Do you see the banking free zone coming into New York City? And what about the criticism that it would let a lot of capital flow out of the country?

The net of it is this: Since time immemorial there have been free trade zones--seventeen of them in the United States. You land your goods behind a wire fence, then you trans-ship them. It's exempt from U.S. customs duties and local taxes because no domestic business is done. It's all foreign business--just passing through. The same applies to the new banking proposal. It's all foreign banking--just passing through.

The main problem with the banking free trade zone is that there's nothing the matter with it. Everybody is looking for the mouse under the rug. But there isn't any. They can't believe that we proposed this without some kind of ulterior motive.

The purpose right up front is to bring back to New York some of the international financial market that we lost to London and various other booking centers offshore, like Nassau, Bahrain, Hong Kong, and Singapore.

As it is, we borrow money from the Eurodollar market in London, book it in Nassau and lend it to Brazil. All the banking free trade zone would do is put a rope on the island and tow it into New York harbor. Absolutely nothing else would happen.

It doesn't make any great difference to Citibank. We can operate, and operate, all around the world. We think it would be a lot better, though, if we could generate those jobs in the City of New York.

Since the Eurodollar market opened in London ten years ago, they've added more than a hundred thousand jobs in the City of London, while New York has lost about the same amount. New York can't afford that. The financial community, including the exchanges, brokers, dealers and so forth, now supplies 350,000 jobs in this city, which is roughly 10 percent of the city's work force. We watch the brokers move across the Hudson to Hoboken and other garden spots. We watch big industry move upstate and to Connecticut. I sometimes think Danbury is going to be the size of Pittsburgh in another few years. The financial community is also moving out. I don't see any good reason to go on exporting jobs from New York City.

Well, the banking free-zone idea passed the New York Legislature with one dissenting vote, which I guess is some kind of record, since the last time they gave themselves a pay increase. Governor Hugh Carey and I went down to Washington to present the idea to the Federal Reserve Board.

When we first launched the idea, there was a lot of nonsense about so-called monetary leakage. I never knew what it meant. It sounded very sinister. Henry Wallich[29]  took me out in the woods and lost me a couple of times trying to explain it. It doesn't make any difference the dollars are. Only one guy prints them, and that's the Fed.

Now, the out-of-town banks are worried that it will give New York a competitive advantage, so they're playing cat-and-mouse on the thing, and throwing sand in the gears. But there are a hundred and twenty billion dollars going through the system every day and the Bank of America's Edge Act office[30]  is part of that system. So there's no competitive disadvantage. It's true that the settlement procedures go through the Fed, but there's no law that says an out-of-state bank can't have an account with the New York Fed.

They complain that Edge Act corporations would have less borrowing power than their parents. On the other hand, all of them are getting guarantees from their parents now, so I don't think that's much of a problem.

Banking free zones would enhance the marketplace all over because you need one in every time zone. California should have one, without question. There'll probably be one in Illinois. The foreign exchange market and the Eurodollar markets never close. So you hand off your position from London to New York to San Francisco to Hawaii. Then you go on to Hong Kong, Singapore, Bahrain, and back to London.

I don't see any downside to the idea, but there's a vast suspicion that New York banks are trying to get away with something. The effect on the monetary system will be absolutely zero. If I were a regulator, I'd rather have these transactions taking place in the United States, where I could watch them, than spread all over the world, where I can't.

It will happen one of these days, but achieving the inevitable is sometimes time consuming.

[29] Formerly professor of economics at Yale University and a member of President Eisenhower's Council of Economic Advisers, he is presently on the Board of Governors of the Federal Reserve System.

[30] Offices established, since 1919, by banks outside their home states specifically to provide financial services related to international trade.