money market

the short-term trade in money, as in the sale and purchase of bonds and certificates.

[1925-30]

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Set of institutions, conventions, and practices whose aim is to facilitate the lending and borrowing of money on a short-term basis.

The money market is, therefore, different from the capital market, which is concerned with medium-and long-term credit. The transactions that occur on the money market involve not only banknotes but assets that can be turned into cash at short notice, such as short-term government securities and bills of exchange. Though the details and mechanism of the money market vary greatly from country to country, in all cases its basic function is to enable those with surplus short-term funds to lend and those with the need for short-term credit to borrow. This function is accomplished through middlemen who provide their services for a profit. In most countries the government plays a major role in the money market, acting both as a lender and borrower and often using its position to influence the money supply and interest rates according to its monetary policy. The U.S. money market covers financial instruments ranging from bills of exchange and government securities to funds from clearinghouses and certificates of deposit. In addition, the Federal Reserve System provides considerable short-term credit directly to the banking system. The international money market facilitates the borrowing, lending, and exchange of currencies between countries.

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▪ economics

Introduction

      a set of institutions, conventions, and practices, the aim of which is to facilitate the lending and borrowing of money on a short-term basis. The money market is, therefore, different from the capital market, which is concerned with medium- and long-term credit. The definition of money for money market purposes is not confined to bank notes but includes a range of assets that can be turned into cash at short notice, such as short-term government securities, bills of exchange, and bankers' acceptances.

      Every country with a monetary system of its own has to have some kind of market in which dealers in short-term credit can buy and sell. The need for such facilities arises in much the same way that a similar need does in connection with the distribution of any of the products of a diversified economy to their final users at the retail level. If the retailer is to provide reasonably adequate service to his customers, he must have active contacts with others who specialize in making or handling bulk quantities of whatever is his stock-in-trade. The money market is made up of specialized facilities of exactly this kind. It exists for the purpose of improving the ability of the retailers of financial services—commercial banks, savings institutions, investment houses, lending agencies, and even governments—to do their job. It has little if any contact with the individuals or firms who maintain accounts with these various retailers or purchase their securities or borrow from them.

      The elemental functions of a money market must be performed in any kind of modern economy, even one that is largely planned or socialist, but the arrangements in socialist countries do not ordinarily take the form of a market. Money markets exist in countries that use market processes rather than planned allocations to distribute most of their primary resources among alternative uses. The general distinguishing feature of a money market is that it relies upon open competition among those who are bulk suppliers of funds at any particular time and among those seeking bulk funds, to work out the best practicable distribution of the existing total volume of such funds.

      In their market transactions, those with bulk supplies of funds or demands for them, rely on groups of intermediaries who act as brokers or dealers. The characteristics of these middlemen, the services they perform, and their relationship to other parts of the financial mechanism vary widely from country to country. In many countries there is no single meeting place where the middlemen get together, yet in most countries the contacts among all participants are sufficiently open and free to assure each supplier or user of funds that he will get or pay a price that fairly reflects all of the influences (including his own) that are currently affecting the whole supply and the whole demand (supply and demand). In nearly all cases, moreover, the unifying force of competition is reflected at any given moment in a common price (that is, rate of interest) for similar transactions. Continuous fluctuations in the money market rates of interest result from changes in the pressure of available supplies of funds upon the market and in the pull of current demands upon the market.

Banks (bank) and the money market

Commercial banks (commercial bank)

 Commercial banks are at the centre of most money markets, as both suppliers and users of funds, and in many markets a few large commercial banks serve also as middlemen. These banks have a unique place because it is their role to furnish an important part of the money supply. In some countries they do this by issuing their own notes, which circulate as part of the hand-to-hand currency. More often, however, it is checking accounts at commercial banks that constitute the major part of the country's money supply. In either case, the outstanding supply of bank money is in continual circulation, and any given bank may at any time have more funds coming in than going out, while at another time the outflow may be the larger. It is through the facilities of the money market that these net excesses and shortages are redistributed, so that the banking system as a whole can at all times provide the means of payment required for carrying on each country's business.

      In the course of issuing money the commercial banks also actually create it by expanding their deposits, but they are not at liberty to create all that they may wish whenever they wish, for the total is limited by the volume of bank reserves and by the prevailing ratio between these reserves and bank deposits—a ratio that is set by law, regulation, or custom. The volume of reserves is controlled and varied by the central bank (such as the Bank of England (England, Bank of), the European Central Bank, or the Federal Reserve System in the U.S.), which is usually a governmental institution, is always charged with governmental duties, and almost invariably carries out a major part of its operations in the money market.

Central banks (central bank)

      The reserves of the commercial banks, which are continually being redistributed through the facilities of the money market, are in fact mainly deposit balances that these commercial banks have on the books of the central bank or notes issued by the central bank, which the commercial banks keep in their own vaults. As the central bank acquires additional assets, it pays for them by crediting depositors' accounts or by issuing its own notes; thus the potential volume of commercial bank reserves is enlarged. With more reserves, the commercial banks can make additional loans or investments, paying for them by entering credits to depositors' accounts on their books. And in that way the money supply is increased. It may be reduced by reversing the sequence. The central bank can sell some of its marketable assets in the money market or in markets closely interrelated with the money market; payment will be made by drawing down some of the commercial bank reserve balances on its books; and with smaller reserves remaining, the commercial banks will have to sell or reduce some of their investments or their loans. That, in turn, results in a shrinkage of the outstanding money supply. Central bank operations of this kind are called open-market operations (open-market operation).

      The central bank may also increase bank reserves by making loans to the banks or to such intermediaries as bill dealers or dealers in government securities. Reduction of these loans correspondingly reduces bank reserves. Although the mechanics of these lending procedures vary widely among countries, all have one feature in common: the central bank establishes an interest rate for such borrowing—the bank rate or discount rate—pivotally significant in the structure of money market rates.

      Money market assets may range from those with the highest form of liquidity—deposits at the central bank—through bank deposits to various forms of short-term paper such as treasury bills, dealers' loans, bankers' acceptances, and commercial paper, and including government securities of longer maturity and other kinds of credit instruments eligible for advances or rediscount at the central bank. Although details vary among countries, the touchstone of any money market asset other than money itself is its closeness—i.e., the degree of its substitutability for money. So long as the institutions making use of a money market regard a particular type of credit instrument as a reasonably close substitute—that is, treat it as “liquid”—and so long as the central bank acquiesces in or approves of this approach, the instrument is in practice a money market asset. Thus no single definition or list can apply to the money markets of all countries nor will the list remain the same through the years in the money market of any given country.

The international money market

      Each central bank usually holds some form of reserve that is acceptable in settling international transactions. International monetary reserves are mainly gold, or “money market assets” in some country whose currency is widely used, such as the United States dollar. The monetary laws of all countries provide for the establishment of some kind of parity between their currencies and those of other countries. This parity may be defined either in terms of gold (gold-exchange standard) or in relation to a key currency such as the British pound sterling or the United States dollar, which in turn has a fixed parity with gold. A country maintains the “convertibility” of its currency by standing ready to buy and sell gold or other currencies in exchange for its own at prices within a fixed and rather narrow “spread” above or below the “exchange rate” for its own currency that is implied by the declared parity.

      Because world trade (international trade) continually gives rise to various needs for payment in various currencies, an international money market must exist so that traders with an excess of one currency can use it to buy another currency for which they have a need. Within the scope of convertibility arrangements, this trading in currencies is carried out by skilled intermediaries, usually banks or specialized foreign exchange brokers and dealers. Trading in currencies is extensive both for immediate use (“spot”) and for future (“forward”) delivery. Quotations vary according to changes in supply and demand, over the range between the upper and lower buying and selling prices set by official parity. If no parity has been set quotations may fluctuate widely. If a currency is subject to exchange controls, there may be two or more quotations for different uses of the same nominal currency.

      Changes in a country's balance of payments may affect the usefulness or prestige of its currency. A sustained and substantial balance of payments deficit (outpayments larger than inpayments), for example, will result in continuous large increases in the world supply of its currency, possibly leading to some decline in its acceptability abroad and to a loss of international monetary reserves. At the same time, an outward drain may reduce the reserves of the commercial banks (the base for the domestic money supply), unless the central bank takes offsetting action.

      Since 1944 most of the countries that have domestic money markets or that play a role in the international money market have been joined together in the International Monetary Fund, which represents a pooling of part of the foreign exchange reserves (including gold) of more than 100 member countries. Drawings on the pool may be made by member countries to meet some of the reserve drains arising from balance of payments deficits and in amounts related to the quota that each has subscribed.

      The internal money markets of a surprisingly high proportion of the countries of the world are quite rudimentary. The work of the money market in these countries is done largely by transfers of deposit balances, government securities, or foreign exchange among a few banks and between them and the central bank. But in nearly all such cases there is genuine discontent with the rigidity of these limited facilities and a desire to develop a structure, as well as instruments and procedures, which would provide the open-market attributes of the arrangements that have evolved in the leading countries. Several of the more fully developed money markets are described below.

The U.S. money market

      The domestic money market in the United States carries out the largest volume of transactions of any such market in the world; its participants include the most heterogeneous group of financial and nonfinancial concerns to be found in any money market; it permits trading in an unusually wide variety of money substitutes; and it is less centralized geographically than the money market of any other country. Although there has always been a clustering of money market activities in New York City and much of the country's participation in the international money market centres there, a process of continuous change during the 20th century has produced a genuinely national money market.

      By 1935 the financial crises of the Great Depression had resulted in a basic revision of the banking laws. All gold had been withdrawn from internal circulation in 1933 and was henceforth held by the U.S. Treasury for use only in settling net flows of international payments among governments or central banks; its price was raised to $35 per ounce, and the U.S. dollar became the key currency in an international gold bullion standard. Domestically, the changes included legislative recognition of the primary importance of unified open-market operations by the Federal Reserve System and delegation to the board of governors of the Federal Reserve System of authority to raise or lower the ratios required between reserves and commercial bank deposits. Although about half of the 30,000 separate banks existing in the early 1920s had disappeared by the mid-1930s, the essential character of commercial banking in the U.S. remained that of a “unit” (or single-outlet) banking system in contrast to those of most other countries, which had a small number of large branch-banking organizations.

The unit banking system

      This system has led inevitably to striking differences between money market arrangements in the United States and those of other countries. At times, some smaller banks almost inevitably find that the wholesale facilities of the money market cannot provide promptly the funds needed to meet unexpected reserve drains, as deposits move about the country from one bank to another. To provide temporary relief, pending a return flow of funds or more gradual disposal of other liquid assets in the money market, such banks have the privilege, if they are members of the Federal Reserve System, of borrowing for reasonable periods at their own Federal Reserve bank. At times some large banks, which serve as depositories for part of the liquid balances of many of the smaller ones (including those that are not members of the Federal Reserve System) also find that demands converging on them are much greater than expected. These large banks, too, can borrow temporarily at a Federal Reserve bank if other money market facilities are not adequate to their needs. Because these borrowing needs are unavoidably frequent in a vast unit banking system and, as a rule, do not indicate poor management, the discount rate charged by the Federal Reserve banks on such borrowing is not ordinarily put at punitive or severe penalty levels—thus, contrary to practice in many other countries, the central bank does not always maintain its interest rate well above those prevailing on marketable money market instruments. To avoid abuse, there is continuous surveillance of the borrowing banks by the Federal Reserve banks.

      Along with this practice of borrowing at a Federal Reserve bank has developed the market for “federal funds.” This specialized part of the money market provides for the direct transfer to a member bank of balances on the books of a Federal Reserve bank in return for payment of a variable rate of interest called the “federal funds rate.” These funds are immediately available. There are transactions, too, in funds that are on deposit at commercial banks—by means of loans between banks, or through loans by one large depositor to another. Because these must be collected through a clearing process, they are usually called “ clearinghouse funds.”

Money market instruments

      Transactions in federal funds and clearinghouse funds are further supplemented by transactions in which either kind of money is exchanged for some other liquid, money market instrument, most frequently government securities. The magnitude of the market for government securities became so great after World War II that it overshadowed all other elements of the money market. Trading in outstanding “governments” is virtually all done through dealers who buy and sell for their own account at prices which they quote on request (standing ready to “bid” for or to “offer” any outstanding issue). Most of these dealers have head offices located in New York City, but all are engaged in nationwide operations. Their transactions and the lending arrangements through which they finance their own inventories of government securities have evolved into a particularly sensitive indicator of the pressures of supply and demand on the money market from day to day. The most common form of dealer financing is the repurchase agreement, through which dealers sell parts of their inventory temporarily, subject to repurchase.

      Closely interrelated, often through trading operations conducted by the same dealers, are the much smaller markets for bank drafts, bills of exchange, and commercial paper. Alongside these other markets and actually somewhat larger in outstanding volume are the markets for securities issued by various “agencies” created by federal statute, such as the Federal Home Loan banks and Federal Land banks. Another money market instrument is the negotiable time certificate of deposit (CD), issued in large volume by commercial banks, which first became significant in 1962. While the owner of a time CD cannot withdraw his deposit before the maturity date initially agreed upon, he can sell it at any time in a secondary market that is conducted by government securities dealers.

      The Federal Reserve System conducts day-to-day operations in the money market on its own initiative in order to assist the smooth working of the nation's financial machinery and to exert a general influence aimed at fostering economic growth and limiting economic instability. Its transactions include substantial outright purchases or sales of government securities, relatively small purchases and run-offs of bankers' acceptances, and a considerable volume of loans made for a few days at a time to dealers in government securities or acceptances in the form of repurchase agreements. While it is still the commercial banks as a group that have the greatest continuing need for the combined facilities of the nationwide money market, there is frequent and continuous participation by a great variety of institutional investors who channel the public's savings into various uses and who must always also make some provision for their own liquidity.

      Perhaps the most unusual feature in the composition of the U.S. money market is the great importance attained by nonfinancial business concerns and local units of government since World War II. Corporate treasurers and the treasurers of many states and local political subdivisions and authorities have become so keenly sensitive to the profitable possibilities of managing their own liquid holdings instead of relying on the commercial banks as most had done formerly that this group at times provides nearly as large a part of the volatile financing needs of government securities dealers, for example, as comes from the banks. Moreover, banks outside New York City sometimes supply more of the financing needed by these dealers than do the traditional “money market banks” in New York City. The nationwide character of the money market is also shown by the participation of nearly 200 banks in the federal-funds market—banks that are widely scattered among all Federal Reserve districts, although the bulk of all transactions is executed through facilities located in New York.

      While the U.S. money market has become truly national, it still needs a final clearing centre upon which the net impact of changes in overall supply or demand can ultimately converge and where the final balancing adjustments of the market as a whole can be accomplished. In filling that need, New York City continues to be the centre of the national money market.

Robert Vincent Roosa

The British (United Kingdom) money market

The discount houses

      In Great Britain the money market consists of a number of linked markets, all of them concentrated in London. The 12 specialist banks known as discount houses have the longest history as money market institutions; they have their origin in the London bill broker who in the early 19th century made the market in inland commercial bills. By selling bills through this market, the growing industrial and urban areas were able to draw upon the surplus savings of the agricultural areas. Quite early many bill brokers began to borrow money from banks in order to buy and hold these bills, instead of simply acting as brokers, and thus became the first discount houses. Since then the major assets held by the discount houses have at different times been commercial bills (first inland bills as described above and later bills financing international trade), treasury bills, and short-dated government bonds. During the 1960s there was a resurgence of the commercial bill, which finally became the discount houses' largest single class of asset, only to be overtaken later by the certificate of deposit.

      Important changes were introduced into the British monetary system in 1971, but money at call with the discount houses retained its role as a reserve asset. Such is the safety and liquidity of call money that, despite the fractionally lower rate on it compared with other reserve assets, the banks hold about half of their required reserves in this form. This in turn provides the discount houses with a large pool of funds, which they invest in relatively short-dated assets, of which the most important is sterling certificates of deposit, followed by commercial bills, local authority securities, and treasury bills. This pattern of assets is greatly influenced by the fact that all call loans to the discount houses are secured loans, parcels of assets being deposited pro rata with the lending banks as security, and the assets held by the discount houses must therefore be suitable for use as such security.

      They also need to hold a substantial proportion of assets that are rediscountable at the Bank of England (England, Bank of) in case of need, and the Bank of England limits their holding of assets other than public sector debt to a maximum of 20 times their capital resources.

      On the liabilities side of the discount house's balance sheet, operating in call money is part of its day-to-day work. A bank that expects to make net payments to other banks during the day (for example, in settlement of checks paid by its customers to their customers) will probably call in some of its call loans, and by convention this is done before noon. Since the banks that have called in money then pay it to other banks, these other banks will have an equal amount to re-lend to the discount houses in the afternoon. Thus the discount houses can “balance their books”—borrow enough money in the afternoon to replace the loans called from them in the morning.

      It is not uncommon for perhaps £100,000,000 to be called from, and re-lent to, the discount houses on an active day.

      There is one main reason why the money position may not balance in this way. The British government accounts are kept with the Bank of England, which does not lend at call as other banks do. Thus net payments into or out of these government accounts will cause a net shortage or surplus of money for the discount houses in the afternoon and will tend to cause money rates to rise or fall. The Bank of England can allow such shortages or surpluses to affect interest rates, or it can offset them by buying or selling bills or by lending overnight to the discount houses at market rates. Even if the Bank of England does not act in this way to meet a shortage of funds, the discount houses are always finally able to secure the funds they need by their right to borrow from the Bank of England (the lender of last resort) against approved security at the “minimum lending rate” (the penalty rate).

      On the assets side of their balance sheets, the discount houses are active dealers in a number of the assets they hold. They make the market in sterling certificates of deposit and in commercial bills, quoting buying and selling rates for different maturities. They also quote selling rates for treasury bills (treasury bill) that they acquire at the weekly tender in competition with each other and with any other banks that may tender, including the Bank of England. Most of these other banks tender for treasury bills in order to hold them to maturity, but the discount houses sell theirs on the average when only a few weeks of the bills' 91-day life has passed. A large proportion of these bills is sold to the clearing banks, which do not tender on their own account.

      The Bank of England minimum lending rate is normally determined for each week 0.5–0.75 percent above the average treasury bill rate at the previous Friday's tender. The bank, however, has the power to fix it at a different level if it so wishes, and this has been done.

Other markets

      Important changes have also occurred outside the discount market described above; after the mid-1950s there was steady growth in public borrowing by local authorities. This led to an active local authority loan market conducted through a number of brokers, where money can be lent on deposit for a range of maturities from two days up to a year (and indeed for longer periods). Much more rapid was the growth after the mid-1960s of the interbank market, in which banks borrow and lend unsecured for a range of maturities from overnight upward. This market also is conducted through brokers, often firms that also operate in the local authority and other markets; a number of these firms of brokers are subsidiaries of discount houses.

      In addition to the markets mentioned, there is the gilt-edged (government bond) market on the stock exchange; short-dated bonds are held by the discount houses and by banks and other money market participants, as are short-dated local authority stocks and local authority “yearling” (very short-dated) bonds. With flexibility of bank deposit rates (at least for deposits of large denomination), both banks and nonbank transactors are faced with a wide and competitive range of sterling money market facilities in London.

      Finally, mention should be made of the Eurodollar market, because London is its centre; this is an entrepôt market with a very large volume of business in U.S. dollar balances, conducted through brokers (often the same firms that operate in the sterling markets), and U.K. banks are active participants. However, owing to exchange control there has been little significant interaction between the Eurodollar market and the U.K. domestic money market.

R.F.G. Alford

The money markets of other countries

The Canadian (Canada) money market

      The Canadian money market was substantially broadened in 1954 with the introduction of day-to-day bank loans against Government of Canada treasury bills and other short-term government and government-guaranteed securities. Treasury bills of 91 days' and 182 days' maturity are issued weekly with the occasional offering of a longer maturity of up to one year. Government of Canada bonds and Government of Canada guaranteed bonds are issued at less regular intervals.

      Groups involved in the money market are the following: the government, as the issuer of the securities; the Bank of Canada (Canada, Bank of), acting as issuing agent for the government and as a large holder of market material; the chartered banks, as large holders and as distributors and potential buyers and sellers of bills and bonds at all times; the security dealers, as carriers of inventories and traders in such securities; and the public (mainly provincial and municipal governments and larger corporations), as short-term investors.

      Treasury bills are sold by competitive tender in which the Bank of Canada, the chartered banks, and a small number of investment dealers participate. Bonds are normally issued at a price at which the yield is in line with outstanding comparable issues.

      The central bank, through its tender at the weekly treasury-bill sale, active manipulation of its own bill and bond portfolio, and regulation of the money supply, has workable instruments for active monetary control. For both banks and qualified dealers, the Bank of Canada acts as lender of last resort. The rate is set slightly above the average rate of the last treasury bill auction to discourage regular borrowing.

The German (Germany) money market

      In what was formerly West Germany, where the money market developed strongly after World War II, transactions have been to a large extent confined to interbank loans. In addition, insurance companies and other nonbank investors are also important lenders of short-term funds. Treasury bills and other short-term bills and notes from government agencies (railways and post) were gaining in importance by the 1960s, whereas in 1955 certain nonmarketable securities (the so-called equalization claims, created during the 1948 currency reform) held by the Bundesbank were transformed into short-term marketable securities in order to obtain suitable market material for the open-market operations of the Bundesbank. Banks are not used to dealing in short-term government securities between each other. They generally either hold these securities to maturity or resell them to the central bank at its buying rates, so that a true money market has not developed.

      The market for commercial paper is of some significance, and dealing in it takes place from time to time between banks, especially in times of tight market conditions. Comprehensive regulations have been given through the Bundesbank about the rediscountability of the several kinds of commercial paper.

      The influence of the Bundesbank on the monetary situation through open-market operations by the 1960s was greatly hampered by the vast liquidity of the banking system as a consequence of the persistence of Germany's favourable balance of payments situation.

The French (France) money market

      The French money market is fairly well established, but its size is restricted by the fact that in France currency still plays an important role in the money supply, whereas by regulations the nonfinancial private sector of the economy is excluded from dealing in the market. Banks as well as a few public or semipublic agencies working in the financial sphere and intermediaries—brokers and discount houses—constitute the market. Transactions take place in commercial paper and in treasury bills. The monetary authorities maintain a special bookkeeping system for all the treasury bills held by banks and other financial institutions, under which such bills are not represented by actual certificates but by entries in special accounts administered by the Banque de France (France, Banque de) for the treasury.

      The central bank's (central bank) open-market operations, which were normally limited to smoothing out disturbances in the local money market, have gained importance in recent years. Open-market transactions are effected to keep domestic money market rates in line with international rates, in an effort to prevent unwanted capital flows. The possibilities of the central bank's influencing the monetary situation through the money market are limited to the large government needs for short-term funds, no market for long-term government borrowing being established.

Christiaan Glasz

The Japanese (Japan) money market

      In Japan's rapidly growing economy the demand for funds, both short-term and long-term, has been persistently strong. Commercial banks and other financial institutions have therefore had an important role. The monetary authorities (the Ministry of Finance and the Bank of Japan) have been unwilling to allow market forces to equilibrate demand and supply in many financial markets for fear that interest rates would become excessively high. Most interest rates have been set administratively at levels high by international comparison (until the late 1960s) but lower than market forces would have dictated. Monetary policy is implemented by controls on both the availability of credit and its cost.

      Under these circumstances, Japan has had a very restricted money market. The market for short-term government securities is negligible; the low, pegged interest rate means that the Bank of Japan is the main buyer and that open-market operations are impossible. Transactions in commercial paper are minimal, being discouraged because they would tend to undermine the structure of interest rates and financial institutions.

      Only the call money market is well developed. It is restricted to transactions among financial institutions. The interest rate on call money has been relatively free, and persistently above most other short-term and long-term rates. Although small amounts are lent overnight, most are “unconditional loans” (repayment after one day's notice, with a minimum of two days) or “over-month-end-loans” (repayment on a fixed day the following month). The pattern of flows is rather stable, despite seasonal and cyclical fluctuations. City banks are the major borrowers; they have a strong demand for loans by large enterprises and use call funds as a major source of liquidity. Major lenders are local banks, trust banks, credit associations, and agricultural cooperatives, which collect individual urban and rural savings and are attracted by the high yields, liquidity, and low risk of call loans relative to other uses. Call brokers help make a market, though most funds flow directly from one financial institution to another. About three-quarters of the funds flow through the Tokyo market, and there are also call markets in Ōsaka and Nagoya.

Money markets in developing countries

      Well-developed money markets exist in only a few high-income countries. In other countries money markets are narrow, poorly integrated, and in many cases virtually nonexistent. Despite the many differences among countries, one can say in general that the degree of development of a country's financial system, including its money markets, is directly related to the level of its economy. Most very-low-income countries have limited financial systems in which money markets play no role. In many former colonies, notably in Africa, expatriate commercial banks had substituted for a local money market; the banks met fluctuations in loan demand by changing their balances at head offices in London or elsewhere. More recently, government policies have encouraged these banks to develop domestic channels for temporary surpluses and deficits. Persistent inflation has been another factor inhibiting the growth of money markets in developing countries, notably in Latin America.

      Most developing countries, except those having socialist systems, have the encouragement of money markets as a policy objective, if only to provide outlets for short-term government securities. At the same time many of these governments pursue low-interest-rate policies in order to reduce the cost of government debt and to encourage investment. Such policies discourage saving and make money market instruments unattractive. Nevertheless, a demand for short-term funds and a supply of them exist in all market-oriented economies. In many developing countries these pressures have led to “unorganized money markets,” which are often highly developed in urban areas. Such markets are unorganized because they are outside “normal” financial institutions; they manage to escape government controls over interest rates; but at the same time they do not function very effectively because interest rates are high and contacts between localities and among borrowers and lenders are limited. In all developing countries traditional forms of moneylending continue, particularly for agriculture and small enterprise.

Hugh T. Patrick

Additional Reading

Glenn G. Munn, F.L. Garcia, and Charles J. Woelfel, Encyclopedia of Banking and Finance, 9th ed., rev. and expanded (also published as The St. James Encyclopedia of Banking & Finance, 1991), provides comprehensive definitions, many with bibliographies. Edward I. Altman and Mary Jane McKinney (eds.), Handbook of Financial Markets and Institutions, 6th ed. (1987), is a thorough compilation. Detailed information on a variety of markets is provided in Francis A. Lees and Maximo Eng, International Financial Markets: Development of the Present System and Future Prospects (1975), a descriptive treatment; Charles R. Geisst, A Guide to the Financial Markets, 2nd ed. (1989), for the general reader; Frank J. Fabozzi and Frank G. Zarb, Handbook of Financial Markets: Securities, Options, and Futures, 2nd ed. (1986); and Perry J. Kaufman, Handbook of Futures Markets: Commodity, Financial, Stock Index, and Options (1984), including the history, regulation, and mechanics of futures trading. Further discussion of financial futures is found in Mark J. Powers and Mark G. Castelino, Inside the Financial Futures Markets, 3rd ed. (1991), an explanation of the exchanges and their functions; and Nancy H. Rothstein and James M. Little (eds.), The Handbook of Financial Futures: A Guide for Investors and Professional Financial Managers (1984), a discussion of the market's development, organization, and regulation. The development and operation of the international capital market is addressed by M.S. Mendelsohn, Money on the Move: The Modern International Capital Market (1980). Reference works include Marcia Stigum, The Money Market, 3rd ed. (1990), comprehensive and readable; and Gunter Dufey and Ian H. Giddy, The International Money Market (1978). Timothy Q. Cook and Timothy D. Rowe (eds.), Instruments of the Money Market, 6th ed. (1986), explains such key instruments as Eurodollars, treasury securities, and federal funds. David M. Darst, The Handbook of the Bond and Money Markets (1981), is a practical guide. Money markets in countries in Asia and the Pacific are studied by Aron Viner, Inside Japanese Financial Markets (1988); Yoshio Suzuki, Money and Banking in Contemporary Japan, trans. from the Japanese (1980), analyzing Japan's participation in international capital markets; The Japanese Financial System (1978), published by the Bank of Japan, a brief description of financial institutions, financial markets, and characteristics of the financial structure; and Michael T. Skully (ed.), Financial Institutions and Markets in the Far East (1982), Financial Institutions and Markets in Southeast Asia (1984), Financial Institutions and Markets in the Southwest Pacific (1985), and Financial Institutions and Markets in the South Pacific (1987).

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