orientation on channels and types of international flow of information. He, however, notes that "the technological orientation and human orientation should be thought of as being complemen tary, interrelated, and adaptive." Mowlana, International Flow of Information, p. 3.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 20 increase their power. This, however, contradicts and conflicts with the socialization process established within the nation/states system. The study will then examine the use of communica tion/ information technologies by transnational banks to manage their money, increase their profits, and exchange information about economic, financial, and political environments. Thus, a vast financial network emerged in recent years to serve these purposes. They will be discussed in detail, followed by an analysis of the reasons why transnational banks intensively utilize TDF. Fourth, the impact of TDF in international finance will be studied. There, we show how world finance moved from the control of the state to the hands of transna tional banks. This produces not only many new financial phenomena such as Euromarket and off-shore banking, but also a movement toward total integration of the world financial system, deregulation of this industry, and failure of economics as a "science." Moreover, this section explains the decline of nations' power to direct their own financial systems, which combined with the growing power of transnational banks which are attempting to create their own rules independent of government super vision. Finally, this study will analyze the general impact of the linkage of information technology and

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 21 transnational finance on the world system, especially on the role of the State, internatinal trade, and labor. It will also attempt to predict the structural change of the world system on international relations and the status of the third world countries. in the end, the study will suggest policy actions which developing societies should take, and will make recommendations for further studies.

Theory and Method The purpose of this study is not to prove or disprove a specific theory, but rather to study a political economy issue in the current world system. That issue is the relationship between information technology and the banking industry and the effect of this relation ship in diminishing the role of the state in financial market(s). The study will not use one specific theory but will borrow some propositions from existing theories and devise new ones.31 It will mainly, but not exclusively, take from international political economic theories such as Wallerstein's world capitalist system and international regime theories. The study will also offer models for the evolution of the financial system and another for the

31The employment of combined theoretical proposi tions is not commonly used in social science, especially in the United States. Nevertheless, it has been admirably used by such scholars as Marc Block and Barrington Moore, and Annales School. For more details, see Theda Skocpol, ed.. Vision and Method in Historical Sociology (Cambridge: Cambridge University Press, 1984).

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 22 evolution of the relationship between transnational banks and information technology. A comparative historical methodology at the macro- level will be utilized to explain the evolution of world finance and the world system. However, quantitative data will be used to support the proposed evolutionary models. Quantitative data will be used also to describe the current connection between transnational banking and TDF and the impact of this connection on international finance. The data are mostly from primary sources, but secondary sources will be used when necessary. The primary sources consist of financial and communications news items and reports? personal interviews with private and public officials? documents from governments and intergovernmental organizations? and pamphlets, newslet ters, and other publications from banking and information industries.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. CHAPTER II

POLITICAL ECONOMY OF TRANSBORDER DATA FLOWS: A REVIEW OF LITERATURE

As we mentioned in the preceding chapter, the term •Transborder Data Flows’ was first used during the middle of the 1970s to refer to the electronic transfer of data from one machine to another machine across national borders. Since then, the term has developed a broader meaning and wide use, as we mentioned previously. Now, in the second half of the 1980s, there are hundreds of articles, theses, monographs, papers, speeches, and books which treat this subject either on its own or in conjunc tion with other subjects (e.g., communication, finance, and economics). Moreover, there is a journal, Transna tional Data Report, which deals with TDF and related subjects. According to the manner in which TDF has been researched, the studies of TDF can be grouped into three types: legal and policy, management, and international relations/world system studies. The latter is divided into communications, finance, and political economy studies.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. The Leaal and Policy Studies These are the oldest studies on TDF, and they dominate the field. In fact, TDF started as a legal issue concerning the protection of personal privacy first at the national level and then at the international level. In the early 1970s, some countries introduced laws to protect the disclosure of data on individuals. Such laws were initially only applied domestically. Later, however, the laws also extended to cross-border transfers of personal data.1 Sweden was the first country to introduce such laws when the Swedish Data Act of 1973 was adopted. Other countries, such as the Federal Republic of Germany (1977), France (1978), Norway (1978), Denmark (1978), Austria (1978) , and Luxembourg (1979) have adopted similar acts. Accordingly, personal data cannot be transmitted abroad without the permission of those individuals concerned.2 Soon the TDF-individual privacy issue became an international as well as a national concern. Therefore, during the last half of the 1970s and the early 1980s, there were many studies of TDF and personal privacy which

1It should be noted that the U.S. has some federal privacy laws such as "The Fair Credit Reporting Act" (1970), The Privacy Act of 1974, and the Right to Finan cial Privacy Act of 1978. See NTIA, Privacy Protection in the U.S. (Washington, D.C.: National Telecommunications and Information Administration, 1982). 2See John A. Kahwaty, "Transborder Data Flow and Its Impact Upon International Banking" (Masters thesis, Stonier Graduate School of Banking, Rutgers University, New Brunswick, New Jersey, 1982).

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 25 were done by individuals, private companies, regional organizations (e.g., OECD), and international bodies (e.g., the United Nations Center on Transnational Corpora tions— UNCTC). In 1978, OECD established an Expert Group on Transborder Data Flows. "Non-binding Guidelines Governing the Protection of Privacy and Transborder Data Flows of Personal Data" were approved by the OECD Council of Ministers in September 1980. In January 1981, the Council of Europe (COE) developed the binding "Convention for the Protection of Individuals with regard to Automatic Processing of Personal Data" which was approved in January 1981. Also, before the end of the 1970s, the legal aspects of TDF started to shift from personal privacy to other legal areas such as intellectual property, free flow of information, national sovereignty, and TDF as a commodity which should be taxed and regulated.3 There have been a growing number of policy studies. Such works examine the impact of a country's national policy on the TDF industry. Thus, policy studies are closely related to legal and economic works. However, since their major goal is an administrative one, they are

3See Rolf T. Wigand, Carrie Shipley, and Dwayne Shipley, "Transborder Data Flow, Informatics, and National Policies," Journal of Communication 34 (Winter 1984):153- 175. See also Eric Novotny, "Transborder Data Flows and International Law: A Technical Issue of Legal Concern," Computer/Law Journal 3 (Winter 1981):105-124., and Eric J. Novotny, "Transborder Data Flows and International Law: A Framework for Policy-Oriented Inquiry," Stanford Journal of International Law 16 (Summer 1980):141-180.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. directed at policymakers— both in government and in the private sector. The purpose is either to inform decision makers or to persuade them to take some kind of action. An example is an essay by Joan Spero, the senior vice President of the American Express Company, which was published in Foreign Policy.4 In this essay, Spero discusses the policies of various countries, especially West European nations, and the impact of such policies in the U.S. TDF industry and related services (e.g., U.S. transnational financial establishments). She also encourages U.S. policy-makers to take a firm stand in the face of other countries' restrictions or competition. Interestingly, within a year of the publication of Spero's article, United States international telecommunication policy was discussed widely within different governmental sectors. In addition, Spero was invited for a hearing on this issue by the United States House of Representatives.5 Policy studies are mostly sponsored by Western government agencies and international organizations. However, some Third World countries, such as India and Brazil, have begun to pay attention to this subject.

4Joan E. Spero, "Information: The Policy Void," Foreign Policy. Fall 1982, pp. 139-156. 5United States House of Representatives, Committee on Energy and Commerce, Subcommittee on Telecommunication, Consumer Protection, and Finance, Hearing on International Trade Issues in Telecommunications and Related Industry. 23 March 1983 (Washington, D.C.: Government Printing Office, 1983).

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 27 Moreover, some international governmental and non-govern mental organizations are conducting their own studies to serve the interest of their members.6 Generally speaking, policy studies tend to be narrowly focused and one-sided. Sometimes they are lacking the comprehensiveness of the different dimensions of the issue. They are also attempting to set an agenda which might be in conflict with the interest of others. They are more useful, however, when they are written on a comparative basis, which is not commonly done.

Management Studies In recent years, computers and telecommunications have become a major area of interest and application for management in the private and public sectors at both the national and international levels. Therefore, many studies deal with the use of information for more effec tive productive management. Also, many courses in information (e.g, computer system application and informa tion systems) have become an integral part of education in public administration, as well as in business and finan cial management. Because computer and telecommunication

60n 1 June 1982, for example, the report adopted by the Council of the International Chamber of Commerce, a non-governmental organization, presented a report about trade in services and TDF. see "Liberalization of Telecommunication Services Position of International Business,” Transnational Data Report 6 (January 1983):34- 36.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 28 technologies have made time, space, and distance virtually meaningless, it is often difficult to distinguish between national and international management.7 However, there are some studies which attempt to examine specifically the role of Transborder Data Flow in the management of transnational business. Such studies are either general or particular. An example of the former is an essay by Fred M. Greguras entitled "Impact of TDF on Cash-Management Services."8 This essay discusses different types of cash-management activities and also deals with broader issues such as the impact of government restrictions on TDF on cash-management. An essay written by Samuel Newman, Vice President of Irving Trust Company, belongs to the second category.9 It explains how the SWIFT (the Society for Worldwide Interbank Financial Telecommunication) Network can be

7See Kenneth L. Parkinson, ed., Cash Management Strategies and the System for the 1980s (New York: Marshall D. Sokaol Associates, 1981). See also £. N. Roussakis, "The Internationalization of U.S. Commercial Banks: Part One," The Magazine of Bank Administration 55 (October 1979):24-30, and "The Internationalization of U.S. Commercial Banks: Part Two," The Magazine of Bank Administration (November 1979):8-10. 8Fred M. Greguras, "Impact of TDF on Cash-Manage- ment Services," Transnational Data Report, no. 7 (1984), pp. 415-417. 9Samuel Newman, "How to Better Use the S.W.I.F.T. Connection," The Banker Magazine. May/June 1984, pp. 38- 41. For another example, see Robert Trigaux, "Chemical Bank Plans Global Portfolio Management," American Banker. 7 January 1982, p. 2.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 29 better utilized by its transnational financial establish ment members. Newman discusses different types of international financial management such as foreign exchange, fund transfer interface, worldwide payroll, reimbursements under letters of credit, and the prepara tion of special reports. In most cases, TDF is likely to attract management studies, because, as we said above, the implication of informatics/telematics at national and international levels is increasing. Also, national and international financial managements are gradually inte grating, because of TDF.

International Relations/World System Studies Coimnun icat ion Over the last fifteen years, the study of interna tional communication has been a major area of interest for both governments and academics and has become an integral part of international relations and the world system. The term 'international communication' covers many areas such as printed media, broadcasting, propaganda and persuasion, national development, cultural interaction, and communica tion technology. For this reason, communication studies tend to be interdisciplinary and comprehensive. The field has attracted many distinguished scholars such as Kenneth Boulding, Karl Deutsch, Jacques Ellul, John Galtung, Jurgen Habermas, Harold Lasswell, and Daniel Lerner, who are known for their work in other disciplines. Students

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 30 of international communication have also contributed to other fields such as international law and international relations.

In the last ten years, the students of interna tional communication have paid considerable attention to TDF in all of its dimensions. This is due to three important reasons. First, TDF is part of the inter national communication and information process, which is the specialty of international communication students. Secondly, the debate about the New International Informa tion and Communication Order, as well as the involvement of some international organizations (e.g., UNESCO and International Bureau of Information) in different aspects of international communication have generated a great interest in TDF. Finally, raw data and general informa tion have become an integrated part, as Cees J. Hamelink points out:

Computers become information/communication media. The crucial element in the integrative process is expected to be the digitizing of all types of information. This will make technical distinctions between data flows and information flows obsolete. Computer data and journalistic information alike will be transmitted across borders in digital form.10 Because of this, international communication studies of Transborder Data Flows analyze the subject comprehensively, across disciplines within the context of

10Cees J. Hamelink, "Informatics: Third World Call for New Order," Journal of Communication 29 (Summer 1979):147.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 31 broader issues, as well as within the context of a specific field such as law, economics, and politics. The former, it seems, however, is more common. Two studies of this type of comprehensive analysis are worth mentioning. First is the final report of the International Commission for the Study of Communication Problems— better known as the Macbride Report.11 It examines "the totality of communication problems in modem societies." It covers wide historical, political, economic, and sociological perspectives of international communication. Within this context, informatics are briefly discussed. Second is Hamid Mowlana's study entitled Global Information and World Communication: New Frontiers in International Relations.12 This work provides a theoreti cal framework which can be used to analyze the structure and process of international information flow. Mowlana also looks into the impact of information flow on interna tional, political, social, and economic relations. Transborder Data Flows is considered within this context. The actors and participants, the types of TDF, the major issues, and the impact are all examined.

^International Commission for the Study of Communication Problems, Many Voices. One World. Macbride Commission Report (Paris: UNESCO, 1980). 12Hamid Mowlana, Global Information and World Communication: New Frontiers in International Relations White Plains, NY, 1986).

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 32 More specific studies of TDF have also been done by students of international communication. in fact, communication scholars are the first to notice the importance of TDF and its connection to specific aspects of international systems. One of the first studies conducted was for OECD by Russell Pipe, an international telecommunications specialist.13 Pipe analyzes the relations between TDF and other international issues such as national security and individual privacy. Also, the first symposium about TDF, entitled "Transborder Data Flow: New Frontiers— Or None?", was organized by communi cations specialists and published in a communication journal in 1979.14 Communication journals such as the Journal of Communication. Telecommunications Policy. Telematics, and Informatics now regularly publish studies of TDF. However, most of these studies fall within other interna tional studies (e.g., economic, legal, political economy, etc.)— which will be discussed in this literature review.

13Russell Pipe, Data Base Development and Interna tional Dimension (Paris: OECD, 1972). It should be noticed that when Pipe wrote this study the term 'transborder data flows' was not used. Instead, Pipe employed terms such as 'data base' or 'storage', 1transfer', and ' processing of data across borders'. 14 "Transborder Data Flow: New Frontiers— Or None?", symposium of eight articles, Journal of Communica tion 29 (Summer 1979):113-155.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 33

Economic and financial Increasingly, the communication field has been recognized as an integral part of international economics and finance.15 Thanks to Transborder Data Flows, interna tional and financial and economic studies now give considerable attention to this area. The studies of the role of TDF to international finance and economics can be grouped into four types: theoretical studies, informatics as a trade issue, informatics as areas of capital invest ment and expansion, TDF and the structure of international economy, and TDF and transnational banking.

Theoretical studies Existing economic theories and theorists have been under attack from different directions and for different reasons. According to Meheroo Jussawalla, one reason for the criticism is that current theories "don't touch upon information trade flows or the effects of technological determinism on production possibility curves, on demand elasticities and income elasticities for information exports and imports."16 Jussawalla explains how trade

15The relationship between information/communica tion aspects and economics has been recognized for many years. One of the earliest studies of the subject is an article by F. M. Hayek, "The Use of Knowledge in Society," American Economic Review 35 (Fall 1945):519-30. 16Meheroo Jussawalla, "Constraints on Economic Analysis of Transborder Data Flows," Media. Culture. and Society 7 (1985):298.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 34 theories should be "extended, modified, or altered to accommodate this new form of exchange of intangible services which are priced and traded as final demand, as well as intermediate demand and also as capital."17 Although Jussawalla persuasively explains the weakness of current economic theories, like other critics, she fails to provide an alternative one.18

Telematics as a trade issue Scholars and decision-makers around the world have already recognized that information is a commodity with production values that affect the balance of trade between countries. Therefore, it has become a heated issue among trading countries. The issue of information is currently being debated among the ninety-three member nations of GATT (General Agreement on Tariffs and Trade). Members are divided on this issue. Third World countries, led by India, do not want information trading to be covered by GATT, while the U.S. wants it to be treated like other

17Ibid., p. 298. 18See Meheroo jussawalla and D. M. Lamberton, eds., Communication. Economics, and Development (New York: Pergamon, 1982) and also Rita Cruise O'Brien, Information. Economics. and Power (Boulder, CO: Westview Press, 1983). For a more comprehensive look at the current problems with economic theories, see the sixth chapter in this study.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 35 goods (in 1986, services made up about 46 percent of U.S. trade).19

The issue of information as a commodity and its regulation within GATT or at bilateral levels has led to the appearance of many studies about this subject. One study conducted by the Canadian government in 1979 entitled Telecommunications and Canada found that, in 1978, between 300 and 350 million dollars worth of computer services were imported from the U.S. by 400 Canadian subsidiaries of U.S. companies. The study also estimated that the Canadian economy would lose about 1.5 billion dollars and about 23,000 jobs in computer services before 1985 as a result of this practice.29 There are other studies which follow the Canadian government line. However, publications on the trade aspects of TDF link it either with other information products (such as films and broadcasting, advertising, banking, and insurance) or with telecommunications and computer equipment. The report to the President of

19Bruce Keppel, "U.S. Taking Hard-Line Stance in GATT Talks," Los Angeles Times. 25 March 1986, part 4, p. 2.

29Canada, National Parliament, Consultative Committee on the Implications of Telecommunications for Canadian Sovereignty, Telecommunications and Canada (Ottawa: Canadian Government, April 1977).

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 36 France, "L1Information de la Societe," is a good example of this.21 The issue of trade and service in general and TDF in particular is likely to be an important subject for scholars of international economics and decision-makers alike. It has already caused some economic constraints, not only between North and South, but also within Western countries. The study of economic and trade aspects of TDF mostly will increase in value and volume in the future.22

Informatics and capital investment and expansion Communication equipment and service— hard and software— is probably expanding more than any other sector of the world economy. It attracts capital investment which leads to economic expansion. The service sector represents 67 percent of the economic output and 72 percent of employment in the United States, as well as more than half of the gross domestic product in most developed countries. At the international level, the trade in the service sector is fast approaching near dominance. In 1982, U.S. service exports totaled $135 billion, a 52 percent increase over 1980. In 1980,

21For an English translation see Simon Nora and Alain Mine, Computerization of Society (Cambridge: MIT Press, 1980). 22See Raymond Krommenacker, "Discussion on Services in GATT," Transnational Data and Communications Report (February 1986):15-16.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 37 service exports from France increased over the previous year by 28 percent to nearly $51 billion; from Britain by 16.5 percent to nearly $50 billion; and from Japan by 33 percent to $26 billion.23 Although many short articles have appeared in the newspapers and news magazines about the importance of the information industry to capital investment, there is only one systematic and comprehensive study of this subject: Cees J. Hamelink's Finance and Information: A Study of Converging Interest.24 Its central concern is to discover who controls the information infrastructure and resources. Hamelink investigates the relationship between private financial establishments and the information industry in the West and around the world. Within this context, he documents the financiers of the information industry, as well as the importance of information for international capital expansion. The study also analyzes the relation ship between information and power, domination and dependency. In general, Hamelink finds that the informa tion/communication industry is currently controlled by transnational financial establishments.

23United States House of Representatives, Commit tee on Energy and Commerce, Subcommittee on Telecommunica tions, Consumer Protection, and Finance, Hearing on International Trade Issues in Telecommunications and Related Industry (Washington, D.C.: U.S. Government Printing Office, 23 March 1983), pp. 36-37. 24Cees J. Hamelink, Finance and Information: A Study of Converging Interest (Norwood, NJ: Ablex, 1982).

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 38 There are two problems in Hamelink's study. First, it does not separate information equipment and information as a product (hardware and software), nor does it differentiate between mass media and information. Second, the information/communication industry has both domestic and international markets. The term 'transborder data flows' is reserved mainly for international data flows, but Hamelink's study makes no distinction between the two.

TDF and the structure of international economy Although the relationship between transborder data flows and international economy has been recognized, no complete study of this relationship has appeared yet. The United Nations Economic and Social Council began to investigate and debate this subject in 1984. So far, it has completed one study entitled The Role of Transnational Corporations in Transborder Data Flows.25 This publica tion started by reviewing the general impact and policy of TDF. Then it examined commercial and corporate TDF, especially the impact and importance of TDF on the structure and decision making of transnational corpora tions. Finally, suggestions were made for the Commission

25U.N. Economic and Social Council, Commission on Transnational Corporations, Policy Analysis and Research: The Role of Transnational Corporations in Transborder Data Flows. Report of the Secretariat (New York: U.N., 1984).

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 39 on Transnational Corporations to study this subject further. However, no other studies have been conducted to date.

TDF and transnational banks Two important and interrelated developments in international finance have occurred over the last twenty years. First, there have been innovations in computer and telecommunications technologies. These innovations have become more efficient, cheaper, and more widely used in international financial transactions. Second, transna tional banks have grown to become the most important actors in international finance. The connection between TDF and transnational banks is so strong that currently no complete study about one can fail to mention the other. For example, three recent books about transnational banking, The Money Lenders by Anthony Sampson,26 Michael Moffitt's The World's Money.27 and The Money Mandarins by Howard Wachtel,28 emphasize the important role of com munication technology in global banking. These three books discuss a wide range of issues in transnational

26Anthony Sampson, The Money Lenders; Bankers and a World in Turmoil (New York: The Viking Press, 1981). 27Michael Moffitt, The World's Money: Interna tional Banking from Bretton Woods to the Brink of Insol vency (New York: Simon and Schuster, 1983). 28Wachtel, The Money Mandarins.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 40 banking, but the Sampson and Moffitt books are more descriptive than theoretical. There are also more specific studies. OECD's Banking and Electronic Fund Transfers29 researches the different implications communication technology has had for the banking system. This study concentrates on national rather than transnational banking. It also analyzes the impact of telematics at the micro-level more than the macro-level. Besides the OCDE study, there are many short articles and essays which appear occasionally in financial and/or telecommunication journals.30 Perhaps the best study of this subject is a Ph.D. dissertation written by Richard Hiller Veith.31 Veith uses interorganizational relations models to analyze the impact of TDF on the international banking industry. After reviewing the use of computer networks in transna tional banks, he examines an increase in standardization and formalization of banking relations, and clusters of interbank telecommunications patterns based on geographic regions. The analysis also shows that interorganizational

R. S. Revell, Banking and Electronic Fund Transfers (Paris: OECD, 1983). 30See, for example, Regan, "Global Banking Data- Dependent," pp. 14-16.

31Richard H. Veith, "The Interorganizational Impact of Computerized Information Processing Networks: The Case of International Banking" (Ph.D. dissertation, Syracuse University, 1980).

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 41 communications have developed and changed over time. The study concludes that TDF is facilitating a collegial form of supra organization or cluster organization. Veith's study appeared in 1980, and its data were collected for at least one year before it was written. Since then, many developments have taken place in the telecommunications technology and banking industry which have affected many findings of the study. Information transfer, for instance, has become cheaper and more efficient since, and the deregulation of financial institutions has become more widespread in Western countries during this period. The study doesn’t examine the impact of the changing structure of banking in world financial, economic, and political relationships and systems such as the debt problem and currency exchange, among others.

International political economy Scholars from different fields have increasingly utilized the international political economy approach as a framework to examine and understand international interac tions. Transborder data flows has been studied within the context of this approach either as a separate subject or in connection with other fields such as trade, communica tion/ information, and politics. Likewise, different frameworks of analysis have been used to study the

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 42 international political economy of transborder data flows. Four frameworks have been generally applied:

General description In this type of study, the connection between TDF, economic interest, and state policies is discussed and compared. Although these types of studies are similar to the policy studies reviewed earlier, unlike the policy studies, they describe the connection between three elements— economic interest, TDF, and national policy— without suggesting a normative action to be taken by a specific identity to further its interest. Karl P. Sauvant's study, Services and Data Services: The Interna tional Politics of Transborder Data Flows.32 is a good example. Sauvant first traces the emergence of interna tional data services such as data processing, data bases, software and telecommunication services, and their major impact on international economic transactions. He then analyzes the economic interest in data services and national policies of various countries. He also reviews bilateral and multilateral negotiations which transpire within such institutions as the Organization of Economic Cooperation and Development, the International Bureau for

32Karl P. Sauvant, Services and Data Services: The International Politics of Transborder Data Flows (Boulder, CO: Westview Press, 1986).

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 43 Informatics, the General Agreement on Tariffs and Trade, and the United Nations. Sauvant's study lacks a theoretical framework, however, and fails to discuss the impact of TDF on the world system.

Interdependence There have been few attempts to apply the inter dependence school of international political/economic relations to international information/communication interaction.33 Nevertheless, with the increasing impor tance of TDF as an economic and political issue, there is a tendency among some scholars to use the interdependence framework to look at this phenomenon. However, this tendency has not gone as far as employing interdependence theory alone in the study of TDF. They merely discuss the possibility of increasing information flow (TDF included) to accelerate global interdependence.34

33If interdependence school is viewed as an extension of integration theory, then there are many studies which analyze communication/information factors in the process of integration. However, it appears that most of the studies about integration have not analyzed recent communication technology (i.e., TDF) but rather such things as mail flow or telephone calls. 3 4 See John Michale, The Changing Information Environment (London: Paul Elek, 1977) and A. G. Oettinger et al., High and Low Politics of Information Resources for the 80s (Cambridge, MA: Ballinger, 1977). For criticisms of these and other interdependence studies, see Rita Cruise O'Brien, "The Political Economy of Information: A North-South Perspective," in World Communications: A Handbook, ed. George Gerbner and Marsha Sieffert (New

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 44 However, the only study which even comes close to utilizing the interdependence theory in analyzing TDF is a Ph.D. dissertation by Belinda Canton.35 After providing an historical overview and defining the process by which information technology affects social transition, Canton looks at current TDF barriers and evaluates international information regimes. The dissertation argues that the TDF rules of interaction will determine the boundaries of future international relations which lean toward inter dependence.

Dependency/Domination The theoretical approach to dependency/domination assumes unequal relations and exchanges between the advanced and the less advanced countries. This has resulted in the domination of the former over the latter, hindering economic development in the less advanced countries.36 International interactions, according to this school, are not simply between and among nation/ states. Modes of production, division of labor, and class division are the factors needed to understand the process

York: Longman, 1984), pp. 37-44. 35Belinda Canton, "The Information Revolution: An International Perspective" (Ph.D. dissertation, University of Southern California, 1984). 36Dependency School has a rich literature, sometimes conflicting. For a review of literature in dependency, see Ronald Chilcote, Theories of Development and Underdevelopment (Boulder, CO: Westview Press, 1984).

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 45 and structure of interactions and relations within and among nation/states. Scholars who use this approach envision a world free of exploitation and conflict, with economic, political, and social equality. The dependency/domination school tends to use a Marxist interpretation of international political economy, viewing the mode of production and division of labor as the main causes of inter- and intra-state conflict and inequality. The state is seen as representing the dominant class at the national and international level. This school has attracted many students around the world, especially those from developing countries who find it more sympathetic to their causes and demands. Therefore, a different range of issues such as international law, trade, finance, culture, and information/communication have been analyzed within this context. Over the last fifteen years, international communication/information as a subject of study has received considerable attention from adherents to this school. Recent developments in telecommunication technology have caused many students from other fields (e.g., economics, sociology, and politics) to study international communication. Some have applied the dependency/domination approach. There are many dependency/domination studies which discuss TDF. Most of them connect TDF with other aspects of telecommunication technology such as direct broadcast

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 46 ing satellites and remote sensing satellites, or with mass media such as international news services and advertise ment industries. The most distinguished scholar in the dependency/ dominance school is Herbert I. Schiller, who wrote several books and numerous articles about the telecommunications industry including TDF.37 Schiller's basic thesis is that there is a military-industrial complex in communications technology in the U.S. which furthers U.S. domination and control of many parts of the world, especially Third World countries. Other scholars make more specific cases than Schiller. Dallas W. Smythe examines communications dependency in Canada. He concludes that Canada has become increasingly dependent on the United States, because such things as Canadian data and information are being processed, analyzed, and stored in the U.S. As a result of this structural relationship, he argues, Canada has lost some of its national sovereignty.38 Armand Mattelart deals with multinational corpora tions and communications. Mattelart investigates how

37See Herbert I. Schiller, Who Knows: Information rn_the. Age of the Fortune 500 (Norwood, NJ: Abiex Publish ing Co., 1981). See also his Information and the Crisis Economy (Norwood, NJ: Ablex Publishing Co., 1984). 38See Dallas W, Smythe, Dependency Road: Communi cations. Capitalism. Consciousness, and Canada (Norwood, NJ: Ablex Publishing Co., 1981).

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 47 transnational corporations, assisted by TDF and other communication media, exploit many Third World countries.39

A New World Order Like dependency/domination students, those calling for a new world order believe that there is an unequal exchange between the developed and developing countries. But unlike dependentists, they claim that equal exchange can be achieved through dialogue and negotiation within the existing system, benefiting all parties in the end. When discussion of a new International Economic Order and a New International Information/Communication Order started in the first half of the 1970s, scholars wrote about these two "orders" as separate subjects. By the 1980s, however, the two "Orders" converged. This was due largely to the growing importance of TDF in particular, and the communication/information industry in general. The New International Information/Communication Order, therefore, has become not only a culture but an economic issue as well. As a result, many studies have analyzed TDF within the context of one of the two orders or both. A study commissioned by UNESCO entitled The New International Economic Order: Links Between Economics and Communica

39Armand Mattelart, Multinational Corporations and the Control of Culture (Atlantic Highlands, NJ: Humanities Press, 1980).

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 48 tions4^ is a good example of the latter. It examines the relationship between economics and communications, discussing communications as a trade issue with implica tions for international economics and finance that then affect relations between North and South. The relation ship between information, trade, and finance cannot be disconnected. Therefore, equitable relations between developed and developing countries could not be estab lished without taking TDF into account. Publications by Rita Cruise O'Brien,41 Meheroo Jussawalla,42 and Jorg Becker41 have come to a similar conclusion as the above study.

S u m m a r y

In summary, the literature reviewed above reveals much about the studies of transborder data flows. First, TDF has become an important area of study in the last few years, and its importance is likely to increase in the coming years. Second, TDF has had an impact on different types of international interactions. Therefore, it has

40Paulic and Hamelink, The New International Economic Order: Links between Economics and Communica tions . 410'Brien, "The Political Economy of Information." 42See, for example, Meheroo Jussawalla, Bridging Global Barriers. Two New International Orders: NIEO. NWIO (Honolulu: East-West Center, 1981). 43See Jorg Becker, "Information Technology and International Politics in the 1980s," pp. 8-11.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 49 been examined by scholars who specialize in a wide range of areas such as law, management, national policy, trade, communication, and finance. Third, some aspects of TDF, such as legal and national policy issues, have received relatively considerable attention. The general impact of TDF on international finance and the evolution and change in the world system, pn the other hand, have received little or no attention. Fourth, while some studies analyze TDF in connection with broader disciplines such as economics and international relations, other studies analyze TDF separately. Transborder data flows and international finance in general and transnational banking in particular have been studied somewhat narrowly. Existing studies examine the subject in terms of regulation and/or management as the effect of money transfer, or the connection between capital investment and expansions. Broader studies such as Wachtel's, Moffitt's, and Sampson's, which examine modern transnational banking, mention TDF in passing. We could therefore conclude that there are no studies which analyze the role of TDF in altering the structure and process of transnational banking, look at the impact of such change in international finance, and examine how this change affects the world system as a whole. This study will attempt to provide this kind of in-depth analysis at the macro-level by looking at the causes and effects of

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 50 the continuing process of evolutionary change in the world system as a whole.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. CHAPTER III

COMMUNICATION AND INTERNATIONAL POLITICAL ECONOMY: THE SOCIO—CULTURAL DIMENSION

Information/communication technology is an important vehicle in changing the structure of the international political economy. Change in the power structure cannot, however, occur effectively unless it is accepted by a large segment of a society. The process of legitimizing an existing order or an emerging new one is what we call the socialization process. It involves the socio-cultural dimension of communication such as mass media, books and pamphlets, research and education, associations and conferences, and symbols (diagram 1). Many scholars have analyzed the importance of this dimension for change in international political economy. Robert 0. Keohane sees communication and information as an important factor for the emergence of (a) new interna tional regime(s). He, however, does not distinguish between the technological and socio-cultural dimension of communication.1 Hamid Mowlana, on the other hand,

Robert 0. Keohane, After Hegemony (Princeton, NJ, Princeton University Press), pp. 243-257. 51

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 52 separates the two dimensions, but he sees them as going hand in hand in affecting international relations.2 When change began to take place, a conflict between the existing establishment and the new one arose— conflict between the agents of the status quo and the agents of change. Both agents would use the socialization process for their purposes. Within this context, this chapter will study part of the socialization process during a period of change. We will look at currencies as a symbol of power, existence, and belief in historical and current terms.

Comm./Inf. Tech. ■■■• !8> Finance The State (TDF) Transnational Banks and Classes

The Socio-Cultural Dimension of Communication (mass media, symbols, etc.) Diagram 1. Socialization process, finance, and the world system.

In contrast to currency as a symbol, among others, of the state legitimacy and power in a nation/states system, there is a new phenomenon in the socialization process within the world system. This phenomenon is exemplified in what we will call the money holder press.

2Hamid Mowlana, Global Information and World Communication; New Frontiers in International Relations (New York and London; Longman), pp. 175-193.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 53 This press is currently working to build a global capital ist consciousness beyond the nation/states system. The audience of this press is expanding to all parts of the world with a clear message: a unregulated movement for goods and capital and information.

Currency and the Socialization Processes Persuasion and legitimization are overlapping and substantial in the socialization process for any system. Language, the press, education, the national anthem, the flag, membership in an organization (e.g., UN), and currency are just a few examples of such processes. They have internal functions, which are directed to people within the systems, and external functions, which are directed to outsiders. Standard economics textbooks, however, view money as a unit of accounting and as a means of payment. Money serves both as a store of wealth and as a medium of exchange.3 Economists usually fail to discuss other functions of money such as its role as a channel of communication (i.e., socialization) between the state and its subjects.4

3The psychological role of money has been studied for a long time. See Ernest Borneman, ed., The Psycho analysis of Money (New York: Urizen Books, 1976). 4The use of the mass media by economic elites to influence the state and the masses has been studied by Marxist and non-Marxist alike. See, for example, William G. Damhoff, Who Really Rules? New Haven and Community

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 54 Historically, currencies have played a crucial communicative role at both the external and internal levels. Indeed, as Charles P. Kindleberger has written in A Financial History of Western Europet Money has been compared with language that assists in national and international intercourse. Italian was the commercial language of the Mediterranean in the late Middle Ages and Renaissance, and Dutch the language of Baltic trade in the seventeenth and eighteenth centuries, just as English (or American) is the commercial language today. By the same token, the Venetian ducat and Florentine florin were the dollars of the late Middle Ages, and Dutch currency (or currencies) the dollar of the seventeenth century.5 (Emphasis added.) Kindleberger argues that currency and language are twin tools in national and international economic inter course and power. He shows also that both language and currency are a means of communication within and between systems. In order to illustrate the role of currency in the process of socialization within national and interna tional levels, the role of currency during the rise of Islamic Empire, the emergence of European power and the nation/states system, and currently the case of a small country, the State of Israel, will be briefly analyzed.

Power Reexamined (Santa Monica: Goodyear Publishing Company, Inc., 1987). 5Charles P. Kindleberger, A Financial History of Western Europe (London: George Allen and Unwin), pp. 20- 21.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 55 Islamic Empire Within ten years after the death of the Prophet Muhammed (8 June A.D. 632) , the Islamic Empire was expanding rapidly. It controlled what is today called the Middle East and North Africa. The Roman and Persian Empires were defeated by this new power. A new order based on the Islamic faith and Arabic language was in the process of being established. This new order had to be enforced by the Islamic State within its domain and communicated to outsiders. Consequently, part of Byzan tine and Sassanian culture, including language and currency, was replaced by Islamic ones. Slowly Arabic was replacing Roman and Persian languages as the official language. The same development was occurring with currency. In 640, Caliph Omar issued what has been considered the first Islamic currency. The new currency was actually inscribed in Persian, although the phrase, "Thank God, Muhammad his Prophet, there is no God but Allah" was added in Arabic. The use of Sassanian and Byzantine currencies continued for more than fifty years with only minor changes, such as adding the name of the Moslem Caliph and the phrase mentioned above. It was not until the late 680s when Calipha Abdil Malik Ibin Marwan decided to issue a pure Islamic currency. At first he issued a new money with Byzantine designs, which also had the picture of the

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 56 Roman hero Hercules and his two sons Harkolanas and Constantine on one side. The other side had the words "There is no God but Allah and Muhammad is his Prophet." Later the pictures of the Roman hero and his sons were dropped. Instead, Abdil Malik has his own picture and the words "In God's name, this Dinnarus is issued in the year. . .". This action, according to Abdulrahman Fahmi in his book, Arabic Money: Its Past and Present, was one of the reasons for the conflict between Abdil Malik and the Byzantine emperor and the deterioration of the peace treaty between the Islamic and the Byzantine Empire around 695-6.6 Since that date, an indigenous Islamic money emerged which communicated to the people inside and outside the Islamic order and which was based on the Islamic faith and Arabic as its official language. Later, each Islamic ruler and state had its own currency but kept the same message. Therefore, until the early Middle Ages, as Claude Cahen stated: Coins foreign to the Muslim world were not accepted, except to be restruck as indigenous tender. Money carried in by merchants from other Muslim lands, however, was circulable. This rule held without exception save for political disruptions; for example,

6,iA Study of Money in an Age Which Did Not Know the Dollar," A1 Maialia. 14 January 1986, p. 55.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 57 while the caliphate Maghribi (i.e., Fatimid) dinars in territories under its suzerainty.7

N. The rise of European power and the emergence of the nation/ states system Before the medieval period, the Islamic dinar and the Byzantine bezant were the only currencies in the Mediterranean region. Europe used these two currencies, as well as less important local ones. With the Crusades, however, things started to change. First, Constantinople fell to the crusades in 1204 and the bezant of the Byzantine Empire fell too. The bezant had been one of the most important world currencies. It was "the dollar of the Middle Ages" in terms of its stability and intrinsic value. It was, as Robert Lopez has written, "more than a lump of gold, it was a symbol and a faith."8 (Emphasis added.) Second, in 1252, the first European Medieval gold coin, the genoin, was produced in Genoa. Other European commercial centers such as Florence followed by producing their own. The Europeans were reaching beyond their continent, economically as well as politically and

7Claude Cahen, "Monetary Circulation in Egypt at the Time of the crusades and the Reform of Al-Kamil," in The Islamic Middle East. 700-1900; Studies in Economic and Social History, ed. A. L. Udovitch (Princeton, NJ: Darwin Press, Inc., 1981), p. 318. 8Robert S. Lopez, "The Dollar of the Middle Ages," Journal of Economic History 21 (1951):209-34.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 58 militarily. They were attempting to challenge the dominant power in the Mediterranean and beyond, and it was necessary to create money which communicated this to the world and to symbolize their "independence." "If Medieval Europe finally perfected its money, it was because it had to meet the challenge of the hostile Muslim world,"9 wrote Fernand Braudel. Also, in the thirteenth century, Europe redis covered bills of exchange— a long distance endorsed paper payment. Its rediscovery in Europe was associated with the success of the Crusades during the same period.10 However, the Crusaders' campaign ended in failure, and the European kings engaged in many wars in that century and the ones to follow. This halted any meaningful develop ment of bills of exchange. With the conclusion of the Thirty Years' War and the signing of the Westphalia treaty in 1643, the bills of exchange extended in use and type. By this time, also, Europe was divided into several "sovereign" states, each with its own currency. Two different kinds of bills of exchange developed in the seventeenth century— governmental "orders" or notes and bankers' notes. They were increasingly used and

9Fernand Braudel, Civilization and Capitalism: Fifteenth - Eighteenth Century, vol. 1: The Structure of Everyday Life: The Limits of Possible (New York: Harper & Row, Publishers, 1981), p. 440. 10Ibid.r p. 472.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 59 circulated all over Europe. Due to some increasing problems with bankers' notes (e.g., endorsement and acceptance), the governments intervened to regulate them. Also, governmental notes developed later into what has been called paper money. By the eighteenth century, the State became the most important actor in money exchange.11 During the eighteenth century, Europe was divided into states of varied size and power which were competing economically with each other. The powerful states were able to legitimize their money, and their money legit imized their power at home and abroad. As Adam Smith stated: The currency of a great state, such as France or England, generally consists almost entirely of its own coin; should this currency, therefore, be at any time worn, dipt, or otherwise degraded below its standard value, the state by the reformation of its coin can effectively re-establish its currency. But the currency of a small state, such as Genoa or Hamburgh, can seldom consist altogether in its own coin, but must be made up, in great measure, of the coins of all the neighboring states with which its inhabitants have a continual intercourse.12 In concluding a chapter about money from the fifteenth to the eighteenth century, Fernand Braudel wrote: Like ocean navigation or printing, money and credit are techniques, which can be reproduced and per

11See Kindleberger, A Financial History of Western Europe. 12Adam Smith, An Inquiry into the Nature and Causes of Wealth of the Nations, ed. E. Cannan (New York: Modern Library, 1976 [1937]), p. 446.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 60 petuated. They make up a single language, which every society speaks after its fashion, and which every individual is obliged to learn. . . . So when a society becomes too populous, weighed down by the demands of cities and the expansion of exchange, the language becomes more complex, in order to the problems that arise.13 As soon as nationalism and the nation/states system expanded to the rest of the world, currency became synonymous with national independence and the state power. When a country announces its independence, it will issue its own currency— no matter how small this country is and how it is economically and financially independent. In fact, for most of the Third World countries' ruling elites, currency is more important in the socialization process than other methods (e.g., national anthem and the flag). For example, when a revolution, coup d'etat, or even death of the top leadership occur, the new ruling elite would issue a new currency expressing their legiti macy.14 The case of Israel as a new state, which is discussed below, will further illustrate the strong connection between currency and legitimacy in the social ization process within the current world system.

13Braudel, Civilization and Capitalism.

14 For the relationship between currency and legitimacy in the Arab countries, for example, see Jtfadul- Munaim S. Ali, The Unity of Arab Currency (Beirut: Center for Arab Unity Studies, 1986).

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 61 New States The governments of small and new states have given a good deal of attention to their legitimacy and indepen dence, and they try to communicate this to their subjects and to outsiders. They use all types of legitimacy methods which include, among others, education, national flag, memberships in international organizations, and currency. The state in these countries considers national currency an important symbol of the state's legitimacy and the country's independence. The case of Israel in the early 1980s and during the economic crisis illustrates fully the relationship between national currency and the subject of legitimacy and independence.15 Besides the use of common methods of socialization (e.g., education, mass media, national anthem, the flag, etc.), Israel uses others such as archaeology and Biblical interpretation to legitimize its existence and right. Currency is also used as a powerful method in this communication process. Currency became especially important when Israel experienced a severe economic crisis in the early 1980s, and particularly in 1983. Because of high inflation and the devaluation of the currency, the Israeli Ministry of Finance announced a

•*-5Among the world nations, Israel is very sensitive to the issue of legitimacy for reasons which cannot be discussed here. In this regard, see Benjamin Beit-Hallahmi, The Israeli Connection (New York: Pantheon Books, 1987).

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 62 new plan for economic stabilization, called the "dollar ization" of the Israeli economy. Among other things, this plan called for linkage of wages and economy in general and the cost-of-living index in particular to the U.S. dollar. In other words, the U.S. dollar would be the main currency in Israel.16 A summary of the proposed plan was published in the Israeli newspaper, Yediot Aharonot on 13 October 1983. When the plan became known, within hours an angry reaction swept across the entire political spectrum of Israel. Energy Minister, Yitzhak Modai, described the plan as "so far-reaching it could be compared only to changing the national anthem or the flag."17 The opposition Labour party called for a joint session of its leadership bureau and the Knesset faction exclusive. The joint session unanimously recommended a no-confidence motion in the government and called for early elections. The session described the proposed plan as "anti-patriotic and anti-Zionist." and said it "would

16It is important to note that the Shekel (the name came from a currency during Biblical times) replaced the Lira during the conservative government of Menachem Begin during economic and political difficulties in Israel in 1982. 17l,Aridoe Quils in $ Fiansco," Jerusalem Post. 14 October 1983.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 63 smash the Jewish dream for political and economic indepen dence.”18 (Emphasis added.) The Prime Minister, Yitzhak Shamir, tried to dissociate himself from the plan and claimed Mhe did not hear of it, but as (food for thought) not a concrete plan."19 The "dollarization" plan died, and the Finance Minister, Yoram Aridor, resigned on the day it was declared. The above three cases reveal that currency has been used as a channel of socialization between the state and its internal subjects as well as outsiders. The purpose of such uses are legitimization, as well as maintenance of power. This practice is very old, but it became more evident with the rise of the nation/states system. Currently, it is very important, yet its impor tance varies from one country to another according to the country's own circumstances.20 This is also contradicted

18Ibid. 19Ibid. 20There are some countries which use other currency, such as the U.S. dollar or the British pound, as their national currency, while other countries use such currency besides their national ones. Liberia is an example of the former, while Panama is an example of the latter. However, it should be noted that Liberia was established by U.S.-freed slaves and still controlled, politically, by them. Panama had also been under U.S. control until recently. Because of the internal conflict between those who come from the U.S. and indigenous people, Liberia decided recently to change its currency and establish a local one. It is also interesting to note that when William Walker, an American adventurer from

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 64 with the globalization process which international finance is moving to currently.

Money Holders and the Mass Media Generally, the relationship between money holders (i.e., bankers) and journalists in capitalistic societies is very close. The bankers are investors, advertisers, and good subscribers to the media. The bankers are also a source of important news. The use of mass media by money holders to influ ence the State and the general public is a modern phenome non which appeared with the rise of modern capitalism and the mass media. In this section, we will examine what can be called bankers' journalism, but first we will discuss the general relationship between bankers and the mass media in contemporary capitalist societies. In his book. The World's Money. Michael Moffitt states: It is clear that among the "foreigners" speculating against the U.S. dollar during the currency crisis of 1971-73 were the overseas subsidiaries of U.S. corporations and banks. Yet speculation against the dollar by American corporations and banks has been almost totally ignored by economists, policy makers, and commentators. Part of this is the result of clever propaganda bv banks.2^ (Emphasis added.)

Tennessee, invaded Nicaragua and installed himself as president in the mid-1850s, the first thing he did, among others, was to issue a new currency with his picture in order to legitimize his presidency and the invaders. 2^-Moffitt, The World's Money.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 65 Currently, transnational banks are the most important players in the world's financial system. The system works to their advantage, and they encourage it to do so. Besides the natural power which springs from their role, they use the mass media to legitimize their role and to reach their goals. Their "clever propaganda," as Moffitt calls it, is directed to the State and the public alike. They use traditional channels of communication (e.g., personal), as well as the modern mass media— money holders journalism and others. Here we will look at the latter by examining several occasions where this practice has occurred. When one studies the relationship between money holders and the mass media, it is important to consider two of the most important financial events in this century— the crash of the stock market in 1929 and the emergence of the Euromarket in the 1950s. Signs that the 1929 crash was going to happen were evident days if not months before it occurred. Yet money holders and the mass media, led by the Wall Street Journal. ignored all indications in their attempt to make the populace believe— perhaps themselves as well— that nothing out of the ordinary was occurring. From the middle 1920s, the stock market was moving in an unusually abnormal way. Call money, or loans to customers, were accumulating rapidly— $2.5 billion in 1926, $3.5 billion in early 1928,

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 66 $6 billion in January 1929, and $8.5 billion in October 1929. Speculation was growing, and people were buying stock with brokers' loans. The Federal Reserve Board and the Congress were attempting to regulate the stock market, but the financial community and the Wall Street Journal were attacking their efforts. In late September and most of October— before Black Tuesday, October 24— the market had been declining sharply. However, the Journal still seemed untroubled by the persisting decline. The following comment, for example, appeared in the Journal on October 22: There is a vast amount of money awaiting investment. Thousands of traders and investors have been waiting for an opportunity to buy stocks on just a break as has occurred over the last several weeks, and this buying, in time, will change the trend of the market.22 Yet the market was sinking further. Finally, on October 28 the Wall Street Journal admitted there was something unusual when it called "a panic, a purely stock- market panic, of a new brand" caused by "marginal traders."23 After the complete collapse of the market on 29 October 1929, the Journal had one of the most mislead ing headlines in journalism history. It was "Stocks Steady After Decline," and the following day it claimed

22,,Broad Street Gossip: The Market," Wall Street Journal. 22 October 1929, p. 2. 23"Broad Street Gossip: Something New," Wall Street Journal. 28 October 1929, p. 2.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 67 that "we have had panicky stock markets in the past, many of them, and stocks have always come back ultimately; the good ones always reach new highs."24 While the story of the Wall Street Journal and collapse of the stock market in the U.S. represents an example of how the press misrepresented facts, the issue of the Euromarket is an example of how the facts were con cealed. Eurocurrency started in Europe in 1948-49, when the Soviet Union and China wanted to place their dollars in a safe place far from the reach of the U.S. government and accumulate interest at the same time. However, bankers then discovered the benefits of this practice. The Eurocurrency market thus started to increase rapidly during the 1950s, although the market remained a secret outside of very narrow circles. Paul Einzig states in Foreign Dollars Loans in Europe: The Eurodollar market was for years hidden from economic and other readers of the financial press by a remarkable conspiracy of silence. . . I stumbled on its existence by sheer accident in October 1959, and when I embarked on an inquiry about it in London banking circles several bankers emphatically asked me not to write about the new practice.25 It appears bankers wanted to keep the Euromarket hidden because it was a new practice in international finance. It also bypassed the State's authority, which

24Wall Street Journal. 30 October 1929, p. 2. 25Paul Einzig, Foreign Dollars Loans in Europe (New York; St. Martins, 1965), p. vi.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 68 might have generated an angry reaction from some politi cians, economists, and other individuals, especially in the United States. It is hard to imagine that the press, especially the bankers* press, did not know about it. It is more likely that what happened to Paul Einzig also happened to other journalists. According to Anthony Sampson, the first time the outside world learned about the Euromarket was in 1960 when the London Times referred to "the so- called Euro-dollar.1,26 This was almost eleven years after the market first came into existence. All in all, the connection between bankers and the mass media goes beyond the above-mentioned cases. There is the case of Harold Timmeny who was working for Chase Manhattan Bank in Europe. After Timmeny opposed money speculation which bypasses government regulations, he was transferred to New York and finally was forced to resign. He attempted to persuade Time Magazine and the Interna tional Herald Tribune to publish reports of unlawful speculation, but both journals refused.27 Moreover, the connection between bankers and the mass media is very strong in the case of what we call the bankers' press. This press is designed to serve the

26Anthony Sampson, The Money Lenders: Bankers and a World in Turmoil, p. 111. 27See Moffitt, The World's Money, p. 83.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 69 interests of bankers in particular and money holders in general. This press has recently also been globalized as a result of globalization of banking. The globalization of the bankers' press therefore warrants further discus sion.

Bankers1 journalism Bankers' journalism can be described as the press which is devoted to the financial interests and concerns of bankers. This press can be divided into two types. First is the press which mainly is read by and circulated among money holders and financiers. It carries financial news and reports written by specialists in this subject. Banker Magazine,. Euromonev. International Currency Review, and Institutional Investor are a few examples. Although they are of considerable importance, they are beyond the scope of this study.

Second is the press which has mass circulation among decision makers in the private and public sectors. Besides financial news and reports, it also covers politics, economics, and arts. Though there are many journals of this type, we will examine two journals, the Economist, and the Wall Street Journal. which have great weight among the elite at the national and international

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 70 levels.28 We will focus mainly on their relationship to the State and money holders.

The Economist was founded by British Financier James Wilson in 1843 to support the Anti-Corn Law League and to support the principle of free trade. Soon it became a highly influential journal in the London finan cial center, the City, and within government circles. Wilson was also appointed as financial secretary to the Treasury and paymaster general. Yet he continued to be the Editor-in-chief of the Economist until he went to India as financial secretary in 1859. He then handed the position over to his son-in-law, Walter Bagehot, a great British financier and the author of Lombard Street. a classical text on the Bank of England. Under Bagehot's editorship, the journal increased the number of topics it covered and established its distinguished style which has continued until today.29

28It should be noted that the Financial Times of London is a more globalized bankers' newspaper than the Wall Street Journal. However the Journal is a more interesting case for analysis because it demonstrates how the globalization of Wall Street, which has occurred in the last two decades, has gone hand in hand with the globalization of the Journal. On the other hand, London as a financial center and the Financial Times have been globalized for quite a long time. It should also be noted that the Journal is more nationalistic than most of the money holders' press. 29See David Hubback, No Ordinary Press Baron (London: Weidenfeld and Nicolson, 1985). See also David Remnick, "Where the Elite Meet to Read," Washington Post. 9 February 1985, p. 85.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 71 By 1930, according to the Economist1s assistant editor. Aylam Vallance, "The Economist has become no longer as it was, a staid and colorless City weekly. . . . but a very definite organ of opinions associated through out the world with the name of an editor who is not so much a journalist as an international public man."30 The editor Vallance was referring to was Walter Layton, a well-known international economist and financier. The Economist. since then, has been a strong supporter of free trade and investment as well as international monetary reform.31 While it attempts independence in political issues,32 it has a clear-cut idea and strong stand on economic and financial issues. For example, the Economist firmly opposed the recent protectionist movement in the United States. It called it "foolishness" and "nonsense,"

30Quoted in Hubback, Ho Ordinary Press Baron, pp. 8-9. 31The Economist. for example, was supportive of Keynes until he advocated a revenue tariff in 1931. 32It is interesting to note that, during the late 1930s, the Economist supported the conservative party within the United Kingdom political system. This led to strong criticism from the City. Thus, the newsmagazine restored its independent political outlook. Also, in the first half of the 1980s, the Economist supported polit ically Reagan and Thatcher administrations in such issues as Central America and South Africa. However, in 1986, its editor Andrew Knight was removed and a new editor, Ruport Pennan-Rea, replaced him. The reason for such a change was not given, but it might swing again to the political center.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 72 because "Free trade is a doctrine supported by the weight of history and wisdom." It called for "a free-trade populist" and asked "closet free traders in Congress" not to be "embarrassed by their views."33 Another example is financial regulations, which the journal describes as "too parochial— and thus harmful." Inasmuch as companies, investors, and financial firms are travel ing the world in search of new markets and better deals, most regulators are still stuck inside their national boundaries. Unless they move out, the markets are going to leave them gasping.34 The Economist is a first class international money holders' journal. It has 278,000 world-wide subscribers— 107,000 in the United States, 78,000 in the United Kingdom, 50,000 in Western Europe, and 43,000 in other parts of the world.35 Its average subscriber is a 42- year-old white male with a university degree who earns $114,000 a year and has a $734,000 net worth.36 Since it was first founded, the Economist has been read by bankers, financiers, and civil servants, or what the journal calls "people who make important decisions on a daily basis." It has specific messages and selected and

33 "Routing Protectionists," Economist 300 (9 August 1986):15—16. 3 4 "Round-the-Clock Markets," Economist 300 (9 August 1986):13-14. 35The data submitted by the Economist to this author. 36Remnick, "Where the Elite Meet to Read," p. 85.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 73 targeted readers. When its new editor was asked about the idea of widening its readership, he replied, "We're read in the right places and have no plan to change our product to bring in new people."37

The Wall Street Journal. In the Prologue of his book about the Wall Street Journal. Edward E. Scharff wrote: The Journal's readership is the cream of American Society, with an average household income of $107,800 per year in 1985 and an average net worth of $767,800. Wealth aside, it is hard to imagine anyone of standing in business or politics not reading the Journal. for as much as any one publication can, it sets forth the intellectual agenda for the nation, particularly in the area of economics.38 Like the Economist. the Journal is a money holders' publication "par excellence." However the two publications differ in four ways. First, the Journal did not start with an economic ideology (e.g., free trade). Instead it began in 1882 as a simple publication to offer daily news for stockholders around Wall Street.39 However, after its success with innovative microeconomic theories, (e.g., Dow Theory and Dow Jones Index), it became

37Ibid. 38Edward E. Scharff, The Worldly Power: The Making of the Wall Street Journal (New York: Beaufort Books Publishers, 1986), p. xi. 39There are differences in style between the two journals. For instance, the Economist does not include the bylines of its writers, while the Wall Street Journal does.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 74 part of the Wall Street establishment and the voice of the financial community in the United States. Second, the Journal has been politically and economically very con servative. It was anti-labor in the 1920s, opposed the New Deal in the 1930s, and has generally been strongly supportive of conservative positions.40 Thirdly, the publisher of the Journal— Dow Jones and Company— has developed into one of the largest information industries in the world. Dow Jones owns seven daily newspapers, a financial news agency, an advertising and marketing com pany, public publishing and retrieval services, among others.41 Finally, unlike the Economist. which from the beginning had an international outlook, it took the Journal and Dow Jones about ninety years to discover the world beyond the United States. In fact, until the 1950s, most of the Journal editors never traveled outside the United States. "Apart from their somewhat provincial worries over the spread of world Communism, they saw little of real interest beyond the American shores," wrote

40It is interesting to note that the Journal avoided publishing the word 'liberal' during the 1960s. When it did, the word was usually placed between quotation marks. 41The Economist offers economic and financial services and sponsors conferences, although such services are very limited.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 75 Edward Scharff.42 During the 1940s, 1950s, and a large part of the 1960s, the Journal reporters covered the entire world— with the exception of the Vietnam War— through its correspondents in London and Paris. But the major foreign stories were reported by senior journalists based in Washington.43 By the end of the 1960s, Dow Jones and the Journal started to go international. In 1968, it signed an agreement with Associated Press (AP) whereby Dow Jones would handle world business news while giving AP responsi bility for sales, service, and a communications network. Before the year's end, they had customers in seven countries. In 1972, the Dow Jones International Marketing Service was established to sell advertising around the world. Also, the possibility of creating a global newspaper was studied during this time. In the following months, a contract was signed with twenty-eight publica tions around the world such as Le Monde in Paris and Die Welt in Germany to participate in an international marketing service.44 In 1973 a new venture started to unfold in Asia. Dow Jones purchased 40 percent (increased later to 49

42Scharff, The Worldly Power, p. 130. 43Ibid. 44L. Wendt, The Wall Street Journal; The Storv of Dow Jones and the Nation's Business Newspaper (Chicago: Rand McNally and Company, 1982), pp. 406-7.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 76 percent) of the Far Eastern Economic Review, which is published in English in Hong Kong. In 1975, Dow Jones bought 10 percent (increased to 16 percent in 1979) of the Morning Post, which is also published in English in Hong Kong. On 1 September 1976, a new edition of the Wall Street Journal, the Asian Wall Street Journal, was published in Hong Kong.45 Thus, the Journal went from being an American capitalist class newspaper to an international publication that also served Southeast Asia— the world's newest economic and financial center. "We had collected some far-sighted Asian partners, and we set out to conquer Asia," declared Wall Street Journal president Row Show.46 However the Journal not only expanded into Asia, it set about to "conquer" Europe and launched the second international edition. By 1985, this edition had an average daily circulation of 34,452 in Europe and the Middle East. The Asian edition's circula tion for the same period was 29,295.47 This is a fairly impressive performance, considering that these editions are relatively new and that a large number of their

45Ibid. 46Quoted by Wendt, The Wall Street Journal: The Story of Dow Jones and the Nation's Business Newspaper, p. 408. 47This data was submitted to this author by the Journal in August 1986.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 77 articles are written in New York for the U.S. national edition and sent via satellite. The Journal is read largely by decision makers and opinion leaders in the U.S. and abroad. Most of its readers are in the business sector, although many of its subscribers are government officials. In 1986, 45,700 or 2.3 percent of subscribers to the national edition in the U.S. were government officials, 900 or 3.0 percent in Asia, and 800 or 2.6 percent in Europe and the Middle East.48 These percentages are relatively large if we take into account the proportion of high-ranking government officials to business people in these areas. The Wall Street Journal considers itself "the most believable publication in America,1'49 and it "behaves like an arm of government, an extension of the Security and Exchange Commission. When the law requires the private sector to disclose its activities, there is little choice but to seek the Journal support."50

48These data were submitted to this author by the Journal in August 1986. The U.S. figures do not include the four regional editions. 49This claim is according to a survey of govern ment and business communities in the U.S. which was done for the Journal and was compared to some U.S. major publications such as the New York Times and Time magazine. Ibid. 50Scharff, The Worldly Power, p. xii.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 78 In sum, the analysis of the Economist and the Wall Street Journal reveals that the money holders' publica tions have a clear influence upon the State and the public at large, that they are usually an arm of financial community at national and international levels, and that they try to persuade the State and the general public that their ideology is the correct one. Finally, as the international financial system becomes more integrated and interconnected, the money holders' press become more and more international in their orientation.

Conclusion In conclusion, the socialization process is an important element of the world system during both times of stability and times of change. Various powers within the world system use a variety of methods to legitimize their power and/or existence. Currencies are among the many methods which have been used for this purpose. Currency, however, became even more important with the rise of nationalism and the nation/states system, as illustrated by the case of Israel. With the globalization of finance, the socializa tion process has taken on a global dimension. The leading actors in the globalization of finance are transnational banks. Therefore, their socialization channels, the money holders' press, are leading the way to legitimize their roles and to create a global capitalist class conscious

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. ness. This, however, creates contradiction and conflict between nationalism and nation/states consciousness on the one hand and global ism on the other. The structural change in the world system will be influenced to some degree by these competing socialization processes, which we will discuss in its larger context in the last chapter of this study, but after we analyze fully the role and impact of TDF on transnational banking.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. CHAPTER IV

THE EVOLVING RELATIONSHIP BETWEEN COMMUNICATION TECHNOLOGY AND TRANSNATIONAL BANKING

The modern capitalist system and transnational banking institutions in Europe first emerged around the fifteenth century. Since then, the relationship between transnational banking and communication technology has gone through four evolutionary stages— pre-industrial, organized industrial, telecommunication, and automated. During the pre-industrial stage, national boundaries had little or no meaning; there were no organized methods of collecting and disseminating information; boats, animals, and humans were the only means to transfer information; and financial enterprises did not have communication systems different from those of other enterprises. In fact, the pre-industrial stage was in existence for thousands of years, not only in Europe but also in other parts of the world. Therefore, this stage will not be discussed here. This chapter will describe briefly the second and the third stages, as well as provide more detailed analysis of the fourth stage. The automated stage is the focus of this study. The analysis of the two earlier ones

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 81 will place the automated stage in a larger context and provide a more complete picture of the relationship between communication technology and transnational banking in today's world.

The Organized Industrial Stage Before the nineteenth century, the growing European bankers and financial centers were connected through traditional methods— horses, boats, and foot— as channels of communication. This communication, however, was not well organized into a network that served solely the interest of bankers. In the beginning of the nine teenth century, however, powerful European bankers started to develop their own communication networks to carry such things as news, gold, securities, letters, and currencies. One of the first bankers to develop a special financial information network in Europe, and perhaps in the world, was Nathan Rothschild. His notion of looking into the future was to obtain news of significant events before it reached other people. As Marcus Eli Ravage wrote: Therefore at the first opportunity he had thought it good business to secure a small fleet of his own, so that officers and crews might devote themselves exclusively to his needs. These boats were not common carriers: they were a bridge between the London house of Rothschild and its associates on the mainland. Chiefly used for the conveyance of money, securities, and letters, they were in effect one of the earliest foreign news services in the world. For their commanders had orders to hurry back, regardless of wind and weather, whenever any event of outstanding importance had occurred on the Continent. It was thus that Nathan learned of battles and things ahead of the

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 82 British government. That was all there was to the mystery.1 (Emphasis added.) The importance of organized information networks in international finance in general and in the House of Rothschild in particular came during the Battle of Waterloo between Napoleon and England in the Spring of 1815. On 19 June 1815, the war was over and Napoleon was defeated. Such news would affect the financial market in Europe, and the winners in the market were those who received the news first. Rothschild planned to get the news before anyone else. Some said he used specially trained carrier pigeons, while others said he had a high speed boat. There were even claims that he was present at the battle and found heavy storms to help him to cross the English Channel quickly. In any case, his messengers arrived in London one day after the war was over and a day before the British government envoy reached London with the news. The messengers "carried cash, securities, letters, and news. Above all, news— latest, exclusive news to be vigorously processed at stock market and commodity bourse," as Frederic Morton noted.2

-^-Marcus Eli Ravage, Five Men of Frankfort: The Story of Rothchilds (New York: The Dial Press, 1929), pp. 147-48. 2 Frederic Morton, The Rothschilds: A Family Portrait (New York: Athenaeum, 1962), p. 49. See also C. E. C. Corti, The Rise of the House of Rothschild (New York: Cosmopolitan Book Corp., 1982) and R. Davis, The English Rothschilds (Chapel Hill: The University of North Carolina Press, 1983).

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 83 Rothschild used his knowledge to gain prestige with the British government and to create enormous fortunes for his family. More important, however, was that the financial community in Europe learned a lesson: A well-organized informational communication network can and does play an important role for national and cross national financial dealings. Soon, financial news agencies which could supply the latest and the fastest information and news were created. Although these agencies covered all kinds of news, the financial com munity in Europe was their main target. Also, at that time, commercial and financial news as opposed to other kinds of news were enjoying absolute freedom to cross national borders. It is interesting that the first news agency in the world was established seventeen years after Waterloo and by a former French banker who lost his fortune as a result of that war. In early 1832, Charles Louis Havas established the Bureau Havas in the center of news and commerce in Paris.3 It was located near the Post Office and near the Bourse, the Paris stock exchange. Havas used couriers, mail, train, caravan, and carrier pigeons to distribute news and information in France and to important

3From the end of the Napoleonic Wars when Havas lost his banking business until the establishment of the Bureau Havas, he was working as a translator of news for banks.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 84 European cities including London.4 Financial and com modity reports were one of the most important services Agence Havas offered.5 In the mid-1840s, telegraph lines had begun to connect major European cities. Havas made good use of them, as did other news agencies. For instance, the New York Associated Press was established in 1848 and the Wolffsche Telegraphen Buro was established in Berlin in 1848 to gather and distribute commercial information. The latter was created by Bernhard Wolff, a former Havas employee who had a strong interest in finance.6 However, traditional methods were still dominant due to the fact that telegraph lines did not yet connect the European and American continents with the most important financial center in the world, London. Also, some other European cities were not connected yet. It was in this environment that Paul Julius Reuter, an ex-Havas employee and a bank clerk, founded the Reuters news agency

4Havas did not originate the idea of utilizing carrier pigeons to organize news services. The Times (London) has been using pigeons since 1837 to carry news across the English Channel. In 1839, the Pigeon Express started in the United States and operated between Boston, New York, Philadelphia, and Baltimore. Havas, however, did not use them until 1840. See R. W. Desmond, The Information Process; World News Reporting to the Twentieth Century (Iowa City: University of Iowa Press, 1978), pp. 134-140. 5The name Bureau Havas was changed to Agence Havas in 1835. See Ibid. 6Ibid., pp. 131-68.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 85 in 1849 in Aachen, Germany. Although at the time Aachen had a telegraph line with Berlin, it did not have any with Brussels, Cologne, Antwerp, or Amsterdam. Reuter estab lished more than forty well-trained pigeon communication networks to service the financial community in places the telegraph had not yet reached. Among other information, the network brought news of the stock exchange and market prices of the European financial centers to the cus tomers .7 By the middle of 1851, most European cities were linked by telegraph lines, and a submarine cable between London and the Continent was about to be opened. Thus, in the summer of that year, Julius Reuter closed his office in Aachen and moved to London. As Graham Storey puts it, Reuter "was following the cable."8 On 14 October 1851, Reuter did what Havas had done nineteen years before; he opened an office near the London Stock Exchange and the telegraph office. Exactly one month later, the first submarine cable between Dover, France and Calais was in operation. This marked the beginning of a new stage of the connection between communications technology and transnational finance— the telecommunication stage.

7Graham Storey, Reuters: The Storv of a Century of News Gathering (New York: Greenwood Press, 1951), pp. 3- 1 2 . 8Ibid., pp. 13-15.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 86

The Telecommunication Stage After the cable was laid down between England and the Continent and most of the European cities were linked, a trans-Atlantic cable, largely promoted by the U.S. financial community, was completed in 1866.9 In the following few years, the telegraph connected Africa, Asia, South America, and Europe. Before the end of the century, almost all the major world cities and financial and economic centers were linked via telegraph lines. The major beneficiaries and users of this new communications technology were financial institutions and other busi nesses, especially those from economically powerful countries like the United Kingdom, France, Germany, Netherlands, and, to a much lesser extent, the United States. ' The second half of the nineteenth century wit nessed a great banking expansion, and the first step toward the integration of international finance was taken. This was reflected in four important financial develop ments which occurred during this period. First, there was a dramatic increase in foreign investment by the European industrialized countries. Great Britain's foreign investment was only $500 million in 1825 and $750 million in 1840, but tripled to

9A. Hamilton, The Financial Revolution (New York: The Free Press, 1986), p. 40.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 87 $2,300 million in 1855 and, in 1870, investment was more than double the 1855 figure. The pace of the increase continued. Other countries witnessed a similar increase, and even the United States had become a non-negligible lending country before the end of the century (see table

1).

TABUS 1 FOREIGN INVESTMENT BY MAJOR LENDING COUNTRIES, 1825-1913 (in millions of dollars) Country 1925 1840 1855 1870 1885 1900 1913

Great Britain 500 750 2,300 4,900 7,800 12,100 19,500 France 100 (300) 1,000 2,500 3,300 5,200 8,600 Germany ** * * 1,900 4,800 6,700 Netherlands 300 300 300 500 1,000 1,100 1,250 United States n n n n n 500 2,500

SOURCE: William Woodruff. The Imoact of Western Man: A Studv of Eurooe's Role in the World Economy. 1750- 1966 (London: Macmillan, 1966), p. 150. *No estimate available. n - negligible.

The second important financial development of this period was that banks of industrialized countries began a process of consolidation at home and expansion abroad. While Europe did have some important transnational banks more than a century before the telegraph, most European banks were at the local, city, or provincial level.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 88 Larger banks started to establish networks of offices in the second half of the nineteenth century, and, conse quently, small banks began a rapid decline. England and Wales, for example, had 409 banks, around the 1850s, with 1,185 offices. By 1900, however, there were only 164 banks but with 4,570 offices. By 1913 the number of banks had decreased to 70, and the number of their offices increased to 6,573.10 During this same period, the United States banks established their first overseas branches. The first foreign branch of an American bank, the Jarvis Conklin Mortgage Trust Company, was established in London in 1887. In 1897, the Guaranty Trust Company opened another branch, and by the beginning of World War I, five American banks were operating in London.11 Thirdly, for the first time in history, a movement for cooperation and standardization of international finance emerged during this period within economically advanced countries. Prior to 1865, there was no serious cooperation in financial matters among nations, with the exception of some bilateral agreements that dealt with some contemporary problems. In 1865, however, France, Belgium, Switzerland, and Italy formed the Latin Monetary

10C. P. Kindleberger, A Financial History of Western Europe (London: George Allen and Unwin, 1984), pp. 85-89. 1:LJ. Kelly, Bankers and Borders: the Case of American Banks in Britain (Cambridge, MA: Ballinger Publishing Co., 1977), p. 3.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 89 Union, which took effect on August 1 the following year. The Union established a fixed mineral percentage for the currencies of its member countries.12 In 1867, the International Monetary Conference was held in Paris to create universal money. The conference fell short of its goal, because participants disagreed on the issue of universal coins. Instead, the conference adopted an evolutionary method of money adjustment among countries. The next year, another International Monetary Conference was convened to discuss a universal converti bility standard, but no agreement was reached.13 Finally, the last two decades of the century witnessed the universalization of the Gold Standard. Prior to 1880, there were two money convertibility stan dards— the Gold Standard, which had been used in England since 1717 or 1774, and the bi-metallism standard, which was common in most other countries. The bi-metallism standard was based on two or more metals. Usually these metals were gold, silver, and/or copper. The Interna tional Monetary Conference and the Latin Monetary Union were attempting to create one general and acceptable system. No such system was established, but the standard ization of gold at the international level was evolving

12Kindleberger, A Financial History of Western Europe. pp. 65-67. 13Ibid., pp. 67-68.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 90 gradually. This was due partly to the economic power of the United Kingdom and partly to increasing international financial interaction.14 During the telecommunication stage, which contin ued approximately until the beginning of 1960, the telegraph was not the only communications technology used by transnational banks; it was, however, certainly the most important one. Two important innovations followed the telegraph— the telephone and wireless communications. Bankers were quick to use these new technologies, but their impact on transnational banking was minimal for several reasons. First, telephones were very expensive, whereas the telegraph could perform a similar function and still remain very cost effective. However, this was not the case with radio, which was the first medium to cross national borders without prior permission from a govern mental authority. Radio is comparatively inexpensive and can deliver messages simultaneously to anywhere in the world. This made it a great tool for financial informa tion. However, the development of wireless transmission mostly came at a time of great political and military

14It is interesting to note that poorer countries such as China and Mexico resisted the gold standard. They preferred a bi-metallism system, because they were short of gold but had more reserves of silver or copper or both. Other countries, with the exception of England, were shifting their position on this question, depending on their reserves of such metals. See Kindleberger, A Financial History of Western Europe, pp. 55-70.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 91 conflict (i.e., the First and Second World Wars) and economic instability (the Great Depression). For these reasons, radio became a channel of military communication and political propaganda. Since it was invented, the radio has been regarded as a tool used by the state, or at least a method of communication functioning under state regulations.15 Radio services had also been perceived and used as a commercial instrument. In the early 1920s, there were some experiments in Germany and England to use radio for such purposes. By 1923, for example, Reuters had a long wave leased transmission facility for price quotations and exchange rates for Europe and the United States. This was expanded later to cover all the world with more powerful radio transmitters.16 The world depression of the 1930s and World War II halted the expansion of transnational financial interactions and the use of these kinds of communications technology. One year before the war was over, however, the computer was developed in the United States. At this time, satellite communications were still

15Among the many works which discuss the evolution of radio waves and its relation to the State is K. Bilby, The General: David Sarnoff and the Rise of the communica tion Industry (New York: Harper & Row, 1986) 16Storey, Reuters: The Storv of a Century of News Gathering. pp. 180-85. It should be noted that stock exchanges and currency prices and other financial news are broadcasted until today in short wave radio frequencies. Most of these services are free and can be picked up anywhere by a short wave transistor radio.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 92 science fiction. Until 1954, computers were under the U.S. government control and were utilized especially by the Army. But soon after they were commercialized, many banks in the United States were using them. By that time, the United States and the Soviet Union were preparing to launch space satellites. In October 1957, the Soviet Union did launch one, and the United States was very close to doing the same. At the same time, research in develop ing a more technologically advanced computer was progress ing rapidly. Thus, we were approaching the third stage, the automated stage.

The Automated Stage The first half of the 1960s witnessed three important developments in the field of telematics. First, in 1960 the "second computer generation" appeared. These computers were half of the size of the first generation and worked a hundred times faster. They also had fewer maintenance problems, and were more reliable and less expensive as well. Second, in 1962, the first active satellite that was exclusively designed for international communication was launched by the United States. Finally, the third computer generation arrived in 1965 with many advances, such as smaller circuits and fivefold speed over the second generation. In the early 1960s, two other developments in communication technologies took place: data communications

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 93 and on-line communications. Because remote terminals need to be connected to a computer for data processing and exchange, data communication arose and has been used predominantly by business.17 On-line data processing, which is the opposite of off-line communications, is a system where a peripheral equipment (e.g., the terminal) is directly connected to the computer where they can feed and re-feed each other.18 • These integrated computer/telecommunications networks proved to be beneficial to banks and were, in fact, largely promoted by bankers. In the early 1960s, they were used at the national level primarily in the United States. By the middle of the decade, they were part of transnational financial interactions, although on a small scale. That is when transborder data flows came into existence. Since then, computer/telecommunications technology in general and TDF in particular have advanced tremen dously, and their use has expanded enormously. It is now unimaginable for transnational banks to function internationally without a reliance on TDF. In order to

17 J. M. Ciano and E. Bryan Carne, "Telecom munications: The Next Generation,911 in Communications and the Future. ed. Howard F. Dissbury, Jr. (Bethesda, MD: World Future Society, 1982), pp. 143-44. 18For a complete definition of such concepts as data communications, off-line, and on-line, see the Glossary at the end of this study.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 94 have a clear picture of the automated stage in relation to international finance, the remainder of this chapter will briefly explain the technological aspects of TDF, then describe the different types of transborder data financial networks, and finally the chapter will conclude with a discussion of international financial databases. To understand basic informatic technology, one should start with digital processing techniques. Unlike analog technology, which transmits information continu ously such as in radio, telephone, and television, digital technology represents information in discrete binary numerical language (i.e., as zeros and ones). In other words, information is stored in and analyzed by computer in digital form. Although most of the information around the world is transferred in analog form, digital signals are gradually becoming more predominant. There are four reasons for this change: The digital signals travel faster in greater volume than other signals; they are part of computer processing and suitable for fiber optics; and analog form can be transferred into digital signal; and different components can be more easily linked. In addition to the computer, which processes data in digital form, there is the terminal and home/office computer. They are machines connected via line or electronic signal, which, with the help of a modulator, convert digital signals to and from analog signals. They

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 95 enable the user to communicate with the computer. Some terminal/home computers might have a computer with a varying degree of power and capacity (e.g., modern personal computers). The information which is sent back and forth between the terminal and computer usually takes the form of raw data where the computer processes it in a digital form and the terminal in a readable form (e.g., printout).19 The term 'raw data* normally refers to two things. First, there is raw data on a collection of statistics and figures which have little meaning unless they are being analyzed and interpreted. The second is the raw data as computer programmed data with defined codes which are understood only by the computer and a computer language programmer (see table 2). However, they are very useful because they establish a standard of interpretation and communication among users. In the United States, for instance, the American Bankers Association's Bank Manage ment Commission started in early 1954 to work on a common computer language, and some banks began to develop their own standard. In 1956, a standard machine language called Magnetic Ink Character Recognition (MICR) was adopted.20

•*-9See T. Forester, ed., The Information Technology Revolutions (Cambridge, MA: MIT Press, 1985). 20American Bankers Association, Fundamentals of Bank Data Processing (United States: Author, 1967), pp. 1-3.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 96

TABLE 2 SAMPLE OF PAW DATA TRANSMISSION (BAX STANDARD) AND THE CAD INTERPRETATION Raw Data 01.0054692306.2722500001.8509234.1432.1432.,/= 02.2722500001.121000086.1.1850913.0000, /= 03, 060-285713,,015,0000000002327729,045,+0000000002327729,040, +0000000002 327729/ 49,+0000000006983187/= 98,+0000000006983187,00001/ 02.2722500001.1.21000086.1.1850916.0000,/ 03,060-2856713,,015,+0000000002324689,045,+0000000002324689, 040,+00000 00002324689/ 49,+0000000006974067/ 98,+0000000006974067,00001/ The Cads Interpretation 01 Company Name Code 02 Bank Name Code 03 Account Name Code 060 Current Available Balance = ($2,857.13) 015 Closing Ledger Balance = $23,277.29 045 Closing Available Balance = $23,277.29 040 Opening Available Balance = $23,277.29 049 End of Information for Account 098 End of Information for Bank 02 Bank Name Code 03 Account Name Code 060 Current Available Balance = ($28,567.13) 015 Closing Available Balance = $23,246.89 040 Opening Available Balance = $23,246.89 049 End of Information for Account 098 End of Information for Bank

SOURCE: Craig Waznick, "Parsing: The Essential Treasury Workstation Capability," Journal of Cash Manage ment. July/August 1986, p. 23.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 97 However, this language is mainly for check processing and intra-bank transmission. The Bank Administration Insti tute (BAI) standard was developed later (table 2). At the international level, SWIFT (Society for Worldwide Interbank Financial Telecommunication), which will be described later in this chapter, is leading the way towards the development of an international transmission standard. To explain the process of data transfer, a brief description of the structure of telecommunication/computer networks is necessary. A network has two interdependent levels of information/data transformation, a macro-level and a micro-level. The macro-level has three important components: telecommunication channels, sender/receiver, and computer and terminal (diagram 2). Telecommunication channels are either a space satellite, fiber optic or copper wire, or a combination of all. The receiver/sender system is made up of a satellite antenna (dish), only for satellite, and an electronic switching system connected to the dish and/or the cable on one end and to the computer or terminal on the other end via another cable or a microwave system.21 Data and/or information are trans

21The computer/telecommunication system is more complex than what we are describing here. An electronic switching system can connect to space satellites. Also, satellite antenna can be mobile of non-mobile. The recent innovation is a small antenna (the size of a handbag) that works on solar energy and can be used wherever a satellite beam reaches, almost all the globe. Further, a microwave

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 98 mitted from the terminal of the computer via a cable or a microwave channel to the switching system. That data will go directly to the receiving end via the dish(es) and satellite or via the cable. This is all done in a matter of seconds in a large volume.22

Orbital Satellite

Switching Satellite System Antenna

Computer □n Terminal

Cable (copper or fiber optic) Diagram 2. The macro level data transmission system.

Conservatively, there are five distinct components of the telecommunications/computer system at the micro level: terminal, modem, digital switching system, process ing computer, and data base. Data flows back and forth

system is used to link two switching systems and thus two telephones and two computers or terminals. We did not discuss microwave systems here, because they have been used largely on the national and not the international level. Finally, it should be noticed that satellite and fiber optics are gradually replacing copper wire as a medium of telecommunication.

22To have a better picture of all of this, one should imagine a direct overseas telephone call and the process, path, time, and distance the call travels.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 99 between the terminal and the processing computer and/or the data base. The modem transfers the computer's digital signal to and from audio signals, and the switching system directs it to the receiving ends (diagram 3).

Data Base

Terminal ft

Computer

• Modem (not always needed) Electronic switching system Telecommunication channel (satellite, cable, microwave) Diagram 3. The micro level data transmission system.

In the case of transborder data flows, each one of these five component parts can be located in a different country. For example, a processing computer can be in one country while the switching system is in another, while the data base is in still a third country, and many terminals in many countries. The connections and the process of data transfer through telecommunication/compu

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 100 ter networks are mostly done simultaneously, around the world, around the clock, in large volume and for different purposes. As discussed earlier, transnational banks were the first to utilize their communication technologies. Currently, there are numerous transborder financial data networks with a variety of purposes, functions, services, and ownership. The following pages will examine different types of transnational financial networks as well as data bases.

Financial Communication Networks When computer and telecommunication technologies were integrated in the early 1960s, banks in the indus trialized countries, especially those in the United States, began to take advantage of this technology— first at the national and then the international level. In the 1970s, the electronic financial networks developed rapidly in terms of their efficiency, speed, value, volume, reach, and importance. By 1986, they had expanded to almost every part of the world, including the socialist countries and most of the Third World. These webs of networks connect individual consumers, businesses, banks, and some government agencies (e.g., central banks) all around the globe. These networks can be divided into several types, depending on their functions and the kind of consumers they serve. The study of each type helps us understand

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 101 how the networks operate and why they are important to different types of financial institutions and to world finance as a whole.

Bipartite personal network This is the earliest and simplest kind of elec tronic financial network. It connects the individual consumer to his/her bank via terminal, purely electronic lines, and computer. The terminal can be located in a public place or perhaps in a home. The terminal is linked to a bank computer with individual financial information. The network provides different services which include: cash withdrawals, deposits, account balance inquiries, funds transfers between accounts, and check authoriza tion.23 No third party is involved in this kind of financial transaction. The data and information is communicated back and forth between an individual using a terminal and the bank computer, as illustrated in diagram 4.

Terminal Bank's Computer

Diagram 4. Bipartite personal network

23See K. W. Colton and K. L. Kraemer, eds., Computers and Banking: Electronics Fund Transfer System and Public Policy (New York: Plenum Press, 1980).

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 102 Bipartite personal financial networks have existed for some years in western industrialized countries. However, they have recently expanded to some Third World countries such as Saudi Arabia and Egypt. They are used mostly at the local and/or national levels, but they have been used across national borders since 1984. For example, VISA International global telecommunications network established the Electronic Money Network, which will have four hundred AITMs (Automatic International Teller Machines) and cash dispensers in 250 key travel areas in thirty-three countries. This type of electronic banking first took place in late 1984, when a VISA card owner used his card in an automated teller in Australia to transfer cash from his bank in Pine Bluff, Arkansas. The Automated Teller Machine beamed the request from Sydney to Singapore through a geostationary satellite, from Singa pore to California via an undersea cable, from California to a VISA operations center near Washington, D.C., and then to the card owner's bank in Pine Bluff. This message then traveled back to Sydney through Atlanta and the same route. This 31,000-mile trip took only six seconds.24

24"International ATM Transactions Made over VISA International's Network," World of Banking. September/ October 1984, p. 26.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 103 Multi-party personal network This network is more complex than the bipartite network, because financial interactions involve more than two parties. It enables individuals to do all their banking, including money transfers with third parties (e.g., grocery stores, shopping centers, telephone companies, etc.) via a public terminal or personal computer. Diagram 5 is a simple illustration.

Bank’s Computer

Terminal or Commerce Personal Terminal Computer Diagram 5. Multi-party personal network

The idea of creating a multi-party electronic financial network to connect customers with each other and with their banks was started in the late 1960s by Bank of America in the United States. Its purpose was to create a paperless transfer of funds that would save time and money (e.g., mailing, bookkeeping, etc.) for the bank and its customers. In 1972, the Automated Clearing House (ACH) was launched by the Federal Reserve Bank and several California banks.25 However, it has not attracted as many

25M. Mayer, The Money Bazaars: Understanding the Banking Revolution Around Us (New York: Mentor Books, New American Library, 1985), pp. 111-15.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 104 individual or cooperative consumers as expected. Cur rently, ACH's main customers are U.S. government agencies which transfer electronically such payments as social security and federal employee checks. ACH attracted more customers in 1985, but it is still far from achieving its goal. Other personal/business electronic networks have been operated in the U.S. in the late 1970s and in the 1980s, but they have not attracted large customers yet.26 The most successful multi-party financial network was established in France in 1981 and has been known as Minitel. This national videotext network connects customers who have access to a public terminal or who have a home computer which can be linked to their banks as well as to stores and other services. For example, customers with a Smart Card, as access, can pay grocery bills or can make phone calls from public booths and charge the bills to their bank account through Minitel. Smart Card and Minitel are used mainly in France, but there are some attempts to use them in other countries such as the United States and Australia. They have not been applied across national borders, but credit card companies and perhaps some business corporations which

26,1 Data Point's ACH Volume Grows," Journal of cash Management. July/August 1986, p. 30.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 105 operate across borders of countries with similar economic systems will probably use them in the near future.27

Cities' financial institutions networks Banks at major international financial centers that carry out extensive daily financial transactions at the local, national, and international levels have been establishing their own electronic communications networks. In this interbank system, the banks in a city deal with each other as well as with outsiders through an electronic switching center, computers, and data bases. This center functions as a clearinghouse where inter-bank fund transfers can be transacted daily. It is also connected to national and international electronic networks. Diagram 6 illustrates the structure of a city's electronic financial network.

International Networks' Computer Switching Center

< - -> • City's Banks' < - -> • Computers < - - > • National The Network's Network Computer Switching Computer Center Diagram 6. A multi-structure city's network

27A. Marton, "250,000 Frenchmen Can't Be Wrong," Institutional Investorsr August 1986, pp. 109-10; "Smart Cards," Telecom France. April 1984, pp. 8-13.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 106 CHIPS (The New York Clearing House Interbank Payments System), the first city electronic network, opened for business in 1970. Its purpose was to combine the enormous and rapidly growing volume of off-shore dollar transactions into the daily New York clearinghouse, by allowing the New York banks to avoid writing checks to each other on behalf of their foreign correspondent banks.28 Since its beginning, CHIPS has been upgrading its services and expanding its membership. In October 1981, it ran on one-day settlements. This means every bank making a payment entry into CHIPS is required to get money to its correspondent bank or to New York Federal Reserve by 6:00 P.M. the same day. There are 70,000 payments entered every day— one-third by foreign banks and about two-fifths for CHIPS' 125 bank participants.29 New York is not the only city with its own electronic financial system. London has one also. In 1984, London banks cooperated with the Bank of England and launched CHAPS (the Clearing House Automated Payment System), which is quite similar to CHIPS in New York. Currently, New York and London are the only cities in the world with their own electronic networks. However, other

28Mayer, The Money Bazaars, p. 90. 29Ibid., pp. 91-92.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 107 financial centers such as Tokyo and Hong Kong might create their own systems, due to the great role they are playing in national and international finance.

Central bank network The central bank in any country exercises a direct influence over the activities of that nation's financial institutions (e.g., commercial banks). The central bank regulates and follows the flow of money within and outside of the country, so it must offer the most competitive procedural system for its various activities. The first electronic financial central bank network was the FedWire, which was launched in 1971 by the U.S. Federal Reserve Bank to adjust internal accounts and accounts held with and between commercial banks. The FedWire is an automated method of payment which could involve also a third party. For example, Hertz, a car rental company in New York, could electronically pay General Motors in Detroit the price of one hundred new cars through the FedWire in seconds without writing a check or moving cash. Through its computers which are linked to a bank in New York, Hertz can transfer funds to General Motors' account in its bank in Detroit. The message will go from the New York Bank to New York Fed, and from there to Chicago Fed, and

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 108 then to the General Motors account in a Detroit Bank.30 Diagram 7 illustrates such procedures.

City or Central Computer for International Recording and Data Network Storage

< — > BF BC 0 FC BC BF L J FC = Federal Computer BC = Bank's Computer BF = Business Firm = an electronic digital connection — = not necessarily an electronic connection Diagram 7. Macro-structure of central bank network.

FedWire is not the only electronic network in the United States at the national level. FedWire has a competitor called Bankwire. Bankwire started in 1952 as a wire system for information exchange between New York and Chicago clearinghouses. It was a simple Telex service operated by Western Union at first. However, in 1968, it was computerized, named Bankwire, and offered subscrip tions to banks throughout the United States. More than two hundred banks subscribed. Bankwire was an information network in the beginning, not a fund transfer system like FedWire. But, finally, and after a long struggle with the

30Personal interview with G. Oreska, Manager of Electronic Payment, U.S. Treasury Department, 12 October 1986.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 109

Federal Reserve, Bankwire was permitted in 1982 to be a fund and information transfer system through its CashWire. Since then, it has expanded to offer different types of information about money transfers (e.g., daily ledger) to its subscriber banks.31 It is, in the words of Bankwire former manager Bernhard Romberg, "a payments management system, not just a payments system."32 (Emphasis in original.)

Transnational financial institutional network The previously discussed networks are national networks with international connections, as we mentioned in the case of CHAPS, CHIPS, and VISA International. There do exist, however, purely international financial networks which are mostly cooperative adventures under taken by commercial banks (private and governments) around the world. The most important network of this type is SWIFT (Society for Worldwide Interbank Financial Telecom munications) .33 In the late 1960s, a group of Western European banks discussed the idea of establishing an international

31Mayer, The Money Bazaars, pp. 93-94. 32Ibid., p. 94. 33There are other transnational financial institu tional networks besides SWIFT, such as Eurex, a European bank network. However, SWIFT is the largest and the most important international financial network.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 110 interbank electronic network because they "were alarmed at the competitive advantage held by large U.S. banks because of their private international telecommunications systems."34 However, the European banks realized soon that they could not generate enough traffic on their own. So, 240 European, U.S., and Canadian banks held a con ference in May 1973 and created SWIFT, "as a cooperative society for the collective benefit of its members."35 SWIFT is a non-profit association registered under Belgian law and headquartered in Hulpe, near Brussels. SWIFT is fully owned by participating banks. The society's members play a very active role in planning the overall activities, since the membership elects the Board of Directors who have responsibility for formulating general policy. Any country or group of countries accounting for over 1.5 percent of total system traffic is entitled to nominate a Board member. Share ownership is allocated in proportion to traffic volumes sent on the system and is periodically reviewed to reflect actual system usage.36 Since it started opening in May 1977, SWIFT's member banks and member countries have grown rapidly. Table 3 shows this growth over the years, and table 4 breaks down the number of member banks by country. The two tables show the large number of countries and banks which are part of SWIFT, although SWIFT is less than ten

34J. R. S. Revell, Banking and Electronic Fund Transfers (Paris: OECD, 1983), p. 149. 35SWIFT, Society for Worldwide Interbank Financial Telecommunication. S.C.: Profile (Belgium, SWIFT (sent to this author in August 1986), n.d.), p. 8. 36Ibid.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. Ill years old. It should also be noted that both tables do not include the national or international branches of member banks, although such branches are connected to SWIFT. Furthermore, some banks did not join for political reasons, such as banks supporting the Arab boycott of companies which contribute to the advancement of Israel's economy.37

TABLE 3 SWIFT MEMBERSHIP CONNECTIONS Year Member Banks Member Countries

1977 519 21 1978 586 24 1979 683 29 1980 768 33 1981 900 39 1982 1,017 44 1983 1,063 53 1984 1,084 54 1985 1,275 54 1986 1,309 55

SOURCES: The Bankers. October 1984, p. 74. For 1985, "List of SWIFT Member Bank/Shareholders as of 9 October 1985," a sheet sent to this author. For 1986, SWIFT Newsletter, July/August 1986, p. 3.

37Most of the Arab countries as well as Iran are not full members because of SWIFT's relations with Israel. However, this has started to change. In 1986, eight banks from Bahrain joined when Bahrain became the first Gulf country to join SWIFT. Perhaps this shows the growing importance of SWIFT in international financial transac tions. Bahrain, however, is the only off-shore financial center in the region.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 112

TABLE 4 SWIFT BANK MEMBERS BY COUNTRY, 1985-1986

country Number of Banks Country Number of Banks Andorra 2 Jordan 1 Argentina 33 Kuwait 1 Australia 14 Liechtenstein 3 Austria 42 Luxemburg 10 Bahamas 4 Mexico 14 Bahrain* 8 Monaco 1 Belgium 28 Morocco 8 Bermuda 3 Netherlands 24 Brazil 26 Netherland Antilles 2 Canada 10 New Zealand 3 Chile 13 Norway 26 China 1 Peru 13 Columbia 18 Philippines 10 Cyprus 5 Poland 3 Czechoslovakia 1 Portugal 11 Denmark 36 Singapore 10 Ecuador 11 South Africa 13 Finland 10 Spain 39 France 77 Sweden 16 Germany 124 Switzerland 73 Greece 8 Taiwan 12 Hong Kong 18 Thailand 12 Hungary 4 Tunisia 10 Ireland 2 United Kingdom 37 Iran 1 Uruguay 11 Israel 12 U.S.A. 160 Italy 158 Venezuela 20 Japan 72 Total 1,284

SOURCE: "List of SWIFT Member Bank/Shareholders as of 9 October 1985," a sheet sent to this author from SWIFT in August 1986. *The figure for Bahrain is for 1986, as it appeared in Swift Newsletter. July/August 1986, p. 3.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 113 However, table 4 shows that SWIFT consists of many countries with different political economic systems and significantly different roles in international trade. There are four Marxist countries (China, Czechoslovakia, Hungary, and Poland) and more than seven with modest economies (e.g., Andorra, Bahamas, Bahrain, Bermuda, Liechtenstein, Monaco, and Netherland Antilles). The second group is part of what has been called "off-shore financial centers," which will be discussed later in this study. SWIFT is a payments information system which transfers funds from bank to bank. Each SWIFT member has its own terminal or computer which is connected to regional processor(s)— one or two in each country— which is tied to SWIFT's three global operating centers (in Amsterdam, Brussels, and Culpeper, Virginia). The system operates twenty-four hours, although messages are deliv ered during the receiving banks' working hours. All this is done electronically through worldwide standardized methods and procedures understood by all member banks.38 SWIFT has improved and expanded its services over the years. Sometime in 1988, for example, SWIFT II will be operational with a greater capacity— 1.5 million transactions per day— and a better developing system.

38SWIFT, SWIFT Profile, pp. 1-8.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 114 Also, its range of services is increasing. Currently, SWIFt offers, among others, the following services: • customer transfers • bank transfers • credit/debit advice • statements • foreign exchange and money market confirmation • collections • documentary credits • interbank securities trading • balance reporting • payment systems.39 Besides offering a diversity of services, stan dardization of messages, speed, geographical expansion, and efficiency, SWIFT has high security and privacy techniques as well. A multi-level physical, technical, and procedural security system makes the network safe from intrusion. All transactions are encrypted, including stored copies. When there is no traffic passing, encryp ted dummy messages are sent to prevent a meddler from establishing a traffic pattern. The SWIFT system itself even ignores the content of the transactions it makes, except some essential data such as the identity of the sender and receiver, and the message type and priority.

39Ibid., p. 1. Also SWIFT Newsletter. July/August 1986, pp. 1-5.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 115 Because of its security techniques and procedures, SWIFT assumes full liability for any problem caused by the network except technical failure and problems beyond its control. Since it began operation in 1977, there has been no recorded interference within the SWIFT's network system. Therefore, the amount and destination of money moving through the network are beyond discovery.40

Private international financial electronic networks Private networks are those which are owned and operated by individual companies and used mainly for their own international operations. Currently, many transna tional banks and other financial institutions such as credit card companies have their own worldwide computer and telecommunications networks. These networks depend mostly on leased channels of telecommunications which connect different branches and outlets to automated switching and computer centers as well as to the institu tion's headquarters. The size of the network depends upon the size of the bank and its transnational operations.41

40Ibid. 41personal interview with David A. Hilton, General Manager, International Corporation and Government Banking, The Bank of Nova Scotia, Toronto, Canada, Washington, D.C., l October 1986.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 116 Citibank, for example, has a private leased line network, GLOBECOM, which connects the bank's branches in about one hundred countries through a main switching center in New York and through other switching centers in London, Hong Kong, and Bahrain.42 Chase Manhattan, one of the leading transnational banks which uses transborder data flows to conduct virtually all of its business, has developed a private extensive telecommunication/computer network (diagram 8) . In fact, Chase is currently working on a radically new project on international electronic banking networks. Chase's network, called Master Payment System or Global ACH, is similar to the ACH system and to Minitel in some ways, except that it operates at the global level and for institutional customers only. The basic idea of this system (diagram 9) is as follows: A Chase customer who wants to buy cars from a company in London would tap in the amount of money he wants transferred through his own terminal keys. This amount would then be sent instantly through SWIFT or Chase's network to Chase in London. It

42See Hamelink, Finance and Information, p. 62 and Veith, International Computer Nets. pp. 51-52. It should be noted, however, that the information about Citibank's GLOBECOM in these two sources are somewhat old, 1977-78. This author contacted Citibank for new data but no response was received.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 117 would then be transferred immediately via CHAPS to the recipient bank where the other company has an account.*3

M R U 10

AEFtiG 10 OSAKA. m e w an# jahnese coareswnoekis v » wauc nenams

HONG KONG REGION MM

HONG KONG BRANCH

NASSAU BANGKOK

ST. THOMAS

SANTO BEIRUT o o m ik g o

SOURCE: Cees J. Hamelink, Finance and Information: A Study of Converging Interests (Norwood, NJ: ABLEX, 1983), p. 63.

Diagram 8. Chase Manhattan's private communi cation network.

43James J. Hopes, Chase Manhattan's Vice Presi dent, "ACH as a Competitive Advantage," a speech given at the National Automated Clearing House Association. See also, "Chase Clears the Globe," The Banker. July 1986, p. 63.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 118

Country A Country B

SWIFT Network

Bank

Institutional Chase's CHAPS or Institutional Customer Branch CHIPS Customer

Chase's Branch

Chase's Network

Key: purely electronic links links that are not necessarily electronic Diagram 9. Chase's master payment system

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 119 International securities market electronic network Since stock exchange markets began in Europe and the United States more than one hundred fifty years ago, the trading floor has been the center of activity. However, since the onset of technological development in telecommunication and computers in the 1960s, the role of the floor has started to change. The importance of the floor is declining, and the stock markets are going automated and international. As a result of increasing demand for over-the- counter shares,44 the National Association of Securities Dealers established NASDAQ (National Association of Securities Dealers Automated Quotations) in Washington, D.C. in the late 1960s. By 1971, NASDAQ had 20,000 miles of leased telephone lines that connected terminals in dealers' offices into a central computing system which records prices, deals, and related information. Since then, NASDAQ has expanded its electronic system. In 1979, for example, the system was ranking the up-to-the-minute best bid and the price of the last deal transacted within ninety seconds of the transaction.45 The use of communi cation technology by NASDAQ has continued over the years,

440ver-the-Counter (OTC) defined as trading in securities and shares outside the formal stock exchange. See Glossary. 45Hamilton, The Financial Revolution, p. 43.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 120 and with a dramatic impact- As Adrian Hamilton has written in The Financial Revolution; Within the next dozen years, the share volume rose by more than sixteen times, and the number of terminals in use rose from barely a few thousand in 1972 to 40,000 in 1978 and more than 120,000 in 1985. By then, the volume of share dealing, at more than 16 billion shares with a value of some $200 billion, made NASDAQ the third largest stock exchange in the world, smaller only than those of New York and Tokyo and greater than those of London, Zurich, Bonn, Toronto, and Paris put together. All of this, through the medium of telephone lines.46 Previously, NASDAQ was a national stock exchange network dealing only with the stock of U.S. firms. Its brokers were American, and so were its customers. How ever, in 1984 NASDAQ started an internationalization/ globalization process by installing terminals in other countries and by displaying the stocks of non-U.S. firms in its network. Table 5 shows the countries with NASDAQ terminals and the number of terminals that existed in each country at the end of 1985. Table 6 shows the number of non-U.S. firms and the countries which displayed their securities in NASDAQ at the end of 1985. In 1985, the trading volume of non-U.S. companies in NASDAQ was at 4 billion shares— which constitutes about 7 percent of the total NASDAQ share volume. This amounted

46Ibid. It is interesting to note that some of the United States formal stock exchanges have not been automated yet. Such markets, however, have very small trading deals.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 121 to nearly $12.5 billion— more than 5 percent of NASDAQ dollar volume.47

TABLE 5 NASDAQ WORLDWIDE DISTRIBUTION AND LEVEL OF TERMINALS Country Number of Terminals Country Number of Terminals Switzerland 4,515 Scotland 26 Canada 4,345 Sweden 24 England 2,873 Spain 22 Germany (West) 721 Argentina 20 France 514 Venezuela 20 Netherlands 387 Virgin Islands 16 Hong Kong 285 Philippines 14 Belgium 185 Denmark 12 Japan 85 Panama 12 Kuwait 75 Luxemburg 10 Malaysia 66 Austria 8 Monaco 64 Uruguay 6 Greece 41 Guam 4 Liechtenstein 28 Lebanon 4 Bahrain 33 Mexico 4 United Arab Emirates 31 Chile 3 Australia 29 Bahamas 1 Bermuda 28 Cayman Islands 1 Italy 28 Norway 38 Total 14,578

SOURCE: NASDAQ, NASDAQ Factbook (Washington, D.C.: Author, 1986), p. 11.

The most important development for the globaliza tion of NASDAQ and perhaps in the evolution of interna tional equity trading occurred in 1985 when the London Stock Exchange agreed- to share quotations of about 600 selected firms. This two-year pilot project which started in April of 1986 allowed NASDAQ to feature 300 London

47NASDAQ, NASDAQ 1986 Fact Book (Washington, D.C.: Author, 1986), p. 102.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 122 stock issues. While the London Exchange's computerized quotation system features a similar number to NASDAQ's, it should be noted that about two hundred of the London Exchange's quotations are not from British securities.48

TABLE 6 WORLDWIDE DISTRIBUTION OF FOREIGN NASDAQ COMPANIES Foreign ADR* Securities Countries Issuers Issuers Aruba 0 1 Australia 12 0 Bahamas 0 2 Belgium 0 1 Bermuda 2 6 Bolivia 0 1 Canada 0 146 Cayman Islands 0 2 El Salvador 1 0 England 13 1 Finland 1 0 France 1 0 Germany (West) 1 0 Hong Kong 0 1 Ireland 2 0 Israel 3 10 Japan 13 3 Liechtenstein 0 1 Luxemburg 0 1 Mexico 2 0 Netherlands 4 4 New Zealand 1 0 Norway 1 0 Scotland 1 0 South Africa 19 0 Sweden 7 0 Switzerland 0 1

SOURCE: NASDAQ, NASDAQ 1986 Fact Book, p. 103. *ADR Issues: American Depository Receipts Issues.

48NASDAQ, From National to International: NASDAQ 1985 Annual Report (Washington, D.C.: Author, 1985), p. 5. Also NASDAQ, NASDAQ Fact Book.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 123 According to David Hunter, NASDAQ's Chairman, Gordon Macklin, its president, and Wilson Wearn, the chairman of the Corporate Advisory Board: The NASDAQ/London initiative is an extremely important step in the evolution of international equity trading. It satisfies the basic need for solid international price quotations. More international linkages for NASDAQ on a larger scale are ahead. This will include new and expanded linkages of NASDAQ with private international information vendors who see a rapidly growing market for international price quotation.^9 By 1987, NASDAQ's new $17.3 million computer operation complex in Rockville, Maryland will commence operations. It has the capability to handle 200 million shares a day. It is also working on a global network of computer software to be compatible with NASDAQ's system. That means home computers and different terminals in the world can be easily connected to NASDAQ's main computer.50 NASDAQ is not the only international network which deals with stock exchanges. In fact the first of such networks was Instinet (International Network Corporation), which started in 1969 in the United States. Its aim is to deal with bulk shares for institutional investors through low cost fees and along the lines of the foreign exchange market. It is completely automated, and its one hundred financial institutions which constitute its membership are

49 «To NASDAQ Companies, NASDAQ Members, and Friends," NASDAQ 1986 Fact Book, p. 3. 50From National to International: NASDAQ 1985 Annual Report, pp. 4-17.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 124 able to execute deals through their terminals. It quotes U.S. and non-U.S. stock shares, and there is no limit to the value of any transaction.51 In 1983, for example, a single deal was worth $19 million of stock.52 Two dramatic developments in securities electron ics systems have taken place since 1985. First is the Intex network, which was founded in 1981 under the auspices of Merrill Lynch and opened in Bermuda in 1985. This highly automated computer/telecommunications network deals with stocks as well as with other financial instru ments such as options and futures.53 Individuals and institutions who subscribe to Intex can observe the figures on their screen anywhere in the world and can make deals within a few seconds through their home or office computers. Mien a deal is completed, parties at both ends receive a confirmation printout from their computer.54 The second development is the establishment in April 1986 of automatic linkage between markets partici

51Hamilton, The Financial Revolution, pp. 44-45. On 28 October 1986, Instinet and Reuters announced an agreement where Reuters acquired 7 percent of Instinet's equity interest. Reuters has also a marketing right of Instinet1s system outside North America. See Reuters, Corporate Relations Department, Reuters: A Background and Chronology of Key Events (London: Reuters, July 1986), p. 20. 52Hamilton, The Financial Revolution, p. 44. 53For a definition of such financial terms as options and futures, see the Glossary. 54Hamilton, The Financial Revolution, pp. 45, 49.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 125 pating in the U.S. Intermarket Trading System (ITS) by Cincinnati Stock Exchange. Through Cincinnati's fully automated system, called the National Securities Trading System (NSTS), a trader anywhere in the world can trade in any of six U.S. exchanges, including NASDAQ and the New York Stock Exchange. What is needed is a registration with Cincinnati (worth ;..500 a year) and a screen (e.g., IBM PC) with a link to NSTS.55 Since September 1986, NSTS's membership has been exclusively within the United States. However, inquiries for memberships have been arriving from Germany, Spain, the United Kingdom, and other countries. Since its membership is generally unrestricted, NSTS is likely to have an international membership by 1987. In addition, NSTS is working with the United Kingdom-based software company to develop a highly sophisticated financial electronic system.56 It is too early to tell about the future of NSTS, but its establishment certainly consti tutes an important step in the direction of international ization and automation of the securities market. Another step in this direction has been the recent trend to link up electronically and internationally exchange markets where prices appear at the same time in

55,,Saving Dealing Costs," The Banker. September 1986, p. 107. 56Ibid.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 126 more than one market. The Toronto Exchange in Canada is electronically linked up with the American Stock Exchange and the Montreal Exchange with Boston. London is linked to the New York Stock Exchange, and both are considering greater cooperation in the future, and the Chicago Mercantile Exchange is connected with the Singapore International Monetary Exchange in option trading and in many metals including gold and silver. Amsterdam, Sydney, and Vancouver are electronically linked.57

General international electronic financial networks Transnational banks and other financial institu tions are concerned not only with money transfers and financial deals, but also with political, economic, and social factors that may influence the market and their international dealings. They want up-to-the-minute news, information, and analysis. This has resulted in the rise of the publications and organizations (e.g., news agen cies) which serve their interest, a development which has already been discussed in the third chapter and in the early part of this chapter. Some old news agencies as well as some new ones have been the first to apply TDF to work for the interna tional and national business and financial community. Dow Jones Co. is an example of the first, and Telerate is an

57Hamilton, The Financial Revolution, pp. 47-48.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 127 example of the second type. They offer terminals for their clients with a variety of information and data. The most automated and comprehensive international financial news network of all is Reuters, which merits a detailed discussion. From the late nineteenth century until 1964, Reuters was more of a general news service. Moreover, during its early age, Reuters acted as an arm and servant of the British Empire. For example, during the last half of the nineteenth century, Britain was competing with European powers, especially Russia, to dominate Iran. In 1863, Britain was granted by the Shah of Iran Nasir al-Din Shah the right to establish an overland telegraph line through Iran to India. It was the first concession by an Iranian ruler to a European power. In 1872, the Shah gave another major concession by granting Baron Julius Reuter the right to establish and control Iranian telegraph lines, transportation, and banking, among others.58 As the British Empire declined so too did the importance of Reuter's decline. The U.S. news agencies, United Press International and the Associated Press, began to take its place. Consequently, the American "empire"

58Rouhallah K. Ramazani, The Foreign Policy of Iran. 1500-1941; A Developing Nation in World Affairs (Charlottesville, VA: University Press of Virginia, 1966), pp. 66-7.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 128 began replacing the British's. In 1964, Reuters experi enced a net loss of 35,000 British pounds.59 However, during the same year, it moved in a new direction which changed the agency's future and the state of international financial and economic information gathering and distribution. On July l of that year, Reuters launched the first international computerized information retrieval system— Stockmaster— which states stock prices for clients in the United Kingdom and other European countries. Furthermore, in 1968, Reuters introduced a computerized message switching system— an Automatic Data Exchange (ADX)— to create faster handling and distribution of financial and general news throughout the world.60 On 4 June 1973, the Reuters Monitor Money Rates Service, better known as Reuter's Monitor, was operating an electronic marketplace system for foreign exchanges. This system was expanded later to cover news, prices, securities, and commodities, as well as currencies. In 1981, dealers were able to trade in foreign currencies

59See Story, Reuters: The Storv of a Century, pp. 118-268. It should be noted that there are other general international financial networks such as Quotron in the U.S., and Extel and Datastream in Europe. However, these networks do not have such expanded services as does Reuters. It should be noted also that American general news agencies (e.g., UPI) have been going through a declining period in the last few years. 60Reuters, Reuters: A Background and Chronology of Key Events, passim.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 129 over their office or home terminals through the Reuter Monitor Dealing Service.61 Currently, Reuters has the largest private communication network in the world, with over 270 interna tional point-to-point circuits connecting more than one hundred countries. These circuits are transferred by satellite, coaxial cables, microwave links, and telephone lines, and connected to automated message-switching systems and databases in five primary centers— Frankfurt, Geneva, Hong Kong, London, and New York— and nine secon dary computer centers located in Amsterdam, Bahrain, Johannesburg, Paris, Singapore, Stockholm, Sydney, Tokyo, and Zurich.62 This vast telecommunication/computer network is fed by 819 journalists and 700 part-time reporters in 150 countries and by 2,593 contributors in 101 organized and over-the-counter exchange markets in twenty-four coun tries. All this is done by computers and terminals in real-time, at the same time, and with up-to-the-minute information. It has business clients in more than 120 countries with 85,800 terminals.63 Reuter's terminal is

61Ibid. Also, Reuters, Reuter Monitor Money Service, sent to this author in December 1986 (New York: Reuters, n.d.), passim. 62Reuters, Reuters: A Background and Chronology of Key Events, p. 8. 63Ibid., p. 7.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 130 very advanced (SDS2). Subscribers can design their personal pages and create four zones on one screen where they can watch many different futures' cash prices and news on one page. The terminal can store more than five hundred pages and update them in real-time— as the information, news, and data changes. Recently, Reuters developed its own receiver— a small dish satellite antenna. It is only two feet six inches in diameter and can be installed on a rooftop or inside a window.64 Money, commodities, and securities information services are Reuters' most frequently used services. They accounted for more than 85 percent of its revenues in 1985 (see Table 7) . The financial and economic information service provided by Reuters can be divided into five types. First is the financial reports, which include "a timely printer service featuring business and financial news, quarterly and annual earnings reports, company announcements, market commentaries, and analysis explain ing the impact of news and trends on individual stocks and industries."65

Second is the foreign exchange and money markets, which are made up of three separate services. The Reuter Monitor Money Service, started in 1973, which gives its

64Reuters, Reuter Monitor Money Service, passim. 65Reuters, Reuter Financial Servi nesr a one-page pamphlet (New York: Reuters, 1986).

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 131 TABLE 7 THE NUMBER OF COUNTRIES AND TERMINALS WITH REUTERS SERVICES Countries with Countries with Year the Monitor The Monitor Dealing Terminals

1981 58 14 27,000 1982 66 22 31,000 1983 84 32 39,000 1984 98 43 56,000 1985 109 52 77,000 1986* NA NA 85,800*

SOURCES: Reuters, Reuters Holding PLC: Annual Report 1985 (London: Reuters, 1985), p. 11. NA = Not Available.

*The figure for 1986 is from Reuters, Reuters; A Background and Chronology of Kev Events (London: Reuters, July 1986), p. 3.

banks and financial institution subscribers in more than one hundred countries (table 8) service in securities and other monetary instruments. The Reuter Monitor Dealing Service (started in 1981 and operating in fifty-two countries by 1985— see table 9) offers instant contact between foreign exchange dealers and enables them to execute on-screen dealing.66 And the Reuter Monitor Position Keeping Service "provides a rapid method of recording deals and automatically updates trading inven

tories. 1167

66Ibid. Also, Reuters, The Reuter Monitor Dealing Service (London: Author, 1982). 67Reuters, Reuter Financial Services. Ibid.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 132 TABLE 8 PERCENTAGE OF REUTERS REVENUE BY MARKET IN 1985 Type of Market Percentage

Money 60 Commodities 13 Securities 12 Rich Inc.* 8 Media 7

SOURCE: Reuters, Reuters Holdings PLC: Annual Report 1985 (London: Reuters, 1985), p. 9. *Rich Inc. is a Chicago-based company which designs and supplies communications systems for financial trading rooms. It was acquired by Reuters on 3 April 1985.

TABLE 9 PERCENTAGE OF REUTERS REVENUE BY WORLD'S AREA 1985 Area Percentage

Asia, Australia, and New Zealand 26 Europe 48 North America 20 Overseas* 6

SOURCE: Reuters, Reuters Holdings PC: Annual Report 1985 (London: Reuters, 1985), p. 9. ♦Overseas is the word used by Reuters to mean Africa and South America.

Thirdly is an international bonds service, which is offered through the Reuter Monitor Bond Service. This service gives comprehensive information on the world capital markets. Dealers can also trade through this system. The fourth is Reuter Monitor Commodities Service,

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 133 which "displays on-screen real-time prices from the world' s futures markets plus market commentary and analysis.1,68 It also offers different international prices for grains, livestock, metals, coffee, cocoa, and sugar through a specialized teleprinter service. Finally, there is the Reuters Monitor Energy Service, where a subscriber can have instant access to five hundred pages of energy information, price quotations, statistics, and news through his/her terminal.69 Undoubtedly, Reuters is the largest international financial and economic electronic network. It will use more and more advanced telecommunications and computer technology to expand and improve its services. In the future, Reuters intends, as it claims, to: • innovate constantly to improve services and introduce new products at a pace difficult for competitors to match • invest heavily in database to maintain a better range of information than its competitors • maintain the best possible communications networks • offer subscribers facilities for computerized trading

68Ibid. 69Reuters, Reuter Monitor Energy Service, sent to this author in September 1986 (London: Reuters, n.d.), passim.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 134 • provide attractive packages of information and communications products and services.70

International Financial Databases The term 'database* is relatively recent. It refers to the raw data (or perhaps semi-raw) which is stored in a computer(s) as well as the computer where the data is held.71 Databases may be used for scientific, weather, military, financial, and other purposes as well. They can be located anywhere, and subscribers anywhere can retrieve data in a matter of seconds and perhaps store data if they have access. The subject of storing data and information across borders is one of the most important aspects of transborder data flows and raises many legal, economic, and security issues at the international level, as was discussed in the second chapter of this study. The value and volume of international databases have increased rapidly during the last ten years. International financial databases, however, are not as

7°Reuters, Reuters; A Background and Chronology of Kev Events, p. 2. 71The words 'database', 'data bank', and 'data centers' have been used sometimes interchangeably and at other times in distinguishing fashion. See, for example, V. A. Vinogradove et al., "Toward an International Data Network," in World Communications; A Handbook, ed. George Gerbner and Marsha Siefert (New York: Longman, 1984), pp. 217-228.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 135 highly developed in comparison to scientific ones, for instance.72 Each of the financial networks described above has its own database. There are, however, two types of databases. First are those which are used merely to record financial transactions and messages. These are not databases per se, but really data files which are used mainly to solve problems or disputes that arise among concerned parties. Yet, they are the most commonly used ones. SWIFT, FedWire, and NASDAQ all have data files for all data which travels through their systems. The second type are made up of true databases that allow members to have electronic access to the databases to call the needed data. These also can be divided into two forms— restricted access and unrestricted access databases. In the case of the former, the use of the database is limited to a few financial establishments or a few individuals within the establishment. Chase Manhat tan, for example, has a database accessible only to worldwide branches and some of the banks' correspondents. Also, most transnational banks and other financial institutions such as credit card companies have databases where data are stored in such matters as personal accounts

72In 1986, the Soviet Union, for instance, opened a large general scientific database permitting free access to individuals, especially those from socialist and Third World countries.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 136 and credit history. Because of privacy and the security of the institutions and their customers, few people within the institutions have full passage to the database. The second form is unrestricted databases, where subscribers have direct access to the data through their terminals. Most general networks have these types of databases. Reuters, however, has a unique database. Reuters' satellite beams over 20,000 per minute (19.2 kilobits per second) to a subscriber terminal which can store up to five hundred pages of data, information, and graphics. All pages are updated in real-time as the market changes.73 The importance of databases has been increasing over time, especially with the growing value and volume of transnational financial activities and transactions. Their importance, however, will be discussed in the next chapter with the analysis of the importance of transborder data flows to transnational banking.

Conclusion In summary, communication and information technol ogies have had a close link to transnational banking industries since the emergence of the modern capitalist system almost four centuries ago. The nature of this linkage has changed as the nature of information

73Reuters, Reuters Monitor Money Service, passim.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 137 technology changed. In the early period, it was a simple but organized relationship. With the appearance of the telegraph, this relationship became more complex. The convergence of computer and telecommunications has revolutionized the use of information technology by transnational banks. Transnational banks have created many transnational automated networks for varieties of purposes which range from fund transfers to general information. Having found that there is a significant relation ship between the transnational banking industry and information technology, the following chapter will look at the importance of information technology to transnational banking options.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. CHAPTER V

THE SIGNIFICANCE OF TDF FOR TRANSNATIONAL BANKING

"We are competing with other banks and competing with communications technology," said David A. Hilton of the Bank of Nova Scotia, Canada.1 "Today the telecom munications department is the most important department in any financial center," as Barry K. Zweibel, Manager of Installation in Chicago Mercantile Exchange, stated.2 The previous chapter studied the relationship between communi cations technology and banking in its historical and current terms. It illustrated the process by which a vast net of electronic financial networks was recently estab lished to service different transnational financial establishments' needs. However, what we have not yet examined is how banks and bankers perceive communication technology and what uses they derive from it. This chapter attempts to answer these questions.

interview with David A. Hilton, General Manager, International Corporate and Government Banking, The Bank of Nova Scotia, Washington, D.C., 1 October 1986. 2Interview with Barry K. Zweibel, Manager of Installation, Chicago Mercantile Exchange, Chicago, 10 January 1986.

138

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 139

The Position of TDF in Transnational Banking Since the emergence of the phenomenon of transbor der data flows as a major international economic factor in the late 1970s, several studies have attempted to deter mine TDF's importance to transnational banking. A study of F. Warren McFarlan published in 1984 shows that currently major U.S. banks are the industry most affected by electronic information systems3 (figure 1) . Among other things, this study points out that in 1980 major banks lagged behind the large insurance companies in their use of TDF, but by 1981 they bypassed the latter. Though McFarlan*s study is about major U.S. companies, it is important to note that most, if not all, of these com panies have international branches, subsidiaries, and financial connections to such an extent that they can be labeled as transnational corporations. The more specific and official studies have reached a similar conclusion. On its growing involvement in transborder data flows, the United Nations Centre on Transnational Corporations (part of the UN Commission on Transnational Corporations) has conducted many studies on

3F. Warren McFarlan, "Information Technology Changes the Way You Compete," Harvard Business Review 62 (May-June 1984).

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 140 Strategic Impact of Application Development Portfolio Low High Strategic Impact Low Large Chemical Insurance of Existing Companies Broker Operation Systems

Large Process Medium Size Industry Grocery Manufacturer Chain

Factory Strategic Major Bank 1980 Major Airline Large Insurance Company $100 Million Distributor Major Bank High 1981

SOURCE: F. W. McFarlan, "Information Technology Changes the Way You C o m p e t e Harvard Business Review 62 (May-June 1984), p. 101. Figure 1. Position of information systems in various types of companies.

the relationship between TDF and transnational corpora tions, including transnational banks.4 Not only did these studies find a strong association between TDF and TNC, but also an actual pattern of dependence between the two. The studies reveal a trend among transnational financial establishments towards heavier use of TDF than is the case

4See United Nations Economic and Social Council, Commission on Transnational Corporations, The Role of Transnational Corporations in Transborder Data Flows (New York: UN, 1984).

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 141 with other TNCs. In two different studies, one about Japan and the second about Brazil, we can observe the following: In 1974 there was only one financial establish ment (or two when stockbrokerages were added) in Japan using TDF. By 1980, however, this number had increased to twenty-two, or twenty-five with the inclusion of stock brokerages. This made Japanese financial establishments in 1980 rank second among national grouping of financial establishments using TDF, where in 1974 they had ranked last.5 (See table 10.) The increase of financial establishments which use TDF networks can also be seen in Brazil. In March 1982, Brazil had only one bank which used TDF, but, by December 1983, this number had increased to ten banks. No other industry experienced similar increases during that period. In fact, by 1985, the banking industry had raised its rank from fifth to second in the use of TDF, while that of the trading industry had actually fallen from sixth to eighth. (See table 11.) The importance of TDF is not only applicable to Japan and Brazil, but to corporate activity worldwide.6 An assessment study of the importance of TDF for transna-

5Ibid., p. 8. 6TDF is also important to financial transactions of socialist countries such as the Soviet Union and China, a subject which will be discussed in the next chapters of this study.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 142

TABLE 10 TRANSNATIONAL COMPUTER-CQMMUNICATION SYSTEM IN JAPAN, BY TYPE OF USER, 1974, 1978, 1980 (NUMBER) Industry 1974 1978 1980

Manufacturing 11 17 33 Trade 10 14 25 Finance and Insurance 1 7 22 Transport 5 10 18 Computer Science 2 5 9 Stockbrokerages 1 1 3 News Agencies, Tourism 1 2 3 Government 3 3 3

Total 34 59 116

SOURCE: United Nations Economic and Social Council, Commission on Transnational Corporations, The Role of Transnational Coroorations in Transborder Data Flow (New York: UN, 1984), p. 8.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 143

TABLE 11 TRANSNATIONAL COMFUTER-COMMUNICATION LINKS OF BRAZIL, BY TYPE OF USER, 1982 AND 1985 (NUMBER) Industry March 1982 December 1985

Petroleum Distribution 2 4 Manufacturing Data-Processing Equipment 4 6 Other 8 18 Services Banking 1 10 Trading 1 1 Data Services 2 5 Airlines 9 9

Other - 2 Government 2 2

Total 29 57

SOURCE: United Nations, Economic and Social Council, Transborder Data Flows and Brazil: Brazilian Case Study (New York: UN Publications), p. 65.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 144 tional corporation activities in different regions, done by Business International, supports this proposition. The study compared different corporate activities (financial management, marketing, distribution, production, manage ment, research and development, and personnel) in the United States, Western Europe, and other parts of the world for 1983 and 1988. TDF was found by far to be the most important for financial functions, the study found.7 Despite the existence of various surveys concern ing the importance of TDF, however, there is no easy and precise way to measure quantitatively the impact of TDF on transnational banking.8 Yet, statements from concerned individuals in the government and banking business point out that TDF has the highest position in transnational banking. It is "the life-blood of transnational corpora tions," said F. A. Bernasconi, Director General of the Intergovernmental Bureau for Informatics.9 The vice president of Continental Illinois Bank, E. L. Walker,

7Business International, Transborder Data Flow: Issues: Barriers, and Corporate Responses (New York, Author, 1983), pp. 11-14. 8The problem of measuring the importance, value, and volume of TDF for the banking industry as well as other industries has been raised by many studies, but without any practical solution. See Lauri Wilson and Ibrahim Al-Muhanna, NEED INFO HERE. 9F. A. Bernasconi in speech to I.B.I. World Conference on TDF policies, Rome, June 1980. Quoted in Paulic and Hamelink, The New International Economic Order, p. 38.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 145 states more precisely: "As an international bank, our business is entirely dependent upon the free flow of instantaneous communication."10 Another banker asserts "We are primarily dependent upon electronic media for international communications, both in providing services to our customers and in administrative communications between our branches."11 Therefore, it is not surprising the United States National Telecommunication and Informa tion Administration has observed that "International data communications have become crucial to the operation of U.S. multinational companies."12

The Usefulness of TDF for Transnational Banking As has been discussed in the previous chapter and above, communication technologies have a close linkage to transnational banking. Communication technology was a major factor in changing the structure of transnational banking, during the second half of the nineteenth century as well as now. However, the question presently before us

10U.S. House of Representatives, Subcommittee on Government Information and Individual Rights, 13 March 1980 (Washington, D.C.: U.S. Government Printing Office, 1980). ■^Robert B. White, "International Communication and Information," The United States Senate Hearing Before the Subcommittee on International Operations of the Committee on Foreign Relations. 10 June 1977 (Washington, D.C.: Government Printing Office, 1977), p. 247. 12United States National Telecommunication and Information Administration, NEED INFO HERE.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 146 is why bankers use TDF intensively. The following section is an attempt to answer this question. In order to put the issue in its proper context, a very brief examination of the history of transnational banking since the Second World War is appropriate. After the end of World War II, the world's major commercial banks, most of which were located in the United States and Western Europe, were investing their capital internally. After both world wars, the domestic markets of both the United States and western European countries were expand ing. Thus, there was little incentive towards investment abroad. Within a decade, however, some U.S. banks began moving overseas, partly as a result of U.S. economic, political, and military world expansion; and also because of the new financial opportunities offered overseas. This particular banking migration was relatively insignificant, however. It was actually less significant than the transnational movement of European banks during the last half of the nineteenth century. Besides the fact that the U.S. banks had a substantial market at home and little experience abroad, the communication technologies did not improve that much.13 The telegraph, telephone, and radio

13Joseph N. Pelton wrote in 1981 that "reliable transoceanic (communication) service is only twenty-five years old." J. N. Pelton, Global Talk (The Netherlands; Alphen aan den Rijn; Sijhoff and Noordhoff, 1981), p. 51. Walter Wriston, the former Chairman of Citibank, says, "When I joined the international division of Citibank in the 1950s, instructions were clearly set forth that you

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 147 were not enough to facilitate substantial out-migration of U.S. finance capital, for reasons discussed in the previous chapter. By the beginning of the 1960s, the situation had slowly started to change. The new communication technol ogy (i.e., TDF), which was already in use at the national level in the United States, proved to be very important for transnational financial operations. Since then, TDF has played a crucial role in changing the structure of transnational banking and, consequently, the structure of international finance. Bankers have discovered TDF to be a valuable tool to break four barriers preventing full transnational banking integration and free banking operations. An analysis of these four barriers, which are time, informa tion accumulation, efficiency and cost, and location, will facilitate our understanding of why the banking industry has relied on so extensively on TDF.

Time

The story of the Rothschild family discussed earlier in this study clearly illustrates the value of time in international financial transactions. Time is an important part of capital accumulation and financial

never sent a cable if a letter would do, and the letter often by sea mail." Walter B. Wriston, Risk and other Four Letter Words (New York: Harper & Row, 1986), p. 131.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 148 competition at the national and international levels, in fact, finances are measured by time more than by anything else. Capital accumulation, for example, is measured in terms of how much capital has been accumulated from period A to period B. Time is a very crucial element in capital accumulation and financial competition. First, much financial trading such as in stock exchanges and currency markets is greatly affected by time span. Second, international economics in general and finance in particular are very sensitive to international and national statistics and events which are being released every day if not every hour. Thirdly, as international interaction from any entity's vantage point has spread so that it now spans the globe, all financial communities have had to monitor new economic, political, and social developments everywhere on a twenty-four hour basis. However, when we discuss the connection between time, TDF, and transnational banking, we should distin guish between three types of time period that figure significantly in international finance. First is the amount of time for a message— or fund— to be transferred

14It appears that there are no studies which deal specifically with the relations between finance and the concept of time. Yet, most of the articles or other works which are done by people within the financial community emphasize greatly the importance of time in financial transactions. See, for example, Wriston, Risk and Other Four Letter Words.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 149 from one location to another. This time span has almost been eliminated with the introduction of TDF or Electronic Fund Transfer. Currently, communication between and among banks around the world is as easy or perhaps easier than communication between banks in the same city, or the same building. Funds and messages are transferred instantly.15 Yet, in some international financial networks certain types of messages still incur periods of delay when entered into certain networks' systems. This delay, however, is not due to the technology as much as to the system capacity. For example, SWIFT has some delays because the system which it uses is an old one, while its member banks and traffic are expanding. SWIFT is now in the process of updating its system in order to expand the capacity. The second type of time period is the amount of time needed to post or execute financial transactions. In the past, such transactions required a lot of office work which sometimes took hours or even days to complete. Currently, however, it takes mere seconds for an agreement to be executed between financial institutions in different

15It should be noticed that individual money transfers— as opposed to interbank or institutional investors— normally go through a couple of days' delay. The exceptions are the cases of those individuals who pay special fees or those with credit card networks access (e.g., VISA). This is perhaps due to the desire of banks to keep individuals' money out of their account, but in the bank's account where banks can use the money for such things as overnight interest deposit.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 150 parts of the world. Even seconds are considered imprac tical in today's financial transactions, as David Roches ter, managing director of Merrill Lynch Europe comments on the new computer system in London Market: "It's still occasionally taking thirty seconds, even a minute or more, for some changes to be posted, and that's quite slow compared to Nasdaq, where it's virtually instantaneous" (Emphasis added).16 Also, currently the clearing time for foreign exchange transactions is ten seconds or less, where in the 1960s it was an hour or longer.17 The third type of time has to do with global time zones. There are twenty-four time zones in the world, and those create a conflict in working hours, which in turn affects global communication and business dealings. However, the situation has slowly changed so that finan cial transactions now behave as if the world had only one time zone. The expansion of TDF uses has facilitated this trend. Table 12 shows that major world financial markets share few working hours, and sometimes have no such over-

16Quoted in Jeff Ferry, "Big Bang Sputters in London," Washington Post. 28 October 1986, p. C3. 17See Ibrahim Al-Muhanna and Arthur L. Fern II, "The U.S. Dollar as Independent, Extraterritorial Actor," paper presented at the 27th Annual Meeting of the Interna tional Studies Association, Anaheim, California, 26 March 1986. The importance of foreign exchange transactions will be very clear in the next chapter when we discuss currencies trading.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 151

TABLE 12 THE OVERLAPPED WORKING HOURS BETWEEN THE WORLD MAJOR FINANCIAL MARKETS (8 A.M.- 5 P.M.) Western New Hong London Europe* York Kong Tokyo** Sydney

London 9 8 5 1 0 0 W. Europe 8 2 4 2 1 1 New York 5 4 9 0 0 0 Hong Kong 1 2 0 9 8 7 Tokyo 0 0 0 8 9 8 Sydney 0 0 0 8 8 9

*W. European markets include: Paris, Frankfurt, Amsterdam, Zurich, Geneva, and Rome, among others. **Tokyo is opened at 9 A.M. Before this time no dealing is allowed.

lap at all. The importance of time and zone differences for international finance is demonstrated by the following quotation from a report published in The Banker magazine: Despite longer working hours, time zones are still critical. At the New York close, 5 P.M. New York time, it is 10 A.M. in New Zealand, 8 A.M. in Austra lia, 4 A.M. in Tokyo, and 6 A.M. in Hong Kong and Singapore (excluding the complication of summer time). In Japan, Ministry of Finance regulations bar banks from making a market until 9 A.M., though they can place orders and deal off other bank's prices in other centers. So, by getting to their desks by 8 A.M., New Zealand has four hours and Australia two hours before Tokyo's official opening— during which a lot of business can be done with Tokyo and even New York. Before these Australasian centers developed, there was a gap between the New York close and the Tokyo opening which was never adequately filled by the U.S. West Coast, because of the lack of counter parties.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 152 The Australasian markets have added depth to the afternoon market in New York, which was traditionally thin after the London close, and the West Coast is passed by. When the East Asian centers open, however, the Australian market also becomes secondary. Equally, Hong Kong and Singapore trading is also generated increasingly by Tokyo: When Tokyo goes to lunch at 12:30 P.M., so do many traders in Hong Kong and Singapore, even though it is only 11:30 A.M., but they point out that they have been at work since dawn. And they face further surges of business when Frank furt and London open at 3 P.M. and 4 P.M.18 The time zone differences have generated major effects upon international finance. First, clusters of financial markets with a center and satellite are created in the areas which have closeness in time zones. Cur rently, there appear three major clusters: the South-East Asian cluster (Hong Kong, Singapore, Sidney, and New Zealand) and Tokyo as its center; the European cluster (Paris, Frankfurt, Amsterdam, Zurich, Geneva, and Rome) and London as its center; and finally, the American center. The number of satellites and their relative power might influence the competitiveness of the center with other centers.19 That is perhaps why London is out performing New York in international transactions, and

18l,Now a Quarter of World Total?", The Banker. September 1986, pp. 54-56.

19No active financial center has developed in Latin America or on the East Coast of the U.S. to be a supportive satellite for New York. The development of such satellite centers is perhaps needed, at least to bridge the time gaps between New York and Southeast Asia. The obstacle for such development is perhaps that New York is so powerful and also the issue of location, which will be discussed later in this chapter.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 153 Tokyo might soon be in second place.20 In this regard, communications technology within a cluster, between clusters, and with the rest of the world has an important role in the performance and competition between clusters and centers. The second impact of time zone differences is the appearance of small but important financial markets to fill the gap between different time zones. The New Zealand market is becoming significant for its role in bridging the time difference between Tokyo and New York. Its market opens two hours before New York's close and closes three hours before Tokyo. Bahrain is another example, being five hours ahead of London, four hours ahead of Hong Kong, and five hours ahead of Tokyo. Therefore, Bahrain gains a special advantage in interna tional finance. "it's blessed by its location," as a Bahrain banker stated.21 Although time zones create a problem for interna tional financial transactions, traders aided by TDF are moving to solve it. Three examples might illustrate this movement. First, the Chicago Board Option Exchange is starting an evening trade where the market will be open until 9 P.M.; thus, they can trade with Tokyo before it

20"Now a Quarter of the World Total?", pp. 54-56. 21Personal interview with Patrick J. Mason, General Manager, Alubaf Arab International Bank, Washing ton, D.C., 1 October 1986.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 154 closes.22 Second, in New York, an almost 24-hour currency trading is booming. [They] have nothing to do with stocks and bonds. They are middlemen, the matchmakers in international around-the-clock action of the world's currencies where more than $50 billion changes hands each day in New York alone. . . . The typical New York currency brokerage office opens for business as early as 5:30 A.M., to handle clients who want to trade with the London market. Those allowed to sleep later arrive by 7:00 A.M. The larger firms have a second shift that carries on until midnight, allowing traders here to deal with the Far East. When the market is moving rapidly, the trading room is a sea of shouts, hand signals, and flashing video screens.23 (Emphasis added.) The second example is from Saudi Arabia, where currencies trading is becoming an important part of banks' business and very profitable for many wealthy people. Many banks, especially Al-Rajahe Financial Establishment, have currency trading rooms which are connected directly to the world's financial centers. In the trading room there are video screens which carry the prices of many currencies for London, Hong Kong, and New York. A customer who has an account with the trading room can call the broker and ask about the prices for sell, and buy any currency. The transaction is completed and a receipt is sent through the mail if needed.

22It has been proposed that the New York Stock Exchange have 24-hour trading hours. However, such a proposal has not materialized yet, but this is likely in the near future. See Nathaniel Nash, "Stretching the S.E.C.'s Reach," New York Times. July 1986, p. 4F. 23Barnaby J. Feder, "Money's Swift Matchmakers," New York Times. 25 August 1986, p. 27.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 155 The normal working hours in Saudi Arabia are usually between 9 A.M. and 5 P.M. However, currencies brokers are open until 9 P.M. or later. Therefore, currency traders are in touch with all major international financial markets not only for price quotations but to sell and buy in those markets. Besides this, Saudi Arabia is a Moslem country whose official holy day is Friday, when most of the government and business offices are supposed to be closed. Yet, currency brokers are open on Friday and closed on Sunday to be in harmony with the major world markets. Some predict that very soon all major banks, other financial institutions, and markets worldwide will work around the clock. As Bank of America's Vice-President Colin Klipin predicts: The needs for cash management circa 1990 will be significantly different from what they are today. Banks will have to get treasury operations to central ize more, to provide better information, more timely information, and operate worldwide, twenty-four hours a day.24

Information ancnmii l a t i on

In the last hundred years, the production of information has increased tremendously to the point where its sheer volume is beyond the normal capability of human beings to comprehend and gain access to. As a result,

24Quoted by Rick Friedman, "The Cash Management Equation," The United States Banker. September 1986, p. 42.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 156 there has been a growing need to organize this information efficiently for recall and use. The idea of organizing information into an accessible system is not new. However, as more informa tion and data have accumulated, they have become difficult to find and use. A new method of organization had to be created. In 1945, Vannevar Bush suggested a desk-sized repository microfilm machine capable of storing five thousand new pages a day for hundreds of years.25 Bush's idea was not implemented, although the issue of handling the growing mountain of information was a hot subject to most of the industrialized countries.26 Although organizing information is an important subject for many people from academic communities to government bureaucracies, it is even more significant for the transnational financial community. Money is very sensitive to political, economic, and military events around the world. Transnational banks need to have full and up-to-date information about the local and regional markets where they operate, as well as global ones. They need to have full information about current and potential customers— individuals, corporations, and governments. Also, most of the financial trading instruments (e.g.,

25Vannevar Bush, "As We May Think," Atlantic Monthly. July 1945, pp. 101-108. 26See Richard H. Veith, Multinational Computer Nets (Lexington, MA: N.p., 1981).

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 157 options, futures, securities, currencies, stocks, etc.) are information-sensitive traders.27 Banks are also interested in another issue, namely, how to handle the growing number of checks and other financial transactions, nationally and internationally. (In the 1970s, the number of checks written in the United States alone was about twenty billion.)28 Since the 1970s, major banks have increasingly used computers for global transactions, and are constantly updating their system. Computers are now viewed not only as calculations machines, but also as tools for the storage and recall of data and information. This develop ment has solved the problem of information volume. The solution to the second problem of handling large numbers of checks and other financial transactions has been proposed with the idea of a cashless or checkless society. The essence of this idea is that most, if not all, money transactions can and should be done automatically. The realization of this idea, however, has not domestically taken root in the Western countries where it was proposed. At the international level, in contrast, most of the financial transactions, especially among financial

27These financial trading instruments as well as others will be discussed in the next chapter. 28See Martin Mayer, The Money Bazaars; Understand ing the Banking Revolution Around Us (New York: Mentor Books, 1984).

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 158 institutions, are done automatically in a cashless fashion. The capacity of the computer to store and process information has expanded rapidly. Currently, a computer the size of a refrigerator, for instance, can hold all the information contained in the Library of Congress. The most recent improvement, however, will reduce such a computer to the size of a football and render its functions ten times faster than those of its predecessors.29 Also, technology has greatly advanced the intensity and speed with which modern telecommunication channels can transmit data and information. Satellites, microwaves, and fiber optics can transmit a large amount of information to anywhere in a fraction of a second. The importance of information/communications technology for transnational financial institutions can be illustrated for instance by the following statement of Joan E. Spero, the Vice-President for International Corporate Affairs for American Express: We process 350 million American Express Card transac tions annually? we authorize 250,000 of these transac tions each day from throughout the world within an average response time of five seconds; we verify and replace lost or stolen travelers Cheques sold by more than 100,000 banks and other selling outlets and travel services; we access reservations systems and travel service data bases from offices in more than 125 countries; we complete 55 million insurance premiums and claim transactions annually; we execute

29See Philip J. Hilts and Michael Specter. "Conductor Technology Advance: Ceramic Material Offers Breakthrough in Handling Current," Washington Post. 11 May 1987, pp. 1, 9.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 159 approximately $10 billion a day in international banking transactions, in the form of money transfers, letters of credit, and foreign exchange transactions; and we respond virtually instantaneously to 500,000 daily messages directly, high-speed trading in securi ties, commodities, bonds, treasury bills, and a host of other items.-*0

Decreasing cost and increasing efficiency For a new innovation to be widely used, it has to be reasonably priced and easy to operate. This is a prerequisite for all innovations to have a clear impact on a society. Yet, the decline of price and increase of efficiency is usually slow. Thus, the impact is very often not tangible and dramatic, although it can be great over time. In the early 1950s, telecommunication and computer technologies were disintegrated, very expensive, and difficult to use. Soon, however, computers and telecom munications were united, and their prices started to decline. Also, more innovations were introduced separ ately within each of these technologies, thus making them more efficient and easy to operate. Therefore, the rapid changes in their prices and efficiency which occurred within three decades have greatly expanded their use and impact. In fact, no other technologies have ever gone

3°Joan E. Spero, The United States Senate Commit tee on Commerce. Science and Transportation. Subcommittee on Telecommunications Act of 1983 (Washington, D.C.: The U.S. Government Printing Office, 1983), p. 176.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 160 through a similar trend. A computer expert illustrated this by "estimating that if the automobile business had developed like the computer business, a Rolls Royce would now cost $2.7 and run 3 million miles on a gallon of gas."31 Without discussing the price decline and growth of efficiency for computer and telecommunications tech nologies in terms of numbers and figures which can be found in most books and journals on this subject, we will analyze the structured changes as related to transnational banking. That will be a qualitative, rather than a quantitative assessment of the changes that have taken place. In order to clarify this point, it is appropriate to separate computer technologies from telecommunica tion's, although they are inseparable in reality. Computer technology is usually divided into "software" and "hardware," meaning the programs and the machine. The first digital computer, created at the University of Pennsylvania, weighed thirty tons, with 18,000 vacuum tubes, was hard to operate, and failed at an average of once every seven minutes. However, a decade later, computers could be found in most of the universities and

31Otto Friedrich, "Computer Moves In," in Technol ogy in the Twentieth Century, ed. Frank J. Coppa and Richard Harmond (Dubuque, IA: Kendall/Hull Publishing Company, 1983), p. 218.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 161 large companies in the industrialized world. By the end of another decade, they could be found in many homes and offices in both industrialized countries and developing countries. The distinction and separation between mainframe computer, home computer, and terminal is gradually narrowing. Some home computers and terminals can now do what a mainframe computer used to. In fact, some communication networks are nothing but small compu ters connected together to make calculations, send messages, and perform data exchange. Such communication networks not only connect banks to each other and to the market, but also connect individuals to the banks and to the financial market as well. The software has also witnessed the same rapid changes. While in the past there were just a few lan guages which were used mostly for business purposes, currently there are hundreds of computer languages with specific business activity. For the financial community, there are two types of software: exclusive and inclusive. The first is developed for the exclusive use of a finan cial firm. The access to the program is limited only to the company and perhaps some of its customers. Their uses are either for security reasons, such as in SWIFT, or for a competitive goal, as in the case of GNP Commodities, a Chicago-based firm which deals with the national and international financial and commodity futures market.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 162 The inclusive programs can be purchased anywhere and used by anyone. They are either designed to compute a specific market such as stock exchange, or for general financial purposes. The same changes can be said about computer manufacturing and know-how. Almost fifteen years ago, computers were under the monopoly of a few corporations in a limited number of countries. Now, however, many coun tries, including many from the third world, have their own computer industries and are competing internationally with the more established ones.32 Also, the U.S., where these products originally developed, is losing its monopolistic status in most aspects of the computer industry, including the semi-conductor industry, which is the most important and sophisticated sector of communications technology.33

32Third world countries like India, Brazil, Yugoslavia, South Korea, among others, have rapidly and aggressively been entering the information age. They are using protectionism and stimulation to develop an indig enous industry at home with possible exporting potential. 33It is interesting to note that IBM, for example, lost an extensive market for hardware products in the last two years. Therefore, it went to software and the service market. However, this still did not prevent IBM from losing its edge in other sectors of the industry. Also, it should be noted that the U.S. has lost control of the world semi-conductor market for the first time in twenty years. This has obligated the U.S. government to finan cially aid this industry and has led to cooperation between this industry and the military establishment, with hopes that the U.S. will regain its edge. It also led to a trade conflict between the U.S. and Japan. In any case, in the future, semi-conductor products as well as other information/communications technologies products will be easy to manufacture in many parts of the world, as has

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 163 Therefore, competition between countries and corporations is increasing rapidly. This tends to reduce the price of computer and telecommunications technologies and increase their efficiency and thus expand the extent to which persons and companies choose to use them. The know-how for construction and manufacture of communications and computer equipment has spread through out the world at exponential rates since the 1970s. Less than two decades ago, instruction in computer technology had only been introduced in the United States. Currently, however, many of the universities in developed and developing countries give degrees in computer science, which has become a very popular field.34 Also, there are an uncounted number of short-term computer training programs which serve a variety of purposes. It has been said, perhaps rightly, that not knowing how to use the computer in the next few years would be a type of illit

been the case for many older electronic products (e.g., radio, television, telephones, etc.). 34Although there are no known world surveys covering all universities and training programs which teach computers, this author observes that computer technology instruction is booming in the Middle Eastern countries, even though it started only five or six years ago. For example, in Saudi Arabia, some universities have established computer departments or colleges in the last six years. Many private and non-private training programs have also been developed. The first medical school, by comparison, started only fifteen years ago. Saudi Arabia is perhaps a fortunate country because of the oil wealth. However, the same trend, perhaps to a lesser degree, is common in economically poor Middle Eastern countries such as Egypt, Syria, Jordan, Sudan, and Yeman.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 164 eracy. It has also been assumed, perhaps wrongly, that computers could bridge the gap between developed and developing countries.35 In any case, the dissemination of knowledge about computers has benefited banking industries together with all others. Perhaps banking has benefited more, because it is a major user and investor in this technology. Like computer technology, the second TDF com ponent, telecommunications technology, became widespread in s short period of time. The two major telecommunica tions channels at present are satellites and fiber optic cable. Like the computer, the satellite industry for commercial purposes was originally produced only in the United States. However, over two decades following the launch by the U.S. of the first commercial communications satellite in 1962, this industry opened up to interna tional commercial competition. At first the Europeans started to compete with the United States; then the Peoples Republic of China entered the field. After the disaster of the Challenger in February, 1986, China started to market its satellite in the U.S. and to advertise it to other public and private institutions for a lesser price and better insurance. Also, by the end of 1986, the Soviet Union joined the international satellite

3^See Richard H. Veith, Multinational Computer Nets, p. 3.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 165 commercial market. Its products are much cheaper than those of the U.S. and Europe but are limited to third world countries. In addition, Japan is already in the market, and India is in the process of entering it. Not only has the commercialization of outer space which took place recently, but also the communication capacities, performances, as well as life spans of satellites have increased dramatically in the last few years. This, of course, has created a sharp decline in the price of their communications services within and between nations.36 Satellite receivers and dishes have also been technologically improved, and are now available at affordable prices. Wealthy individuals and companies can easily buy a small dish which can be installed on a rooftop or inside a window, as demonstrated in the case of Reuters Financial Services. The latest development in this regard is a battery satellite antenna dish which can

36The most dramatic change in communications services in the U.S. happened with the break-up of AT&T in 1983 in the U.S., which led to entrance of other companies into this service. Similar processes of deregulation and commercialization of communications services are taking place in West European countries, also. See Jeremy Tunstall, Communications Deregulation: The Unleashing of America1s Communications Industry (Oxford and New York: Basil Blackwell, 1986). At the international level, a similar trend is in progress. Intellsat, the interna tionally state-owned enterprise, is currently being challenged by private enterprise, which promises cheaper and better services.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 166 be carried in a bag and works anywhere a satellite beam reaches. The second development in telecommunication technology, which has gained importance in the last few years, is fiber optic cable. It is replacing copper cable nationally and internationally. It can carry eight hundred times as many phone calls as the copper cable. In addition, it is more secure from interception, more clear, and less expensive. It can also transfer voice, data, and pictures at the same line at a very high speed, on laser beams of light (1010 bits/second, via radio waves 105 and submarine cable 107), without electronic interference. The most important development in international fiber optic cables thus far is trans-Atlantic fiber optics cables, which AT&T and other American and European telecommunications companies are working on. It costs $335 million and runs 3,607 nautical miles across the Atlantic. This AT&T cable, which is expected to be operating in 1988, will handle about 40,000 simultaneous telephone connections, more than double the capacity of the three copper-core cables currently in use. It will make much cheaper, clearer, and faster overseas communica tions. For example, it minimizes the echo sound and a half-second delay of present-day communications satellite. Besides the transAtlantic cable, AT&T and twenty- two others companies are building a $700 million, 8,600

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 167 nautical mile transpacific fiber optic cable which is expected to be completed in 1989- For transnational financial institutions, these two projects are very important. Besides their modest fees, clarity, speed, and integration of voice, data, and picture, they will, as Time magazine describes them, provide another advantage— security— for banks and other institutions that send sensitive information. Unlike satellite transmissions, which can be inter cepted by outsiders, a glass fiber line is almost impossible to tap.37 (Emphasis added.) In sum, Joseph N. Pelton stated, "Today, advanced communications systems allow global transborder data flows. International electronic transfers today take place at a rate of $5 trillion per year."38 Furthermore, Until recently, international securities dealings were slow and cumbersome, not to mention expensive. "Five years ago, even if we had wanted to, we could not have handled the volume," notes Tetsundo Iwakuni, chairman of Merrill Lynch, Japan. But today's computer know how and a 95 percent slash in data-communications costs over twenty years allow traders to transfer billions of dollars halfway around the world prac tically as cheaply and quickly as they can wire the money to a bank around the corner.39

37"London Calling, on a Beam of Light," Time. 19 January 1987, p. 52. 38Joseph N. Pelton, "Global Talk and the World of Telecomputerenergetics," in Communications and the Future, ed. Howard F. Didsbury, Jr. (Bethesda, MD: World Future Society, 1982), p. 81. 39"International Links Are Bringing the 24-Hour Stock Market Nearer Than You Think," U.S. News and World Report. 24 March 1986, p. 53.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 168 Location

Before the communication revolution, most finan cial and economic transactions occurred in a specifically defined geographic location's markets. These locations were called trade centers or the markets. Some were specialized and others were general. Some were local, while others regional, national, or international. They were places where people met, made deals, and exchanged information. It was unwise to trade outside these centers. Those who could not be present at these centers for actual transactions usually sent a representative. All this has changed, however, with technology. A recent example of this change is worth mentioning. The Dutch port of Rotterdam, Rotterdam Spot, used to be a place where oil tankers went to sell their oil in what has been called the black spots. Today, thanks to telecom munications and computer technology, oil tankers do not have to come to this spot. They sell their oil in the middle of the sea and to the buyer directly. Similar changes are taking place in other markets also, such as London's sugar market. For the international financial system, the subject of location is, however, more complicated. For individuals and institutional customers, the location is absolutely meaningless. They can trade with any financial

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 169 market in the world, regardless of location.40 What they need is the right communication and information channels and the permission to operate if needed.41 With regard to the location question, financial markets can be divided into four types. Firstly, there are those markets where the meeting place is still very important— traders meet here to exchange information and carry out transactions. Although these traders make their connections to outsiders via computer and communications channels with prices displayed on a computer screen, face- to-face meeting in a designated area has not disappeared yet. Examples of such markets are the New York Stock Exchange, Wall Street, and many other financial markets around the world. Secondly, there are markets containing a special place where brokers and traders go, but with no face-to- face transactions. Here, each trader has his own office which is equipped with computer screens for general information and for processing and executing transactions. The computers are connected to each other, to customers,

40Currently, wealthy individuals can have a direct connection with financial markets all around the world, even if they are aboard their planes and ships or in resort areas. 41The legal access to different financial markets at the national and international levels is still prob lematic. Each market and nation has its own rules and regulations. However, this has started to change in the last few years. We shall discuss it further in the following chapter.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 170 to information and price suppliers around the world. The best example of this kind of market is the London Stock Exchange, The City, which in October 1986 ended three hundred years of on-site, face-to-face trading and is about to close its trading floor. "In terms of physical markets, it's the end of an era in London," comments Luke Glas, the exchange spokesman.42 Thirdly, there are markets with no sites at all, except perhaps a large mainframe computer for information storage and linkage. In such a market, traders and dealers are automatically and simultaneously connected with each other via computer and telecommunication channels. NASDAQ and the Cincinnati Stock Exchange markets, discussed in the previous chapter, are examples of this type of market. Finally, there is a market which has no physical reality whatsoever, the Euromarket. It has its own rules, procedures, and offers (e.g., interest rates, futures, options, hedging, bidding, etc.). It exists only through the communication channels of its interested customers.4 3 All in all, the elimination of a concrete, physical location for financial markets is moving ahead. Perhaps by the beginning of the next century, with the

42,1 London to End Floor Trading," New York Times. 3 March 1987, p. D7. 43In the next chapter we will discuss in detail the Euromarket and its development and structure.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 171 integration of the world's finance, and further tech nological and administrative improvement in transborder data flows, Wall Street, the City of London, and a couple of big financial markets will be historical monuments.

Transnational Financial Activities Supported by TDF Transborder data flows have been an important part of transnational financial transactions, as discussed throughout this text. There are many activities which bankers and other financial institutions engage in worldwide and which require TDF. These activities can be grouped into eleven major types. Together, they will give us a clear picture of the connection between TDF and transnational banking.

General information The need for fast, comprehensive, and diverse information and data no doubt increases as an organiza tion's activities and interactions increase. This has been the case with transnational banks and other financial institutions which have consolidated, during the last few years, into what is now known as the Financial Services Industry. This industry offers its customers an array of current and past information which affects their interna tional dealings. It includes economic, political, and

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 172 social information in the form of statistics, figures, graphs, and analysis delivered through communication channels to the customer's computer. Some of the informa tion is produced by government agents to intergovernment organizations; some is also produced by independent companies. In both cases, transnational banks rely greatly on this information and use TDF both for the transformation and storage ends of handling this information.

Management:

The success of transnational banks, like other transnational corporations, depends on the effectiveness of their management, and communication plays a major role in the management process. Yet, as an establishment expands, the need for instant and clear communication increases. Therefore, the role of TDF in transnational banking management has received considerable attention from the students of international finance and business administration, as was discussed in the literature review, the second chapter of this study. Yet, it can be said that most communication technologies— TDF included— behave similarly for the management of all transnational corpo rations, as well as for transnational banks. Activities

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 173 may differ slightly, however, among the different types of transnational corporations.44 TDF in management activities of transnational banks can be divided into two types. First there is personnel management, where the headquarters and/or the regional quarters of a bank have direct input, observa tion, and instant information on the activities of the branches' personnel. Secondly, there is money management, which involves the allocation of funds both for internal purposes and for investment. It also involves other aspects of financial management, such as the day-by-day handling and monitoring of accounts in all currencies. Essentially, the connection between TDF and banking management has created a situation of decentral ized decision making but centralized oversight. This means that a branch is free to make a management decision, but the headquarters observes and oversees what occurs within the branches on a day-by-day or hour-by-hour basis.

Transfer of money Electronic Fund Transfer has been one of the most important features of the current world financial system. Most of the world's money is transferred electronically. A computer specialist notes that:

44Here communication technology includes such things as electronic mail, teleconferencing, telephone, videotext, telegraph, and telex, among other things.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 174 International trade accounts to nearly two trillion dollars a year. But worldwide capital movements in a year are some fifty times greater than that— and growing. This isn't done by the physical exchange of assets, nor of currency, nor of paper credit instru ments. That would be impossible at today's volume of transactions. No, the world's money system is electronic. It's a vast system of computers tied together by telecommunications.45 International electronic money transfer is done for corporate and individual customers. The latter situation is still uncommon, except on an experimental basis in certain credit companies such as VISA.

Financial trades International trade of financial documents such as stocks, bonds, options, and currencies takes up a major portion of transnational financial transactions. Finan cial trade has by far surpassed international trade in goods and services.46 All financial institutions (e.g., banks, brokers, investment companies, etc.) which are involved in international financial trading rely heavily

45G. G. Probst, "Applying Tomorrow's Technology Today," a speech delivered to the Charles Babbage Insti tute of the University of Minnesota symposium on "Comput ing in the 21st Century," and 40th Anniversary of the founding of Engineering Research Associates, Minneapolis, Minnesota, 9 September 1986. Printed in Vital Speeches of Todayf 1 January 1987, pp. 116-18. 46The subject of trading in financial documents will be discussed in the next chapter.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 175 on TDF in their business. TDF connects these companies with all or most of the world's financial markets and also promotes them to execute orders and observe the world financial and economic markets. Moreover, in some markets where communication/computer technology is the only way to conduct business (e.g., NASDAQ and Cincinnati Stock Exchange), TDF is the only way that international finan cial trade can take place.

Credit worthiness As transnational banks become the most important player in the world financial market and as the market becomes more integrated, the need for current information of an individual customer's financial status increases. TDF has been proven to be helpful in this respect. TDF has been used by credit card companies to check instantly the accounts of card holders, and by major transnational banks which lend money to developing countries. With the rise of the debt crisis in the 1980s, two information mechanisms were developed to deal with lending money to these countries. Firstly, large banks established their own country risk and information analysis systems for their own use and also for sale to other banks. Secondly, independent country risk consulting firms and special

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 176 institutes have been established to sell their analytical services to whomever desires them.47

Secrecy and the bypassing of national regulations One of the major impacts of information/communica tion technology on international finance is the increasing facility with which banks may bypass national regulations. They can bypass these regulations to increase their profits, to escape from taxation, or to camouflage the money of certain illicit customers such as drug smugglers, or even government agents and officials. The Reagan Administration's secret aid to the Contras is an example of illegitimate acts by government agents that banks might conceal. In many cases, transnational banks want to keep information about their reserves, money transfers, assets, and the like secret because of competition with other banks or to have an excellent balance sheet for their own reputations. Therefore, they try to keep certain infor mation from public disclosure. Here, TDF1s role is maximized, as well illustrated earlier in our discussion of SWIFT'S high security procedures.

47See Christine A. Bogdanowicz-Bindert and Paul M. Sancks, "Closing the Barn Door: The Role of Information in Bank Lending to LDCs," The World of Banking. September- October, pp. 17-18.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 177

Crisis reaction For transnational banks, there is always a possi bility of a crisis situation which could negatively affect their business nationally and internationally. A crisis might be caused by social/political events such as nationalizations of firms and resources, coup d'etat, wars, and also natural disasters. When an earthquake ravaged Mexico City, Mexico in September 1986, the Bank of America building there was damaged, together with its computer switching and data transmission circuits, "the heart of operations for any bank doing business in a foreign country."48 Because of the earthquake, most of the communication technology which linked the city with the world was destroyed. This cost Mexico an estimated one million U.S. dollars a day in international financial transactions losses (e.g., penalty interest on cross- border loan payment and currency exchange losses). However, within a few days and with hard work, Bank of America, among others, were quick to re-establish their communication link with the rest of the world, before many other services in the city were restored. Thus, banks

48Tom Rankin, "International Banking System Breaks Ground for Disaster Relief," Communication Age. April 1986, p. 20.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 178 were able to cut their losses and return to their normal transnational operations.49

Competition Currently, there are four types of actors that compete within the world's financial system. TDF plays a crucial role in their activities. First, competition between banks and other financial institutions promotes the use of the most efficient and up-to-date information/ communication technologies in order to save money, time, and to reach new places where they will attract more customers and expand their profits. Secondly, there is competition among financial services companies and finan cial electronic networks for both institutional and individual customers as well as for financial markets (e.g., stock markets). Thirdly, international financial markets such as London, New York, and Hong Kong, among others, are using communication/information technology in their competition with each other. The best example of this is the recent change in the London financial market, the City. This change, which is known as Big Bang, Fall 1986, was motivated primarily by London's desire to compete with New

49See Ibid., pp. 18-22. It is also interesting to note that, when a snow storm hit New York in the winter of 1987, the most important thing banks and other financial establishments were concurring about was their computer systems working and the telecommunication channels intact.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 179 York and Tokyo, as well as not to permit a growing European financial center to upstage London in importance. Besides financial deregulation, the London market was completely computerized and electronically linked to the rest of the world. Paris, Amsterdam, Madrid, and other markets are installing more modern and automated technol ogy in their competitive drives. Finally, there is a growing competition between countries, developed and developing, to attract investment and/or to have regional or international financial centers. In both cases, in order for a country to be competitive, it has to offer the most advanced information/ communication services. For example, after Egypt started to emphasize the private sector of its economy and seek foreign investment in the late 1970s, one of the most frequent complaints from private companies, Egyptian and non-Egyptian, was the bad quality of Egypt's communication system. So, the top priority of the Egyptian government was to improve this system. A second example is the economic reform in the People's Republic of China in the early 1980s. In 1982, it established the Ministry of Foreign Economic Relations and Trade. Within this ministry, the transnational Information Center was created and was given an important role at the national and international levels. It is commonly understood now that developed or developing countries cannot attract foreign

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 180 investment and facilitate internal and external trade and finance without a modern communication system. Therefore, in the last two years, the World Bank started to place a special emphasis on communication projects in the Third World countries.

Cooperation Although transnational banks compete with each other, they cooperate in two areas where TDF is believed to be helpful. First, transnational banks cooperate in organizing syndicated loans to large corporations or to a third world country. In this case, a bank will serve as a coordinator for a syndicated loan involving banks from different parts of the world. Such an arrangement is greatly facilitated by modern information/communication technology. The second area in which transnational banks cooperate is in dealing with debtor countries having difficulty in repaying the principal or interest on loans. This means transnational banks will adopt a uniform policy towards a given debtor nation. Arriving at such a policy, however, requires mutual consultation and sharing informa tion among transnational banks. Ironically, the debtor countries have been unable to achieve a similar coopera tion. This is not due to lack of communication among them

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 181 but rather to other factors which are beyond the scope of this study.

Information recording Accumulation of information, as we have previously mentioned, is an important and new phenomenon globally, and particularly in the world banking system. The ever- increasing amount of information accumulated needs to be stored, retrieved when needed, and shared when possible. Communication/information technology is believed to be an important tool for this purpose. Without access to information and technologies, transnational banks, especially larger ones, would find it impossible to operate in a highly changing, interactive, and sensitive economic and financial world. However, there are three types of financial capital information that is recorded. First, there is information which is stored for immediate use— hours or days— such as stock exchange prices, currencies prices, and some short-term economic indicators. This information is submitted to members second by second or day by day by such agencies as Reuters, and they are usually erased when used or/and not available the following day. The second type of recorded information is long term stored data. This sort of information affects structural and long-term decisions such as the granting of loans for countries and firms, the making of long-term

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 182 investments, the opening or closing of a bank branch, and the rescheduling of debts. It includes basic, but important information, such as a finn's or a country's economic and financial performance, its past experiences, and other economic factors. They are available from transnational banks, and bases, consulting and research firms, a bank's research department, and government and intergovernment agencies. Finally, there is information which is recorded for its own merit not for long- or short-term decisions. Most transnational financial electronic networks such as SWIFT and FedWire record all the data and information going through their systems. The purpose of such record ing is to measure trends and directions or to present a more complete picture of money flow. Or, the data may simply remain available for the concerned parties to use in as-needed cases of disputes, misuse of credit, and the like. It should be noted, however, that, in all three of these types, there are usually two levels of information recording. The first level is performed by the concerned parties and the second by the networks.

Standardization When TDF started to be used by transnational banks in the second half of the 1960s, one of their major problems with it was the lack of a common and easily

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 183 understandable format of financial transaction.50 However, when SWIFT was created in the early 1970s, one of its major goals was the development of such a format. "Before SWIFT, banks talked in different languages, in telexes, in memos, in letters, it was all free form," said Robert Minutaglio, Senior Vice President, "but the days of Babel have been ended by message formats that standardize processing information down to finest details. There is one format for money transfers, for example, and another to confirm a foreign exchange deal."51 But this is not the case for all transnational financial transactions. Firstly, there are many banks, especially small ones and those in some socialist and Third World countries, that are not members of SWIFT. Secondly, some banks are attempting to create their own electronic network, i.e., their own format. Thirdly, different formats and old methods such as telex, letters, and others are still used by many banks. Fourthly,

50It is worth noting that, when computers started to be used by banks in the United States in the 1950s, the Bank Management Commission worked on a common computer language in 1986 called Magnetic Ink Character Recognition (MICR). Also, the Technical Committee on Mechanization of Check Handling was created at the same time to deal with checking issues. Its work finished in April 1959, and immediately the American Banker Association adopted the MICR program. 51Robert Minutaglio, Senior Vice President, SWIFT, quoted in "Around the World in 80 Nanoseconds," Constitu tional Investor, intnl. ed., special advertising supple ment, "Telecommunications in 1986," p. 48.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 184 computers and computer languages and other communication equipment vary in format, and this creates further difficulty in financial communication among banks. In any case, as time passes, a global uniform method of electronic communication will develop, and the method adopted might be one of those introduced by SWIFT. Small banks and countries which have not joined SWIFT will, like Bahrain, find themselves forced to join if they want to deal internationally. Also, large banks and those that still use the old methods will find it to their advantage to adopt a universal format.

Conclusion In the previous pages we found transborder data flows to have a significant position in transnational banking and the financial industry. The importance of TDF comes in its role in making time irrelevant in financial transactions. TDF also has made the storage, processing, and retrieval of large amounts of information and data an easy matter, regardless of distance and location. There fore, TDF has been comprehensively used by transnational banks for cooperation, competition, security, credit worthiness, financial trade, and management, among others. This undoubtedly would affect the global financial industry, which will be the subject of our analysis in the next chapter.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. CHAPTER VI

THE IMPACT OF TDF ON TRANSNATIONAL BANKING AND INTERNATIONAL FINANCE

When Jimmy Carter, the former president of the United States, ordered a freeze of Iranian assets in American banks around the world during the hostage crisis in 1979, one of the issues discussed was the role of communication technology in this freeze. When the seven western industrialized powers held their 1986 Economic Summit in Tokyo, the New York Times devoted a considerable amount of attention to "the magic of modern telecommunica tions11 which has changed "today's international financial system."1 When an American financial delegation from Wall Street visited the Peoples Republic of China in November 1986 to discuss cooperation between the two financial communities, the Americans demanded information/communica tion access to and from the Chinese market before any meaningful cooperation could take place. When the London financial center, the City, restructured its dealing system in the fall of 1986— occasionally known as the Big Bang— because it was one of the most important changes in

1hSummit in Tokyo and the Way It Works," New York Times. 4 May 1986, p. Fll. 185

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 186 recent decades in the international financial market, the most discussed aspect in London and around the world was the role and impact of computer/telecommunication technol ogy on this change. When the New York Stock Exchange Market fluctuated so sharply in 1986 and 1987, many analysts attributed these acute fluctuations to the computer-directed trading programs. When the Iran-Contra scandal surfaced, the question of where, how, and to whom the extra money was transferred was a puzzling one. The whole affair unfolded as a global one, involving a host of individuals and banks, as well as several countries: Iran, Israel, Switzerland, the Cayman Islands, Brunei, Saudi Arabia, the Bahamas, and, of course, the United States. Again, the role of modern communications in this affair was widely discussed. In fact, during the last ten years, most of the books, articles, and reports about international banking and finance have necessarily included some treatment of the role and impact of communication/information technol ogy on international financial transactions. The connection between the two, as the previous chapters have illustrated, is very strong. The impact of this connection on international banking in particular and on international finance in general, has been widely recognized, but has not yet been systematically analyzed in structural terms. Specifically, there has been no

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 187 comprehensive analysis of the extent to which TDF has affected the structure of the international banking and financial system. This chapter is an attempt to answer this question and, in order to do so, we have devised a simple model to describe processes of structural change in this system. The basic idea of this model is that, since the emergence of modern communication and information technol ogy, the international banking and financial system has gone through four interrelated and overlapping stages (diagram 10) . The first stage was the appearance of new technology, TDF. As a result of this new technology, the second stage began, in which banks expand their activi ties, capital, and relations on a large scale. Thirdly, this expansion led to suppression of the existing rules and procedures which governed the international financial system. New rules and procedures replace the old ones and, thus, the system enters the fourth stage in the process of transformation. These stages, as stated above, are interrelated and overlap. This means, during the process of transformation, more technological innovations evolve, expansion continues, old rules disappear, and new ones replace them in a gradual manner. Also, during the processes of the various stages and because of them, varieties of financial and economic phenomena emerge. Some of the new phenomena would be absorbed within

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 188

Bretton Woods (Insti tutional ization)

Technology

New System

Breaking Down the Law (Dereg ulation)

Old System

Transition Period 1940s 1950s 1960s 1970s 1980s 1990s Diagram 10. The changing stages of transnational finance.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 189 the new system and become part of it, others would create lasting or temporary problems, and still others would disappear during the transformation process. Therefore, information technology plays the role of an intervening variable in the process of evolution and change in international financial relations. As the telegraph was an important factor in the expansion of banking during the last half of the nineteenth century, the computer and telecommunication is responsible for the current one. However, the current information technology is more sophisticated and used more, where time and distance are made irrelevant and vast financial networks have been built. Therefore, its impact on international finance is more magnificent. The old international rules have been broken and new ones are in the process of replacing the old ones. Also, many financial phenomena emerge where information technology is responsible for their appearance and maintenance, as we will see through out this chapter.

The Expansion Stage It is generally agreed among students of inter national finance that the international financial system has gone through major changes during the last ten to fifteen years. However, there is much disagreement in terms of just when the system started to change and why. Some would say that the change started in the early 1970s

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 190 and stemmed from declining U.S. economic and financial power. Others attribute the change to the increase in oil prices and the recycling of petrodollars.2 Others have traced the change to the 1960s and such factors as the end of European and Japanese reconstruction, the emergence of transnational corporations, increasing demand for finan cial services, and instable exchange rates.3 Technologi cal innovation has not been discussed as the main factor in changing the international financial system. Today, almost all the studies of international banking devote some consideration to the role of communication/informa tion technologies, in the evolution of international finance but fail to take these technological changes back to their origin— the 1960s.

2 It seems that people who adhere to these argu ments are politically motivated. Those who believe that the changing world economic and financial system is due to a decline of American power resulting from extensive military spending are mostly liberals who are against U.S. military overseas intervention. Also, those who pose the argument that the increase in oil prices and recycling of petrodollars are the cause of current world financial changes— problems— are mostly conservatives with a tendency to be anti-Third World in general and anti-Arab in particular. These two factors are important— but not central, to the changes in international finance. These two factors accelerated the changes, but did not cause them. Historically, the price increase of one commodity (e.g., oil) or the involvement of an economically powerful country in a regional war had not led to structural change in the world economy. 3See, for example, Benjamin J. Cohen, In Whose Interest International Banking and American Foreign Policy (New Haven: Yale University Press, 1986).

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 191 As we have already seen, computer and telecom munication technologies started to be used by large banks in the United States in the late 1950s and early 1960s. Also, they gradually came to be used for other transna tional financial services at that time— the first trans- Atlantic telephone calls were made in 1956. Therefore, by the 1960s, and, particularly by the second half of that decade, the banking industry's transnational financial operations were extensive. Banks, mainly the larger ones, expanded their international operations by opening branches and offices overseas, increasing their assets and investments abroad, and acquiring other banks outright in foreign lands. The flow of money between and among nations was increased rapidly during the 1960s and has continued to do so. Table 13 shows the development of the U.S. banks' operations abroad during the 1960s. It reveals that the number of U.S. banks with foreign branches increased about tenfold in that decade— there were only eight banks with 131 foreign branches in 1960, but by 1970 there were seventy-nine banks with 532 branches abroad. The gross assets from foreign operations also increased— from 5.3 million dollars in 1960 to $52.6 million in 1970. In fact, by 1970, international earnings accounted for a substantial percentage of total earnings of major U.S. banks. For example, international amounted to 40 percent

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 192 for Citicorp, 25 percent for J. P. Morgan, 22 percent for Chase Manhattan, and 14.5 percent for Bankers Trust. Furthermore, the general U.S. international investment and assets increased about three times for the same period, from a dollar amount of $66,320 million in 1960 to $1,680,459 in 19714 (Table 14).

TABUS 13 FOREIGN BRANCHES OF U.S. BANKS DURING THE EXPANSION STAGE (In Billions of Dollars) Year Number of Banks Number of Branches Gross Assets 1950 7 95 1960 8 131 3.5 1965 13 211 8.9 1967 15 295 15.7 1969 53 460 41.1 1970 79 532 52.6

SOURCE: U.S. Board of Governors of Federal Reserve System, Annual Reports (Washington, D.C.).

The increase of global money flow in the 1960s was not in one direction. As capital went from the U.S. private financial institutions to overseas markets, there was also a similar capital movement from overseas institu tions into the American market. Three times as much

4Frank Mastrapasqua, U.S. Bank Expansion Via Foreign Branching. The Bulletin (New York University School of Business Administration, Institute of Finance, Nos. 87-88, January 1973).

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 193 foreign money was invested in the U.S. in 1971 as in i960: $122,775 million and 40,859, respectively.5 Also, there was a wave of acquisitions by foreign banks and other private financial institutions of U.S. banks in the 1960s and after. The first known acquisition of a U.S. bank occurred in 1962. This was different from an earlier situation, which started in 1922, wherein a non-resident bank established a new bank in the United States, but this practice also increased considerably during the 1960s and after6 (table 15). Tables 15 and 16 give some picture of expanding global transnational banking networks during the sixties. During that period, the decolonization process took place, which affected the extent and the meaning of the whole global banking expansion. It appears that, as more countries achieved independence— sometimes they national ized foreign businesses— the more banks of old colonial power lost overseas branches. For example, the foreign branches of European-based banks on the continent of Africa declined from 2,530 in 1961 to 1,767 in 1970. At

5Ibid., p. 17. 6See Judith A. Walter and Steven J. Weiss, "An Evaluation for Foreign Acquisition Issue," in Foreign Acquisition of U.S. Banks. Staff of the Office of the Comptroller of the Currency, U.S. (Richmond, VA: Robert F. Dame, 1981).

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 194 the same time, the French overseas branches decLined from 361 to 179.7

TABLE 14 INTERNATIONAL INVESTMENT (U.S. AND THE WORLD) DURING THE EXPANSION STAGE (MILLIONS OF DOLLARS) U.S. Investment Foreign Investments Year and Assets Abroad and Assets in the U.S.

1950 30,094 17,632 1955 42,279 27,822 1960 66,320 40,859 1965 104,593 58,739 1967 119,909 69,720 1969 141,094 90,822 1971 168,459 122,775

SOURCE: Frank Mastrapasqua, U.S. Bank Expansion Via Foreign Branching; Monetary Policy Implications. The Bulletin (New York University School of Business Adminis tration, Institute of Finance, Nos. 87-88, January 1973), p. 13.

Table 16, however, offers a better picture of the overall global banking expansion. During the 1960s, the number of transnational banks more than doubled— from 113 in 1961 to 239 in 1970. We should also note that British and Italian transnational banks declined during that

7Diana Page and Neal M. Soss, "Some Evidence on Transnational Banking Structure," in Foreign Acquisitions of U.S. Banks. Staff of the Office of the Comptroller of the Currency, U.S. (Richmond, VA: Robert F. Fame, Inc., 1981), pp. 144-47.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 195 period, but by 1978 they too had more transnational banks than they previously had in 1960.

TABUS 15 KNOWN FOREIGN ACQUISITION OF U.S. COMMERCIAL BANKS DURING THE EXPANSION STAGE Country/Nation Year of Acquisition Total Assets ($ Million)

1961 Switzerland/Israel 41.5 1966 Canada 8.4 1968 Canada 21.5 1968 Guatemala 15.0 1969 United Kingdom 50.2 1969 Ecuador 22.3 1971 Canada 51.1 1971 Italy 3,537.5 1972 Japan 32.3 1972 Spain 40.5 1972 Spain/Latin America 53.2 1972 Saudi Arabia 79.3 1972 Italy 294.0 1972 United Kingdom 1,333.6 1972 France 2,655.9

SOURCE: Figured from Judith A. Walter and Steven J. Weiss, "An Evaluation of the Foreign Acquisition Issue," in Foreign Acquisition of U.S. Banks. Staff of the Office of the Comptroller of the Currency, U.S. (Richmond, VA: Robert F. Fame, 1981), pp. 37-88.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 196

TABLE 16 NUMBER OF TRANSNATIONAL BANKS BY COUNTRY OF ORIGIN Country of Origin 1961 1970 1978

United States 8 68 136 United Kingdom 17 13 20 France 16 19 24 Germany 2 2 12 Switzerland 3 6 12 Netherlands 2 3 7 Italy 5 4 6 Other Europe 13 12 32 Canada 5 5 7 Latin America 2 11 15 Japan 6 11 23 Australia 4 8 9 Other Far East 17 31 47 Middle East 6 10 21 Africa 6 8 15

Caribbean 1 I 1

Total 113 212 387

SOURCE: Diane Page and Neal M. Soss, "Some Evidence on Transnational Banking Structure," in Foreign Acquisitions of U.S. Banks. Staff of the Office of the Comptroller of the Currency, U.S. (Richmond, VA: Robert F. Dame, Inc., 1981), p. 145.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 197 During that period of expansion, three important international financial phenomena, which would later have a crucial role in international finance, started to develop. The first was the growth of the Eurocurrency market, the second was the development of off-shore banking, and the third was the appearance of the debt problem. Although the Eurocurrency market started in the very late 1940s and early 1950s, its real growth took place in the late 1960s and the early 1970s (and continued until the 1980s, when this market became one of the most important components of the international financial system— more about this later). In the early years of the sixties, the Eurocurrency market was growing slowly, but later on the growth accelerated. The market's gross assets were only $20 billion in 1964, but by 1968 it reached $50 billion. By 1970, it had more than doubled— $110 billion, and doubled the 1970 figure in 1972. By 1973, the Euromarket gross assets reached $305 billion.8 Off-shore banking followed a similar growth pattern during that period. The idea of having a deregu lated and more secure financial market from disclosure is an old one. Switzerland served such a purpose for more than a century. However, during the second half of the

sSee John E. Spero, The Politics of International Economic Relations (New York: St. Martin Press, 1985), p.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 198 1950s and the early 1960s, more places started to compete for this market status with better deals, especially for foreign banks and money. Therefore, many island states and territories in the Caribbean and elsewhere adopted deregulatory and disclosure policies to attract foreign capital. Bankers and wealthy individuals found them attractive, and they served a variety of purposes. Most notably, they served as a means of concealing monies from governmental authorities, in their capacity as easy global monetary conduits. These places became known as off-shore centers or money-havens, and they gradually gained an important place in international financial transactions. The total number of off-shore branches of U.S. banks rose from 124 in 1960 to 460 in 1969, and to 496 in 1970. This number has continued to increase since. The British registered banks' assets in the Bahamas, an important off-shore center, rose from $1,108 million in 1971 to $2,999 million in 1973. Their liabilities also saw the same degree of increase from $313 to $893 million during the same period. In fact, both the liabilities and assets of transnational banks in the Bahamas were growing at over 50 percent in the very early 1970s. Their assets, for example, were $4,756 million in 1970, but by 1973 they had risen to $23,251 million. For the same years, their liabilities rose from $4,725 to $23,320 million.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 199 The Bahamas is not the only country experiencing a boom in off-shore banks. During that same period, existing off-shore centers were experiencing similar booms. The percentage of foreign assets in Panamanian banks, for instance, was 4 percent in 1960. But by 1970, it reached 37 percent, and in 1973, the share of foreign assets had bypassed the local assets by 6 percent. A similar increase took place during that time in other existing off-shore centers such as Hong Kong and Singapore.9 The debt problem also emerged during this expan sion period. Although it had been an important issue since the existence of the world capitalist system in the fifteenth century, the 1960s witnessed the first series of debt reschedulings after the Bretton Woods accords. From 1961 until 1971, there were nineteen debt reschedulings amounting to $4,608 million. However, the international debt did not become a serious issue until the 1980s.10 The emergence of the debt problem, off-shore centers, and

9For the development and growth of off-shore banking, see Xavier Grostiaga, The Role of International Financial Centers in Underdeveloped Countries (London: Croom Helm, 1984), and Ingo Walter, Secret Money: The World of International Financial Secrecy (London: George Allen and Unwin, 1985). 10Brian G. Crowe, "International Public Lending and American Policy," in Debt and the Less Developed Countries. ed. Jonathan David Aronson (Boulder, CO: Westview Press, 1979), pp. 36-42. The current status of debt, off-shore banking, and Euromarket will be discussed later in this chapter.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 200 Euromarket is made possible by information technology, as we will see later in this chapter when we discuss these issues in more detail.

The Rules-Supercession Stage As international banking activities expanded, the world of finance had to change. This was particularly true of many of the rules and sets of procedures which had governed global financial activities. This process has continued from through the early 1970s and into the present. However, the rules-changing process needs to be discussed in its larger context. The following is a brief review of the old rules in terms of their origins and relations to banking activities and the state. Banking and finance have traditionally been the most regulated of business activities. Money flow (internally and externally), exchange rates, money supply, the issuing of currencies, the separation of roles of different financial entities (commercial banks, savings and loans, brokerage firms, insurance companies, etc.), and deposit insurance are among the activities which have been regulated more or less by the State at the national level. Likewise, at the international level, there have always been written or non-written, bilateral or multi lateral financial rules. London and the City were the centers which set a large portion of these rules and acted as a reserve, and as the central bank of the central

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 201 banks. Some of the international rules under which the City operated were implicit, while others were explicit. When the world of finance was expanding in the late nineteenth century, London was losing some of its power, and there emerged a trend toward international financial cooperation concerning such issues as coining and the gold standard, as was discussed in the fourth chapter. This system of rules began to unravel after the First World War, partly as a result of the economic expansion which took place in the second half of the last century during the telecommunications stage, and partly as a result of London's subsequent decline as a financial power with the creation of other centers (e.g., New York). Another factor here was the continuing international conflict and instability exemplified by the Bolshevik Revolution in Russia, the case of Fascism in Italy and Germany, the civil war in Spain, and, finally, the Second World War. After the war was over and the United States was clearly the military and economic victor, it institution alized a world financial system similar to the one which existed before World War I. The dollar became the international currency, with convertibility to gold at a fixed price ($35). The exchange rate was under its control, and the International Monetary Fund (IMF) was established as a type of central bank of the central

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 202 banks. The private banks indirectly operated under the supervision of the IMF, the World Bank, and the financial policies of the member countries. The system, organized in 1944, known as the Bretton Woods system, was enforced during the following two decades. For example: In 1961 a gold pool was established to hold the gold price at $35. In 1962, the U.S. Treasury issued "Roose bonds" for the use of foreign governments instead of the dollar, and in 1968 IMF created the Special Drawing Rights (SDR) to supplement both the dollar and gold as international reserves. However, by the early 1970s, international finance had developed in such a way that many of old Bretton Woods rules became irrelevant. The first sign came on 13 August 1971 when the United States de-linked the dollar and gold. An attempt by the leading ten western industrialized countries to restore the system led to the signing of the Smithsonian Agreement in 1971. This agreement established a wider fixed exchange rate band. It further provided that the exchange rate could fluctuate within a plus or minus 2.5 percent of parity. This was more than twice the range allowed under the Bretton Woods Agreement. However, "the greatest monetary agreement in the history of the world," as President Nixon called it, did not last much more than one year. In March 1973, things changed so that the dollar was allowed to float freely and

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 203 its management and that of other hard currencies were left to the market. Central banks retained some minor input into currency fluctuation, in that they could choose to intervene cooperatively to prevent extreme fluctuations. Therefore, the most important part of the Bretton Woods system was pronounced dead. The process of rules-supercession continued through the 1970s and 1980s with the liberalization or deregulation of the financial market, which recently became a type of competition between and among nations and markets. The deregulation of the financial industry is going hand-in-hand with the deregulation of the informa tion/communication industry.11 Deregulation continues to sweep the whole finan cial market, affecting commercial banks, savings and loans, brokerage firms, security dealers, insurance companies, etc. It is taking place in the Soviet Union, China, India, Egypt, and Ghana, as well as in the United States and England.12 After decades of government regulations and nationalizations, it seems the trend has been reversed. We should, however, distinguish between

13-On the subject of deregulation of the communica tion industry, see Jeremy Tunstall, Communications Deregulation: The Unleashing of America's Communications Industry (Oxford and New York: Basil Blackwell, 1986). 12Later in this chapter we will discuss how centrally planned economies (e.g., socialist countries) are slowly deregulating their markets and moving toward financial integration within the world capitalist system.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 204 deregulation of financial markets and that of financial institutions, although they greatly overlap. For many decades, there have been strict demarcations among different financial institutions and the activities which they are allowed to perform. In some cases, these demarcations dictated the cities in which financial institutions could operate. This means that there were clear and distinct financial activities for brokers, commercial banks, savings and loan banks, insurance companies, and credit card companies. But during the last half of the 1970s and after, the activities of various financial bodies started to overlap, and the distinctions among them became very hard to make. As a result of this development, governments in many capitalist countries were forced either to relax the separation rules or at least not to strictly enforce them.13 In general, financial markets have been undergoing deregulation processes during the last ten years. One manifestation of this process has been that outsiders (i.e., foreigners) are given greater access to the domestic financial market. In some countries (e.g., Peoples Republic of China), such access is limited but more open than five years ago; in other financial markets

13The overlapping function of different types of banks (e.g., agriculture, industrial, and trade banks) is occurring recently in some socialist countries such as the Peoples Republic of China.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 205 such as that of the United Kingdom, foreigners have equal access with locals. There exists still a third situation where foreign financial institutions have fewer regulatory procedures than do domestic ones (e.g., Cayman Islands). Perhaps the single most important event in the deregulation process, which illustrate the connection between deregulation of finance and information technol ogy, took place on 27 October 1986, with the deregulation of the London market, the City, where, as the New York Times wrote, “Never before has the deregulation of one city's financial markets caused such a change in the tempo of the business and attracted so much attention from the leading banks and investment firms of the world."14 Therefore, the deregulation of the London finan cial market, known as the Big Bang, deserves some analy sis, not only because it represents a major manifestation of the process of deregulation and globalization of international financial markets, but also because it shows the strong connection between these processes and the role information technologies play in international finance. The Big Bang ended three hundred years of finan cial practices in the City and opened the door to great

14,,London Markets Face Global Arena," New York Times, 27 October 1986, p. D12. Most of the U.S. major newspapers such as the New York Times. the Washington Post, and the Wall Street Journal, not to mention European newspapers and magazines, devoted many pages to the opening of the London financial market during that day and the day before.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 206 financial competition to attract foreign capital and offer the best services. It is based solely on modern informatic technology. It took the City over four years to build a modern automated financial trading system, at a cost of $120 million. The trading floor disappeared as traders made deals and watched the market through their own computers. A broker can now buy and sell via computer all stocks and securities listed in the London market— British and foreign alike, as can a foreign broker. For example, a New York-based broker can trade in the London market, such that he can purchase Japanese bonds, securi ties, and stocks, among others, for his Parisian client. Besides this, the deregulation of the City ended the broker-fixed commission, opened the British government bonds, the guilds, to foreign dealers, and ended the strict division between stockbrokers (salesmen) and market. These developments caused London to become the most important market in Europe and enabled it to compete internationally with New York and Tokyo.15 Today, the London market has over 550 foreign banks and security firms from seventy countries. But interestingly enough,

15Currently there are other financial markets (e.g., Amsterdam) which are attempting to compete with London, or at least attract foreign money. Their tool for competition is more deregulation and more sophisticated information/communication technology. Also, other markets, such as Tokyo, are expected to continue their deregulation processes.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 207 175, or about 32 percent of them, were established in the 1980s.16 The deregulation and automation of the London financial market will continue to attract foreign money from different parts of the world. For example, "U.S. commercial banks, hobbled by the separation of commercial and investment banking in the U.S., have looked to London to escape from the regulatory shackles still applied to them at home," as William C. Freund wrote.17 The same is expected to happen to the Japanese banks, which have regulated policies similar to those in the United States. The deregulation of London's market and the importance of information technology in this process have spearheaded a movement in other countries by bankers and other financial traders to push their various governments to relax or abolish many rules which have restricted transnational and national financial activities. The Wall Street Journal has been an important advocate for this movement in the United States and abroad through its national and international editions. For example, on the day of the opening of the Big Bang, 27 October 1986, the Journal carried two articles on its editorial page by two

16Collected from "Foreign Banks and Security Firms in London," Institutional Investor. International Edition, March 1987, pp. 159-199. 17William C. Freund, "First the Big Board, Now the Big Bang," Wall Street Journal. 27 October 1986, p.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 208 influential financial experts, William C. Freund, the NYSE-endowed chair at Pace University's Graduate School of Business in New York, and L. William Seidman, FDIC Chairman. Both strongly argued for deregulation of the Unites States financial market, and stated the connection between financial deregulation and information technology. Freund wrote: Increasingly, traders and investors are able to transact their business in London, Tokyo, and New York markets that compete with each other. This transna tional trading has made the notion of restrictive national rules and regulations a mirage. Moreover, trading is increasingly done in unregulated interna tional markets, especially the Eurobond and Euroeoui- ties markets, which exist solely in the memory of a computer and in telephone communication links between dealers and customers, fEmphasis added. 18 L. William Seidman expressed a similar view: Nevertheless, movement towards a more deregulated U.S. Financial appears inevitable. Interstate banking, powered by state legislative actions, is well under way. Technological chance and clever use of loopholes allow new forms of services to be provided bv new providers. The good old days when all segments of the financial marketplace were tightly regulated as to entry, prices, and services, and when few banks failed, are not likely to return. The U.S. is only one player in the world financial marketplace, and will have to change to meet the competition.19 [Emphasis added.] In part, the movement goes beyond just changing some regulations of the financial market such as those

18Ibid. 19L. William Seidman, "A Time for Case-by-Case Control of Risk," Wall Street Journal. 27 October 1986,

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 209 governing interstate banking, the separation between commercial and investment banks, and the like. In fact, some economic scholars such as Thomas Sargent and Neil Wallace have recently argued and debated the desirability and possibility of a financial market without the existence of central banks, in which the money supply would simply be market determined.20 This school of thought has been challenged by mainstream economists, and the influence it will wield depends on the future of the financial market. However, the possibility of this sort of development still exists, at least in some countries.21 An important sign of the changing structure of international finance as a result of the supercession of rules, which originated by TDF, has been the diminishing importance of the discipline of standard economics. It has been regarded for many years as the most— if not the only— "scientific" discipline among the social sciences. Economic theory, models, and method have been used intensively by governments and private businesses as

20See Thomas J. Sargent and Neil Wallace, "The Real-Bills Doctrine Versus the Quantity Theory: A Recon sideration," Journal of Political Economy 90 (1982), and also see Neil Wallace, "A Legal Restriction Theory of the Demand for 'Money' and the Role of Monetary Policy," Quarterly Review. Federal Reserve Bank of Minneapolis, Winter 1983. 21See Ramon Moreno, "Monetary Control Without a Central Bank: The Case of Hong Kong," Economic Review. Federal Reserve Bank of San Francisco, no. 2, Spring 1986, pp. 17-37.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 210 important tools with which to forecast and plan future development. Economists have also held considerable prestige in society. However, their prestigious position started to decline during the last ten or fifteen years. Interestingly, the criticism of economic theories and method started in the early 1970s with the rise of political economy approaches. Since then, the criticism has increased— even within— and the importance of the "scientific" approach characterizing economics has continued to decline. The reasons for the recent upstag ing of economists are various. Some attribute it to the failure of many economists to consider political factors. Others blame the "poorly developed psychological side of economic modeling.1,22 Still, a third speculation blames the situation on the failure of the discipline to include a consideration of information/communication processes in its approach.23 Finally, some economists believe that their models are "tarnished with the realities of a peculiar institutional structure," because they believed that their models "inferior from a methodological perspec

22D. Clark, quoted by Eva Etzioni-Halevy, The Knowledge Elite and the Failure of Prophecy (London: George Allen and Unwin, 1985), p. 81. 23See the second chapter in this study.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 211 tive" which lead in the end to "gross errors of analysis."24 Essentially, "the economic profession— and economics generally— doesn't know where it's headed. There is no controlled research program. It's sort of floundering around. It doesn't have any focus," said Nobel Economics Prize winner James McGill Buchanan.25 The selection of Buchanan for the prize is another sign of the failure of economists. He is a public choice scholar who attempts to apply economic methodology to analyze polit ical phenomena. Public choice is neither pure economics nor political economy, despite the fact that many have assumed this approach as the latter. The failure of mainstream economic paradigms, including the Marxist one, to understand and deal with the current economic and financial reality is very clear all around the world. In many socialist countries, this failure has manifested itself in the many attempts not only to apply a liberal economic policy (e.g., free enterprise) but also to use some capitalist approaches to

24K. Alec Chrystal and David A. Peel, quoted by Leonard Silk, "Lost Standing of Economists," New York Times. 3 January 1986, p. 22. 25James McGill Buchanan, quoted in an interview with the Washington Post. 19 October 1986, p. C5. For a more detailed study of the failure of the economic profession, see Eva Etzioni-Halevy, The Knowledge Elite and the Failure of Prophecy, especially chapter five.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 212 the study of economic phenomena.26 The failure of mainstream western economics can also be seen in some Muslim countries, where there have been many attempts in the last six or seven years to create modern Islamic financial and economic doctrines.27 This failure is equally evident in the United States, where the supply side economic theory became dominant among some of the conservative elite. This theory has been attacked by the mainstream economists, and most of its assumptions have not been proved either at the theoretical or the practical levels. In sum, it is useful to quote at length Walter Wriston, the former president of Citibank, on the current status of the relationship between economics and the real world:

26See, for example, Adam Zwass, Monetary Coopera tion Between East and West (White Plains, NY: Interna tional Arts and Sciences Press, 1975); Zwass is a respected East European economist. 27Islamic Economics is a recent practice and theory in some Muslim countries (e.g., Egypt, Iran, Pakistan, Saudi Arabia, and Sudan). There are many university programs, scholars, and books in such countries which approach a distinguished Islamic Economy— based on the Holy Koran and the sayings of the Prophet Mohammed— Hadith— which differ from western capitalist doctrines and Marxist ones. Also, there are some banks and other financial institutions in many parts of the world— including non-Muslim states— which apply Islamic doctrines in different financial and business dealings (e.g., interest rates, investment, currency trading, insurance, etc.). For Islamic banking theories and practices, see Traute Wohlers-Schart, The Arab and Islamic Banks (Paris: OECD, 1983).

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 213 Today I would argue that the words we use to describe and measure our economy no longer accurately reflect our society as it exists today. Even very good people using bad information misjudge the situation. Since some very excellent economists have been dead wrong in their judgments about the future of the American economy, perhaps a case can be made that their mistakes may have flowed from using words and concepts that are no longer applicable to the real world. Most of the terms we use in standard economic analysis were invented in the industrialized age, and while many are still relevant, some no longer measure what they once did, because the base has changed. . . . It makes as little sense today to look at the GNP of the United States without reference to the rest of the world, as it would to analyze the GNP of New York state without looking at the rest of the country.28

A New World Financial System The old rules that governed different areas in world economics and finance have been superceded by new ones. However, it is hard to say right now that we have a new and distinct world financial system with a known set of rules, boundaries, procedures, with internal and external power structure and guidelines for internal relationships. We can, however, discern certain direc tions and characteristics of a new, emerging system. The following pages will analyze the nature of this new system by looking at some of its important attributes.

Off-shore financial centers In the last quarter century, an important develop ment in international finance has taken place. This has

28Wriston, Risk and Other Four-Letter Words. pp. 120-22.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 214 been the emergence of off-shore banking, or off-shore financial centers. The actual number of these centers varies according to who defines them and what definition is being used. Generally speaking, they can be called places where banks and other financial institutions enjoy the freedom of moving money in and out of their holding, via financial electronic networks, without having to disclose information about such transactions to authori ties, depositing a portion of their assets with the host governments, or having to invest in insurance. These banks and their customers pay no taxes. Basically, off shore banking can be defined, in the words of a U.S. Congressional study, as "any banking activity within a country's borders, but outside its banking system."29 Currently, off-shore centers play a very important role in transnational financial transactions and activi ties. As table 17 illustrates, the assets and liabilities of transnational banks in off-shore centers exceed by far their assets in all of the industrialized countries combined. According to the U.S. Federal Reserve account, by the end of 1986, the U.S.-based transnational banks held more assets in the Bahamas and the Cayman Islands than in the United Kingdom. The exact dollar amounts were

29U.S. Congress, Office of Technology Assessment, Effects of Information Technology on Financial Services (Washington, D.C.: U.S. Government Printing Office, September 1984), p. 156.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 215 $142,592 million and $140,917 million, respectively. A similar difference exists for liabilities, too. Further more, U.S. banks' aggregate liabilities and assets in the Bahamas and the Cayman Islands alone amount to more than one-fourth of their assets and liabilities in all other countries combined— assets $142,592 to $456,627 million and liabilities $142,592 million to $456,627 million.30 Moreover, according to a study by the International Monetary Fund cross-border interbank account by residence of off-shore centers in 1985, the amount totaled $433.9 billion, which was more than one sixth the total of the world, $2,358.3 billion; more than one-fourth that of the industrialized countries, $1,599.8 billion; ten times as much as that of the socialist countries, $41.1 billion; and twice that of all developing countries, $241.7 billion.31 The importance of off-shore centers is increasing rapidly, so that one day they may become dominant in international financial transactions. In fact, tradi tional financial centers such as London, New York, and

30The Federal Reserve Bulletin, no. 4 (April 1987), pp. A55-6 (Washington, D.C., Board of Governors of the Federal Reserve System). 31Maxwell Watson, ed., International Capital Markets (Washington, D.C.: IMF, December 1986), p. 99. It should be noted that, according to this study, the off shore centers consist of the Bahamas, Bahrain, the Cayman Islands, Hong Kong, the Netherlands, Antilles, Panama, and Singapore. Also some OECD countries such as Greece and Portugal are counted among the industrialized countries.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 216

TABLE 17 BANKS' EXTERNAL LIABILITIES AND CLAIMS BY ECONOMIC AND GEOGRAPHICAL AREAS, 1985 (in millions of dollars) Number of Region Countries Liabilities Assets

Industrial Countries 17 1,924,193 1,804,988 Off-Shore Centers- Reportinga 6 2,386,389 2,225,034 Off-Shore Centers- Non-Reportingb 7 54,354 54,289 Other Developed Countries— Western Europe 12 33,148 51,378 Other Developed Countries— Others0 3 41,247 110,224 Eastern Europe 8 27,532 70,670 Oil Exporting Countries 16 262,040 158,501 Latin America and Caribbean 30 69,206 220,107 Middle East 6 22,158 16,138 Africa 46 12,499 22,854 Asia 35 84,166 101,053

SOURCE: Bank of England Quarterly Bulletin. February 1987, table 13.1. aThis includes the Bahamas, the Cayman Islands, Hong Kong, the Netherland Antilles, and Singapore. bThe non-reporting off-shore centers include Barbados, Bermuda, Lebanon, Liberia, Panama, Vanuatu, and the West Indies. The quantities given in this table amount to much less than the actual figures. GAustralia, New Zealand, and South Africa.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 217 Tokyo are -themselves moving in the direction of becoming off-shore centers or of having their own off-shore centers within.32 For instance, the Japanese finance ministry opened Tokyo's off-shore banking market in December 1986 which is "a separate computer program, not an island.11 according to The Banker's description. Therefore: Banks with off-shore accounts will be able to take deposits and make loans in any currency to all non residents, non-individual clients. They will be exempt from the 20 percent withholding tax, interest rate regulations, reserve requirements, and deposit insurance schemes.33 The Japanese Ministry of Finance expects two hundred banks, including seventy foreign banks, to open off-shore accounts at estimated aggregate amounts ranging from $30 to $85 billion. However, many experts doubt that Tokyo's off-shore center will be very successful and compete with other off-shore centers because of some restrictions which still apply to this new market.34

32In fact, some researchers consider London as a type of off-shore center. However, it is not in a full sense, and thus this study will not consider it as such. Yet, it should be noted that some off-shore centers (e.g., Hong Kong and the West Indies) are part of the British political and economic dominance, although they enjoy some administrative freedom, but more financial freedom than a political one. 33Lisa Martineau, "A Long Wait for Foreign Banks," The Banker. January 1987, p. 77. 34Ibid., pp. 76-78. Also, see Christopher J. Chipelli, "Japan's Off-Shore Banking Center Opens Today," Wall Street Journalr 1 December 1986. It should be noted that the United States is moving either to have its own external or internal off-shore center, or to make the country as a whole a tax-haven place. See Tom Redburn,

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 218 Banks in off-shore centers have no actual money— when a lawyer in the Bahamas was asked what would happen in case of a Cuban invasion, he replied, "Castro wouldn't find any Eurodollars in the safe. They're all really held in New York and London."35 These banks rarely have actual money in the traditional sense of the word. What they have is an account record, and what they transfer are mere figures via computer and telecommunications. If TDF had not existed, off-shore centers could not exist in the same magnitude and importance. A study by the U.S. Congress points out that money transferred to off-shore centers is done primarily by banks, through wire transfer via bank communication networks.36 Another Congressional study states that "the development of off-shore banking centers is facilitated by information technology, which tends to make the industry less location-sensitive.1,37 It is interesting to note that, in 1983, Cable and Wireless (C-

"U.S. Becoming a Tax Haven: New Laws May Make It the World's Biggest Refuge," Los Angeles Times. 22 December 1986. 35Quoted in Anthony Sampson, The Money Lenders (New York: Viking Press, 1981), p. 228. 36U.S. Congress, Senate, Crime and Secrecy: The Use of Off-Shore Banks and Companies. U.S. Senate Hearings before the permanent Sub-Committee on Investigation of the Committee on Government Affairs (Washington, D.C.: U.S. Government Printing Office, 1983). 37U.S. Congress, Office of Technology Assessments, Effects of Information Technology on Financial Services System (Washington, D.C.: Author, September 1984), p. 156.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 219 W) invested U.S. $20 million in sophisticated telecom munication equipments in the Cayman Islands. These new equipments are more up-to-date than those available either in the United States or United Kingdom. The tiny Cayman Islands have the highest per capita number of telex machines in the world, and the number of lines and telephone installed here have increased by over 30 percent in the last two years.38

Euromarket Another financial phenomenon the existence of which, its maintenance, and growing importance are due to TDF is the Euromarket. This is a term used to describe a financial market which is not under the jurisdiction of any state. It includes such financial instruments as currencies, bonds, and notes. Although it started in the very early 1950s, it was a greatly neglected market. During that time, as well as in the 1960s, it used to be called the Eurodollar Market or stateless money, because they were mainly based on U.S. dollars, but outside the U.S. control. As a result of increasing utilization of information technology in the 1970s and the 1980s, this market moved in two directions and became one of the most

38nfinancial Havens and TDF," Transnational Data Report 6 (1984):301. It should be noted that the Cayman Islands had only two banks in 1964, and neither of these were off-shore banks. But by 1981 it had more than three hundred banks and only thirty with full local service.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 220 important— if not the most important— financial market in the world. First, the volume of the Eurocurrency market started to grow at a rapid rate and came to include other currencies— besides the U.S. dollar— such as the Japanese Yen, the British Sterling, the French Franc, and other hard currencies. The dollar is still dominant, but other currencies are gradually taking greater market shares. (Today, between 30-35 percent of the amount of all currencies in this market are non-U.S. dollars.) Currently, there are no clear-cut estimates of the size of the Eurocurrency market. Morgan Guaranty esti mated the volume of dollar-transactions in the 1982 market to be $1.8 trillion, with an annual growth rate of $300 billion. One can appreciate the magnitude of this figure by considering that the basic U.S. money supply, largest in the world, as measured by Ml, was $442 billion at the end of 1981. The U.S. money supply for that year amounted to less than a quarter in dollar amount of the Eurocur rency market. In 1986, it may be on the order of $2.5 to $3 trillion. This increment is traceable to the recent huge increase in the U.S. trade deficit, the increase in market shares of other participating countries, and the globalization and deregulation of world finance.39

39See Ibrahim Al-Muhanna and Arthur L. Fern, "The U.S. Dollar as Independent, Extraterritorial Actor."

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 221 Furthermore, the Euromarket has become important inside the United States. In 1981, the Chicago Mercantile Exchange opened its ninety-day Eurodollar future contract. Within four years, this contract became the second most actively traded interest rate contract, after Treasury bond futures. About nine million Eurodollar futures were traded in 1985, whereas $4.2 million were traded the year before. Trade in Eurodollar futures is expected to increase in subsequent years.40 What is vitally crucial about this market is that, at least on paper, Eurocurren cies are held outside the country and therefore are beyond the control and scrutiny of governments. Aside from its growth, the second direction in which the Euromarket has moved is a direction of diver sification. The Euromarket is no longer restricted to currencies, but also includes other financial instruments. In the 1960s, a Eurobond market emerged as an outgrowth of the Euromarket proper. Between 1966 and 1980, the size of the Eurobond section increased by 28.4 percent per year from $17.4 billion to $575 billion. By 1985, the Eurobond market's volume had passed the trillion dollar level, with an annual increase of $135 billion (table 18). Another development in the Euromarket was the creation of the Euro-equity market in the 1980s. In 1983,

4 0,1 Eurodollar Deals," New York Times. 2 March 1986, p. FI.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 222 the value of Euro-equity (stock offerings made outside a company's home country) was about half a billion dollars. By 1985, however, it had reached $3.1 billion.41 Euro- equity value has continued to increase since 1985. For example, in 1986, the value of Euro-equity issued by U.S. corporations alone was about one billion dollars, a fivefold increase over the previous year.42

TABLE 18 THE DEVELOPMENT OF THE EUROBOND MARKET ($ MILLION) Year 1970 1980 1983 1985

Number of issues 128 310 526 1,357 Value 2,672.0 26,423.0 46,376.5 235,672.2

SOURCE: Andrian Hamilton, The Financial Revolution (New York: Free Press, 1986), p. 55.

Basically, the Euromarket is gradually becoming the world's most important financial market, complete with its own financial instruments (e.g., options, futures, interest rates, etc.) and rules. It also functions with a minimum of, or no, government regulations. This market has definitely existed, developed, and functioned, thanks to the help of transborder data flows which make borders.

41Nathaniel C. Nash, "Stretching the S.E.C.'s Reach," p. 4F. 42Leslie Wayne, "Finance Officers' Wider Role," New York Times. 20 October 1986.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 223 time, and space meaningless. Most of Euromoney exists in the computer, registered in such places as off-shore centers, and goes around the world and around the clock via electric financial networks. The world's financial community has little besides praise for the Euromarket. As the Banker Magazine stated: The Euromarket is a near-perfect market. Although often thought of as synonymous with classic borrowers' market, it will surely adjust by itself— as good markets will— if it cannot digest the continuously thinner margins.43 (Emphasis added.)

Currency trading As we stated earlier in this study, currencies used to be a store of wealth and a medium of exchange. However, while currency continues to serve these two functions, they have been superceded in the last ten years by a new function. The new function which is the most important one in the current international money exchange is international currency trading. Thus, currencies, like pork bellies, grain, and steel, can be traded for finan cial gain. In fact, in the last five years, currencies trading became the easiest, fastest, and largest way to make money at the international level. It can be said that currency trading has existed for a long time, especially in fixed currencies (e.g., currency black market). However, the value and importance

43"Euromarket: A Borrower's Paradise," The Banker. September 1986, p. 72.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 224 of currencies trading did not go beyond their local area of use. It was with the floating of the dollar in 1973 that international currency trading started to emerge. However, it is TDF which has made currency trading flourish in the following years. Therefore, currency trading really attained importance as a business during the 1980s. Like Eurocurrency, there are no clear-cut estimates of the total volume of the world's currency trading. Also, it is hard to separate those transactions which are performed by currency traders and those executed for other commercial purposes. However, the volume of currency trading was estimated to amount to $75 billion a day in 1979, but trebled in 1987 to reach $200 billion or more a day.44 Therefore, "only 5 percent to 10 percent of exchange-rate dealings are now linked to commerce," according to Roland Leuschel, an editor of Banque Brucelles Lambert, Brussels.45 Yet, taking into account the major money markets, the value of currency-exchange trading is much higher (see table 19), when the smaller financial markets and the black markets are not included.

44Pamela Sherrid, "The Gnomes Behind the Dollar's Fall," U.S. News and World Report. 16 February 1987, p. 43.

45Roland Leuschel, "Money's Riding on the Group of One," Wall Street Journal. 29 September 1986.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 225

TABLE 19 FOREIGN EXCHANGE TRADING— BY MARKET— 1986/7 (U.S. $ BILLION A DAY) London 90 New York 50 Tokyo 48 Singapore 12-18 Hong Kong 10 Australia 6-8 New Zealand 1

Total 215-220

SOURCE: "Forex Turnover: Now a Quarter of World Total," The Banker. September 1986, p. 54? Pamela Sherrid, "The Gnomes Behind the Dollar's Fall," U.S. News and World Report. 16 February 1987, p. 43.

It is very easy to imagine how much a trader can earn through currency exchange if we know that the U.S. dollar rose 100 percent against major currencies between 1980 and 1985 and dropped to a similar percentage two years later. It is no wonder, then, that Citicorp's global exchange income has risen 60 percent in the last two years to $412 million in 1986 and that Morgan Guaranty Trust gained $230 million in 1986— a 57 percent rise over the previous year.46

46Sherrid, "The Gnomes Behind the Dollar's Fall," p. 43. It is interesting to note that currency trading is a growing market in many Third World countries. There are

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 226 The multi-trillion dollar trade involves not only individual traders and corporations but also governments and international organizations. The World Bank, for instance, has been recently active in currency-debt swap, a new method of currency trading where money is borrowed in one currency but interest is paid in another. Essen tially, currency trading is a growing and sophisticated international business. Its transactions occur around the world and around the clock. It is a full-fledged market with its own options and futures contracts, as well as bets and hedging. Moreover, almost all currency trading is done via computer and telecommunication technology.

International debt One of the oldest transnational financial issues has been the debt problem. In recent years, however, its magnitude and complexity, as well as its main actors, have given it a new direction. It is today a global issue which involves small and large banks, rich and poor countries, and socialist and capitalist systems in an interlocked debt relationship. It is here to stay. The value of the debt and its concentration (i.e., geograph ical area) may shift from time to time, but the problem will be there as long as the current transnational

many individuals and institutions in these countries who make and invest their fortunes in the international currencies trading market.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 227 financial arrangements continue and develop in the same directions.47 This generalization is valid, because the debt problem is closely linked with capital flight, the Euromarket, off-shore banking, floating exchange rates, and, of course, with transborder data flows. A U.S. Congressional study observed about the debt that "the extent to which communication and information technologies contribute to the situation should be noted."48 Other data support the assumption of globalization of debt. The total balance of payment of almost all the countries in the world has been negative in the last seven years. This negative balance of payment might shift from one geographical area to another, and it might vary from one year to another, but in its totality it has been on the negative side, as table 20 shows. This means that there are always billions of dollars which are unaccounted for.

Perhaps the most important feature of globaliza tion of debt is the source of the money being lent to the

47Currently the total U.S. debt, private and public, is about $9 trillion; thus, it is likely that the debt issue will switch from being a Latin American problem to a U.S. problem. Yet, such a change would have a different and perhaps a severe impact on the world's economy and finance. 48Effects of Information Technology on Financial Systems. p. 155. Also, Herbert I. Schiller in his book, Information and the Crisis Economy, shows that the debt problem is related to the change in the world capitalist economy as a result of the expansion of the information industry.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 228

6.0 -8.9 21.6

-35.5 -22.0 -13.5 148.3 -19.0 -12.0 -23.3 -126.7 1985 1986 12.1 -9.4 -2.2 -8.8 -0.4 -4.0 79.7 -37.4 -25.9 -11.5 -24.7 -50.0 -104.4 1.4 1.7 -8.1 -0.7 -5.1 60.7 -32.1 -24.0 -35.1 -95.8

-6.7 -2.9 35.3 -7.8 -8.4 -57.2 -50.5 -14.7 -38.2 -12.8 1.4 2.8 1982 1983 1984 -8.9 26.0 1.2 1.5 -1.4 -94.1 -30.0 -23.3 -17.9 -75.6 -58.9 -65.7 -103.0 -529 2.4 1981 12.8 74.0 -13.9 -92.8 -27.5 -22.7 -50.4 -17.8 -10.4 -30.3 -106.7 TABLE 20 1.4 8.4 (billions of dollars) of (billions 1980 -4.9 -69.1 -17.0 -52.1 -38.2 -46.6 -33.9 -27.9 -18.8 THEWORLD CURRENT BALANCE, 1980-86

aReflects errors, amissions, and asymmetries in reported balance of payments statistics on statistics payments of balance reported in asymmetries and amissions, errors, aReflects SOURCE: The World Bank, World Development. Report 1987 (London: Oxford University Press, 1987), Press, University Oxford (London: 1987 Report Development. World Bank, World The SOURCE: NOTE: Net official transfers are excluded. Data for developing countries are based on a sample a on based are countries developing for Data excluded. are transfers official Net NOTE: low-income countries low-income Middle-incoue countries Middle-incoue Oil exporters Oil Exporters of manufactures of Exporters Sub-Saharan Africa Sub-Saharan Highly indebted countries indebted Highly Other industrial countries industrial Other United States United Country Group Country Developing countries Developing Industrial countries Industrial High-incame oil exporters oil High-incame 88.5 Totala of ninety countries. ninety of p. 17. p. current account, plus balance of listed groups with countries not included. not countries with groups listed of balance plus account, current

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 229 borrowing countries or corporations. Debt used merely to be an issue between two or three countries or between a country and the World Bank. But currently it involves hundreds of banks from tens of countries. A single loan might involve tens of banks from all around the world, and that includes many developing countries as well. This is the situation in the case of syndicate loans. It is ironic that some banks from Brazil, the most indebted country in the Third World, have been participating in some syndicate loans to other countries and have partici pated in the Paris Club.49 Also, the number of banks which are involved in loans to Mexico is said to be over five hundred banks, including small regional banks from industrialized countries and still other banks from Third World countries.50 Although most loans to Third World nations come from industrialized countries, the latter are suffering from the debt problem as well. In fact, the United States is currently the leading debtor nation, with more than $209 billion owed to overseas sources as of 1986. Other industrialized countries will be in a similar situation if

49See "Interview with Han Dordozan, the Paris Club representative," A1 Maialla. 22-28 April 1987, p. 35. 50C. Todd Conocer, a U.S. government bank regu lator, observed that "There are 115 banks with loans outstanding to Argentina. There aren't 115 bankers in the country who can find Argentina on the map." Quoted by Hobart Rowen, "More Trouble Ahead for Banks," Washington Post. 13 January 1985, p. F2.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 230 the Euromarket, off-shore centers, and currency trading continue at the same pace, which is likely. Moreover, it is highly improbable that the United States, for instance, will send its troops to collect debts from any country as the United Kingdom did with Venezuela eighty years ago.5-1- In fact, the opposite is occurring. Two official U.S. government plans are proposing that U.S. banks— among others— either give more loans to debtor countries to serve their interest as the Baker Plan proposes, or relieve debtor nations of some of their principal and interest payments altogether, as the Bradley Plan suggests. In addition, as soon as Japan earned financial surpluses, it came under heavy pressure to spend part of it in economic assistance to Third World countries. As a result, it decided in early 1987 to lend more than $30 billion to debtor nations in Latin America alone. Another aspect of the global debt issue is capital flight, which was made possible by TDF where individuals can transfer and manage their money from anywhere in the world. This term broadly refers to the flight of private sector capital from the home country to be invested overseas. Although it is currently a common problem for many countries, it is more serious for developing coun

51For a summary and an in-depth study of the debt problem, see Harold Lever and Christopher Huhue, Debt and Danger: The World Financial Crisis (Middlesex, England: Penguin Books, 1985).

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 231 tries, where it happened in most of the cases without the knowledge and approval of these countries' financial authorities.52 There are no agreed-upon figures on the value of global capital flight. This figure depends on the measurement being used, as well as upon the countries where the money goes. Most of the studies of this phenomenon fail to take into account capital flight into off-shore centers, perhaps because of the unavailability of data from such places. In any case, a study by the IMF found that, "During 1980-86, international bank deposits held by non-banks in developing countries rose by almost $80 billion to $185 billion at mid-1986, amounted to 31 percent of those countries' bank debt or 21 percent of their total debt."53

52 For a country like Egypt, capital flight presents a very serious problem. Some individuals estimate it to be about $120 billion, which is more than three times Egypt's foreign debt. See "Will Money Stop From Egyptian Banks?", Ashara Al-Awsat. 16 April 1987, p. 8. 53Watson, ed., International Capital Markets. p. 69. It should be noted also that capital flight is not a problem for developing countries only, but for developed countries as well, with the exceptions of Japan, West Germany, and very few temporarily advantaged countries such as those exporting capital (e.g., Kuwait and Saudi Arabia) and off-shore centers. However, such advantages are temporary and could change at any time— except in the case of off-shore centers. The apparent seriousness of the problem for Third World countries is due mainly to the structure of the world financial system, which we shall discuss in the next chapter.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 232 Financial innovations A study about world capital markets by IMF has noted that: Market incentives for innovative instruments and techniques may be attributed in part to opportunities to avoid or reduce the costs of regulatory restric tions and the taxes on financial activity through the use of new instruments or issuing techniques. Another market factor motivating innovation has been the intensification of competition among financial firms. In this connection. technological advances have promoted competition bv making it increasingly feasible to separate the location of the underlying real economic activity, as well as to separate the location of final investor from final borrower.54 [Emphasis added.] Within the last five years, financial innova tions— new instruments either for attracting investors or for securing capital markets' future investments— have been sweeping the international financial system. A local market usually adopts these innovations first; then they spread to other countries' markets. In some cases, they are globalized at once, as happened in the case of currency swapping. There are many different financial innovations, and more are appearing every day.55 They include financial trading tools such as options, futures,

54Ibid., pp. 38-39. 55See, for example, Michael Fowle and Tony Wedgewood, "Accounting for Innovation," The Banker. September 1983, pp. 43-47.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 233 hedging, valuation or accruals, liquidity enhancing, and credit creating, among others.56 Since there are many financial innovations, we shall discuss here only the most rapidly growing and important one, which is that of financial futures.57 "Financial future" simply refers to the contract to purchase or sell a set of financial documents at a set of future dates. For generations, future contracts were limited to agricultural and metal products at the national level. In the last few years, however, the futures market has been expanded to international financial trading in areas such as foreign currencies, Eurocurrency, interest rates, stock indexes, and government securities. In fact, ten years ago, agricultural and metals were almost the only commodities traded under future contracts. Today, however, their share of the market has diminished substan tially. For example, agricultural and other raw commodi ties accounted for over 97 percent of all commodities traded under futures contracts in the United States in 1975. By 1985, however, their share had fallen to

56For the definition of such terms, see the Glossary. 57,,Futures, State of the Industry: How the Game is Changing," Futures, March 1986, pp. 47-51.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 234 approximately 35 percent, while the share of financial documents in the futures market had risen by 60 percent.58 Besides the domination of financial documents, the futures market is increasingly becoming a global practice via two methods. First, Eurocurrency is becoming an important part of the futures market. For example, the Chicago Mercantile Exchange, the largest futures and options market in the world, opened a 90-day Eurodollar futures contracts market in 1981. Here, traders buy or sell a specific amount of dollars held outside the United States at a specified price within a known period of time. Within four years, this market became the second most active trader in interest-rate contracts after the U.S. Treasury bond futures. In 1985, $8.9 million Eurodollar futures were traded. The volume is expected to increase rapidly in subsequent years.59 Secondly, due to information technology, a global connection among financial futures markets around the world is taking place. In 1987, three developments in this direction have occurred. First, the Chicago Board of Trade (CBOT) has started to offer U.S. traders a futures contract on the Financial Times-Stock Exchange 100 Share

58"Futures, State of the Industry: How the Game is Changing," pp. 47-51. 59"Eurodollar Deals," New York Times. 2 March 1986, p. IF.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 235 Index, a major British stock index.60 Secondly, in March 1987 the United States Securities and Exchange Commission began to allow the U.S. exchanges to trade futures contracts on British, Canadian, and Japanese government bonds. It is too early to evaluate the market for such futures bonds, but it is expected that the United States market for them will be substantial.61 Finally, it is likely that sometime in 1987 the Japanese government will permit Japan's financial institutions to trade directly in overseas financial futures markets. This is expected to further globalize financial futures, stocks and bonds markets, as well as to expand investments in financial trading.62 What is important in this aspect is that financial futures markets and other financial innovations are closely linked to information technology. Futures, for example, are a very sophisticated transaction, especially when they are linked with options and hedging, as is usually the case. Here computer programming is important, not only for calculation of the profitability of a

. 60It should be noted that stock-index futures were introduced only in 1982 and are usually traded in baskets of $5 million to $10 million worth of stocks. 61See Stan Hiden, "Foreign-Bond Futures Trading Approved for U.S. Exchanges," Washington Post. 13 March 1987, p. D2. 62See Scott McMurray, "Japan May Let Its Firms Trade Directly in Financial Futures Markets in the U . S," Wall Street Journal. 30 March 1987.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 236 contract, but also for the making of speculations. Today, financial futures and options markets function around the clock and around the world. Therefore, almost all companies which deal within these markets are dependent on TDF.

Financial integration The term 'integration' may have many meanings as regards the world financial system. It could, for instance, mean the increased linkage between and among financial centers and the establishment of global twenty- four hour financial trading. It might also mean the deregulation processes and the emergence of the Euromarket and off-shore centers where actors interact and integrate with no restrictions. It might mean the integration of the peripheral areas (e.g., some Third World countries) into the world financial system.63 What we want to discuss here, however, is the movement among Marxist states to integrate within the world capitalist system. What is interesting about this movement is that, for many decades, these states rejected capitalist approaches to finance, created their own financial system, and attempted

63With the exception of off-shore centers, all Third World countries are peripheries in the world financial system. However, their relationship with the system varies from one state to another and sometimes from one time to another. The relations between Third World countries and the world financial system will be discussed in the next chapter, as well as in the conclusion.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 237 to sever and keep asound their connections with the world financial system, which is dominated by capitalist states. However, within the last five years, there have been movements by some Marxist countries to adopt some capitalist approaches to their domestic economies and to their external link with the world capitalist financial systems.®4 They are using TDF to increase this linkage. Internally, they are gradually adopting many capitalist approaches such as private enterprise (e.g., the Soviet Onion), joint ventures (e.g., Hungary), the use of hard currencies by the public for purchasing (e.g., Poland), the establishment of a two-tier banking system (e.g., Hungary), the creation of a central bank authority (e.g., China), and the selling of shares of public firms' stocks privately (e.g., China). There have even been some attempts to reassess and redefine the role of the state in economic affairs, and discussion of the feasibility of complete disclosure of economic statistics and major currency reforms. Although internal financial changes in Marxist states is very important, this subject is not within the scope of this study.65

64There are some American Soviet experts who believe that discussions in the Soviet Union of a finan cial reform have been going on since the mid-1970s. See Karene Witcher, "Soviets Consider Joining INF, World Bank," Wall Street Journal. 15 August 1986, p. 19. 65It appears that there are no comprehensive studies of the recent economic and financial reforms in the Socialist states. Most of the writings on this

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 238 However, these states' external financial rela tions have every relevance to this study. Therefore, we will elaborate on some of the recent developments that have taken place within this area. Since various Marxist states have each adopted somewhat different external financial policies, our discussions will be limited to the two major Marxist countries, the Soviet Union and the People's Republic of China.66 Besides an increase in the number of joint ventures in the last two years between the Soviet Union and Western private enterprise, the Soviet Union is attempting to play an active role in international finance. In 1986, it expressed its desire to be a member of the International Monetary Fund and the World Bank, financial organizations it had refused to join for forty years. Also, it is attempting to be more active in the Euromarket. In addition to the Eurocurrency market in which it has always participated, reports now state that

subject have either been short articles or news items in western mass media. 66It should be noted that, besides Yugoslavia, which broke rank with European Soviet-led socialist countries a long time ago, Hungary has the most far- reaching economic and financial reform program and the most extensive connections with western capitalism. But because it is a small country and because it has little influence within the socialist bloc, we did not include it in our discussion of the process of eastern integration into the world capitalist financial system, although Hungary should not be ignored, especially since Soviet leaders have recently praised the Hungarian financial and economic experience.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 239 the Soviet Union is in the process of issuing the first dollar-denominated Eurobonds.67 This development will be an important step in the integration of the Soviet Union into the new developing world's capitalist financial system and will also be an expansion of the Euromarket itself. The relationship between the Soviet Union's off shore banking and interbank deposits is becoming strong, although its precise nature is not yet clear. Using TDF, the Soviet Union has established many branches or sub scribers of its international trade bank in some off-shore centers. In Singapore, for example, it owns Moscow Narodney Ltd., which is recorded there as a British Bank because its Soviet parent bank is incorporated in London. Also, in interbank deposits, it is estimated that Soviet banks have approximately $10 billion which are being recycled around the world.68 Yet more interesting is the three recent Soviet organizational changes which present more evidence of a movement towards connection to and understanding of the world capitalist system. First, it has established a new twelve-member Commission on Foreign Economic Relations which reports directly to the Chairman of the Council of

67"Dollar Detente?", New York Times. 5 October 1986, Section 3, p. 1. 68See Roger W. Robinson, Jr., "Moscow's 'Shell Game,"' Washington Post. Outlook. 22 June 1986, pp. Cl-2.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 240 Ministers in order to coordinate all foreign economic activities such as trade, banking, and insurance. Second, a Department of International Economics within the Ministry of Foreign Affairs has been established to analyze world economic conditions and assist Soviet businessmen abroad. Finally, a transformation of several foreign trade agencies (e.g., autoexport, tractorexport, enegramashexport, etc.) have not been integrated into corresponding government agencies, while a new role has been assigned to the Ministry of Foreign Trade.69 The People's Republic of China is moving towards integration into the capitalist global financial system even more aggressively than has the Soviet Union. Its communication and financial linkages with the world's financial system are increasing almost every day. Besides having established national stock markets in four cities, China is in the process of listing government bonds and firms' stock in international exchange markets. A Chinese company, Guandong Enterprise, will list its stocks for trading in Hong Kong and Shanghai and will float a $100 million public bond issue in Singapore's market some time in 1987. Shanghai, in fact, is enjoying notable financial and economic freedom as well as strong communications and

69See Robin Pringle, "Mr. Gorbachev's Economic Reforms," The Banker. February 1987, pp. 15-17, as well as other articles in the same issue about Eastern Europe and Chinese economic and financial reforms.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 241 financial linkages to the outside world in comparison with the rest of China. It might become China's off-shore center either before the end of the decade or some time in the next. Perhaps this was what the city's mayor, Jiang Zemir, had in mind when he told the Washington Post: Before liberation (in 1949), Shanghai was more important than Hong Kong in trade and financial affairs, but for various historical reasons, Shanghai has lagged behind, . . . We hope in the future Shanghai will once again be an important center for trade and finance.70 The Bank of Communications, a Shanghai bank which went into "exile" to Hong Kong after the Revolution, is to be re-established in Shanghai as the first semi-indepen dent, multi-service financial institution in China, with many branches around the country. It has both experience and longstanding connections in the international finan cial market. Other Chinese banks, mainly People's Bank and Bank of China, have branches around the world and are trying to learn the art of effective participation in the world financial market.71

70Daniel Southerland, "Shanghai Acts to Recreate a Major Financial Center," Washington Post. 14 December 1986, p. CIO. 71The Chinese drive to learn about financial practice in the West as well as in the world's financial system as a whole has been very strong in the last few years. They are sending students and officials abroad and inviting foreign experts from the United States, Japan, and the United Kingdom to lecture to them at home. This shows their great desire to be open to the world's capitalist system, but a reluctance to participate fully until they have been sufficiently instructed.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 242 Although they have limited access to local Chinese industry and other enterprises, there are currently one hundred representatives and branch offices of foreign banks in China. They deal mostly with China's financial and foreign trade sectors, but they represent another strong connection to the outside world. More interesting, however, is the recent presence in China of MasterCard, an American credit card consortium, which relies almost completely on information/communications technologies. MasterCard signed an agreement making the Bank of China a full member. It was the first credit card organization to strike such an arrangement with China, so now the Bank of China's few thousand existing credit customers have access to MasterCards. Therefore, the card holders can obtain cash at two hundred Bank of China branches. Also, MasterCard is persuading Chinese merchants to accept the card. The success has been such that fifteen hundred establishments have already done so. So far, there are few Chinese businessmen enrolled in MasterCard, but if the success of MasterCard in other parts of Asia is any indicator, MasterCard should expect to have a booming business in China.72

72See "Credit Card in China: When the Plastic Revolution Comes," Economist. 25 April 1987, p. 78.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 243 Information standard Walter Wriston, the former Chairman of Citicorp, believes that the current world's financial system is based on what he called the information standard. This standard, according to Wriston, is replacing the gold standard and is actually affecting the nation/state system as a whole.73 Some might disagree with this view, but no student of international finance or decision maker— private or public— would disagree about the crucial role of information and communication for the current world financial system. Although information and communication have formed an inseparable part of financial transactions for a long time, information has only recently become such a crucial part of international finance itself. First, interna tional financial transactions are information sensitive. The market reacts immediately to new information such as the release of the United States trade deficit statistics, the resignation of West European government officials, or the death of a Soviet leader. The market even reacts to rumors. For example, when a rumor circulated in late 1985 that Saudi Arabia's former Oil Minister, Ahmad Zaki Yammani, had been killed, the prices of the world's major currencies were changing on the same day.

73See Wriston, Risk and Other Four-Letter Words. pp. 129-41.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 244 Secondly, many transnational financial deals are based on comprehensive and up-to-date information and analysis concerning all the participants. For example, after the appearance of the debt "crisis" in 1982, country risk analysis became an important business. Some banks, like Citicorp, have their own country risk analysis departments, while others rely on independent firms which collect data from a variety of sources such as government, private, and intergovernment agencies, and thereby obtain comprehensive economic and financial information about the countries and issues in question. The information is usually analyzed and stored and then submitted to the customer banks requesting it, with recommendations if needed.74 Finally, the sophisticated and automated method of transferring, analyzing, and storing data and information via TDF has become an integrated part of transnational financial functions. They are, as we said earlier, an important part of the various aspects of international finance that we have covered, such as financial innova tions, Euromarket, debt, and financial trading. Also, large banks and other financial institutions have begun to establish research and development laboratories which are similar to those in other industries. This has led to the

74See, for example, Bogdanowicz-Bindert and Sacks, "Closing the Barn Door: The Role of Information in Banks Lending to LDC," pp. 17-18.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 245 development of market competitiveness among international financial institutions, as The Banker Magazine has reported: Whether they are based in North America, Europe, or Japan, most seasoned institutional investors consider that the research done in New York is second to none and say that it has been an important factor in the development of the City's role as the focal point of world finance. "Wall Street analysts can move markets way outside the United States with their research in a way which their rivals in Europe or Japan generally can't," comments one mutual fund manager/75

The decline of governments1 power An important aspect of the connection between information technology and transnational banking is the decline of governments' power. However, there is no easy way to measure the decline of the state power vis-a-vis transnational banks or any other such corporations. Yet, we can observe such a decline and the role of information technology in such process through the failure of govern ments to act, their failure to carry out certain policy, their inability to resist external pressure, and through the statements by government and private officials which point to governments' weakness vis-a-vis certain institu tions . Also, within the world financial system as a whole, each particular government's power varies according

75David Fairlamb, "The New York Connection," The Banker. March 1987, p. 54. Also see Leah Nathans, "U.S. Innovators Still Ahead," The Banker. March 1987, pp. 47- 48.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 246 to its country's economic power and internal economic and political structure. The Third World countries govern ments' powerless status in the face of international financial pressure has been a well-studied historical reality.76 The recent trend within Marxist countries to integrate their economies into the world capitalist system is another indicator of the failure of their government to sustain a distinct and isolated financial system. The Western industrialized countries are not much better off in their relations with changing the international finan cial system. The United States, the most powerful country economically and financially, is no longer able to set domestic financial policy independently of the interna tional financial market. According to Michael Moffitt, by 1970 "U.S. domestic economic policy was subject to ratification, and veto by the international money men."77

76Most of the studies which deal with current world financial systems discuss, in one way or another, the growing weakness of Third World countries vis-a-vis big transnational banks. Perhaps one sign, among many, of this weakness is the growing use of swap between banks and some debtor countries. Transnational banks start to take over some state-run companies— banks included, in exchange for their debts. For a general study of the relationship between transnational banks and developing countries, although it is somewhat outdated, see Richard E. Feinberg and Valeriana Kallab, eds., Uncertain Future: Commercial Banks and the Third World (New Brunswick, NJ: Transaction Books, 1984). 77Michael Moffitt, The World1s Money (New York: Simon and Schuster, 1983), p. 164. It is interesting to note that when the dollar price was raising in the late 1970s and early 1980s, the U.S. government tried to stop it but failed. For example, on November 1, the U.S. Fed

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 247 Other Western governments are also "subject to ratification and veto by international money men." Even the socialist government in France failed in its attempt to nationalize and strictly control its banking industry when it came into power in 1982. In fact, within a few years, the Mitterand government went in the other direc tion by increasing deregulation and decreasing government intervention in the financial market.78 The British Labor Party had also been debating the party's policy concerning the appropriate actions to be implemented with reference to the banking industry during the 1987 election. They felt that they cannot stop the "internationalization" of the British financial market. The only alternative the Labor Party considers to be in their power is to take "advantage" of this trend. Thus, the Labor Party's financial policy is unlikely to be different than that of the Conservatives.79

was spending about $300 billion an hour, but the value of the dollar kept rising. Also, in November and December of the same year, the New York Fed spent about $7 billion to stabilize the dollar, but without much success. The Japanese government did the same in late 1986 and early 1987 with no result. The world financial market proved in both cases that it is more powerful than the governments of the most economically powerful countries in the world. 78See, for example, Martin Fenton, "A Sea Change in the Paris Markets," The Banker. May 1987, pp. 35-41, and Vivian Lewis, "French Banks Face Further Reforms," The Banker. May 1987, pp. 43-48.

79See David Goodhart, "City: Off the Hustings and Into Reality," New Statesman. 5 June 1987, pp. 18-19.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 248 The role of information technology in the decline of governmental power vis-a-vis the international finan cial and economic system is also illustrated in statements of many private and public officials. Walter Wriston, the former Chairman of Citicorp and a U.S. government advisor, wrote: The convergence of computers with telecommunications has produced a global trading system, which in turn has allowed creation of a new international monetary system I call the Information Standard. Because this global market is something different in kind and not just a change in degree. It has truly revolutionized the world. Political, regulatory, and economic concepts and compacts suddenly lose some of their relevance, and everyone from business people to politicians have new issues to worry about. The new Information Standard, unlike all prior arrangements, is not subject to effective political tinkering. [Emphasis added.] 6. <3. Robst, former Chairman and Chief Executive of Sperry Corporation, expresses a similar view: It is internationalizing the world economy in a way treaties and accords have never managed. The meaning of that is not lost on national governments, including ours. They're beginning to realize that the tides of electronic money are passing out of the control of anv single nation. Obviously, this concerns all of them and worries some of them. But, worried or not, they're well aware that we've reached the point where restricting electronic money movement would be like pulling the plug on their economic life support system.81 (Emphasis added.)

80Walter Wriston, "In Search of a Money Standard," Wall Street Journal. 12 November 1985, p. 28. See also W. Wriston, "Economic Freedom Receives a Boost," New York Times. 15 April 1986, p. 32. 81G. G. Probst, "Applying Tomorrow's Technology Today." For more quotations regarding government's loss of power in international finance, see the first chapter of this study.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 249 Collective governments' actions have also produced few results in the face of this trend. For the past thirteen years, the leaders of seven industrialized countries— Canada, Japan, France, Italy, West Germany, the United Kingdom, and the United States— have held annual economic summits. However, most of their discussions have lately been directed toward political issues such as terrorism and military presence in the Persian Gulf. Economic and financial issues are usually discussed, but the summits usually end without concrete results concern ing such matters as exchange rates, the debt crisis, and interest rates.82 Other groups of Western countries such as the Group of Thirty, the Group of Ten, the Group of Six, the Group of Five, the Group of Three, and the Group of Two have attempted to formulate policies for world financial stability and control. However, neither stability nor control have been achieved. Intergovernmental financial organizations, such as the International Monetary Fund and the World Bank, have become important arms for transnational banks. Within the first two decades of their establishment, the private

82Helmut Schmidt, former chancellor, Federal Republic of Germany, points out that "Nowadays an economic summit is a meeting of the mass media, on the fringes of which you also have seven prime ministers or presidents," quoted in Institutional Investor. International Edition, June 1987, p. 18.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 250 banks had an antagonistic relationship with these two institutions. But, as the international financial system changed, the relationship changed too. Currently, IMF and the World Bank offer three important services to transna tional banks. First, as TDF became an important part of transna tional financial operations, the World Bank started to allocate more money for the development of modern informa tion/communication infrastructure in developing countries. This infrastructure, however, favors the interests of transnational corporations and "their local partners over national capital formation," as Gerald Sussman found in his study of the World Bank telecommunications projects in the Philippines.83 Second, the World Bank and IMF serve as informa tion agents. The IMF and the World Bank collect informa tion and conduct analyses about various economic and financial activities from around the world. Such informa tion collection and analyses have been very useful and important for transnational banks. For example, on 1 January 1983, a group of transnational banks from dif ferent parts of the world established the Institute of International Finance in Washington, D.C. The primary goal of I IF is to collect information about developing

83Gerald Sussman, "Banking on Telecommunications: The World Bank in the Philippines," Journal of Communica tion 37 (Spring 1987):90-105.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 251 countries from IMF and promote cooperation with the IMF and the World Bank regarding this matter. Third, when the debt crisis became a serious problem for transnational banks, IMF proved to be very helpful in recommending, if not enforcing, certain economic and financial policies that the Third World

countri 33 SuCUld take. Such policies (e.g., "liberaliza tion") are favored by and for the benefit of private banks which cannot and prefer not to make such recommendations. In the midst of this, banks and other financial establishments (e.g., securities firms) are shrinking in number but increasing individually and in aggregate in size, holdings, and power. Rural, small, and specialized banks all throughout Western countries and in some developing countries are gradually diminishing. Banks which cannot operate across national borders, and which do not have interests and holdings in a variety of financial instruments cannot compete at local, national, and global levels and, therefore, their continued survival is in question. In the United States, for example, the number of bank failures has increased dramatically in the last six years and is expected to continue rising. In 1986, the number of failing banks reached 144, and, by 1987, this number is expected to reach 20084 (table 21).

84See the fourth chapter in this study, where we discussed the declining number of the British banks during

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 252 TABLE 21 BANK FAILURES IN THE UNITED STATES Bank Type 1981 1982 1983 1984 1985 1986

Failed 7 34 45 78 118 144 Problem 196 326 603 800 1098 1457 Unprofitable 741 1196 1530 1891 2453 2784

SOURCE: John M. Berry, MTwo Hundred Banks Facing Failure This Year," Washington Post. 22 May 1987, p. FI.

The trend in international finance seems to be such that soon, the world will have a few banks and other financial institutions which will dominate most national and international financial transactions. As Scott E. Pardee, Vice Chairman of Yamaichi International (America), Inc., and former manager of the Federal Reserve Open Market Account in New York, predicts: The upshot of all this, I believe, is a further painful evolution of the international financial system. Ten years from now there will be a core of some thirty to fifty financial institutions— banks, securities houses, and perhaps insurance companies— at the center of international finance. They will be operating in New York, London, Frankfurt, Tokyo, and elsewhere, . . . They will have capabilities in equities, fixed-income, futures and options, and foreign exchange. They will retain a flavor of their original nationality— Merrill Lynch will always be bullish on America and Yamaichi will always evoke the image of Mount Fuji. But they will all employ graduates from the best universities in the United States, England, and Japan, as well as graduates from

the telecommunication stage— the last part of the nine teenth century.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 253 the school of hard knocks from a wide range of countries.85

Mew rules

Very recently a movement has arisen to establish common rules and procedures for the international finan cial market. This movement differs in three major ways from other international arrangements, previous or current, such as the Universal Money Accord of 1880, Bretton Woods, and the European Monetary Accords. First, it recognizes and deals with the changes such as Euromar ket, Electronic Fund Transfer, and other financial innovations which have occurred in the international financial market. Second, this movement operates among transnational banks and other financial establishments, bank supervisors, and financial centers. Thus, govern ments, especially political and national fiscal authori ties, have little or no involvement in this movement. This movement is not an attempt to regulate the financial industry in the broad sense of the word. Rather, its purpose is to establish a consistency of procedure and conduct among financial markets and banks. In other words, the goal is to unify and protect the conduct of financial business all around the world.

85Scott E. Pardee, "internationalization of Financial Markets," Economic Review. Federal Reserve Bank of Kansas City, February 1987, p. 6.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 254 It is too early to describe the particulars of this movement, since it is in its formative stages of discussion, study, and practice. Also, most of what has taken place so far is a reaction to common needs and problems rather than organized enforcement of a set of rules. Furthermore, most of the existing regulations governing this movement are fragmented, and still at the experimental stage. Nevertheless, we can briefly outline here three examples which might clarify the current status and future of this movement.86 First, there is an attempt to place the Euromar kets under one system. A self-regulatory organization, the Securities Association, was formed in early 1987 by a merger of the Old London Stock Exchange and International Securities Regulatory Organization (ISRO), which used to represent Euromarkets firms until 1986. Another step in this direction is the institution of a screen-based system by the Association of International Bond Dealers (AIBD), a Zurich-based Eurobonds group. This screen-based system is to serve the purpose of keeping AIBD1s members and their customers well informed about price changes and differ

86It should be noted that there is a drive to create unified global indexes in such financial matters as stocks, futures, options, and the like which we are not including in our discussion here. Also, there are many calls for self-regulation with the international banking community. For the latter issue, see Lee Gunderson and William Spang, "A View Toward Self-Regulation in Banking," Issues in Banking Regulation 10 (Autumn 1986):3-5.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 255 ences in the Eurobond market. Also, in January 1987, AIBD asked its 860 worldwide members to report their prices at the end of each day. The goal of the screen-based system and daily report is to unify the Eurobond market. But presently, no one is sure of how much of a success the program to unify the Euromarket under one system will be. 87

Secondly, security markets supervisors all around the world are trying to create cooperative rules either bilaterally or through the International Association of Securities Commissions. These markets' aims are to exchange information, disclose securities fraud such as insider trading and stock manipulations, and establish common enforcement and other standardized rules. The issue of insider trading is currently a very important one? thus, it might soon be regulated on a global level. Others, however, might follow later.88 The third example of this trend is the desire of most of the world's banking supervisors and bankers to institute uniform banking practices and rules based in information technology and the change it has produced. This unification process entails, among other things, a precise definition of capital, minimum banking capital,

87see "Tying Down the Euromarkets," The Economist. 25 April 1987, pp. 73-74.

88see Nash, "Stretching the S.E.C.'s Reach."

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 256 accounting, risk asset system, and the off-balance sheet. During the last few years, bank supervisors have conducted many studies and discussions concerning how to standardize international banking practices. In mid-1986, a group of central bankers under Sam Cross of the New York Federal Reserve issued a report, the Cross Report. outlining an international banking cooperation plan. At the same time, the Cooke Committee of the Bank for International Settle ments was conducting a similar study. In October 1986, banking officials from more than ninety countries met in Amsterdam and discussed these issues. They also formu lated a plan for minimum common standards for bank capital. The most important step in this direction of international banking standardization took place in January 1987, when the United States and the British banking supervisors signed an agreement for a common banking standard. This agreement has tremendous impor tance for the international banking system, as the Financial Times wrote:

If implemented by other countries— and the prospects are that this will happen over coming years— it would result in banking becoming the first business in the world to be regulated on a global scale.89

89David Lascalles, "Step Towards Global Banking Rules," Financial Times. 9 January 1987. Also an impor tant movement in the process of creating a global banking cooperation might take place before the end of 1987. Nine Japanese banks are planning to support BankAmerica, the second largest bank in the U.S. and which is facing some

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 257 Conclusion During the last twenty years, international finance experienced a major transformation. The leading actor in this transformation is transnational banks through their comprehensive utilization of information technology. When this technology was introduced in the 1960s, the banking industry started to expand internation ally. By the early 1970s, the power of the government to regulate financial transactions began to break down. Also during the 197Os, the use of information technology by transnational banks increased rapidly by the establishment of many electronic international financial networks. In the midst of this change, many financial phenomena such as Euromarket and off-shore financial centers appeared, and, by the middle of the 1980s, became dominant. Information technology plays an important role in the existence and continuity of these phenomena. Currently, in the last part of the 1980s, western governments and Third World countries are losing their power in world financial transactions, and Socialist countries are attempting to increase their role and integrate in the world financial system. At the same time, the power of transnational financial establishments

difficulties in the last few years. If this happened, it would be the first time that transnational banks came to rescue each other, with no government involvement. Governments are usually the place where banks go for help in times of trouble.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. is increasing, and they are attempting to create an international financial regime somewhat independent from the State. Information technology is a major factor in this process.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. CHAPTER VII

CONCLUSION

Information and communication technology has been an influential factor in promoting change in the modern world system. It has a significant impact on almost all aspects of international relations— from war and peace to individuals' freedom. Private financial institutions, however, play the leading role in beneficial utilization of this technology. Transnational banks have built comprehensive, complex, and vast electronic communication networks around the world. These networks offer a variety of services which range from general information to money transfer. Moreover, information technology has made time, space, and location irrelevant in international financial transactions. Money and information about money are largely transferred and received instantly to and from any part of the world. In fact, money and information transfers are merging. Yet, in some cases such as Electronic Fund Transfer (EFT), money transfer is merely information transfer. Because of information technology, the process and structure of the international banking system is changing.

259

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 260 Large transnational banks are expanding their business and becoming powerful, while the small and local ones are either disappearing, merging, or losing business. The reason is obvious. The big banks are able to employ the most sophisticated, up-to-date, and expensive communica tion and information systems. At the same time, many financial phenomena are taking place at the global level. These phenomena are made possible by transborder data flows and in turn encouraged by the large transnational financial establish ments. The Euromarket, for example, exists in computer memories where currencies and securities are traded around the clock via telecommunication channels. Off-shore financial centers are another information technology phenomenon. These small island states are located around the world and are supposed to "hold" more money than any country in the world. Yet not that much money is held in these islands. What actually takes place is the elec tronic transfer of data— as if they were money— to and from these places to the rest of the world. A more illustrative example of the role of information technology in this process is the development of Tokyo's "off-shore financial center" where no island-state exists, but there is a computer network connected to Tokyo's financial market as well as the rest of the world.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 261 The globalization of the banking industry has forced many countries to compete with each other in order to attract the money circulating around the world. Therefore, a deregulation process of financial markets has swept through the world in the last ten years. The deregulation of financial markets is going hand in hand with the deregulation of the communication and information industry, which illustrates the strong connection between the two processes. As the structure of the banking system is chang ing, the other two elements of international finance— fiscal and monetary systems— are changing too. Therefore, the international financial system as a whole is in a transformation process. This in turn affects the rela tionship between finance and the state on the one hand and the relationship between finance and the other two components of the world economy (labor and goods produc tion, and trade), on the other hand. As we said in the introductory chapter, the state in the modern capitalist societies functions as an independent and stabilizing organism with a role to intervene with different and perhaps conflicting interests within the society. Due to information technology, this role has, however, changed, as Howard Wachtel points out in the conclusion of his study of transnational banking: In the world economy, a private supranationalism, energized by the technological revolution in

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 262 information and communications, has overwhelmed public institutions that were designed for what now looks like a horse-and-buggy technological era. Filling this gap, between private technological modernism and public institutional obsolescence, is free market monetarism— a political-economic strategy that— at best, holds the system together for a short time but is unable to produce the structural changes that are needed to place it on a more solid footing.1 The relationship of the state with these financial institutions is characterized by fear and need. This fear is held in common by virtually every type of state— capitalist, socialist, large or small.2 A statement by William Sediam, Chairman of the U.S. Federal Deposit Insurance Corporation, illustrates the extent of this fear among U.S. Government officials. He said: The financial area is, like nuclear war, the kind of area that can get out of control, and, once out of control, cannot be contained and will probably do more to upset the civilized world than about anything you can think of.3 Most states fear a possible collapse or crisis in international financial markets, home markets, or a major transnational financial institution. Governments, especially in western industrialized countries, know very

^■Howard M. Wachtel, The Money Mandarins, p. 226. 2An example of the case of a small country is the crash of Saug Al-Manakh, the financial center in Kuwait, in 1982. The impact of that crisis was and still is very harsh not only on Kuwait's economic and financial system, but also on its political and social system. The effect of the crash has also been felt in some neighboring countries. 3Quoted by Jack Anderson and Dale Van Atta, "Fear Not for the Big Banks," Washington Post, 31 May 1987, p. 7.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 263 well that they are very vulnerable now more than ever to any crisis in international finance. A U.S congressional study observes: Communication and information technologies have increased the interdependency of the participants within financial systems. The international financial system may now be more vulnerable than ever to upheaval, both economic and political, in foreign countries. At issue within this area is the question of increasing vulnerability of all parties to interna tional events that result from communication and information technology.4 The nature and extent of the United States government's fears concerning a possible financial crisis has been revealed recently. A forty-page confidential study was reported to recommend the nationalization of the U.S. top ten banks in case of a crisis within the U.S. international financial system.5 This same fear is also seen in the reaction of some western governments to minor banking crises such as occurred with the German Bank Herstatt in 1974, the Hunt family in 1980, Continental Illinois in 1982, and the near bankruptcy of Poland and Mexico in 1982.6

4U.S. Congress, Office of Technology Assessment, Effects of Information Technology on Financial Services System (Washington, D.C.: U.S. Congress, Office of Technology Assessment, September 1984), p. 163. 5See Jack Anderson and Dole Van Atta, "Fear Not for the Big Banks," p. 7. This author tried to obtain more information about the U.S. government's possible plan to nationalize big banks, but failed. 6For more information about these aspects as well as others, see Michael Moffitt, The world's Money and Anthony Sampson's The Money Lenders.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 264 Transnational banks are able to predict quite accurately the reaction of western governments to finan cial crises, and are able to use this knowledge as bargaining power and as a tool for expansion at the national and international levels. They know for certain that, if any large bank faces troubles, western govern ments, individually and collectively, will come to rescue them. These governments are aware that their fates are linked with that of the international financial system. If the banking system collapses, the current arrangement is likely to collapse.7 Above all, however, bankers comprehend the international financial system better than governments do. They recognize that, while governments fear any banking crisis, they have little control over the world financial system. As Walter Wriston, the former chairman of Citicorp, wrote: Today, except in a very few instances, national borders are no longer defensible against the invasion of knowledge, ideas, or financial data. The Eurocur rency markets are a perfect example. No one designed them, no one authorized them, and no one controlled them. They were fathered by controls, raised by technology, and today they are refugees, if you will, from national attempts to allocate credit and capital

7These opinions are based on personal interviews with people who work with transnational banks, especially Robert L. Slighton, Vice-President Director, International Forecasting, The Chase Manhattan Bank, New York, 28 February 1986.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 265 for reasons that have little or nothing to do with finance and economics.8 Outside of the industrial West, transnational banks have most recently gained entrenchment in Third World and Socialist countries, and this has arisen out of need. The Third World countries have demonstrated this need and dependence very clearly. The case of the socialist countries is more recent.9 Besides the issue of integration which we discussed in the previous chapter, socialist countries like the Soviet Union, for example, have demonstrated increasing dependence on transnational banks. The government of the Soviet Union announced in early 1987 that it was willing to pay all the debts to British banks plus interest which the Tzarist government had incurred (the new Bolshevik government had announced in 1917 that it would not pay them).

8Wriston, Risk and Other Four-Letter Words, p. 133. He also stated: "The fact is that banking is a branch of the information business," p. 135. 9Most bankers do not worry too much about the unpaid debts from the Third World countries except for balance sheets and market perception purposes. They know that sooner or later these countries will pay their debts with interest. They also know that the loans are spread among thousands of banks; thus, unpaid debt will not affect the international financial market as a whole. The general financial standing of transnational banks has not been changed by recent rescheduling of debt, whether in the form of suspension of debtor countries' payments of principal, or of simply counting unpaid loans as losses. See Anne Swardson, "Losses Mount as Banks Cope with Bad Third World Loans," Washington Post. 14 July 1987, pp. 1, 12,

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 266 In the cases of the changes we have described, the international labor movement has weakened drastically. The modest advantages and rights they gained earlier in this century have been declining everywhere during this decade. In the Third World countries, the limited privileges gained during the past three decades are slowly being eroded in many countries such as Chile, Egypt, Mexico, Tanzania, Kenya, Pakistan, and Tunisia. The combination of increasing movement of capital internation ally, the reliance on high technology, as well as misman aged and corrupt governments at home are likely to worsen the status of the working class in most of the Third World countries.10 It is particularly in the industrialized countries that we see labor's position declining because of the changing structure of the world's production and financial systems. First of all, wage earners' real income is declining. Their bargaining power vis-a-vis the state and large powerful corporations is also diminishing. A study about the power of labor unions in the United States, for example, has observed that:

10For examples of the relationship between information technology and labor in the Third World countries as well as industrialized countries, see John Besant and Sam Cole, Stacking the Chios; Information Technology and the Distribution of Income (London: Frances Printer, 1985). Also see various issues of New Technol ogy. Work, and Employment.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 267 The United Steel Workers of America have not called on an industry-wide strike since 1959; the United Auto Workers have not shut down General Motors since 1970. Both unions realize all or most U.S. manufacturing would not shut out U.S. customers. Overseas suppliers are there to supply the market.11 The shift of balance of power between labor and big corporations in core countries has undoubtedly been facilitated by the new communication technology and its role in globalization of financial markets. As another study has noted: Capital now moves routinely on a global scale. Labor remains a national, if not locally bound, factor of production. As a consequence, national labor forces, if not entirely, are increasingly subject to capital's capability to relocate if its demands are not acceded to.12 In keeping with the configuration described above, international labor cooperation and aspiration are fading. International labor's development trend is moving into the opposite direction to that of the banking system, which has become increasingly globalized and interlocked. Labor movements, in contrast, still remain nationally based phenomena. As such, each defines its goals within the parameters of a national framework. This leads to a narrow, parochial definition of goals and interests in both developing and developed countries. This parochial ism often gets its blessing from the state. Hence, German

11Theodore Levitt, "The Globalization of Market," Harvard Business Review. May-June 1983, p. 99. 12Schiller, Information and the Crisis Economy, p. 96.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 268 labor has developed an antagonistic attitude towards the Turkish workers, and the French laborers have similarly aligned themselves against the North Africans. Other examples of labor's international fragmentation can be found in the British attitude against India, the antag onism of U.S. laborers against the Mexicans and the Asians, and even in the Nigerian workers' antagonism towards other workers from a neighboring country, Benin.13 Labor cooperation across national borders is very weak. Different labor unions have failed to establish mechanisms of understanding and develop common policies and communication channels. In fact, in some countries, labor organizations have actually played the role of vehicles of the State and capital in the name of national interest. An example of this was the position taken by some United States labor unions during the crisis in Chile in the early 1970s. Moreover, labor parties in western Europe started to doubt their abilities to attract voters. In March 1978, the famous British socialist journal, New

13It is interesting to note that in 1983 some laid-off auto workers in Detroit killed a fellow worker because he looked like a Japanese. The general perception at that time in the United States was that American auto workers were losing their jobs because of the competition from Japanese auto manufacturers. This, however, proved untrue. In the following years, U.S. auto companies were producing more cars and making a record profit. Despite this fact, U.S. auto workers continue to lose their jobs. In contrast, capitalists have demonstrated more commonali ties across nations. For the latter point, see Alex S. Edelstein, Comparative Communications Research (Beverly Hills: Sage, 1982), pp. 105-118.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 269 Statesman. ran a special issue entitled, "Does Socialism Have a Future?". In it, many famous British socialist writers wrote about the labor movements' diminishing chance to win electoral power in the West, because of the increasing power of capitalism, the bad organization within labor parties, and the failure of these parties to cooperate across borders, especially within the European Economic Community.14 However, the future of a world labor system is not over. Labor militancy and demands might increase with the growth of economic pressure on workers.15 The potential that labor movements have for establishing a new world order, however, depends upon their capability of forming a common global attitude and goals, as opposed to their present orientation towards a position defined solely by nationalism and "national interest."16 World trade has likewise faced a period of instability during the last few years. Perhaps the most

14New Statesman. 6 March 1987. 15See, for example, Georges Lefebure, et al., The Transition from Federalism to Capitalism (London: Verso, 1978). 16Immanuel Wallerstein in his book, The Capitalist World Economy (Cambridge: Cambridge University Press, 1979), predicted a worldwide labor revolution. His prediction, however, is based on nationalist and ethnicity factors (e.g.. Central Asians vis-a-vis European Rus sians), pp. 191-92. We, however, interpret such signs as pointing to a nationalist revolution rather than a global workers movement. The recent protest by the Tatars in the Soviet Union points to this observation.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 270 clear sign of this trend has been the growth of interna tional barter in its various forms such as countertrade, offsets, and buy-backs.17 The portion of world trade accounted for by barter is estimated to be about 30 percent, with a likelihood that it will reach 50 percent in fifteen years or sooner. The role of barter in world trade was estimated to increase by 50 percent in 1981, by 64 percent in 1982, and by 117 percent in 1983.18 Currently almost all countries use barter— instead of cash— as an important method of international trade. In the United States, for instance, companies such as McDonnell Douglas and G.E. are increasingly using barter. Thus, it is no wonder that some have suggested the establishment of "a central countertrade information clearinghouse.1,19 A major reason for the use of barter is a financial one, as Stephen Cohen and John Zysman explained in the Los Angeles Times: As hard currency has all but vanished from Latin America, governments have turned to countertrade to sustain exports, conserve cash, and get around

17For the definition of these terms, see the Glossary. 18Stephen S. Cohen and John Zysman, "Countertrade Deals Are Running Out of Control," Los Anaeles Times. 23 March 1986, Part IV, p. 3. 19Ibid., p. 7.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 271 austerity controls imposed under pressure from the International Monetary Fund.20 It is, however, not only a question of hard currency and IMF, as Cohen and Zysman assume. This trend towards barter in world trade finds its roots in the change in the whole structure of the world financial system, which affects not only trade and investment, but also the State, the nation/states system itself, and labor. one element of this change, which has been overlooked, is the increasing independence of transna tional financial institutions from other elements of the world system, particularly from the institutions of the State structure, trade and production, and labor. Aside from the ease with which these institutions can move capital around the globe, they are also capable of generating and accumulating money by virtue of their own internal structures. This means that the owners of capital, as well as banks, no longer need to engage in commodity trading, or in investment in agriculture or industrial production to increase capital holdings. Now, their preference lies in investing and generating more money in financial instruments. Euromarket, options and futures markets, currency trading, and inter-bank trading, all of which we discussed earlier, are just a few examples of financial investment markets in which owners of capital

20Ibid.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 272 invest their assets and thereby increase capital hold ings. 2 1 All in all, information technology has transformed the structure of international political economy. It has linked financial establishments and financial centers into a unified market which operates around the clock and around the world. It has also led to a relative indepen dence of financial institutions from the supervision of the state through the development of Euromarket, off-shore financial centers, and currencies trading, among others. As a result, the state is losing the power to control the inflow and outflow of capital, the direction of financial market(s), and, above all, the value of its currency.

The Future It is hard to predict for sure the future of the world financial system and international political economy. The most pessimistic views forecast the collapse

21An interesting case is that of the Gulf Invest ment Establishment, which was established in 1985 in Kuwait by the States of the Gulf Cooperation Council— Kuwait, Saudi Arabia, Qatar, Oman, Bahrain, and the United Arab Emirates. The reason it was established was to encourage the agricultural and industrial development in these countries by investment in those sectors. However, it did not invest in what it was established for. Instead, it has been investing its capital in the world financial market in such areas as currency trading, bonds, stocks, etc. The reason behind this move was the genera tion of more income. See Abdual Rahman Al-Rashid, "The Gulf Investment Establishment Intensifies Its Trading in the World Financial Market," A1 Maialia. 27 August 1986, pp. 30-31.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 273 of the world financial system in the near future. The most optimistic views (mostly held by bankers) predict that the current change in finance will lead to prosperity and economic growth, especially within societies which follow liberal economic and financial practices. However, the latter prediction seems to be motivated by self- interest, while the former is based on speculation more than facts. A total collapse of the world financial system is unlikely, because western governments and transnational banks would work together to prevent such an outcome, as they have done many times in the last fifteen years. The most likely outcome of the current change in international political economy is the increasing integra tion of international finance one hand, and the appearance of economic blocs (for production and trade in goods and services) on the other hand. In most of the cases, there will be four economic blocs. First is the West European, which is composed of the members of the European Economic Community. The second is the North American bloc, which consists of the United States and Canada and perhaps Mexico. The free trade agreement in early October 1987 between Canada and the United States is an important step in this direction. The South-East Asian is the third economic bloc. Its major countries are Japan, South Korea, Taiwan,

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 274 Singapore, New Zealand, and Australia. This bloc is not yet highly developed in terms of binding official agree ments and policies like the North American and the Western European ones.22 Eastern European states— common members— are likely to be the fourth major world economic bloc. The power and direction of this bloc is not clear yet. It will depend on the extent of economic and financial liberalization which some of the Eastern European coun tries are moving toward now. It will depend also on the degree of economic and financial integration within these countries, as well as their behavior at the international level as one entity. The Soviet Union, the major actor within this bloc, is currently pushing towards this goal. Information technology and financial policy coordination will play an important role in inter- and intra-bloc relations, as well as their relation to the rest of the world. Each bloc will develop a highly integrated information/communication network and technol ogy. As a consequence, each bloc is likely to have one financial market where local markets are electronically linked and trade at the same time in the same financial

22Political considerations might be an obstacle in the development of an integrated East Asian economic bloc. The Peoples Republic of China is likely to resist such a bloc if Japan is going to be its center. This is perhaps why China proposed recently and for the first time a unification with Taiwan, where the latter can have a separate political system.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 275 instrument and with unified rules and perhaps one currency. The developing countries are likely to suffer from the new international political economy structure. The gap between the haves and have-nots will grow. Part of the problem is due to the structure of the world system, a subject which has been analyzed by dependencies and capitalist world system studies. Part of the problem is related to internal structure and is not necessarily an extension of the structure of the world system. Corrup tion within the elites, disinterest in meaningful economic cooperation with each other, individual and collective dictatorships, disempowerment, and lack of clear develop ment methods and goals are among the internal factors which prevent developing countries from participating in and benefiting from the changing structure of the interna tional political economy. Two examples might illustrate the internal problems within many of the Third World societies. The first is from the Middle East, where many Arab countries accumulated a large sum of wealth during the late 1970s and early 1980s. Due to internal corruption and lack of long-term economic planning, the largest part of this money went to the West as either a result of capital flight or in the form of military spending. Although most of the Arab countries established good communication/

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 276 information networks (e.g., Arabsat), these networks are used mostly for political and military purposes and not for economic and financial development and cooperation. Currently the oil wealth is draining slowly and the Arab governments have failed to establish a financial power or industrial infrastructure. Andrian Hamilton stated this problem clearly in his book, The Financial Revolution: Most of money accumulated during the golden days of oil wealth tended to go abroad, either into private accounts in Switzerland and into dollars or, through the banking system, into syndicated loans. Arab banks were certainly set up and grew with this capital outflow. But they tended to go with it to the international capital centres of Europe, .... The object was to get into the outside network, not to build a new network of Arab banks.23 The second example is that of Latin American countries. The debt crisis had given these countries a good opportunity to bargain with western countries and transnational banks for at least equal economic and financial relations and management. For example, Latin American countries could have demanded at minimum taxation of the capital flight which left there or at a maximum a return of this capital from whence it illegally fled. They should have developed data bases, research centers, and networks of communications— similar to those developed by transnational banks— in order to adopt a central common and solid policy. However, Latin American countries dealt with the problem individually, and the

23Andrian Hamilton, Financial Revolution, p. 198.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 277 call for a unified policy did not go beyond some single voices separated by time, distance, and ideology, in the end, the debtor countries have lost. Transnational banks became part owners of many productive government-owned national companies in exchange for the debt-debt swap— and some banks wrote off some of the debt as non-performing assets, which did not affect the banks' financial standing at all. The economic and financial status of most of the Third World countries are likely to get worse unless they change their current internal and external financial and economic policies. Therefore, we will make briefly some policy suggestions which might improve the financial and economic status of the Third World countries. 1. Economic cooperation between neighboring Third World countries should be established to facilitate the flow of trade and capital among these countries. This includes the creation of economic blocs similar to the European Economic Community. 2. Building national and regional information/telecommu nication networks which are directed toward long-term economic development and regional cooperation. There fore, such networks should not be directed toward political and military purposes nor strongly connected to western centers and the interest of transnational banks, as has been the case so far.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 278 3. The creation of regional economic and financial data bases to be used at the regional level by both private and public sectors. 4. A call for a New International Financial Order. This can be modeled on the Third Law of the Sea Conference. In this regard, developing countries should be clear in the linkage between a New International Financial Order and a New Communication/Information Order. They should also realize and use the economic and financial power they have and use it to support their demands. 5. The role of off-shore financial centers and their relations to the Third World countries should be reconsidered. Many of these centers have played a role in channeling illegal money (i.e., capital flight) to western financial centers. In this regard. Third World countries should demand from transnational banks disclosure of the sources of capital flight and the return of this money, or at least taxation.24 6. Technological and capital self-reliance is a necessity for developing countries. Therefore, their economic and financial linkage to the industrialized countries and transnational banks should be limited as much as possible. Also, many Third World countries have a

24According to a recent study about capital flight and debt, there are large sums of money in transnational banks without anyone who can claim owning them. See R. T. Naylor, Hot Money and the Politics of Debt (New York: Simon and Schuster, 1987).

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 279 small domestic market and limited resources which make self-reliance more difficult. Therefore, a financial and economic linkage among developing countries— especially small ones with limited resources— is an important requirement for any self-reliance policy. 7. The non-alliance movement has become very loose in the last ten or fifteen years. it lost its appeal and meaning, and also many of its current members are "clients” to superpowers. Therefore, a reexamination of this movement is needed, especially by those who are still committed to this movement (e.g., Algeria and India) with a possibility of excluding the non committed members. 8. It seems that democratization of the Third World society is a prerequisite for the above-mentioned recommendations. This does not necessarily mean following a Western or Marxist style of democracy. What is needed is an equal opportunity and an end of corruption, mismanagement, abuse of power, loyalty to foreign power, and individual self-interest within developing societies, especially among their ruling elites. This can be achieved, although slowly, by creating an awareness of these issues and their role in the problems that Third World societies are facing now and some that they will face in the future.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 280 The Unfinished Agenda The impact of information technology upon interna tional finance in particular and the world system in general goes beyond what we have analyzed in this study. This study, in fact, has left many questions without answers. The information/communication technology has not reached its peak yet. Improvement and innovation in this technology appears almost every day. Also, information technology has not been used yet to its full extent in financial transactions at both national and international levels in many parts of the world. Furthermore, the impact of this technology on the financial system has not been fully realized by governments. Policy makers as well as the public at large always lag in their reactions, and when they do react it is hard to say in which direction they will go. Nevertheless, if the pace of change in information technology and finance continues in the way which we analyzed in this study, which is highly likely, then it will bring into question many theoretical and practical issues regarding the world system. These questions need to be studied fully. First, the nature and future of the nation/states system which existed for more than four centuries is in doubt. Currently many scholars believe that the nation/states system is going through a transfor mation period which might lead to either its dismissal or

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 281 modification. According to many of these scholars, information/communication technology, as well as the change in international finance which this technology produced, is a major factor in the transformation process within and of the nation/states system. However, none of such scholars have analyzed comprehensively how this system will disappear and what will replace it. There fore, this subject needs to be investigated further and within the context of information/communication technology and international finance. Second, if the nation/states system changes, then the role and nature of the state, especially within western industrialized countries, is going to change too. The state is unlikely to maintain its position as an "independent" and stabilizing force within the society. A conflict is likely to appear between nationally oriented segments of the society (e.g., labor unions, local business, nationalists, etc.) and internationally oriented segments (e.g., transnational banks, transnational traders, and communication industries). This might lead to jeopardizing the role of the state and perhaps lead to a radical change within these societies. Within this context, the role of the socialization process should be examined. This means conflicting actors within the society, including the state and transnational financial establishments, will use the socialization process to

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 282 convince others to accept and support their vision and interest in the structural change within the world system. Finally, some theories of international relations and the world system need to be reexamined. The theory of the world capitalist system ignored the capability of capitalism to expand horizontally. This study, for example, finds that capitalist expansion is not neces sarily or always a territorial one, which negates one of the main assumptions of the world capitalist system scholars. Another current international relations theory which needs to be reexamined in the light of the findings in this study is international regime theory. The main problem with this theory is that it is a state-centered one. Therefore, it pays little attention to the develop ment of an international regime between and among transna tional corporations such as financial establishments. As this study shows, transnational banks are developing their own rules and procedures, and regimes, not only indepen dently from the state but sometimes in direct challenge to its authority.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. BIBLIOGRAPHY

Articles and Periodicals Al-Rashid, Abdual Rahman. "The Gulf Investment Establish ment Intensifies Its Trading in the World Financial Market." A1 Maiallah. 27 August 1986, pp. 30-31. Anderson, Jack, and Van Atta, Dale. "Fear Not for the Big Banks." Washington Post. 31 May 1987, p. 7. Becker, Jorg. "Information Technology and International Politics in the 1980s." Media Development 30 (1983) . Bodganowicz-Bindert, Christine A., and Sacks, Paul M. "Closing the Barn Door: The Role of Information in Banks Lending to LDCs," The World of Banking. September-October 1984, pp. 17-18. Boulding, Kenneth. "The Economics of Knowledge and the Knowledge of Economics." American Economic Review 56, no. 2 (1966):1-13. Bryant, Ralph C. "Eurocurrency Banking: Alarmist Concerns and Genuine Issues," OECD Economic Studies 1 (Autumn 1983):7—39. Bushkin, Arthur A. "Information Exchange: An International Trade Issue?". Satellite Communications. January 1983, pp. 42-43. Cohen, Stephen S., and Zysman, John. "Countertrade Deals Are Running Out of Control." Los Angeles Times. 23 March 1986, part IV, pp. 3, 7. "Credit Card in China: When the Plastic Revolution Comes." Economist. 25 April 1987, p. 78. Cruise, O'Brien, Rita. "Specialized Information and Interdependence." Telecommunications Policy. March 1980. Cruise O'Brien, Rita, and Helleiner, G. K. "The Financial Economic Order." International Organization (Autumn 1980). 283

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 284 Eastman, H. C. "Interdependence in the International Monetary System." International Journal 39 (Summer 1984). "Eurocurrency Banking: Alarmist Concerns and Genuine Issues." OECD Economic Studies (Autumn 1983). "Eurodollar Deals." New York Times. 2 March 1986, p. IF. "Euromarket: A Borrower's Paradise." The Banker. September 1986, p. 72. Fairlamb, David. "The New York Connection." The Banker. March 1987, p. 54. Feldman, Mark B., and Garcia, David R. "National Regula tion of Transborder Data Flows." North Carolina Journal of International Law and Commercial Regulation 7 (Winter 1982). "Financial Havens and TDF." Transnational Data Report 6, no. 6 (1984):30.1-2. Fishman, William L. "Introduction to Transborder Data Flows." Stanford Journal of International Law 16 (Summer 1980):l-26. Fowle, Michael, and Wedgewood, Tony. "Accounting for Innovation." The Banker. September 1983, pp. 43- 47. Freund, William C. "First the Big Board, Now the Big Bang." Wall Street Journal. 27 October 1986. "Futures, State of the Industry: How the Game is Chang ing." Futures. March 1986, pp. 47-51. Galtung, Johan. "A Structural Theory of Imperialism." Journal of Peace Research 8, no. 2 (1971):81-118. Goodhart, David. "City: Off the Husting and into Reality." New Statesman. 5 June 1987, pp. 18-19. Gotlieb, Allen; Dalfen, Charles; and Katz, Kenneth. "The Transborder Transfer of Information by Communica tion and Computer Systems: Issues and Approaches to Guiding Principles." American Journal of International Law 68 (1974):227-257. Greguras, Fred M. "Impact of Transborder Data Flow Restrictions on Cash Management Services." The

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 285 World of Banking. September-October 1984, pp. 10- 16. Gunderson, Lee, and Spang, William. "A View Toward Self- Regulation in Banking." Issues in Banking Regula tion 10 (Autumn 1986):3-5. Hall, William, and Snoddy, Raymond. "The Information Warehousers: The Billion-Dollar Demand for Instant Data." World Press Review. June 1983. Hawley, James P. "Protecting Capital from Itself: U.S. Attempts to Regulate the Eurocurrency System." International Organization 38 (Winter 1984):131- 165. Hayek, F. A. "The Use of Knowledge in Society." American Economic Review 35, no. 4 (1945):517-30. "International Links Are Bringing the Twenty-four Hour Stock Market Nearer Than You Think." U.S. News and World Report. 24 March 1986, pp. 53-54. Jussawalla, Meheroo. "Constraints on Economic Analysis of Transborder Data Flows." Media. Culture. and Society 7 (1985):297-312. ______. "The Economics of International Communication." Third World Quarterly 1 (July 1979). Keddy, Barbara. "Transborder Data Flows: An Uncertain Threat." In Search, Fall 1979. Krommenacker, Raymond. "Discussion on Services in GATT." Transnational Data and Communications Report. February 1986, pp. 15-16. Lascalles, David. "Step Towards Global Banking Rules." Financial Times. 9 January 1987. Leuschel, Roland. "Money's Riding on the Group of One." Wall Street Journal. 29 September 1986. Levitt, Theodore. "The Globalization of Market." Harvard Business Review, no. 3 (May-June 1983). Lewis, Vivian. "French Banks Face Further Reforms." The Bankers. May 1987, pp. 43-84. "Macroeconomic Policies and Exchange Rates." OECD Economic Studies, no. 3 (Autumn 1984).

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 286 Madec, Alain. "The Political Economy of Information Flows." Intermedia 9, no. 2 (1980):29-32. Marton, A. "250,000 Frenchmen Can’t Be Wrong.” Institu tional Investors. August 1986, pp. 109-10. McLuhan, Marshall, and Powers, Bruce. "Electronic Banking and the Death of Privacy." Journal of Communica tion 31 (Winter 198l):l64-9. McPhail, Thomas L., and McPhail, Brenda. "The Interna tional Politics of Telecommunications: Resolving the North-South Dilemma." International Journal 32 (Spring 1987):284-319. Melody, William. "The Information Society: Implications for Economic Institutions and Market Theory." Journal of Economic Issues. June 1985. Milmo, Sean. "The Battle for European Financial Informa tion." Business Marketing. June 1983, p. 19. Moreno, Ramon. "Monetary Control Without a Central Bank: The Case of Hong Kong." Economic Review. Federal Reserve Bank of San Francisco, no. 2, Spring 1986, pp. 17-37. Mowlana, Hamid. "Technology Versus Tradition: Communica tion in the Iranian Revolution." Journal of Communication. Summer 1979, pp. 107-112. Nacchio, Joseph P. "A Brave New World of Bank Technology: Computers Create New Horizon for Profit." American Banker. 4 February 1985. Nathans, Leah. "U.S. Innovator Still Ahead." The Banker. March 1987, pp. 47-8. "The New Technology: Who Sells It? Who Needs It? Who Rules It?" Symposium of ten articles. Journal of Communication 32 (Autumn 1982). Newman, Samuel. "How to Better Use the S.W.I.F.T. Connec tion." Bankers Magazine. May-June 1984, pp. 38-41. Novotny, Eric J. "Transborder Data Flow Regulation: Technical Issues of Legal Concern." Computer/Law Journal 3 (Winter 1981). ■____ . "Transborder Data Flows and International Law: A Framework for Policy-Oriented Inquiry." Stanford

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. Journal of International Law 16 (Summer 1980):141- 80. Ostry, Bernard. "Industry Should Regulate Data Flow." Transnational Data Report 3 (October 1980). Pardee, Scott E. "Internationalization of Financial Markets." Economic Review Federal Reserve Bank of Kansas City. February 1987. Pelton, Joseph N. "International Telecommunications Competition in the Age of Telepower." Interna tional Journal 32 (Spring 1987):239-255. Porat, Marc Uri. "Emergence of Information Economy." Economic Impact, no. 24 (1979). ______. "Global Implications of Information Society." Journal of Communication 28 (Winter 1978):70-80. Pool, Ithiel de Sola. "International Aspects of Computer Communications." Telecommunications Policy. December 1976, pp. 31-51. Pringle, Robin. "Mr. Gorbachev's Economic Reforms." The Banker. February 1987, pp. 15-17. Rada, Juan F. "The Microelectronics Revolution: Implica tions for the Third World." Development Dialogue, no. 2 (1981). Rankin, Tom. "International Banking System Breaks Ground for Disaster Relief." Communications Acre. April 1986, pp. 18-22. Regan, Edward. "Global Banking Data-Dependent." Transna tional Data and Communication Report. March 1986, p. 16. Sargent, Thomas J., and Wallace, Neil. "The Real-Bills Doctrine Versus the Quantity Theory." Journal of Political Economy 90 (1982). Sauvant, Karl P. "From Economic to Socio-Cultural Eman cipation: The Historical Context of the New International Economic Order and the New Interna tional Socio-Cultural Order." Third World Quar terly 3 (January 1981). Schmidt, Helmut. Institutional Investor. international edition, June 1987, p. 18.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 288 Schultz, George P. "Consequences of the Age of Informa tion." Transnational Data and Communication Report. May 1986, p. 15-16. Schiller, Herbert I. "Madison Avenue Imperialism." In Communication in International Politics. Edited by Richard L. Merritt. Urbana: University of Illinois Press, 1972. ______• "Decolonization of Information: Efforts Towards a New International Order." Latin American Perspectives 5 (Winter 1978):35-48. Seidman, L. William. "A Time for Case-by-Case Control of Risk." Wall Street Journal. 27 October 1986. Sherrid, Pamela. "The Gnomes Behind the Dollar's Fall." U.S. News and World Report. 16 February 1987, p. 43. Spero, Joan E. "Information: The Policy Void." Foreign Policy. Fall 1982, pp. 139-56. Silk, Leonard. "Lost Standing of Economists." New York Times. 3 January 1986, p. 22. Southerland, Daniel. "Shanghai Acts to Recreate a Major Financial Center." Washington Post. 14 September 1986, p. CIO. "Stateless Money." Business Week. 21 August 1978, pp 76, 94.

Stigler, G. J. "The Economics of Information." Journal of Political Economy 67 (1961):213-25. "SWIFT: Leading Banking into the 21st Century." The Banker. October 1984, pp. 73-4. Sussman, Gerald. "Banking on Telecommunications: The World Bank in the Philippines." Journal of Communica tions 37 (Spring 1987):90-i05. "Transborder Data Flow: New Frontiers— Or None?". Sym posium of eight articles. Journal of Communication 29 (Summer 1979):113-55. Turbett, Peggy. "Banks Keep the Barrier Watch to Maintain Global Data Flow." American Banker. 4 February 1985, p. 12.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 289 "Tying Down the Euromarkets." The Economist- 25 April 1987, pp. 37-40. Veith, Richard H. "Informatics and Transborder Data Flow: the Question of Social Impact." Journal of American Society for Information Science 31 (March 1980). Wallace, Neil. "A Legal Restriction Theory of the Demand for "Money" and the Role of Monetary Policy." Quarterly Review. Federal Reserve Bank of Min neapolis, Winter 1983. Wallerstein, Immanuel. "Economic cycles and Socialist Politics." Futurist 16 (December 1984). Wellons, Philip A. "International Debt: The Behavior of Banks in a Politicized Environment." International Organization 39 (Summer 1985):441-71. Werdel, Judith A., and Steele, Richard A. "The Information Age: Worldwide Data Warfare?". Bulletin of the American Society for Information Science 4 (August 1978). Wighand, Rolf T., Shipley, Carrie: and Shipley, Dwayne. "Transborder Data Flow, Informatics, and National Policies." Journal of Communication 34 (Winter 1984):153-75. Wiley, Richard E., and Newstadt, Richard. "U.S. Com munication Policy in the New Decade." Journal of Communication 32 (Spring 1982):22-32. "Will Money Stop From Egyptian Banks?" Ashara Al-Awsat. 16 April 1987, p. 8. Wriston, Walter. "In Search of a Money Standard." Wall Street Journal. 12 November 1985, p. 28. "Economic Freedom Receives a Boost." New York Times. 15 April 1986, p. 32. Wilson, Laurie J., and Al-Muhanna, Ibrahim. "The Political Economy of Information: The Impact of Transborder Data Flows." Journal of Peace Research (Fall 1985}.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 290 Books Aldrich, R. "Emerging Issues in Transborder Data Flows.” In International Telecommunications Policy; A Source Book. Washington, D.C.: Yurrow, 1983. Bilby, K. The General: David Sarnoff and the Rise of the Communication Industry. New York: Harper and Row, 1986. Brock, Gerald W. Telecommunication Industry: The Dynamics of Market Structure. Cambridge, MA: Harvard University Press, 1981. Bushkin, Arthur A. Transborder Data Flows: Evolution of the Issues and Impact on Banking. Washington, D.C.: American Bankers Association, 28 March 1983. Cohen, Benjamin J. In Whose Interest International Banking and American Foreign Policy. New Haven, CT: Yale University Press, 1986. Colton, Kenneth W., and Kraemer, Kenneth L. Computers and Banking; Electronic Funds Transfer Systems and Public Policy. New York/London: Plenum Press, 1980. Corti, C. E. C. The Rise of the House of Rothschild. New York: Cosmopolitan Book Corp., 1982. Curran, William. Banking and the Global System. Cambridge, MA: Woodhead-Faulkner, 1973. Davis, R. The English Rothschilds. Chapel Hill: The University of North Carolina Press, 1983. Desmond, R. W. The Information Process: World News Reporting to the Twentieth Century. Iowa City: University of Iowa Press, 1978. Didsbury, Howard F.,Jr., ed. Communications and the Future: Prospects. Promises. and Problems. Bethesda, MD: World Future Society, 1982. Dizard, Wilson P., Jr. The Coming Information Age: An Overview of Technology. Economics, and Politics. New York: Longman, 1982. Einzig, Paul. Foreign Dollars Loans in Europe. New York: St. Martins, 1965.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 291 Etzioni-Halevy, Eva. The Knowledge Elite and the Failure of Prophecy. London: George Allen and Unwin, 1985. Feinberg, Richard E., and Kallab, Valeriana, eds. Uncer tain Future: Commercial Banks and -the Third World. New Brunswich, NJ: Transaction Books, 1984. Forester, T., ed. The Information Technology Revolution. Cambridge, MA: MIT Press, 1985. Galtung, Johan. "The New International Order: Economics and Communications." In Communication and Economic Development. Edited by Meheroo Jussawalla and D. M. Lamberton. New York: Pergamon, 1982. Gerbner, George, and Siefert, Marsha, eds. World Communi cation: A Handbook. New York: Longman, 1984. Grostiaga, Xavier. The Role of International Financial Centers in Underdeveloped Countries. London: Croom Helm, 1984. Haigh, Robert W . ; Gerbner, George; and Byrne, Richard. Communication in the Twentv-First Century. New York: John Wiley, 1981. Hamilton, A. The Financial Revolution. New York: Free Press, 1986. Hamelink, Cess J. Finance and Information: A Study of Converging Interests. New Jersey: Ablex, 1982. Hawkins, Robert, et al., eds. Research in International Business and Finance. Vol. 3: The International ization of Financial Markets and National Economic Policy. Greenwich, CT: JAL, 1983. Helleiner, G. K. "Uncertainty, Information, and Economic Interests of Developing Countries." In Informa tion. Economics, and Power. Edited by Rita Cruise O'Brien. London: Hodder and Stoughton, Ltd., 1983. Hubback, David. No Ordinary Press Baron. London: Weiden- feld and Nicolson, 1983. Johnson, T., and Lewis, D. International Data Communica tions: Volumes and Applications. London: Logica, 1979. Jussawalla, Meheroo. Bridging Global Barriers. Two New International Orders: NIEO. NWIO. Honolulu: East- West Center, 1981.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 292 Jussawalla, Meheroo, and Laberton, D. M., eds. Communi cation. Economics, and Development. New York: Pergamon, 1982. Kelly, J. Bankers and Borders: The Case of American Banks in Britain. Cambridge, MA: Ballinger Publishing Co., 1977. Keohane, Robert. After Hegemony: Cooperation and Discord in the World Political Economy. Princeton, NJ: Princeton University Press, 1984. Kindleberger, C. P. A Financial History of Western Europe. London: George Allen and Unwin, 1984. Kranser, Stephen D. International Regimes. Ithaca, NY: Cornell University Press, 1983. Lehman, Maxwell, and Burke, Thomas J. M., eds. Communica tion Technologies and Information Flow. New York: Pergamon Press, 1981. Lewin, Leonard, ed. Telecommunication in the United States: Trends and Policies. Dedham, MA: Artech House, 1981. Magee, Stephen P. "Information and Multinational Corpora tions: An Appropriability Theory of Direct Foreign Investment." In The New International Economic Order: The North-South Debate. Edited by J. N. Bhagwati. Cambridge, MA: MIT Press, 1976. Mastrapasqua, Frank. U.S. Bank Expansion via Foreign Branching. The Bulletin. New York: New York University School of Business Administration, Institute of Finance, Nos. 87-88, January 1973. Masuda, Yoneji. The Information Society as Post-industrial Society. Tokyo, Japan: Institute for the Informa tion Society, 1980. Mayer, M. The Money Bazaars: Understanding the Banking Revolution Around Us. New York: Mentor Books, New American Library, 1985. Meyer, John R., et al. The Economics of Competition in the Telecommunication Industry. Cambridge, MA: Oelegeschlager, Gunn, and Hain, 1980. Moffitt, Machael. The World*s Money. New York: Simon and Schuster, 198 3.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 293 Morton, Frederic. The Rothschilds; A Family Portrait. New York: Athenaeum, 1982. Mowlana, Hamid. International Flow of Information: A Global Report and Analysis. Paris: UNESCO, 1985. Mowland, Hamid. Global Information and World Communica tion: A New Frontier in International Relations. New York: Longman, 1985. Nora, Simon, and Mine, Alain. Computerization of Society. Cambridge, MA: MIT Press, 1980. Nordenstreng, Kaarle, and Schiller, Herbert I. National Sovereignty and International Communication. Norwood, NJ: Ablex Publishing, 1979. Norman, Colin. Microelectronics at Work: Productivity and Jobs in the World Economy. Worldwatch Paper 39. Washington, D.C.: Worldwatch Institute, 1980. O'Brien, Rita Cruise. Information. Economics, and Power. Boulder, CO: Westview Press, 1983. Oettinger, A. G., et al. High and Low Politics of Infor mation Resources for the 80s. Cambridge, MA: Ballinger, 1977. Porat, Marc Uri. The Information Economy: definition and Measurement. Washington, D.C.: U.S. Government Printing Office, 1977. Pecchioli, R. M. The Internationalization of Banking: The Policy Issue. Paris: OECD, 1983. Ravage, Marcus Eli. Five Men of Frankfort: The Storv of Rothchilds. New York: The Dial Press, 1929. Revell, J. R. S. Costs and Margins in Banking: An Interna tional Survey. Paris: OECD, 1980. ______. Banking and Electronic Funds Transfers. Paris: OECD, 1984. Sampson, Anthony. The Money Lenders. New York: Viking Press, 1981. Sauvant, Karl P. Services and Data Services: The Interna tional Politics of Transborder Data Flows. Boulder, CO: Westview Press, 1986.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 294 Scharff, Edward E. The Worldly Power: The Making of the Wall Street Journal. New York: Beaufort Books, 1986. Schiller, Dan. Telematics and Government. Norwood, NJ: Ablex Publishing, 1982. Schiller, Herbert. Who Knows: Information in the Aae of the Fortune 500. Norwood, NJ: Ablex Publishing, 1981. Shiller, Herbert. Information and the Crisis Economy. Norwood, NJ: Ablex Publishing Co., 1984. Singh, Indu B., ed. Telecommunication in the Year 2000: National and International Perspectives. Norwood, NJ: Ablex Publishing, 1983. Singleton, Loy A. Telecommunication in the Information Aae: A nontechnical Primer on the New Technol ogies. Cambridge, MA: Ballinger Publishing Co., 1983. Skocpol, Theda, ed. Vision and Method in Historical Sociology. Cambridge, MA: Cambridge University Press, 1984. Smith, Anthony. The Geopolitics of Information: How Western Culture Dominates the World. New York: Oxford University Press, 1980. Smythe, Dallas W. Dependency Road: Communications. Capitalism. Consciousness, and Canada. Norwood, NJ: Ablex Publishing Co., 1981. ______. The Structure and Policy of Electronic Communi cations . Urbana: University of Illinois Press, 1957; reprinted in J. M. Kitross, Documents in American Telecommunications Policy. Vol. 2. New York: Arno Press, 1977. Spindler, Andrew J. The Politics of International Credit. Washington, D.C.: The Brooking Institution, 1984. Staniland, Martin. What Is Political Economy?. New Haven, CT: Yale University Press, 1985.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 295 Storey, Graham. Reuters; The Story of a Century of News Gathering. New York: Greenwood Press, 1951. Swass, Adam. Monetary Cooperation Between East and West. White Plains, NY; International Arts and Science Press, 1975. Tsoukalis, Loukas. The Political Economy of International Money; In Search for a New Order. Beverly Hills: Sage, 1985. Turn, R. Transborder Data Flows; Access to the Interna tional On-Line Data Base Market. New York: United Nations, 1983. Wallerstein. Immanuel. The Capitalist World Economy. Cambridge: Cambridge University Press, 1979. ______. The Modern World System. New York: Academic Press, 1975. Weil, Ulric. Information Systems in the 80s. Englewood Cliffs, NJ: Prentice-Hall, 1982. Williams, Frederick. The Communications Revolution. Beverly Hills, CA: Sage, 1982. Wilson, Rodney. Banking and Finance in the Arab Middle East. New York: St. Martin's Press, 1983. Wohlers-Schart, Traute. The Arab and Islamic Bank. Paris: OECD, 1983. Walter, Ingo. Secret Money: The World of International Financial Secrecy. London: George Allen and Unwin, 1985. Waston, Maxwell, ed. International Capital Markets. Washington, D.C.: December 1986. Wendt, L. The Wall Street Journal: The Storv of Dow Jones and the Nation's Business Newspaper. Chicago: Rand McNally and Co., 1982. Wriston, Walter, B. Risk and Other Four Letters. New York: Harper and Row, 1986. Veith, Richard H. Multinational Computer Nets. Lexington, MA, 1985.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 296 Documents and Mon-Published Works Al-Muhanna, Ibrahim. "The Political Economy of Informa tion: Transborder Data Plows and the World's Financial System." A paper presented at the International Studies Association Convention, Washington, D.C., March 1985. Al-Muhanna, Ibrahim, and Fern, Arthur L. "The U.S. Dollar as Independent, Extraterritorial Actor." Paper presented at the International studies Association Annual Meeting, Anaheim, California, March 1986. American Bankers Association. Fundamentals of Data Processing. United States: Author, 1967. Burnett, John. "Information and the Law of Banking." Paper presented to the TDK Conference on the Inter national Information Economy." Williamsburg, VA: 30 October-1 November 1985. Business International. Transborder Data Flow: Issues. Barriers, and Corporate Responses. New York: Author, 1983. Canadian National Parliament, Consultative Committee on the Implication of Telecommunications for Canadian Sovereignty. Telecommunication and Canada. Ottawa: Canadian Government, April 1977. Canton, Belinda. "The Information Revolution: An Interna tional Perspective." Ph.D. dissertation, Univer sity of Southern California, 1984. Citibank. Global Financial Intermediation. New York: Citi bank, 1980. Darke, William J. "Structural Power, Telematics, Telecom munication Institutions." Paper presented to the Annual Meeting of the International Studies Association, Anaheim, California, March 1986. Donaghue, Hugh P. "The Business Community's Stake in Global Communication." Paper delivered at 43rd Annual Meeting of U.S. National Commission for UNESCO, Athens, Georgia, 12 December 1979. Fair, Jo Ellen. "Regulation of Transborder Data Flows: An International Law Perspective." Paper presented at the Annual Meeting of the International Communica tion Association, Chicago, May 1986.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 297 International Finance Corporation. Annual Report. 1986. Washington, D.C.: IFC, 1986. International Monetary Fund. International Capital Markets: Developments and Prospects. Washington, D.C.: International Monetary Fund, World Economic and Financial Surveys series, December 1986. ______. IMF Annual Report of the Executive Board for the Financial Year Ended April 30. 1986. Washington, D.C.: IMF, 1986. Kahwaty, John A. "Transborder Data Flow and Its Impact Upon International Banking." Masters thesis, Stonier Graduate School of Banking, Rutgers University, New Brunswick, New Jersey, 1982. More, Elizabeth A., and Laird, Roderick K. "Emerging Communications Technology Paradigms." Paper presented at 35th Annual Conference of the International Communication Association, 23-27 May 1985, Honolulu, Hawaii. National Association of Securities Dealers, Inc. 1986 Fact Book. Washington, D.C.: NASDAQ, 1986. Office of the Comptroller of the Currency, U.S. Govern ment. Foreign Acquisition of U.S. Banks. Richmond, VA: Robert F. Dame, 1981. Regan, Edward J. "Emerging Transborder Data Flow Issues and Their Impacts on International Banking." Masters thesis, Stonier Graduate School of Banking, American Bankers Association at Rutgers University, New York, New Jersey, June 1984. Reuters. Reuters Holdings PLC Annual Report 1985. London: Reuters, 1986. Sapir, Andre, and Lutz, Ernst. "Trade in Services: Economic Determinants and Development Related Issues." Staff working paper no. 480, World Bank, 1981. Schultz, George. "Consequences of the Age of Information." Transnational Data and Communications Report. May 1986, pp. 15-16. Stewart, Robert. "Transborder Data Flows: An Issue that Won't Go Away." A paper presented at the Interna tional Communication Association Annual Meeting, Chicago, May 1986.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 298 Strange, Susan. "A New Knowledge Structure: Or, How International Political Economists Might Think About the Information Revolution." Paper presented at the International Studies Association Con ference, Anaheim, California, March 1986. United Nations, Economic and Social Council. The Role of Transnational Corporations in Transborder Data Flow. Report to the Secretariat, April 1984. ______. Transborder Data Flows and Brazil: Brazilian Case Study. New York: U.N. Publications, 1985. U.N., Economic and Social Council, Commission on Transna tional Corporations. Policy Analysis and Research: The Role of Transnational Corporations in Trans- border Data Flows. New York: U.N., 1984. ______. The Role of Transnational Corporations in Transborder Data Flows. New York: U.N., 1984. U.S. House of Representatives. Committee on Energy and Commerce, Subcommittee on Telecommunication, Consumer Protection, and Finance. Hearing on International Trade Issues in Telecommunications and Related Industry. March 23. 1983. Washington, D.C.: Government Printing Office, 1983. U.S. Congress. Office of Technology Assessment. Effects of Information Technology on Financial Services. Washington, D.C.: U.S. Government Printing Office, September 1984. U.S. Congress. Senate. Crime and Secrecy: The Use of Off-Shore Banks and Companies. U.S. Senate Hearings. Washington, D.C.: U.S. Government Printing Office. U.S. Congress. Office of Technology Assessments. Effects of Information Technology on Financial Services System. Washington, D.C.: Author, September 1984. Widman, Timothy L . ; Mickunas, Algis; and Pilotta, Joseph J. "Technology Transfer: Theory and Outline of a Research Model for Managing Cultural Change." N.p.: n.p., n.d. The World Bank. World Development Report 1987. London: Oxford University Press, 1987. Veith, Richard H. "The Interorganizational Impact of Computerized Information Processing Networks: The

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 299 Case of International Banking." Ph.D. disserta tion, Syracuse University, 1980.

Personal Interviews and Speeches Hilton, David A. General Manager, International Corpora tion and Government Banking, the Bank of Nova Scotia, Toronto, Canada. Personal interview, Washington, D.C., 1 October 1986. Hopes, James, Chase Manhattan's Vice President. "ACH as a Competitive Advantage." A speech given at the National Automated Clearing House Association. Mason, Patrick J. General Manager, Alubaf Arab Interna tional Bank. Personal interview, Washington, D.C., 1 October 1986. Oreska, G. Manager of Electronic Payment, U.S. Treasury Department. Personal interview, Washington, D.C., 12 October 1986. Probst, G. G. "Applying Tomorrow's Technology Today." A speech delivered to the Charles Babbage Institu tion of the University of Minnesota Symposium on "Computing in the 21st Century," Minneapolis, Minnesota, 9 September 1986. Schotta, Charles. Deputy Assistant Security of the U.S. Department of Treasury. Personal interview, Washington, D.C., 20 June 1987. Slighton, Robert L. Vice-President Director, International Forecasting, The Chase Manhattan Bank. Personal interview, New York, 28 February 1986. Zweibel, Barry K. Manager of installation, Chicago Mercantile Exchange. Personal Interview, Chicago, 10 January 1986.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. GLOSSARY

Analog communications: the method of transmitting information continuously— not discrete— as in radio, telephone, and television. By-backs: taking the future outputs of a plant as a price of the sold manufacturing plant. Association of International Bond Dealers (AIBD): founded in Zurich in 1969 as a self-regulatory organization of Eurobonds dealers. Capital flight: the flight of private sector capital from the home country to be invested overseas without the knowledge and approval of the financial authorities of the original country. Communication technology: any tools which assist the production, distribution, storage, reception, exposi tion, or manifestation of information. Communication: the process by which human, as well as other organisms, create, send, receive, store, and interpret information in order to adapt to and affect their environment. Countertrade: a type of barter where seller has a list of items to choose from. Data base: the raw data, or semi-raw, which is stored in a computer(s) and the computer where the data is held. Digital communications: the method of representing and transmitting information in discrete binary numerical language (i.e., in zeros and ones). Electronic Fund Transfer (EFT): system which allows funds to be switched automatically. Hedging: a method to limit risk by purchasing commodities or financial futures or option to counterbalance any possible loss. Fiber optics: hair-thin strands of glass which transmit data and visual communications efficiently, at very low

300

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. 301 cost, high speed, and use little space in digital light waves. Futures: The purchase of set of commodity or financial instruments at a future date. Off-line communications: a system where computers, terminals, and main computers are not directly, nor continuously connected. Offsets: a type of barter where the buying country demands that part of the production be located there and where the seller demands that part of production be exported. Options: having the right to buy or sell financial instruments at or within a specific time. On-line communications: an automated system where peripheral equipment (e.g., terminals) are directly connected to the main computer where they can feed and re-feed each other. Over-the-counter (OTC): securities and share trading outside the formal stock exchange. Currently OTC is mostly done by computer. Swap: the exchange of debt obligation from one currency to another or to securities or goods. Wireless computer networks: the networks which use air waves (e.g., radio waves) to connect computers and terminals.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.

INFORMATION to USERS the Most Advanced Technology Has Been Used to Photo­ Graph and Reproduce This Manuscript from the Microfilm Master

INFORMATION to USERS the Most Advanced Technology Has Been Used to Photo Graph and Reproduce This Manuscript from the Microfilm Master