The Hidden History of Eurodollars, Part 1: Cold War Origins
Odd Lots
Deep Dive
What are eurodollars and how do they function in the global financial system?
Eurodollars are dollar-denominated bank deposits held at foreign banks or overseas branches of U.S. banks. They are essentially offshore dollars that sit outside the U.S. banking system and Federal Reserve control. With nearly $10 trillion outstanding, they form the backbone of the global dollar system, enabling non-U.S. banks to hold and lend dollars internationally.
Why did the Soviet Union withdraw its gold and dollar reserves from New York in 1947?
The Soviet Union withdrew its gold and dollar reserves from New York in 1947 due to fears of potential U.S. sanctions, inspired by the U.S. freezing Yugoslavia’s gold reserves earlier. The Soviets moved their assets to Paris, where they stored them in banks like Bicen, a communist-sympathizing bank, to ensure access to dollars and gold outside U.S. control.
How did the eurodollar market initially develop?
The eurodollar market began in the late 1940s as a way for communist countries like the Soviet Union and China to evade potential U.S. sanctions. They deposited dollars in European banks, such as Bicen in Paris, which issued dollar liabilities. These deposits were used to finance East-West trade and later expanded into a broader market for dollar-denominated banking outside the U.S.
What role did London play in the growth of the eurodollar market?
London became a central hub for the eurodollar market in the 1950s, as British banks like Midland Bank began issuing eurodollars to facilitate cross-border interest rate arbitrage. The liberalization of the foreign exchange forward market in 1952 allowed these banks to hedge dollar risk, making eurodollars a profitable and attractive financial instrument for international trade and finance.
Why did the U.S. Federal Reserve view the eurodollar market as useful?
The U.S. Federal Reserve viewed the eurodollar market as useful because it increased the global appeal and utility of the U.S. dollar. By allowing central banks and corporations to hold dollar balances offshore, the market kept dollars circulating internationally without touching the U.S. financial system, thereby enhancing the dollar's role in global trade and finance.
What was the significance of the eurodollar market in the context of the Bretton Woods system?
The eurodollar market emerged as a solution to the U.S. balance of payments crisis under the Bretton Woods system. As the U.S. faced a growing mismatch between its gold reserves and dollar liabilities, the eurodollar market provided a way to keep dollars circulating offshore, reducing pressure on the U.S. to redeem dollars for gold and helping sustain the global dollar system.
How did the eurodollar market evolve from its communist origins to a global financial system?
The eurodollar market evolved from its communist origins in the late 1940s, where it was used for sanctions evasion and financing East-West trade, into a global financial system in the 1950s and 1960s. London banks adopted the practice, using eurodollars for cross-border arbitrage and trade financing. By the 1960s, U.S., Japanese, and European banks had established branches in London, turning eurodollars into a cornerstone of international finance.
Shownotes Transcript