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- [00:00]
Joe Weisenthal
89% of business leaders say AI is a top priority, according to research by Boston Consulting Group. The right choice is crucial, which is why teams at Fortune 500 companies use Grammarly with top tier security credentials and 15 years of experience in responsible AI. Grammarly is how companies like yours increase productivity while keeping data protected and private. See why 70,000 teams trust Grammarly@Grammarly.com.
- [00:28]
Sonali Basak
I'm Sonali Basak and I hope you'll join me and many of the most important institutional investors and money managers for the year's preeminent finance event, Bloomberg Invest. Returning to New York on March 4th and 5th, come face to face with leading voices in markets, identify the next big investments, forge meaningful connections and swap strategies. Register now@bloomberglive.com invest. That's bloomberglive.com invest.
- [01:00]
Joe Weisenthal
Bloomberg Audio Studios Podcasts.
- [01:03]
Sonali Basak
Radio news.
- [01:09]
Tracy Alloway
Joe Joe, what's that noise?
- [01:12]
Joe Weisenthal
Where's this going? Tracy?
- [01:13]
Tracy Alloway
I'm setting the scene.
- [01:15]
Joe Weisenthal
What was that? All right, let's just start. I'm Joe Weisenthal.
- [01:19]
Tracy Alloway
And I'm Tracy Alloway and this is a very special edition of the Odd Lots podcast.
- [01:24]
Joe Weisenthal
Tracy. So one thing I've been really fascinated by, and I mentioned it on some episodes lately, I've been really getting into Cold War history actually. And I guess I don't know, probably because I'm a middle aged man and that's a middle aged man hobby, you start reading about 20th century history, but particularly Soviet and Chinese history. And one thing I've learned, and this did actually come up on an old episode, there's some interesting financial linkages in the past that people might not have expected at all. And I feel like more people should be talking about this.
- [01:53]
Tracy Alloway
I agree. And also if you like Cold War history, Joe, you are going to love what we are about to do because there is a big connection between the history of the Cold War and the development of the modern financial system. And that connection is Eurodollars. And of course, just to be clear, this is not the Eurodollar exchange rate.
- [02:14]
Joe Weisenthal
I will fully admit that it took me 10 years. Like 10 years. Maybe less, maybe five. No, it probably was closer to 10. That euro dollar did not mean the euro, the EURUSD exchange rate.
- [02:28]
Tracy Alloway
It can be admittedly confusing. So why don't we just define it right away. So Euro dollars are dollar denominated bank deposits held at foreign banks or overseas branches of U.S. banks. And you can think of them as basically offshore dollars that sit outside the US Banking system and kind of away reserve. They're basically a very Special form of money. You could call them shadow money.
- [02:55]
Joe Weisenthal
And it's totally gigantic. So it's almost $10 trillion. And I just find it so interesting. Right, because when I think of dollars, they're either coming from, you know, the government spends dollars into existence or US bank credit. US Banks license to de facto create dollars or deposits at will. And yet Euro dollars are kind of this weird thing, I guess, because they're not that.
- [03:19]
Tracy Alloway
Yeah, they're not either of those. And Eurodollars didn't just spring up fully formed out of thin air. They were the result of a series of decisions all aimed at solving particular problems. And that's what we're going to hear about today. So the origins of the Eurodollar market. And this story has a lot in it. There's political intrigue, rivalry between the east and west, big existential questions about the role of the US Dollar itself in the global financial system. Just a lot of fascinating history to satisfy your new middle aged man face.
- [03:57]
Joe Weisenthal
Thank you. And we literally, literally have the perfect.
- [04:00]
Tracy Alloway
Guests to tell this story while we're trapped in this bunker or vault.
- [04:05]
Joe Weisenthal
Yeah. You might recognize our storytellers. We're gonna be speaking once again with Lev Menand and Josh Younger.
- [04:11]
Lev Menand
I'm Lev Menand. I'm a law professor at Columbia Law School, where I study money in banking and the history of central banking.
- [04:18]
Josh Younger
I'm Josh Younger. I'm a policy advisor at the Federal Reserve bank of New York. And the views I am going to express are my own and not necessarily those of the Federal Reserve bank of New York or the Federal Reserve System.
- [04:28]
Joe Weisenthal
They have been digging deep in the archives and are ready to tell us the story of the hidden history of Eurodollars. In this very special series. There's going to be three episodes with Lev and Josh.
- [04:37]
Tracy Alloway
And because it's so good, they tell the story so well. Joe and I aren't going to say anything at all. We're just going to listen in.
- [04:45]
Joe Weisenthal
I love this. We should do all of our episodes like that where we just get to.
- [04:48]
Tracy Alloway
Just cut ourselves out.
- [04:49]
Joe Weisenthal
All right, let's do it.
- [05:25]
Josh Younger
So Eurodollars are among the most important financial instruments in the world. They're really the backbone of the global dollar system. But they come from a very humble beginnings, very idiosyncratic start. And really it all started in Yugoslavia. And I mean that quite literally. This is kind of like the original sin that leads to the development of Eurodollars. And it starts especially when Marshal Tito takes over in Yugoslavia. So in 1940, 5. In November, there's a communist revolution. And the US is miffed in a bunch of ways, but one of them is that the old government owes them money. And so the question is, how are they going to get it? And a few months later, Tito asked for his gold back because the Yugoslav government had $70 million worth of gold in New York. And the Secretary of State, George Marshall of the Marshall Plan, he realizes he's got a bargaining chip, which is the gold. It's in New York, and they don't get it back until they settle their claims. Now, even people within the State Department were kind of skeptical of this. The Yugoslavian government is obviously furious. And so the Russians, who at this point, Tito and Stalin have a falling out eventually, a few years later. But at this point they're quite closely aligned. And so the Russians are furious, the Yugoslavian government is furious. The State Department internally has some turmoil over this. And they take it to the un, which has just been constituted, and the UN says pass. They won't consider the claim. And so the Russians get the sense that the US is willing to use gold as a bargaining chip. They'd previously actually been building up dollar balances in New York. This is kind of a misnomer about the post war period. There's this sense that the Russians are extracting all their resources from the US but they're actually building up reserves of dollars because the thought is we're probably going to need to trade with these people. We have a trading company based in the US and they need resources. And so they're building up foreign currency deposits and gold. But in 1947, they realize it's not going to go well potentially, and they pull all the gold out. They actually just called banks in New York and they say, we want our gold back. A massive reversal of the policy. And the question is, where is it going to go? And so they need dollars because the US dollar is the currency of foreign exchange. If they want to trade with the west, they have to trade in dollars. They need gold because gold is the basis for the monetary system. And so the question is, where can they put gold and dollars in a safe place that's still on the right side of what was then already known as the Iron Curtain? And so it turns out Paris is the ticket. They've actually been secretly stockpiling cash and gold in Paris. They put it in briefcases. They would fly people to Paris and put it in the consulate offices. They would just build up piles of cash and gold. And in particular, there's a Bank Bisen. I won't try to do it in French. And BSAN is owned by or run by a notorious communist sympathizer who has a very good relationship with the Politburo. And so this is a friendly bank. And so they take on deposit the Soviet money. And BSAN's moniker and the telex system that they used to communicate was Eurobank. And so Eurodollars were initially in the late 40s, just deposits issued by Eurobank, Bsen generally for the Soviets, although also for the Chinese. And slowly this starts to percolate. There's another communist owned bank in London, there's one in Brussels, which the CIA just describes as run by someone with few scruples, I think was the way they put it. And so there's some friendlies across Europe who are willing to take their money. And the Eurodollar market begins this way, which is preemptive sanctions evasion, basically that we might be sanctioned. It happened to Tito, it might happen to us. And so we need a safe place to go. And the European regulations allowed for this. And they need dollars again because they, they trade with the West. And so the first use of Eurodollars is for that. And also to replace the salaries of striking French coal miners was another potential place to do it. The record's not super clear.
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Lev Menand
I think it's worth pausing here for a second to ask why wouldn't the Soviets have just been in France all along? Why were they in New York initially? Why hadn't other people thought of this? And I think the answer is the dollar liabilities of communist sympathizing French bank are not the same thing as the dollar liabilities of a bank headquartered in New York. I think it's helpful to think about why we even hold the dollar liabilities of a bank headquartered in New York. Even today, when you log on to your bank account and you see a balance $5,000, $10,000, the bank doesn't hold US government dollars to back that. And yet we are very comfortable treating those as equivalent. We aren't concerned that those dollars are not the same thing. And why is that? There's a number of factors that go into it. Of course, since the 1930s, we've had deposit insurance up to a $250,000 balance. Of course, businesses routinely hold larger balances and they are comfortable treating them as equivalent. Well, there's the implicit backing of the United States that comes from the fact that your bank was actually chartered by the US Government. It's supervised by the US Government. There's a sense that it's backed by the US Government. And then there's the actual institutional apparatus of the Federal Reserve, which has a facility, the discount window. And if you do go to your bank and say, I actually want to turn this balance into government cash, the bank can go to the Federal Reserve and get that cash, the Fed can print it for the bank and hand it over. There's this whole apparatus that facilitates you treating your balance at a US bank as equivalent to government cash. Those are trading at par. This bank over in France that's now issuing these dollar liabilities that the Soviets are holding. Why should we think that that should maintain par equivalents to US Government dollars? That bank's not FDIC insured, that bank's not chartered by the US Government, that bank's not supervised by the US Government. And that bank can't call up the Fed when the Soviets are drawing down their balance and the Fed won't print money and hand it over. And so this move by the Soviets, they're taking on a lot of risk to get out of the US and they're doing it because they're worried about the risk on the other side, the Yugoslavia risk, the risk that the US will actually freeze their balances. And so they have much higher risk tolerance and they are willing to go out and try something different, which is hold dollar balances offshore.
- [11:43]
Josh Younger
And it's a risk for the bank taking it as well. Because the question for Beeson and others is what are you going to do with this money? So there's actually an antecedent to the Eurodollar market from the 20s when the dollar was actually the global reserve currency in the 20s and then it lost that status in the 30s. But at that time, dollar acceptances, which is a form of trade finance, were larger than ones drawn on London. And the dollar was the currency of international trade and in particular the reserve currency of the world. It was the largest, was much bigger than sterling, at least for a few years. And as a consequence of that, some of the Austrian banks in particular started issuing dollar deposits. There's one in particular in Austria that did a pretty brisk business in this. And they were doing interbank deposits, they were doing private deposits like non bank deposits that looked a lot like the euro dollar market. The difference is they were basically holding it in cash on the other side. So it was more of a correspondent custody type arrangement. And so the question for a bank taking deposits is not are you comfortable issuing deposits? Of course they're comfortable issuing deposits. What are you going to do with the money. And so what can a communist owned bank in Paris in 1948 do with the money? And at the time there was still some trade between the east and the west cross Iron Curtain. Now the Soviets don't like this in general because they have this policy of self reliance. They would, for obvious reasons, they don't want to rely on the west for anything. And we actually don't know how much of their trade this was because you'd be sent to the Gulag for talking about economic data. So no talking about payrolls. Joe. In Soviet Russia in the 40s, at least starting in the 40s. But the key was there was enough to make a business out of it and it was in dollars. So using these dollar deposits to finance east west cross Iron Curtain trade was profitable in two respects. One is you just make more money on loans than you make on cash. The others, you don't have to hedge it because you have a dollar asset, a dollar loan to facilitate trade and a dollar liability, a dollar deposit. So you're not taking foreign exchange risk. And so that turns out to be an okay business. There's not enough of that to make for a large market, but it grows. It's 100, $200 million in the early 50s. And so this is the seed that's planted. And it basically sets a precedent, which is banks are willing to do this, but the question is, how do you make this a bigger business? What are the business opportunities to do it? And that's where the early 50s are, a critical period. Because after the war, most foreign exchange markets are just straight up closed. The British in particular are heavily controlling their currency. London's the obvious place to do this kind of business. It's still a center for international trade. But they can't hedge if they issue dollar deposits, they're just holding dollars. And unless they have a dollar loan to make, on the other hand, which they didn't necessarily have at the time, you're just warehousing the risk that the dollar depreciates or appreciates relative to sterling, which is ultimately what you pay your employees in. That's your sterling funder, meaning you are a British business, you care mostly about sterling. Then in 1952, as things are starting to improve, the Marshall Plan is mostly done. The dollar gap has been mostly filled. We'll talk about that a little bit. And things are normalizing. So the British feel comfortable partially liberalizing their foreign exchange markets now, not all at once. The spot, meaning today you want to exchange sterling for dollars. The rate at which you can do that is still heavily controlled by the bank of England. It's in a range that's widened, but it's still pretty narrow. But in particular, they've liberalized the foreign exchange futures market or forward market. So what is a foreign exchange forward? A foreign exchange forward is I'm going to give you dollars per sterling. Not today, maybe tomorrow, maybe in a month, maybe in a year. This is a very, very large market today. It's a critical piece of hedging equipment for a bank because you can use those forwards if you've borrowed dollars and lent them out for say a year. You don't want to hedge your dollar risk today. You want to hedge it for the return of those dollars in a year. You want a coverage for the full term of the loan. So the forwards market is critical to this. And so the bank of England says now you can trade forwards on dollar sterling and other major currencies, but in particular dollar sterling, and we won't control that rate. So now there's a hedging instrument and now banks in London can look around and say, what can I do with this? Because there's clearly interest, there's a precedent for dollar deposits, and then the question is, what can I do with it? And so they figure out something that still happens today, which is there's a shortage of dollars in the uk. That means if they were to borrow dollars and functionally lend them out through the FX markets, they can construct arbitrage type arrangements. And by arbitrage I mean I borrow a dollar, I hedge that dollar, I use the sterling proceeds of the hedge to buy an onshore sterling asset and I collapse the whole thing when everything matures. So this is just cross border interest rate arbitrage. Today we'd call it a cross currency basis, but it is not perfectly efficient, meaning if there's more demand for dollars or more demand for sterling, the pricing can get out of whack relative to the relative interest rates on those two instruments. And so the banks in London, in particular Midland bank, realizes that if they issue Eurodollars, use the dollars they borrow through Eurodollar issuance to buy sterling assets and hedge that package, they can make arbitrage. Prof.
- [16:53]
Joe Weisenthal
89% of business leaders say AI is a top priority, according to research by Boston Consulting Group. But with AI tools popping up everywhere, how do you separate the helpful from the hype? The right choice is crucial, which is why teams at Fortune 500 companies use Grammarly. With over 15 years of experience building responsible secure AI Grammarly isn't just another AI communication assistant. It's how companies like yours increase productivity while keeping data protected and private. Designed to fit the needs of business, Grammarly is backed by a user first privacy policy and industry leading security credentials. This means you won't have to worry about the safety of your company information. Grammarly also emphasizes responsible AI so your company can avoid harmful bias. See why 70,000 teams and 30 million people trust Grammarly@Grammarly.com Enterprise that's Grammarly@Grammarly.COM Enterprise Grammarly Enterprise Ready AI I'm Sonali Basak.
- [17:54]
Sonali Basak
And I hope you'll join me and many of the most important institutional investors and money managers for the year's preeminent finance event. Bloomberg Invest Returning to New York on March 4th and 5th, come face to face with leading voices in markets, identify the next big investments, forge meaningful connections and swap strategies. Register now@BloombergLive.com invest. That's BloombergLive.com invest and so the first.
- [18:24]
Josh Younger
Use case of Eurodollars is sanctions evasion. The second use is to facilitate cross iron curtain trade, although that's a pretty small business. And so the third and much larger business is cross border interest rate arbitrage. And that sounds really technical, but what it's really doing is using foreign exchange markets and derivative markets to source dollars that the UK in particular needs in this post war environment. So imagine a Eurodollar bank, a Eurobank takes in a Eurodollar deposit, which means it gets a dollar in cash. Let's think of a physical bill, that's an asset. It issues a Eurodollar liability and then what is it going to do next? Because it needs to do some sort of investing. And what it does is it exchanges that dollar asset for a sterling cash and it invests that sterling cash in some short term sterling investment. It's short bills or something like that. And after it does that it says I want to hedge my foreign exchange risk because now I have a dollar liability and a sterling asset. So I'm going to use the foreign exchange forward market to agree to sell that sterling back for dollars at some point in the future at a fixed price that we agree on today. So that's the bank's position. Who's on the other side of that trade? Let's say a corporation, a manufacturing entity. They make radios. And that radio production process requires inputs. Those inputs are imported. And so that radio production company needs dollars with which to buy the raw materials that it uses to make the radio that it then sells $4 in foreign markets and so they get those dollars from the Eurobank in exchange for the sterling they have on hand, they go buy all the parts, but they want to make sure that they know how much they're going to receive in local currency at the end of the production process. When they sell that radio abroad, they don't want the value of the dollar to go down, so they sell those dollars forward in exchange for sterling. And so they've entered into a derivative agreement which is the opposite of the one that the Eurobank has or the Eurobanking system. And so then they put together the radio, they sell it abroad, they receive dollar proceeds, they turn those into sterling, which is what they pay their employees in, that's what they pay for their land and equipment in. And that exchange rate was the one they agreed upon in advance through the foreign exchange forward contract. And so basically what's happening is the Eurobanks are pulling in dollars from abroad, distributing them through the foreign exchange market, that's trading onshore to those that need dollars today, and then providing hedges to those that will receive dollars in the future. And in the case of the Eurobank, the dollars they'll owe in the future potentially to the Eurodollar deposit holder.
- [20:59]
Lev Menand
Think about this from the perspective of the City of London coming out of the war and those bankers and the world that they grew up in, which is a world that we've completely forgotten, but was the world of sterling dominance before the First World War and the role that the empire played in financing global trade. What we're looking AT in the 50s is a group of London based financial institutions trying to figure out a way to continue their dominance in a global economy that runs on dollars now and not on sterling. And so the Eurodollars are sort of worth the risk to the City of London and to some extent to UK financial regulators like the bank of England, because they need to fix their business model for a dollar world and they want to get in on the dollar world. Dealing in dollars is going to be a necessary part of that. And so the UK is adapting here by turning to dollars and embracing dollar liabilities for its own institutions.
- [22:10]
Josh Younger
And in the UK this was a particular problem because they imported so much of what they used to produce products that were manufactured to sell finished goods abroad. And so there's a great newsreel from the late forties for the British population saying you have to go without today for high quality locally manufactured goods so that we can export as much as possible and source the dollars. But another way to do it is to Get Euro dollars.
- [22:34]
Joe Weisenthal
The Smith household is very dissatisfied. Dad wants a new wireless, Mother wants.
- [22:39]
Josh Younger
A sewing machine, and Betty wants glamorous beauty preparations. But these are needed for export because we must build up overseas markets. We sell these goods overseas for foreign.
- [22:50]
Joe Weisenthal
Currency to buy the food and raw materials we need to live and work. These things would soon vanish if we couldn't pay for them. We must sell the things we'd like.
- [23:05]
Josh Younger
To buy the things we need. And so this cross border interest rate arbitrage is really just a way markets distribute the currency according to who needs it and provide the hedges that facilitate the functioning of British corporations as well. It's what we'd call now like a use case, right? This is like a real underlying use case that doesn't involve the Soviet Union for dollar deposits issued by non US banks, which you can't emphasize enough how fundamentally strange that is because if I tried to make dollars by writing it on a piece of paper, I don't think I'd get very far. But at the time, that's essentially what these are doing. And in particular, London is a more, let's say, reputable locale, particularly banks that are not known to be communist sympathizers. There's a little bit of a funny thing about being a communist bank, but we won't get into that specifically. But these are blue chip banks in London issuing dollar deposits and that means you can use them for things and you can feel more comfortable along the lines of what Lev was talking about. You can feel much more comfortable with Midland bank, which was among the largest in the city, than bsan, which is a tiny little place on the continent. And so the market starts growing. It has a bunch of things going for it. And the most important arguably is that they can pay higher interest rates than banks in the US in general. I think you've done podcasts before about the impact of Regulation Q at different times. Regulation Q is a ceiling on interest rates that banks can pay. It's a depression irregulation designed to mitigate races to the bottom and bad decision making among commercial banks. And so they are limited in what they can pay. Now we don't have to talk about whether or not that should or should not have been done. It was definitely in place in the 50s and 60s. And so if you go to London, there is no regulation queue, so you can offer dollar deposits and pay a higher rate of return. So that's more money, right? So that's appealing as long as you can get your head around the counterparty risk. Meaning this is not a New York bank. They don't have access to the Fed. But as long as this market is reasonably small, they have enough dollars on hand, they have enough dollars in reserve, maybe I feel comfortable. The second is a much more practical thing, which it was just hard to call New York from London. I was somewhat surprised to learn this in reading around, but the first transatlantic cable for telephone communications was 1956. So it's after the first euro dollars are issued by non communist banks. And even then there were 36 circuits, which means if you want to call New York from London, you have to wait online for one of 36 open lines at some point during the day, which could take a long time. It was very expensive and perhaps more problematically, these cables would get cut with some frequency. And so you've got one transatlantic cable that can get cut for any number of reasons with indeterminate resolution times. And so it's just hard. There was a telegraph cable, but that wasn't great. And so basically it's just annoying to deal with an overseas bank, especially if you need money soon. So New York banks would generally not offer same day liquidity to European customers for obvious reasons. And there's a gold rush in the transatlantic cable business. So the next Cable comes in 58, there's another one in 61. So the capacity expands, but you're still talking about a few dozen lines here. So it's just hard to manage your liquidity, let's say, if you have to wait in line for six hours to call your bank, and it's a lot easier to walk down the street. And so to the extent that dollars are used for international trade, that trade flows through London, these banks are in London. Why not have a local branch essentially of your bank to deal with? And so if you're offering higher interest rates and much greater convenience, it's a very attractive product. And so the market grows pretty rapidly. It's still inhibited on the continent because you haven't restored full convertibility until 1958, but at that point you do and you have this dramatic expansion in Eurodollar deposits and in particular their use for the thing for which they will become famous, which is trade. So now most cross border trade or intra European and global trade is done in dollars. That's a Bretton woods thing. We'll talk about Bretton woods later. But you essentially have to use dollars to do international trade. You often need to borrow money to facilitate trade. Trade is very heavily dependent on credit. So now you have the beginnings of a real Like I said, it was a real business when you're doing cross border arbitrage. But that goes away if enough people do it. Trade is expanding dramatically. The world in the late 50s is growing enormously quickly and a lot of that is driven by international trade. So the demand for credit to facilitate that trade is growing just as fast as the trade itself. And a lot of other banks start to get in on the action. So what was a London City bank dominated market? City of London banks becomes really an international market based in London. So by the early 60s there are a bunch of US banks who have opened branches in London to facilitate Eurodollars. They find this to be a good way to get around regulation Q because I want to pay up for deposits, I can't do that in New York, I might as well just do it in London. It's all dollars at the end of the day. So they open branches in London. There are Japanese banks in London, there are continental banks in London, there's Eurodollars in Paris and Milan. So it's turning into a real global business, all in dollars. And so that obviously gets everyone's attention and it starts to raise a few eyebrows. And this is where people start to notice who are not directly involved in the market. It was previously a practitioner's market. If you were involved in international trade finance, you would know about Eurodollars. But I wouldn't say anyone on the street would know about your dollars now. But if you were involved in finance now you've heard of them, that becomes to be more the case. And by the late 50s they attract the attention of the Federal Reserve who actually gets an inquiry from a third party saying these are interesting, why don't you look into it? And so they dispatch a couple of senior officers, Alan Holmes and Fred Klopstock. Alan Holmes becomes the selling manager eventually. And Fred Klopstock is kind of like this giant of international finance, although he's at the beginnings of his career. But senior officers, they run departments and they're sent to Europe on. I mean, I would love to go on this work trip. It's like 12 different European cities and all good food places. And it wasn't easy to get to Europe in 1959. So they go on this barnstorming tour of Europe, basically talking to anyone who will take the meeting. A bunch of central bankers, a bunch of private bankers, and they come back with this big thick confidential report that is later summarized for public use. But they have this big report about what this thing is, how big it is they don't know, by the way, how big it is. They just know it's big. So they know it's at least a billion dollars, which back in the day was a lot of money.
- [29:21]
Lev Menand
Although just let's size this a little bit, right? It was a billion dollars in say, 1960, which is maybe the equivalent of $50 billion today. That's still half of a tether. You know, tether is, you know, $100 billion, basically. Eurodollar Bank. And so what we have is the Fed looking into this market when it has gotten to the point of being about half of the size of tether's balance sheet. So we have way more to go in terms of the growth of this market subsequent to 1960. It's still pretty nascent in 1960. It's where some action is in London. The policymakers here, they're already on top of this at half the size of a tether and they're off trying to get to the bottom of what's going on.
- [30:07]
Josh Younger
What they come back is they say, this is interesting. And this is interesting in two respects. One is it's just weird that you can do this still. You can just write a dollar on a piece of paper and people will take it. But they also, more importantly say this makes the dollar more useful. They literally say useful in the report. And so the question is, what does useful mean? And useful in this context means you're earning enough interest on this dollar that you're willing to hold it as a dollar deposit. And on the other hand, you're willing to hold dollars in balances instead of spending them immediately. And so this is a short term liquid investment in dollars that is appealing especially to the central banks which are rapidly accumulating dollars through the growth of international trade. So they need somewhere to put it. If I'm at central bank, I take in a dollar, I can go turn it in for gold. If I want gold, I can hold it as a dollar and maybe buy treasury security or I can put it in a Eurodollar bank and something like one out of five of the early Eurodollars, maybe more. There's some estimates that are up to 40% were from Central banks themselves, European central banks that were facilitating the market. And so that's a way to keep dollars circulating offshore, not in the US So you have a functional dollar financial system, or at least the beginnings of one that doesn't really touch the US financial system. And so that is both interesting but also useful in the sense that this becomes an increasingly valuable Tool. Because behind the scenes of all of this, we're kind of focused on the Eurodollars themselves. That's not the big story here. The big story is the balance of payments crisis, which is what they called it, which is really just the fact that the US had written too many claims on its gold. They'd issued a lot of dollars, those dollars were exchangeable for gold. And now there were way more dollar claims on their pile of monetary gold than there was gold. And increasingly people were turning their dollars in.
- [31:57]
Lev Menand
Well, before we get to the Bretton woods system, just on the usefulness of dollars, I think it's helpful to reflect on how for ordinary people we take for granted the usefulness of the dollar. We don't actually think, should I pay for this coffee with yen? When we're operating in the domestic economy, the dollar is just self evidently the useful form of money. But when you're talking about international trade and finance, currencies are in legitimate competition with each other for uses. And so put your corporate treasurer hat on of a 1950s UK business engaged in import or export. Part of what Josh is illustrating is suddenly the dollar is a more attractive currency to use in various ways because you can maintain dollar balances at a nearby bank that you've banked with, you have a strong relationship with, you don't need to have some transatlantic relationship with the New York bank. So suddenly there's more transactions that you will do, trade, financing and actual trade invoiced and denominated in dollars, because suddenly the dollar is a more appealing currency for you. So the dollar's usefulness has grown. And to the New York Fed team that is looking into this, they are pleased with this development to see that the Eurodollar market, this nascent development of European sovereigns essentially is actually going to be a good thing for the currency that we in the United States are creating in terms of its competitiveness with other currencies in the global marketplace.
- [33:35]
Josh Younger
So the question at this point is it's a nascent markets half a tether, and it's unclear whether or not it's become a big major global actor. We know it eventually becomes that, but at the time that's super unclear. But it becomes eventually and soon the solution to a big problem. So Eurodollars are the solution to a big problem because in the background of all of this buildup, there's massive trouble brewing. And the whole global edifice of the dollar system is starting to crack. And the question is, how are we going to save it? Or should we.
- [34:11]
Joe Weisenthal
That was the first installment of our special three part series examining the origins of Eurodollars. It's so funny to hear about the communist origins of like, here's this thing that we hear about every day, they're big in the news, et cetera. And it actually had communist origins in the 1950s.
- [34:27]
Tracy Alloway
Yeah. In the next episode, Josh and Lev are going to continue the story into the turbulent 1960s, with that cracking dollar system now morphing into a major campaign issue in the race between John F. Kennedy and Richard Nixon.
- [34:43]
Joe Weisenthal
Will it be Eurodollars to the rescue? Find out in the next installment.
- [34:46]
Tracy Alloway
But in the meantime, this has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me. Racialloway and I'm Joe Weisenthal.
- [34:55]
Joe Weisenthal
You can follow me at the Stalwart. Follow one of our special guests, Lev Manand. He's evmanand. Our other special guest, Josh Younger, he's not on Twitter. Thanks to our producers Kerman Rodriguez, Ermin Erman, dashiell Bennett at Dashbot&K. Kalebrooksailbrooks and special thanks to our sound engineer, Blake Maples. For more Odd Lots content, go to bloomberg.com oddlots where we have transcripts, a blog and a daily newsletter and you can chat about all of these topics 24. 7 in our Discord, Discord, GG Oddlots.
- [35:26]
Tracy Alloway
And if you enjoy Odd Lots, if you like it when we bring you the Hidden History of Eurodollars, then please leave us a positive review on your favorite podcast podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad free. All you need to do is find the Bloomberg Channel on Apple Podcasts and follow the instructions there. Thanks for listening. Join Bloomberg in Atlanta or via livestream.
- [36:22]
Josh Younger
On February 11th for the future investor.
- [36:25]
Tracy Alloway
Finding the opportunities this 2025 event series will examine how companies are investing in their businesses to create efficiencies, innovate their products and services, and improve the customer experience.
- [36:39]
Sonali Basak
This series is proudly Sponsored by Invesco.
- [36:41]
Josh Younger
Q. Q. Q.
- [36:44]
Tracy Alloway
Register@Bloomberglive.com futureinvestoratlanta.